UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
[] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number: 000-50184
YANTAI DAHUA HOLDINGS COMPANY LIMITED
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Belize
-----------------------------------------
(Jurisdiction of incorporation or organization)
East of Muping, Yantai, Shandong, People's Republic of China
----------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares, $.001 par value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
1
The number of outstanding shares of common stock as December 31, 2002
5,149,000 shares of Common Shares
(33,447,000 shares of Common Shares as of 23 April 2003)
and
10,000,000 shares of authorized but not yet issued Preferred Shares
Indicate by check mark whether the registrant(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] YES [ ] NO
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [ X ] Item 18
2
TABLE OF CONTENTS
Page No
Forward-looking Statements 4
PART I
Item 1 Identity of Directors, Senior Management and Advisers 4
Item 2. Offer Statistics and Expected Timetable 4
Item 3 Key Information 4
Item 4 Information on the Company 11
Item 5 Operating and Financial Review 16
Item 6 Directors, Senior Management and Employees 18
Item 7 Major Shareholders and Related Party Transactions 20
Item 8 Financial Information 22
Item 9 The Offering and Listing 22
Item 10 Additional Information 22
Item 11 Quantitative and Qualitative Disclosures about Market Risk 24
Item 12 Description of Securities Other than Equity Securities 25
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies 25
Item 14 Material Modifications to the Rights of Security Holders
and Use of Proceeds 25
Item 15 Controls and Procedures 25
Item 16 Reserved for Future Use 25
PART III
Item 17 Financial Statements 25
Item 18 Financial Statements 25
Item 19 Exhibits 66
Signature 84
Certification 85
3
(A) Pursuant to General Instructions E(b) of Form 20-F, this annual report
includes the information specified in Parts I, II, III
(B) Pursuant to General Instruction E(c) of Form 20-F, the registrant has
elected to provide the financial statements and related information
specified in Item 18
FORWARD LOOKING STATEMENTS
The statements in this annual report and the documents incorporated by reference
contain certain forward-looking statements concerning recent and future economic
performance and the plans and objectives of management for future operations.
These forward-looking statements can be identified by the use of such words as
"project," "expect" and "anticipate," and variations of such words. Actual
results might differ materially from such projections, expectations and
anticipations, due to general economic conditions, supply and demand for paper,
labor conditions, the availability of requisite financing and other factors. We
intend those forward looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and are including this statement for the purposes
of complying with the safe harbor provisions.
You are cautioned not to place undue reliance on these forward-looking
statements. These forward-looking statements are made as of the date of this
annual report on Form 20-F and are not intended to give any assurance as to
future results.
PART I
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
See Item 6 for information about directors and senior management.
Mr. David Levenson of 7800 Town Gate Place, Bethesda, Maryland 20817, USA has a
continuing relationship with the Company as its special securities legal
adviser.
Malone & Bailey was the accountant for the Company's predecessor Equity Finance
Holding Corporation for fiscal year 2002.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable
ITEM 3 KEY INFORMATION
A. SELECTED FINANCIAL DATA
We prepare the consolidated financial statements in accordance with United
States Generally Accepted Accounting Principles ("US GAAP").
The Company's selected financial data includes the data from (1) its predecessor
Equity Finance Holding Corporation and (2) its subsidiary Yantai Dahua Paper
Industry Company Limited, which was acquired after the acquisition of Australia
China Investments Limited (see Item 4A for more information about the
acquisition).
Equity Finance was a management consulting company and marketer of management
and financial consulting services offered principally to small businesses with
annual sales of $1,000,000 to $20,000,000. Equity Finance provided resources to
a variety of business clients, assisting them in developing their capitalization
4
to achieve corporate growth. Additionally, Equity Finance provided counsel and
expertise to this market segment, which allowed the closely-held client
corporations to be held more broadly.
FOR THE PERIOD ENDED DECEMBER 31,
- --------------------------------------- --------- ---------- ------------- ------------ ------------
OPERATIONS FOR THE PERIOD 2002 2001 2000 1999 1998
- --------------------------------------- --------- ---------- ------------- ------------ ------------
Revenues-Consulting fee $ - $ - $ - $ 1,429 $ 4,922
Net income (loss) from
Operations 25,596 (360,576) (297,287) (236,109) (341,578)
Loss from operations per
share of common stock
diluted .00 (.07) (0.06) (0.05) (0.07)
Cash dividends declared
per share of stock - - - - -
AS OF DECEMBER 31,
- --------------------------------------- --------- ---------- ------------- ------------ ------------
BALANCE AT THE END OF
THE PERIOD: 2002 2001 2000 1999 1998
- ----------------------- --------- --------- --------- --------- ---------
Total assets $ 1,186 $ 9,612 $ 49,689 $ 582 $ 2,898
Long-term obligations 155,466 116,439 102,345 69,805 27,069
The Yantai Dahua Paper's summary statements of operations data for the years
ended December 31, 2000, December 31, 2001, December 31, 2002 and the
consolidated balance sheet data as of December 31, 2000, December 31, 2001,
December 31, 2002 were derived from our audited financial statements included
elsewhere in this report and should be read in conjunction with such financial
statements.
After the acquisition on February 18, 2003, the Company's structure is as
follow:
--------------------
The Company
--------------------
|
| 100%
|
--------------------- --------------------
Yantai Longda Australia China
--------------------- --------------------
| |
15% | | 85%
-------------------- -----------------
|
|
----------------
Yantai Dahua
Paper
----------------
5
The selected financial data of Yantai Dahua Paper for years ended December 31,
2000, 2001 and 2002:
STATEMENTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
2000 2001 2002 2002
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
RMB RMB RMB US$
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
OPERATING REVENUE
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Sale of goods 96,585,857 93,616,071 102,149,716 12,356,030
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
COSTS OF SALES (75,050,872) (71,455,136) (72,207,917) (8,734,270)
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
GROSS PROFIT 21,534,985 22,160,935 29,941,799 3,621,760
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
OPERATING EXPENSES
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Depreciation (328,313) (376,070) (401,642) (48,583)
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Handling and shipping costs (6,084,348) (5,900,783) (4,752,591) (574,873)
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Selling, general and administrative expenses (15,797,505) (14,524,343) (14,321,978) (1,732,386)
------------ ------------ ------------ -----------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
(LOSS) INCOME FORM OPERATIONS (675,181) 1,359,739 10,465,588 1,265,918
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
NON-OPERATING INCOME
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Sundry income 709,030 260,178 520,695 62,983
------- ------- ------- ------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
INCOME BEFORE INCOME TAXES 33,849 1,619,917 10,986,283 1,328,901
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Provision for income taxes (409,790) (131,149) (2,834,106) (342,813)
--------- --------- ----------- ---------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
NET (LOSS) INCOME (375,941) 1,488,768 8,152,177 986,088
========= ========= ========= =======
- --------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
BALANCE SHEETS FOR YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
AS OF DECEMBER 31,
---------------- ----------------- ----------------- --------------
2000 2001 2002 2002
RMB RMB RMB US$
ASSETS
CURRENT ASSETS
Cash and bank balances 7,817,564 7,596,125 5,667,121 685,495
Accounts receivable, trade 50,039,379 47,125,357 56,421,029 6,824,688
Prepayments and other receivables 7,672,862 7,678,627 9,786,474 1,183,771
Inventories 13,431,722 14,762,938 13,740,686 1,662,073
Income tax recoverable 94,161 - - -
Due from related parties 5,252,782 6,064,545 1,889,523 228,557
---------------- ----------------- ----------------- --------------
TOTAL CURRENT ASSETS 84,308,470 83,227,592 87,504,833 10,584,584
Property and equipment, net 67,248,351 74,134,902 81,137,911 9,814,442
Construction in progress 3,416,927 1,599,673 1,174,844 142,109
---------------- ----------------- ----------------- --------------
TOTAL ASSETS 154,973,748 158,962,167 169,817,588 20,541,135
---------------- ----------------- ----------------- --------------
6
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES
Short-term loans 2,745,000 7,395,000 29,870,000 3,613,075
Accounts payable, trade 13,434,005 16,215,222 15,190,144 1,837,401
Accrued charges and other payables 19,635,865 15,769,353 17,647,605 2,134,655
Due to related parties 27,218,806 26,449,009 21,261,928 2,571,843
Income tax payable - 36,988 205,399 24,845
Deferred tax - - 1,897,935 229,574
---------------- ----------------- ----------------- --------------
Total current liabilities 63,033,676 65,865,572 86,073,011 10,411,393
---------------- ----------------- ----------------- --------------
Non-current liabilities
Long-term loans 18,230,000 18,230,000 - -
Deferred tax - - 725,805 87,793
---------------- ----------------- ----------------- --------------
18,230,000 18,230,000 725,805 87,793
---------------- ----------------- ----------------- --------------
Owners' equity
Registered capital 33,590,000 33,590,000 33,590,000 4,063,046
Retained earnings 36,575,466 37,648,928 45,667,872 5,523,985
Statutory reserves 3,544,606 3,627,667 3,760,900 454,918
---------------- ----------------- ----------------- --------------
Total owners' equity 73,710,072 74,866,595 83,018,772 10,041,949
---------------- ----------------- ----------------- --------------
Total liabilities and owners'
equity 154,973,748 158,962,167 169,817,588 20,541,135
================ ================= ================= ==============
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. SELECTED FINANCIAL INFORMATION
Not Applicable
D. RISKS FACTORS
COMPETITION.
The Company is engaged in, through its subsidiaries, the manufacturing and sales
of paper principally for printing and writing in China. Yantai Dahua Paper is a
leading paper manufacturer in Shandong, China. There are competitors in the
industry that provide similar products and services to those which are provided
by Yantai Dahua Paper. Yantai Dahua Paper's future success will depend to an
extent upon its ability to remain competitive in the areas of service, quality,
price, marketing, product development, service delivery, distribution and client
processing. There can be no assurance that Yantai Dahua Paper will be able to
compete successfully. Prices for the Yantai Dahua Paper's products and services
are typically determined by market conditions. To remain competitive, the
Company reviews and adjusts its pricing structure from time to time in response
to such industry-wide price changes. To the extent that the Company may be
obligated to adjust Yantai Dahua Paper's pricing policies to meet competition,
the Company's financial performance may be adversely affected by its inability
to reduce its costs in response to industry-wide price reductions or by its
inability to increase its prices in response to increases in its costs and
expenses.
LACK OF LIQUIDITY OR DIFFICULTY IN BUYING AND SELLING
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The SEC's regulations generally define a penny stock to be an equity
security that has a price of less than $5.00 per share, subject to certain
7
exceptions No exceptions are applicable to the Company. Unless an exception is
available, the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. In addition, unless and until the
securities of the Company are listed for trading on NASDAQ or the Company has $2
million in net tangible assets, trading in the Company's securities will be
subject to Rule 15c2-6 promulgated under the Securities Exchange Act of 1934 for
non-NASDAQ and nonexchange listed securities. Under the penny stock rules,
broker-dealers who recommend such securities to persons other than institutional
accredited investors (generally institutions with assets in excess of
$5,000,000) must make a special written suitability determination for the
purchaser, receive the purchaser's written agreement to the transaction prior to
sale and provide the purchaser with risk disclosure documents which identifies
certain risks associated with investing in penny stock and which describe the
market as well as the purchaser's legal remedies. Further, the broker-dealer
must also obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required risk
disclosure document before a transaction in a penny stock can be consummated.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for securities that become subject to the penny stock
rules. With the Company's securities being subject to the penny stock rules,
investors may find it more difficult to sell such securities, which could have
an adverse effect on the market price thereof. Because our common stock would be
characterized as penny stock, the market liquidity for the Company's securities
could be adversely affected. In such an event, the penny stocks regulations
could limit the ability of broker-dealers to sell the Company's securities and
the ability of stockholders to sell their securities in the secondary market.
THE COMPANY'S DEPENDENCE ON KEY PERSONNEL.
The Company's ability to compete is largely dependent on the personal efforts
and abilities of its senior management. The Company believes that the loss of
the services of any of these executives could have a material adverse effect on
the Company. In addition, the Company believes that its success is dependent on
its ability to attract and retain additional qualified employees, and the
failure to recruit additional skilled personnel could have a materially adverse
effect on the Company's financial condition and results of operations. The
Company currently does not maintain key employee insurance on any of its
employees.
DIVIDEND POLICY.
The Company anticipates that all of its earnings in the foreseeable future will
be retained for the development and expansion of its business and, therefore,
has no current plans to pay cash dividends. The Company's future dividend policy
will depend on the Company's earnings, capital requirements, financial
condition, bank facilities and other factors considered relevant by the Board of
Directors. However, at present, the Company does not have any plans to pay cash
dividends in the future.
THE COMPANY'S OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
The Company's quarterly and annual operating results may be affected by a wide
variety of factors that could materially adversely affect revenues and
profitability, including: competitive pressures on selling prices; the timing of
customer orders and the deferral or cancellation of orders previously received;
changes in product mix; the Company's ability to introduce new products and
technologies on a timely basis; the introduction of products and technologies by
the Company's competitors; market acceptance of the Company's and the Company's
competitors' products; fulfilling backlog on a timely basis. As a result of the
foregoing and other factors, from time to time we experience material
fluctuations in future operating results on a quarterly or annual basis which
could materially and adversely affect the Company's business, financial
condition and operating results.
8
EFFECT OF CHANGES IN BELIZE LAWS COULD NEGATIVELY IMPACT SHAREHOLDERS.
Because the Company is incorporated in Belize, it is subject to potential
changes in Belize law. The effects of any change in Belize laws on the Company
are unknown at this time, but such effects may be adverse to the Company's
shareholders' best interests. These potential changes include changes in tax
law, corporate law, political instability, economic collapse, and currency
fluctuations.
INDEMNIFICATION OF OFFICERS AND DIRECTORS FOR SECURITIES LIABILITIES COULD
CREATE LOSS OF RETURN ON INVESTMENT FOR SHAREHOLDERS.
The laws of Belize provide that the Company may indemnify any Director, Officer,
agent and/or employee as to those liabilities and on those terms and conditions
as provided for by law. Further, the Company may purchase and maintain insurance
(but has not done so) on behalf of any such persons whether or not the
corporation would have the power to indemnify such person against the liability
insured against. The foregoing could result in substantial expenditures by the
Company and prevent any recovery from such Officers, Directors, agents and
employees for losses incurred by the Company as a result of their actions.
Further, the Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification is against public policy and is, therefore,
unenforceable.
At the moment, pursuant to the International Business Companies Act (the "Act")
Articles of Association of Equity, in addition to section 57 of the Act, every
Director or other officer of the Company shall be entitled to be indemnified out
of the assets of the Company against all losses or liabilities which he may
sustain or incur in or about the execution of the duties of his office or
otherwise in relation thereto, and no Director or other officer shall be liable
for any loss, damage or misfortune which may happen to or be incurred by the
Company in the execution of the duties of his office or in relation thereto. But
this Article shall only have effect in so far as its provisions are not avoided
by the Securities Act of 1933 as amended.
SHAREHOLDER LOSS MIGHT RESULT BECAUSE A U.S. CITIZEN WHO PURCHASES SHARES OF
COMMON STOCK MAY HAVE DIFFICULTY IN ENFORCING HIS RIGHTS AGAINST THE COMPANY.
The Company is incorporated in Belize and engages in business in the PRC; its
directors and officers and certain of its advisers are citizens and/or residents
of the PRC. The Company'engages in, through its subsidiaries, the manufacturing
and sales of paper principally for printing and writing in the PRC. The main
assets of its subsidiaries are located outside the United States. As a result,
it may be difficult for shareholders to initiate a lawsuit within the United
States against the Company or its subsidiaries or these non-resident persons, or
to enforce judgments in the United States against the Company or its
subsidiaries or these persons that are obtained in a non-United States court. It
also may be difficult for shareholders to enforce a judgment of a United States
court or to succeed in a lawsuit in Belize or China on the assets of the
Company's subsidiaries based only on the United States securities laws.
SHAREHOLDER RIGHTS MAY BE AT RISK AS A RESULT OF THE COMPANY'S ORGANIZING IN
BELIZE.
In Belize, there is no established body of corporate law on which shareholders
can rely for clarifying and protecting their rights. These rights differ
materially from typical rights of investors in U.S. companies. For example, (1)
Shareholders do no have the right to approve mergers and sales of substantially
all of the Company assets by a vote of the majority of common shares
outstanding, and (2) Appraisal rights do not exist by law.
All of Company's directors and officers are citizens and resident of countries
outside the United States. Therefore, it may be difficult to serve process upon
them in the United States or to collect upon a judgment obtained in the United
States against them There is doubt as to the enforceability of liabilities
predicated on U.S. federal securities laws determined in original actions in
Belize or the PRC and judgments of U.S. courts obtained in actions based upon
the civil liability provisions of U.S. federal securities laws may not be
enforceable in Belize or the PRC. Moreover, no treaty exists between the United
States and Belize or the PRC for the reciprocal enforcement of foreign court
judgments. Consequently, the Company's U.S. shareholders may be effectively
prevented from pursuing remedies under U.S. federal securities laws against the
9
Company, its officers and directors.
POLITICAL AND ECONOMIC INSTABILITY IN THE PRC MAY RESULT IN LOSS TO THE COMPANY
SHAREHOLDERS.
The Company is organized under the laws of Belize but engages in business in the
People's Republic of China ("PRC"). Since 1979, the PRC adopted an open-door
policy and the country is gradually shifting itself towards a more
market-oriented economy. Such reforms have resulted in significant economic
growth and social progress. Many of the reforms are unprecedented or
experimental and will be refined and improved upon. The reforms over the past 20
years have significantly opened up the country's investment and business
environment compared with the past, but as the economy is now at a transitional
stage, a number of reforms are subject to further refinements and readjustments.
We are operating on the assumption that, in the long term, such refinements and
readjustments should in most cases improve the overall investment and business
environment that would be advantageous to us. However, there is no assurance
that such reforms will benefit us immediately, and it is difficult to determine
whether such reforms may have direct or indirect negative impacts on our
business and operations in the future.
THE LEGAL AND REGULATORY FRAMEWORK OF THE PRC COULD CREATE LOSSES FOR THE
COMPANY SHAREHOLDERS.
The National People's Congress, or its Standing Committee, is responsible for
the passing of new laws of the PRC and any amendments thereto. The PRC legal
system is based on written statutes. Court judgments are therefore not legally
binding - although judges in subsequent cases will often make reference to them
in forming their judgment. The interpretation of the PRC laws may be subject to
policy changes reflecting the domestic, political and social developments at the
time. Since 1979, to facilitate foreign investments and to meet the needs of
Investors, the PRC government has been developing and modifying its economic
systems by promulgating a series of economic related laws and regulations. As
the legal system of the PRC keeps evolving, the promulgation of new legislation,
the changes to existing laws and regulations and the precedence of national laws
over local regulations may have negative impacts on foreign investors. Although
throughout the past 24 years, the legal system of the PRC in general has been
evolving in favor of foreign investors, there is no guarantee that the changes
and modifications of laws and regulations in future will be advantageous to
foreign investors as in the past. Therefore uncertainty exists as to changes to
and/or development of any PRC laws and regulations and of the legal system
itself. There is no assurance that any change in and interpretation of the PRC
laws and regulations in future will not have any adverse effect on our business
and prospects.
THE CURRENCY OF OUR OPERATING SUBSIDIARY IS NOT FREELY CONVERTIBLE
The State Administration for Exchange Control ("SAEC"), under the authority of
the People's Bank of China (the "PBOC"), controls the conversion of Renminbi
into foreign currency. The value of the Renminbi is subject to changes in
central government policies and to international economic and political
developments affecting supply and demand in the China Foreign Exchange Trading
System market.
Since substantially all of our raw materials are provided by local suppliers
using Renminbi and the majority of our expenses are denominated in Renminbi,
restrictions on currency conversions did not and likely will not materially
affect our operations. Also, since we do not expect to require any raw material
that are not permitted or are limited to purchase using foreign currencies, our
management believes that such restriction will not materially affect our
operations in the future.
However, our ability to pay dividends and meet other obligations depends upon
the receipt of dividends or other payments from our operating subsidiaries and
our other holdings and investments, and our operating subsidiaries located in
China may be subject to restrictions on the conversion of Renminbi to U.S.
dollars and, as a result, may be restricted to make distributions to us.
10
WE DEPEND ON OUR SUBSIDIARIES' FACTORIES
We have no direct business operations, other than through our ownership of our
subsidiaries for the manufacturing and sales of paper principally for printing
and writing in the PRC. Our results of operations and financial condition are
currently solely dependent on our subsidiaries' factories in the PRC. We
currently maintain fire, casualty and theft insurance covering various of our
stock in trade, goods and merchandise, furniture and equipment, and factory
buildings in the PRC. The proceeds of this insurance may not sufficiently cover
material damage to, or the loss of, any of our factories due to fire, severe
weather, flooding or other cause, and such damage or loss would have a material
adverse effect on our financial condition, business and prospects. However, we
have not suffered from such material damage or loss to date.
ITEM 4 INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Equity, a Belize corporation, the predecessor of the Company, was a management
consulting corporation and marketer of management and financial consulting
services offered principally to small businesses with annual sales of $2,000,000
to $20,000,000. The Company provided resources to a variety of business clients,
assisting them in developing their capitalization to achieve corporate growth.
Additionally, the Company provided counsel and expertise to this market segment,
which will allow the closely-held client corporations to be held more broadly.
On February 18, 2003 Equity announced the closing of an Agreement and Plan of
Share Exchange dated January 10, 2003 pursuant to which it acquired Australia
China Investments Limited ("Australia China"), a British Virgin Islands limited
corporation incorporated on February 1, 2002, engaged, by and through
subsidiary, in the production and sale principally of printing and writing
papers in China. At closing, Equity issued an aggregate of 6,000,000 Equity
shares and certain Equity stockholders transferred 3,000,000 of their 4,634,100
Equity shares to Tang Yuxiang and Qu Shuzhi, the Australia China stockholders,
in exchange for all of the issued and outstanding Australia China shares.
In connection with the exchange, Equity changed its name to Yantai Dahua
Holdings Company Limited (OTC BB: YDHCF), all directors and executive officers
of Equity resigned. Mr. Tang Yuxiang and Mr. Qu Shuzhi were appointed directors
of the Company along with Mr. Yu Shou Ping, Mr. Yu Zhou and Mr. Xiong Shi Gui,
Mr. Tang Yuxiang was appointed Chief Executive Officer and Mr. Leung Wai Chiu
Albert was appointed Chief Financial Officer.
Australia China holds 85% of the shares of a sino-foreign joint venture, Yantai
Dahua Paper Industry Company Limited a sino-foreign equity joint venture
established in the on April 14, 1994.
Yantai Longda Paper Industry Company Limited, a company incorporated in the PRC,
formerly known as "Muping Paper Manufacturer", an originally state-owned
enterprise but is now a private company jointly owned by management and
employees, is the PRC partner holding 15% of Yantai Dahua Paper.
Yantai Dahua Paper was an equity joint venture with an initial registered
capital of Rmb38,177,000 and planned to operate for a term of 15 years until
April 14, 2009. The initial registered capital was contributed by Yantai Longda,
and Australia China Investment Pty Limited, a company incorporated in Australia
in the ratio of 77% and 23% respectively.
On May 28, 1996, Yantai Dahua Paper's application for capital reduction to
Rmb33,590,000 was approved by Muping Foreign Economic Trade Committee. After the
reduction, the ratio of the contribution between Yantai Longda and Australia
China was changed to 74% and 26% respectively.
Yantai Dahua Paper is principally engaged in manufacturing and selling various
paper products, including printing paper, writing paper and computer paper, etc.
11
On June 28, 2002, Australia China Investment, Yantai Longda and Australia China
entered into an agreement in which Australia China Investment agreed to transfer
its entire interest and Yantai Longda agreed to transfer its interest in Yantai
Dahua Paper to Australia China (the "Transfer"). The aggregate consideration of
the Transfer is US$8,242,836 which represented 85% of net asset value of Yantai
Dahua Paper as of September 30, 2002.
Upon completion of the transaction, Australia China and Yantai Longda own 85%
and 15% interest in Yantai Dahua Paper, respectively. On July 30, 2002, the
Yantai Foreign Investment Bureau approved the above transfers of interest.
At a meeting of the Board of Directors held on April 3, 2003, the Board of
Directors resolved to issue two additional shares for each common stock issued
and outstanding, as a stock split, for no consideration, to its shareholders of
record on April 13, 2003, to be effected on April 23, 2003.
The additional shares would be of the same class of common stock outstanding,
with the same right and privileges and without change in the par value. Prior to
the split, the Company has a total of 11,149,000 shares of common stock issued
and outstanding. The stock split increased the total issued and outstanding
shares to 33,447,000.
B. BUSINESS OVERVIEW
The Company is engaged in, through its subsidiaries, the manufacturing and sales
of paper principally for printing and writing in the PRC. Yantai Dahua Paper is
a leading paper manufacturer in Shandong, China and employs a total of 1,180
staff.
The Company's marketing teams distribute its products through six sales offices
in different parts of the PRC to cater for its clientele of over 210
well-established publishing houses, printing companies and other state-owned
material supplies companies.
Under the leadership of its experienced management, the Company expects to
expand its production capacity to meet the anticipated increase in the demand
for paper and that such increased demand is projected to result in growth in the
Company's revenues and net income.
The Company's production facilities are based at Yantai Dahua Paper, situated at
Muping, Yantai City, Shandong Province. Yantai Dahua Paper's current production
capacity is about 20,000 tons of paper per year.
The major types of paper products manufactured by Yantai Dahua Paper comprise of
Printing Paper, Writing Paper, Computer Paper, and small quantity of other
papers, including news print.
For 2000, 2001 and 2002 a break down of the Company's sales of paper products is
summarized as follows:
---------------------- ----------------------------------- -----------------------------------
PRODUCT TYPES IN `000 TONS PERCENTAGE
---------------------- ------------ --------- ------------ ----------- ----------- -----------
2000 2001 2002 2000 2001 2002
---------------------- ------------ --------- ------------ ----------- ----------- -----------
Printing Paper 11,890 12,850 15,999 63.1% 65.5% 83.2%
---------------------- ------------ --------- ------------ ----------- ----------- -----------
Writing Paper 2,087 2,685 2,060 11.1% 13.7% 10.7%
---------------------- ------------ --------- ------------ ----------- ----------- -----------
Computer Paper 4,703 4,093 1,175 25.0% 20.8% 6.1%
---------------------- ------------ --------- ------------ ----------- ----------- -----------
Others 156 0 0 0.8% 0% 0%
---------------------- ------------ --------- ------------ ----------- ----------- -----------
Total 18,836 19,628 19,234 100% 100% 100%
---------------------- ------------ --------- ------------ ----------- ----------- -----------
The percentage of each product remains quite stable during 2000 to 2001 and in
year 2002, the sales for printing paper increased with a corresponding decrease
in computer paper.
12
Sales of the Company's paper products are conducted by Yantai Dahua Paper's
sales teams based at the head office in Muping and 6 representative offices
located at Beijing, Shijiazhuang (capital city of Hebei Province), Guangzhou
(capital city of Guangdong province), Lanzhou (capital city of Gansu), Shanghai
and Hangzhou.
The Beijing and Shijiazhuang offices account for roughly 69% of the sales,
Guangzhou 3%, Shanghai and Hangzhou 20%, and Lanzhou 8%. Each of the
representative offices is manned by a Sales Manager and several full-time sales
representatives.
With representative offices covering the capital city and major cities in
northern, eastern, western and southern China, the Company has established a
sales and distribution network serving an established customer base all over
China.
Today, the Company has a list of more than 210 customers through out China. Of
these, nine major customers accounts for about 50% of the yearly sales. These
major customers include major publishers, printers, and state-owned enterprises
and they are material to the Company's business and profitability.
The Company's sales in the second half of the year is usually higher than those
in the first half of the year.
To produce its three major paper products for the Chinese market, the Company
requires regular supplies of its raw materials from local suppliers. The major
raw materials comprise:
- Wheat stalks for conversion into pulp,
- Wood pulp,
- Chemicals, including sodium hydroxide and liquid chlorine.
Local suppliers supply most of the above raw materials, and Company also brings
in some wood pulp itself, because of its status as a sino-foreign joint venture.
The manufacturing of paper products also requires substantial amount of water,
heat and electricity. At present, the Company supplies its own heat with its new
35 metric tons boiler, which commenced operation in April 2001. The Company has
built a new 3000 kilo watt electricity generator within its site at Muping. With
this new facility, the Company is no longer dependent on the local grid to
supply its electricity, and the Company expects to save on its electricity bill.
Today, there are more than 500 paper manufacturers in China. Of these, about 200
have an annual production capacity of over 20,000 tons. In Shandong province
alone, there are 78 paper manufacturers. Most of these manufacturers are
state-owned enterprises. The principal competitive factors are brand name
recognition, distribution capability, product quality and capability of mass
production.
The paper manufacturing industry, because of the process of cleaning and
bleaching of the pulp, does produce effluents which contaminate the environment
and consumes a great deal of water. In a country where water is a valuable
resource, the Chinese government is implementing stringent measures to protect
the environment. A number of these paper plants that fail to meet the
environmental standards have been and will be closed. Only those that comply
with the environmental standards can continue to produce.
The Company's plan for the future is based on the following two measures. - Cost
saving, and - New products that meet the market's demand.
Costs Saving
To save manufacturing cost, the Company completed its own 3000 kilo watt power
generation plant at the end of March, 2002. Upon completion of the plant, the
13
Company began to generate its own electricity for the operation of the plant.
Previously, the Company had to purchase about 16,200,000 units of electricity
each year from the local grid at the cost of about Rmb0.65 per unit, meaning it
was spending about Rmb10.5 million each year on electricity supply. With its own
electricity generator, the cost reduced to Rmb0.30 per unit, saving its cost of
electricity by about Rmb5.7 million, or approximately US$ 700,000, per year.
The Company is already generating its own heat supply with its 35 tons boiler,
which commenced operation in April 2001. Each year, it needs about 85,000 tons
of heat. Comparing with the cost of heat from external supplier of Rmb 94 per
ton, the cost of its heat supply will be reduced to Rmb 69 per ton. This will
reduce the manufacturing cost by about Rmb 2.1 million, or approximately US$
250,000, per year.
The above two measures will improve the Company's bottom line by about Rmb6.2
million, or US$750,000, after deducting depreciation of the boiler and
generator.
New Products
The Company sees an opportunity to develop a new product that meets the demand
of the PRC market. Because of the increasing affluence, and hence the increase
in the general standard of living, of the Chinese people, an increasing demand
on both the quantity and quality of a great variety of commodities is observed.
Books and magazines are among those in demand. Therefore, it is not surprising
that consumption of copper printing paper, used mostly in the printing of books
and magazines for the upper end market, has been increasing at about 18% per
annum for the last ten years.
Domestic supply of copper printing, increasing from 850,000 tons in 2000 to 1.5
million tons to 2002, still cannot match demand, and the deficit have to be
imported from outside. In fact, copper printing paper is among the top 5
imported paper products into China in 2002.
Yantai Dahua Paper has made an in-depth analysis on the copper printing paper
market and concluded that the investment of a new production line to produce
such product would bring favorable return to the Company and the shareholders.
The Company plans to construct a new production plant that would increase its
capacity by an additional 30,000 tons of copper printing paper, which is
projected to or are expected to generate an extra revenue of up to US$25 million
per year.
The proposed facilities, when installed, will enable the Company to have an
additional capacity to produce 30,000 tons of copper printing paper each year.
A 40,000 sq. meter piece of land next to the Company's existing plant has been
acquired for the building of the new production plant.
The major equipment for the new production line is a 2640 papermaking machine,
which is capable of producing paper sheet of up to 2,640 mm in width. The
machine has a maximum output speed of 500 m/min and can be purchased from within
China.
Other equipment include refiner, headbox, coating machine, supercalender,
hyropulper, control systems, etc. Part of these would be imported from overseas.
The major raw material required for the production is chemically bleached wood
pulp, which can be sourced in the international market (countries like USA,
Canada, Finland and Sweden, etc.) with ease.
The Company has also secured the supply of water, which is required in abundant
14
amount for the paper making process. The 20 wells owned by the Company can
produce 20,000 cubic meter of underground water per day.
The Company is installing an additional power plant that can generate 6,000 kilo
watts of electricity, thereby guaranteeing the power required for the production
process.
Two more boilers of 35 ton each will also be installed to supply the heat
required for the new plant.
Construction work for the factory electricity plant and boiler plant has already
commenced and is scheduled to be completed by as early as August 2003. Assuming
the availability of funds, and a lead time of 9 to12 months for the ordering and
installation of equipment, the trial production can commence in the second half
of 2004.
As the Company's customers are really well established publishers and printing
houses, the management believes that the additional 30,000 tons of copper
printing paper can be easily absorbed by these customers.
Another new product the Company sees an opportunity in is anti-counterfeit
paper. As there is growing concern for the importance of security and
authenticity, anti-counterfeit paper could be another paper product with a huge
demand.
Currently, anti-counterfeit paper in China is mainly using watermark and
hologram and the Company sees the opportunity to get into more sophisticated
product. It is conducting feasibility studies with regard to the co-operation
with a Shenzhen company to see if this would be the next new product in line.
C. ORGANIZATIONAL STRUCTURE
--------------------
The Company
--------------------
100%
--------------------- --------------------
Yantai Longda Australia China
--------------------- --------------------
| |
15% | | 85%
| -------- ------- |
|
|
----------------
Yantai Dahua
Paper
----------------
D. PROPERTY, PLANTS AND EQUIPMENT
Yantai Dahua Paper is situated at Muping East at a site close to the
Yantai-Weihai Highway. The area of the site is about 110,000 square metres. On
the site, the total built-up area is about 22,000 square metres. The built-up
area includes pulp making facilities, 5 paper making plants, storage warehouse,
administration block, boiler plant, electricity generation plant, effluent
treatment plant, and other amenities.
15
The pulp making facilities can produce up to 20,000 tons of straw pulp per year.
There are 4 paper making plants in Yantai Dahua Paper, with a total production
capacity of 28,000 tons of paper per year. In each of these plants, there is one
paper making machine. Three of the plants produce up to a maximum of 22,000 tons
of paper with a width of 1.76 metres and one produces up to 6,000 tons of paper
with a width of 1.575 metres.
Yantai Dahua Paper also has one dinking line for making pulp from waste paper.
This line of operation is currently not in use because of the high cost of
electricity, making it not profitable to produce pulp from waste paper. With the
new electricity generator, which commenced operation in April 2002, Yantai Dahua
Paper can have the option open whether to utilize this pulp making facility
because the reduction in the cost of electricity will make it viable but has not
done so. This plant has the capacity of producing 6,000 tons of better quality
pulp per year.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
GENERAL
All statements contained herein that are not historical facts, such as
statements regarding the Company's current business strategy and plans for
future operations, are based upon current expectations. These statements are
forward-looking in nature and involve a number of risks and uncertainties. Such
risks and uncertainties include, but are not limited to, those described herein
including, among other things:
(1) significant increases in competitive pressure in the paper industry;
(2) general global economic conditions;
(3) changes in the regulatory environment; and
(4) changes in the securities markets.
Therefore, the information set forth in such forward-looking statements should
be carefully considered when evaluating the business prospects of the Company.
FINANCIAL RESULTS
Yandai Dahua Paper had a net loss of Rmb 375,741, equivalent to US$45,450 for
the year ended December 31, 2000 and then ran into net income of Rmb 1,488,768,
equivalent to US$180,081 for year ended December 31 2001, net income of Rmb
8,152,177, equivalent to US$986,088 for year ended December 31 2002. The
increase in the net income relates primarily to the increase in gross margin.
Short-term loans increased from Rmb 2,745,000, equivalent to US$332,035 for the
year ended December 31 2000 to Rmb 7,395,000, equivalent to US$894,499 for the
year ended December 31 2001 and to Rmb 29,870,000, equivalent to US$10,411,393
for the year ended December 2002, whilst long-term loans of Rmb 18,230,000
equivalent to US$2,205,101 for year ended December 31 2001 fell due within one
year from December 31 2002 and were classified as short-term loans at December
31, 2002.
INFORMATION REGARDING SIGNIFICANT FINANCIAL FACTORS
Inflation generally affects companies by the cost of labor, equipment, and raw
materials. The Company does not believe that inflation has had, or will have,
16
any material effect on the Company's business
B. LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Australia China, the Company's wholly owned subsidiary, has an audited operating
revenue of US$3,469,026 with net income after tax and minority of US$288,750,
being 85% net income of the 4th quarter of 2002 of Yantai Dahua Paper for the
period from February 2002 (date of incorporation) to December 31, 2002.
The Company's primary sources of funding are (i) cash flow from operating
activities and (ii) borrowings from credit agreements with various banks.
There are no material unused sources of liquidity. The Company is in the opinion
that the working capital is sufficient for the Company's present requirement.
There is no legal or economic restrictions on the abilities of subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or advances
are.
Information relating to Equity's cash flow and borrowings as at December 31,
2002 can be reflected in the audited accounts to be disclosed once the same is
available.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES The Company has not
invested into research and development.
D. TREND INFORMATION
Sales
Because of the increasing affluence, and hence the increase in the
general standard of living, of the Chinese people, an increasing demand
on both the quantity and quality of a great variety of commodities is
observed. Books and magazines are among those in demand. Therefore, it is
not surprising that consumption of copper printing paper, used mostly in
the printing of books and magazines for the upper end market, has been
increasing at about 18% per annum for the last ten years.
Production
Upon the completion of the Company's plan to construct a new production
plant, production will be increased by an additional 30,000 tons of
copper printing paper, which is projected to or are expected to generate
an extra revenue of up to US$ 25 million per year.
Price
Due to the keen competition in the paper market, the Company's unlikely
to increase the price of its products.
Inventory
Yantai Dahua Paper is likely to maintain the value of our inventory as of
December 31, 2002 at approximately US$1,662,073.
E. OFF-BALANCE SHEET ARRANGEMENTS
The Company has not made any off-balance sheet arrangement.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
17
Yantai Dahua Paper has the following contractual obligations as at
December 31, 2002:
- --------------------------------------------------- ----------------------------------------------------------------------
Payments due by period of
- --------------------------------------------------- ----------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than
5 years
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Long-term Debt Obligations Rmb29,870,000 Rmb29,870,000 0 0 0
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Capital (Finance) Lease Obligations 0 0 0 0 0
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Operating Lease Obligations 0 0 0 0 0
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Purchase Obligations 0 0 0 0 0
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Other Long-term Liability reflected on the 0 0 0 0 0
Company's Balance Sheet under the GAAP of the
primary financial statements
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
Total Rmb29,870,000 Rmb29,870,000 0 0 0
- --------------------------------------------------- ----------------- ----------------- ----------- ---------- -----------
G. SAFE HARBOR
The safe harbor provided in Section 27A of the Securities Act and Section
21E of the Exchange Act ("statutory safe harbors") shall apply to
forward-looking information provided pursuant to Item 5F, provided that
the disclosure is made by: an issuer; a person acting on behalf of the
issuer; an outside reviewer retained by the issuer making a statement on
behalf of the issuer' to an underwriter, with respect to information
provided by the issuer or information derived from information provided
by the issuer.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Australia China's Key Management Team consists of the following persons:
Mr. TANG Yuxiang, age 55, is Chairman & Chief Executive Officer of Australia
China. He has been working in the paper industry since 1984, when he was
appointed as Party Secretary and then Plant Manager of Yantai Longda. Since the
inception of Yantai Paper in 1994, he has been General Manager and Chairman of
the Board of the joint venture. His previous experience includes 18 years
experience in an agricultural machinery plant in Yantai Longda, where he was
promoted to Deputy Plant Manager, a position he held from 1979 to 1982. He is a
graduate of Shandong Agricultural Machinery Institute and is a Chinese
government endorsed Senior Economist.
Mr. YU Shou Ping, age 56, is Director & Chief Operating Officer. He has been
Deputy General Manager and Director of Yantai Paper since 1994. He is
responsible for its manufacturing operations. He has been working in the paper
industry since August 1984. He is a graduate of Shandong Muping Electricity
University.
Mr. QIAO Xuezhou, age 41, is Deputy General Manager, Sales & Purchasing of
Yantai Paper. He manages its sales and purchasing operations, including the six
offices in the PRC. He joined Yantai Longda in 1980 and was promoted to Deputy
Plant Manger in 1989. He was appointed to his present position in 1994. He is a
graduate of Yantai University.
Ms. JIANG Min, age 41, is Chief Engineer of Yantai Dahua Paper. She is
responsible for its engineering, technical and quality operations. She joined
Yantai Longda in 1982 and was appointed to her present position in 1994. She is
a graduate of Shandong Technical College of Light Industry, majoring in pulp and
paper manufacturing.
Mr. QU Shuzhi, age 43, is Deputy General Manager & Chief accountant of Yantai
Paper. He is responsible for its accounting and general administration. He
18
joined Yantai Longda in 1979 as an accountant, and was promoted to Chief
Accountant in 1988. He was appointed Deputy General Manager & Chief Accountant
in 2001. He is a graduate of in Finance Management at the China Agricultural
University.
Mr. QU Dongqing, age 39, has been Assistant to Mr. TANG Yuxiang since June 2000.
He is responsible for Human Resources and General Administration. He joined
Yantai Longda in 1980 as an officer of the trade union within Yantai Longda.
From 1986 to 1996, he served as Manager, General Administration of Yantai
Longda. From 1996 to 2000, he served as Plant Manager of an iron lid
manufacturer branch of Yantai Longda.
The Company's Key Management Team consists of the following persons:
Mr. TANG Yuxiang, Chief Executive Officer and a Director. Please see his
biographical sketch above.
Mr. QU Shuzhi, Director. Please see his biographical sketch above.
Mr. YU Shou Ping, Director. Please see his biographical sketch above.
Mr. YU Zhou, Independent Director, aged 46. He is working for an information
technology company since 1996.
Mr. XIONG Shi Gui, Independent Director, aged 69. He was a law graduate in PRC
in 1958. Since graduation, Mr. Xiong has been working for the Government in
respect of education work. He is now working for Sincere College Shanghai as an
Associate Dean.
Mr. LEUNG Wai Chiu Albert, Chief Financial Officer, age 46. Before this
appointment, he held senior accounting and finance positions in headquarters and
in operational units of leading multi-national companies in Europe and in Asia
Pacific. He is a graduate of the Hong Kong Polytechnic and l'Ecole des Hautes
Etudes Commerciales in France. He is a member of the Association of Chartered
Certified Accountants of Great Britain and a member of the Hong Kong Society of
Accountants.
B. COMPENSATION
COMPENSATION TO DIRECTORS
For the year ended December 31, 2002 there was no compensation paid by the
Company to its directors as a group. In the year 2003, the Company has no plans
to pay the directors any compensation. There are no stock options, retirement
plans, nor agreements for compensation upon separation from the Board of
Directors.
COMPENSATION TO OFFICERS
For Equity in fiscal year 2002, no compensation was paid to the Board or the
officers. In the resignation statements, the Board and the officers each and all
waived all rights to any back salary and or benefits.
For the Company, the salaries paid by the Company or its subsidiaries to the
officers are:
----------------------------- ---------------
NAME ANNUAL
SALARY
----------------------------- ---------------
TANG Yuxiang US$12,000
----------------------------- ---------------
YU Shou Ping US$8,000
----------------------------- ---------------
QU Shuzhi US$8,000
----------------------------- ---------------
QU Dongqing US$8,000
----------------------------- ---------------
19
C. BOARD PRACTICES
The following persons serve as a member of the Company's Board of Directors:
NAME POSITION
Mr. TANG Yuxiang Chairman & Chief Executive Officer
Mr. QU Shuzhi Director
Mr. YU Shou Ping Director
Mr. YU Zhou Independent Director
Mr. XIONG Shi Gui Independent Director
There are no directors' service contracts with us or any of our subsidiaries
providing for benefits upon termination of employment.
D. EMPLOYEES
The Company has 1,180 employees. Management considers the relationship with
employees to be excellent.
As stipulated by PRC regulations, the Company participates in a retirement plan
for all employees. Pursuant to the plan, all retired employees of Yantai Dahua
Paper are entitled to certain retirement benefits. antai Dahua Paper is required
to make contributions to a state sponsored retirement plan at approximately 20%
of the basic amount which is within the range from RMB400 to RMB468 stipulated
by the PRC government. Yantai Dahua Paper determines the base amount with
reference to the basic salary of its employees and has no further obligations
for the actual payments of any post-retirement benefits. The state sponsored
retirement plan is responsible for the entire pension obligations payable to the
employees. [
Yantai Dahua Paper's pension expense for the years ended December 31, 2000, 2001
and 2002 was RMB1,175,625, RMB1,175,625 and RMB1,370,584 (US$165,786),
respectively.
E. SHARE OWNERSHIP
The following table set forth the share ownership of the Company as at June 19,
2003
Name Shares Percentage
Magic Growth Investments Limited 18,000,000 53.82%
Success Channel Limited 3,000,000 8.97%
Everwell Strategy Limited 3,000,000 8.97%
Tang Yuxiang is a director and shareholder of Magic Growth Investmenrs Limited.
Qu Shuzhi is a director and shareholder of Success Channel Limited. Qu Dongqing
is a director and shareholder of Everwell Strategy Limited.
ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
Please see Item 6E for share ownership information regarding our principal
shareholders.
The following is provided regarding the Company's principal shareholders; that
is, the beneficial owners of 5% or more of the Company's common share voting
20
securities. Provided are the names of the major shareholders, and the number of
shares and the percentage of outstanding shares of the common shares owned by
each of them as of December 31, 2002.
Name Shares Percentage
Magic Growth Investments Limited 18,000,000 53.82%
Success Channel Limited 3,000,000 8.97%
Everwell Strategy Limited 3,000,000 8.97%
Golden Nugget Resources Limited 1,800,000 5.38%
The Company's major shareholders do not have different voting rights.
To the extent known to the Company, it is not directly or indirectly owned or
controlled by another corporation other than Magic Growth Investments Limited
and its director and shareholder Tang Yuxiang, or by any foreign government or
by any other natural or legal persons, severally or jointly.
To the Company's knowledge there are no arrangements the operation of which may
at a subsequent date result in a change in control of the Company.
B. RELATED PARTY TRANSACTIONS
From time to time, the Company may enter into transaction with parties that have
relationship with our officers or directors or entities in which we have an
ownership interest. Such transactions are reviewed by the Board of Directors and
are subject to the approval of members of the Board of Directors who do not have
a personal interest in the applicable transaction. We disclose all material
transactions that, in our judgment, constitute related party transactions;
related parties include our subsidiaries, investments accounted for under the
equity method, members of our management and owners of a significant percentage
of our common stock and their family members, and any other party that we
significantly influence.
(a) Name and relationship of related parties Existing relationships with Yandai Dahua
Paper
Yantai Longda (YLPI) PRC Joint venturer
Australia China Investment Pty Limited (ACIP) Foreign Joint venturer (ceased on October 1,
2002)
Muping Iron Cover Manufacturing Factory (MIC) Branch of PRC Joint venturer
Muping Paper Product Manufacturing Factory (MPP) Branch of PRC Joint venturer
Muping Vegetable Processing Factory (MVP) Branch of PRC Joint venturer
Australia China (ACIL) Holding company (since October 1, 2002)
(b) Related party transactions
2000 2001 2002 2001
RMB RMB RMB US$
(i) Due from related parties
ACIP 3,224,265 3,224,265 - -
MVP - 297,349 111,780 13,521
MPP 489,085 1,017,784 358,716 43,390
MIC 1,539,432 1,525,147 1,364,434 165,042
ACIL - - 54,593 6,604
------------- ------------- -------------- -------------
5,252,782 6,064,545 1,889,523 228,557
============= ============= ============== =============
(ii) Due to related parties
YLPI (Note) 26,784,256 26,449,009 21,261,928 2,571,843
MVP 434,550 - - -
------------- ------------- -------------- -------------
27,218,806 26,449,009 21,261,928 2,571,843
============= ============= ============== =============
21
Note: Loans from YLPI amounting to RMB25,680,000, RMB22,880,000
and RMB21,100,000 (US$2,552,256) as of December 31, 2000,
2001 and 2002, respectively, were borrowed from banks on
behalf of Yantai Dahua Paper.
The amounts due are unsecured, interest-free and have no fixed repayment terms.
The terms of the related party transactions are as favorable to Yantai Dahua
Paper as could be obtained from an unaffiliated party.
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable
ITEM 8 FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The unaudited management account of Equity, audited financial statements of
Australia China and Yantai Dahua Paper are filed in this annual report as Item
18.
B. SIGNIFICANT CHANGES
At a meeting of the Board of Directors held on April 3, 2003, the Board of
Directors resolved to issue two additional shares for each common stock issued
and outstanding, as a stock split, for no consideration, to its shareholders of
record on April 13, 2003, to be effected on April 23, 2003.
The additional shares would be of the same class of common stock outstanding,
with the same right and privileges and without change in the par value. Prior to
the split, the Company has a total of 11,149,000 shares of common stock issued
and outstanding. The stock split increased the total issued and outstanding
shares to 33,447,000.
ITEM 9 THE OFFER AND LISTING
Not Applicable
ITEM 10 ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
This information, contained in the by-laws of Equity Finance Holding Corporation
and the Memorandum of Association and Articles of Association of Equity Finance
Holding Corporation, IBC No. 6825, incorporated, Belize, 6 March 1998, is hereby
incorporated by specific reference in this annual report to Exhibits 1 and 2 to
the registration statement Form 8-A12G dated February 20, 2003.
22
C. MATERIAL CONTRACTS
Not applicable
D. EXCHANGE CONTROLS
Belize has no system of exchange controls. There are no Belize restrictions on
the repatriation of capital or earnings of a Belize public company to
non-resident investors. There are no laws in Belize or exchange restrictions
affecting the remittance of dividends, profits, interest, royalties and other
payments to non-resident holders of the Company's securities.
The PRC has a system of exchange controls. The Renminbi exchange rate system is
the base for stable operation of PRC's exchange control system. The Regulations
on Exchange Control of the PRC promulgated with the State Council's approval in
January 1996 point out that the exchange rate for Renminbi is a single, managed
floating exchange rate based on market demand and supply.
Foreign exchange system reform began in 1994 with the establishment of the China
Region Exchange Trading Center in Shanghai which is linked to 34 cities by a
computer network and extends to the nearby regions. After segmentation by
administration areas was discarded, a nationwide unified interbank trading
market was established. The Center has adopted a membership system with 384 unit
members - at present comprising the head offices of Chinese-funded banks and
their authorized branches, foreign-funded banks and authorized non-bank
financial institutions, which represent the main trading body on the market.
Following foreign- funded enterprises' participation in the banking system for
the settlement and sales of foreign exchange, foreign-funded banks are also
permitted to engage in such business, so that the interbank trading market is
further stimulated.
At present, there are three foreign currencies tradable with the Remninbi at the
Center: US dollars, Japanese yen and Hong Kong dollars. The daily weighted
average is published by the People's Bank of China as the middle rate for the
ensuing business day; each bank may quote prices within the permitted floating
limits of 0.15 per cent for US dollars and 1 per cent for Japanese yen and Hong
Kong dollars.
For other currencies, cross rates are fixed on the basis of the international
market level and a floating margin as specified by the People's Bank of China.
Thus the establishment and normal operation of the nationwide interbank trading
market has geared the Renminbi rate to market supply and demand.
In January 1994 the single exchange rate system was hailed as a strategic
decision by the IMF, and has created favorable conditions for China to
participate in international competition with others on a fair and equal
footing. In order to ensure the healthy development of the national economy and
maintain basic stability of the Renminbi rate, the People's Bank of China
exercises necessary control and intervenes in the light of state macroeconomic
control targets.
Now Renminbi payments for foreign trade and non-trade transactions as well as
transfers of capital gains within China may be converted into foreign currencies
for remittance or transfer abroad.
23
The following table sets forth certain information concerning exchange rates
(the noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York) between Renminbi and U.S. dollars for the periods indicated:
CALENDAR YEAR YEAR AVERAGE (1)
(RMB PER US$)
1997 8.3193
1998 8.2991
1999 8.2785
2000 8.2784
2001 8.2772
(1) Determined by averaging the rates on the last business day of each month
during the relevant period.
As of June 24, 2003, the exchange rate was US$1.00 = Rmb 8.2774.
E. TAXATION
Yantai Dahua Paper is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates.
Yantai Dahua Paper is established and is carrying on business in the PRC and
subject to the PRC enterprise income tax at a rate of 24%.
Deferred income tax has not been provided for in 2000, 2001. Deferred income tax
of RMB 2,623,740(US$317,367) has been provided to Yantai Dahua Paper for year
2002.
The Company is incorporated in Belize and the Belize tax laws are summarized as
follows. Unless exempt under an investment incentive, resident companies are
liable for corporate income tax on all of their income, whether derived from
Belize or not, although foreign earned income is taxed only on remittances to
Belize. A company is resident if it is incorporated in Belize or if it's central
management and control are exercised in Belize. If a company does not operate
under a Fiscal Incentives (Approved Enterprise Order) the total tax payable is
35% of the chargeable income.
Corporate income tax is charged on net profits, as adjusted for tax purposes.
Net profits comprise the aggregate amount of net income derived from conducting
business in Belize. Inventory valuation is not specifically addressed in income
tax law and, in any event, is inapplicable to the Company. Methods that conform
to generally accepted accounting principles may be used as long as they are
consistently applied. Dividends are taxable in the hands of recipients, the cash
amount of the dividends paid being grossed up by the amount of corporate income
tax paid by the distributing company, although the latter is liable only for
corporate income tax and does not actually account to the tax authorities for
any withholding. Some dividends are not taxable on recipients, including those
paid to exempt entities and those paid under specified tax incentives.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
Not Applicable
I. SUBSIDIARY INFORMATION
Not Applicable
ITEM 11 QUANTITATIVE INFORMATION ABOUT MARKET RISK
The Company does not maintain nor invest in market sensitive or interest rate
sensitive holdings. Therefore, the Company has no quantitative or qualitative
exposure to market risk associated with activities in derivative financial
instruments, other financial instruments and derivative commodity instruments.
24
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable
ITEM 15 CONTROLS AND PROCEDURES
Based on their evaluation of the Company's internal disclosure controls and
procedures completed on June 2003, Mr. Tang Yuxiang, Chief Executive Officer,
and Mr. Leung Wai Chiu Albert, Chief Financial Officer, have concluded that the
Company's controls and procedures (as defined in Rule 13a -15 and Rule 15d-15(c)
of the Securities Exchange Act of 1934) are adequate and effective on ensuring
the accuracy and intensity of the information in this annual report. There have
not been any significant changes made in the Company's internal controls and
procedure or any other factors that could significantly affect these controls.
ITEM 16. [Reserved]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
EQUITY
PAGE NO.
BALANCE SHEETS 27
STATEMENTS OF OPERATIONS 28
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT 29
STATEMENTS OF CASH FLOWS 30
NOTES TO FINANCIAL STATEMENTS 31
INDEPENDENT AUDITORS REPORT 35
25
AUSTRALIA CHINA INVESTMENTS LIMITED
PAGE NO.
INDEPENDENT AUDITORS' REPORT 36
CONSOLIDATED STATEMENT OF OPERATIONS 37
CONSOLIDATED BALANCE SHEET 38
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 39
CONSOLIDATED STATEMENT OF CASH FLOWS 40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 41
YANTAI DAHUA PAPER
PAGE NO.
INDEPENDENT AUDITORS' REPORT 52
STATEMENTS OF OPERATIONS 53
BALANCE SHEETS 54
STATEMENT OF OWNERS' EQUITY 55
STATEMENTS OF CASH FLOWS 56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57
EQUITY FINANCE HOLDING CORPORATION
BALANCE SHEETS
As of December 31, 2002 and 2001
2002 2001
------------- -----------
ASSETS
Current Assets
Cash $ 1,186 $ 9,612
----------- -----------
Total Current Assets $ 1,186 $ 9,612
=========== ===========
LIABILITIES
Current liabilities
Accounts payable and other liabilities $ 203,437 $ 70,971
Customer deposits 38,000 243,515
----------- -----------
Total Current Liabilities 241,437 314,486
----------- -----------
Note payable 50,683 48,270
Related party notes payable 104,783 68,169
----------- -----------
Total liabilities 396,903 430,925
STOCKHOLDERS' DEFICIT
Common stock, $.001 par value, 100,000,000 shares
authorized, 5,149,000 shares outstanding 5,149 5,149
Additional paid in capital 816,812 816,812
Retained deficit (1,217,678) (1,243,274)
----------- -----------
Total Stockholders' Deficit ( 395,717) (421,313)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,186 $ 9,612
=========== ============
See accompanying summary of accounting policies
and notes to financial statements.
26
EQUITY FINANCE HOLDING CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
--------- --------- -----------
Operating Expenses
General & administrative $ 9,518 $ 306,229 291,472
Impairment expense 48,500
Debt forgiveness (42,750)
--------- --------- ---------
Operating income (loss) 33,232 (354,729) (291,472)
Other Income and (Expense)
Interest Income 26 893 400
Interest Expense (7,662) (6,739) (6,215)
--------- --------- ---------
Total other income (expense) (7,636) (5,847) (5,815)
--------- --------- ---------
Net income (loss) $25,596 $(360,576) $(297,287)
========= ========= =========
Net loss per common share $.00 $(.07) $(.06)
Weighted average common
shares outstanding 5,149,000 5,149,000 5,149,000
See accompanying summary of accounting policies
and notes to financial statements.
27
EQUITY FINANCE HOLDING CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2002, 2001 and 2000
Common Stock Paid In Retained
Shares Amount Capital Earnings Totals
---------- ------- -------- ---------- ----------
Balances,
December 31, 1999 5,149,000 $5,149 $392,812 $(577,687) $ (179,726)
Issuance of non-cash
Dividends (5,150) (5,150)
Services contributed by
principals without
compensation 212,000 212,000
Net loss (297,287) (297,287)
---------- ------- -------- ----------- ---------
Balances,
December 31, 2000 5,149,000 5,149 604,812 (880,124) (270,163)
Issuance of non-cash
dividends (2,574) (2,574)
Services contributed by
principals without
compensation 212,000 212,000
Net loss (360,576) (360,576)
---------- ------- -------- ----------- ---------
Balances,
December 31, 2001 5,149,000 5,149 816,812 (1,243,274) (421,313)
Net Income 25,596 25,596
---------- ------- -------- ----------- ---------
Balances,
December 31, 2002 5,149,000 $5,149 $816,812 $(1,217,678) $(395,717)
========== ======= ======== =========== =========
See accompanying summary of accounting policies
and notes to financial statements.
EQUITY FINANCE HOLDING CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $25,596 $(360,576) $(297,287)
Adjustments to reconcile
net income (loss) to cash used by
operating activities:
Increase in work in process (45,000)
Decrease (increase) in other assets 48,500 (3,500)
Decrease in accounts payable
and other liabilities 132,466 (6,536) 12,004
Increase (decrease)in customer deposits (205,515) 103,515 95,000
Increase in accrued interest
included in notes payable 7,027 6,020 5,510
Services contributed by principals 212,000 212,000
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITY (40,426) 2,923 (21,273)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from related party notes
payable 32,000 5,500 21,880
--------- --------- ---------
NET INCREASE (DECREASE)
IN CASH (8,426) 8,423 607
CASH AT BEGINNING OF PERIOD 9,612 1,189 582
--------- --------- ---------
CASH AT END OF PERIOD $ 1,186 $ 9,612 $ 1,189
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 0 $ 0 $ 0
Income taxes paid 0 0 0
NONCASH ACTIVITIES:
Increase in accumulated deficit through
the issuance of non-cash dividends $ 2,575 $ 5,150
Issuance of related party notes
payable in purchase of Hacienda
International Resorts, Ltd. stock 2,575
Issuance of related party notes
payable in purchase of QVP
International stock 2,575
Issuance of related party notes
payable in purchase of International
Technology Enterprises Limited stock 2,575
See accompanying summary of accounting policies
and notes to financial statements.
EQUITY FINANCE HOLDING CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. Equity Finance Holding Corporation ("Equity Finance") was
incorporated on March 6, 1998 in Belize, Central America with offices in Punta
Gorda, Belize and Playas De Rosarito, B.C., Mexico. Equity Finance is a
management consulting company and marketer of management and financial
consulting services offered principally to small businesses with annual sales of
$1,000,000 to $20,000,000. Equity Finance assists small businesses in accessing
the U.S. capital markets for financing.
Equity Finance provides its management consulting services through a five-year
program of planning for growth and equity sales to investors under the name "The
Advantage 2000 Program." Equity Finance markets and sells its services
principally through representatives in California.
Equity Finance maintains its books and records in United States dollars using
accounting principles generally accepted in the United States of America.
Revenue Recognition. Revenues are recognized for Advantage 2000 Program ("the
Program") services using the specific performance method with revenue
recognition tied to the completion of identifiable milestones. Substantially all
services to be provided by the Equity Finance in connection with the Program
will have been completed prior to the recognition of revenue. Revenue for other
consulting services provided to Program clients will be recognized upon
completion of the contracted task. Equity Finance clients are not required to
purchase supplemental services from the company and client entitlements related
to refunds vary by contract, but generally allow for the return of unearned
advances, less a 5% processing fee. Deferred revenue consists of retainers
collected from clients in advance of reaching contractual milestones for
recognizing the revenue.
Estimates and assumptions that affect amounts reported are used by management to
prepare these financial statements and accompanying footnotes in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For purposes of the statements of cash flows, Equity
Finance considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Income Taxes. Equity Finance recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax basis of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. Equity Finance
provides a valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.
Basic and diluted loss per common share are calculated by dividing the net loss
by the weighted average shares outstanding. There are no dilutive securities.
Impairment reviews are performed at least annually, whenever conditions indicate
that assets may not be realized for their recorded values.
Recently issued accounting pronouncements. Equity Finance does not expect the
adoption of recently issued accounting pronouncements to have a significant
impact on Equity Finance's results of operations, financial position or cash
flow.
31
NOTE 2 - GOING CONCERN
As shown in the accompanying financial statements, Equity Finance has recurring
net losses and has a net deficit of $395,717 as of December 31, 2002. These
conditions create an uncertainty as to Equity Finance's ability to continue as a
going concern. Management is trying to raise additional capital through sales of
its common stock as well as seeking financing from third parties. The financial
statements do not include any adjustments that might be necessary if the Equity
Finance is unable to continue as a going concern.
NOTE 3 - ASSET IMPAIRMENT
In 2001, management determined that a $45,000 sales commission and a $3,500
expenditure capitalized in 2000 that related to a customer signed in 2000 had no
continuing value and was written off.
NOTE 4 - ACCOUNTS PAYABLE
At December 31, 2001, accounts payable includes a $42,750 refund due to a former
Program participant who invested in 1998. At December 31, 2002, accounts payable
includes refunds due former Program participants of $26,515 and $152,000 who
invested in prior years.
NOTE 5 - NOTE PAYABLE
In June 1999, Equity Finance negotiated the settlement of an outstanding account
payable through the issuance of an unsecured note payable to the service
provider totaling $42,000. The note bears interest at 5% and is due June 2004.
No payment of either principal or interest is required prior to the maturity
date. The service provider has the ability to exchange the note for 100,000
shares of Equity Finance's stock owned by Equity Finance International
Corporation (EFIC). Accrued interest included in the balance of the note payable
totaled $8,683 and $6,270 at December 31, 2002 and 2001, respectively.
32
NOTE 6 - RELATED PARTY NOTES PAYABLE
Related party notes payable consist of the following:
2002 2001
-------- --------
Equity Finance International Corporation (EFIC),
6% annual interest, principal and interest
due March 2003 $ 63,667 $ 60,063
Purchase of inactive shell companies:
QVP International (QVPI), 5% annual interest,
Principal and interest due December 2005 2,839 2,704
International Technology Enterprises Limited
(ITEL), 5% annual interest, principal and
interest due December 2002 2,839 2,704
Hacienda International Resorts, Ltd. (HIRL), 5%
annual interest, principal and interest
due December 15, 2006 2,833 2,698
James A. Bishop, 5% annual interest, principal
and interest due August 15, 2007 32,605
-------- --------
$104,783 $ 68,169
======== ========
Accrued interest included in the balance of the note payable to EFIC totaled
$13,118 and $9,514 at December 31, 2002 and 2001, respectively.
Certain directors of Equity Finance are the principal owners of EFIC and an
Equity Finance director serves on the board of QVPI, ITEL and HIRL. QVPI, ITEL
and HIRL are inactive shell companies with nominal assets that have been
established by Program clients. At December 31, 2002 and 2001, these directors
are the beneficial owners of approximately 31% of Equity Finance's shares and
approximately 10% of the outstanding shares of QVPI, ITEL and HIRL. All related
party notes payable are unsecured.
NOTE 7 - INCOME TAXES
Equity Finance is domiciled and operated in Mexico and Belize, and has no
operations in the United States. Mexico and Belize both have corporate income
tax laws. Equity Finance has had losses since inception except for 2002.
A summary of deferred tax assets and liabilities is as follows:
Deferred tax assets $122,000
Less: valuation allowance (122,000)
--------
Net deferred taxes $ 0
========
Equity Finance has cumulative net operating losses of $360,000.
NOTE 8 - STOCK DIVIDENDS
As part of the agreements with customers to establish and promote investor
financing through the inactive shell entities, Equity Finance receives 10% of
each of these entities and this same 10% is immediately distributed pro rata to
the four major shareholders of Equity Finance, which collectively own 97.8% of
Equity Finance. These transfers have been recorded as non-cash dividends because
3 of these 4 stockholders are not involved in the operations of Equity Finance.
33
NOTE 9 - FORGIVENESS OF DEBT
At December 31, 2002, a $42,750 refund due to a former Program participant who
invested in 1998 was reclassified as debt forgiveness.
NOTE 10 - SUBSEQUENT EVENT
On February 18, 2003 an Agreement and Plan of Share Exchange dated January 10,
2003 was closed. Equity Finance acquired Australia China Investments Limited
(Australia China), a British Virgin Islands corporation. Equity Finance issued a
aggregate of 6,000,000 Equity Finance shares and certain Equity Finance
stockholders transferred 3,000,000 of their 4,634,100 Equity Finance shares to
Tang Yuxiang and Qu Shuzhi, the Australia China stockholders, in exchange for
all of the issued and outstanding Australia China shares. In connection with the
exchange, Equity Finance changed its name to Yantai Dahua Holdings Company
Limited.
34
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Equity Finance Holding Corporation
East of Muping, Yantai, Shandong, People's Republic of China
We have audited the accompanying balance sheets of Equity Finance Holding
Corporation, as of December 31, 2002 and 2001 and the related statements of
expenses, stockholders' deficit, and cash flows for the years then ended. These
financial statements are the responsibility of Equity Finance's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equity Finance Holding
Corporation as of December 31, 2002 and 2001 and the results of its operations
and its cash flows for the years then ended, in conformity with principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, Equity Finance has suffered recurring losses from
operations and has a net capital deficiency, which raises substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MALONE & BAILEY, PLLC
Houston, Texas
www.malone-bailey.com
July 1, 2003
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders of
AUSTRALIA CHINA INVESTMENTS LIMITED
(A company incorporated in British Virgin Islands)
We have audited the accompanying consolidated balance sheet of Australia China
Investments Limited (the "Company") and its subsidiary (hereinafter collectively
referred to as the "Group") as of December 31, 2002 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
period from February 1, 2002 (date of incorporation) to December 31, 2002. These
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Group as of December 31, 2002 and the results of their operations and their cash
flows for the period then ended in conformity with accounting principles
generally accepted in the United States of America.
Moores Rowland
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS
Hong Kong
Date: April 25, 2003
36
AUSTRALIA CHINA INVESTMENTS LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- -------------------------------------------------------------------------------
Note US$
Operating revenue
Sales of goods 3,469,026
Cost of sales (2,345,510)
-----------
Gross profit 1,123,516
Operating expenses
Depreciation (11,248)
Handling and shipping costs (85,956)
Selling, general and administrative expenses (560,177)
-----------
Income from operations 466,135
Non-operating income
SUNDRY INCOME 21,475
-----------
Income before income taxes 487,610
PROVISION FOR INCOME TAXES 6 (147,907)
-----------
Income after income taxes 339,703
Minority interest in income of subsidiary (50,953)
-----------
Net income 288,750
===========
Earnings per share
Basic common stock outstanding 5,000,000
============
Basic net income per common stock US 0.6 cents
=============
The accompanying notes are an integral part of these financial statements.
37
AUSTRALIA CHINA INVESTMENTS LIMITED
CONSOLIDATED BALANCE SHEET
As of December 31, 2002
- --------------------------------------------------------------------------------
ASSETS Note US$
Current assets
Cash and cash equivalents 692,099
Accounts receivable, trade 6,824,688
Prepayments and other receivables 1,183,772
Inventories 7 1,662,073
Due from related parties 10 221,953
----------------
Total current assets 10,584,585
Property and equipment, net 8 9,814,442
Construction in progress 142,109
----------------
Total assets 20,541,136
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term loans 9 3,613,075
Accounts payable, trade 1,837,400
Accrued charges and other payables 2,134,655
Due to a related party 10 2,571,843
Due to stockholders 10 8,196,910
Income tax payable 24,845
Deferred tax 229,574
----------------
TOTAL CURRENT LIABILITIES 18,608,302
----------------
NON-CURRENT LIABILITIES
Deferred tax 87,793
----------------
Minority interest in subsidiary 1,506,291
----------------
STOCKHOLDERS' EQUITY
Common stock, par value US$0.01 each; 5,000,000 shares authorized, issued
and outstanding 11 50,000
Retained earnings 275,052
Statutory reserves 12 13,698
----------------
Total stockholders' equity 338,750
----------------
Total liabilities and stockholders' equity 20,541,136
================
The accompanying notes are an integral part of these financial statements.
38
AUSTRALIA CHINA INVESTMENTS LIMITED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Period from February 1, 202 (date of incorporation) to December 31, 2002
- -------------------------------------------------------------------------------
COMMON STOCK RETAINED STATUTORY
---------------------------- EARNINGS RESERVES TOTAL
NO. OF SHARES AMOUNT
US$ US$ US$ US$
New stock issued on February 1,
2002 (date of incorporation) 5,000,000 50,000 -- -- 50,000
Net income for the period -- -- 288,750 -- 288,750
Transfer to statutory reserves -- -- (13,698) 13,698 --
--------- --------- --------- --------- ---------
Balances as of December 31, 2002 5,000,000 50,000 275,052 13,698 338,750
========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
39
AUSTRALIA CHINA INVESTMENTS LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 288,750
Adjustments to reconcile net profit to net cash used in operating activities:
Depreciation 129,548
Exchange gain (17)
Minority interest 50,953
Changes in working capital:
Accounts receivable, trade 287,026
Prepayments and other receivables (443,238)
Inventories 61,619
Due to a related party (113,338)
Accounts payable, trade (305,329)
Accrued charges and other payables (7,289)
Income tax 146,979
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 95,664
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash flows from acquisition of subsidiary 846,047
Purchases of property and equipment (184,278)
Addition to construction in progress (115,334)
-----------
Net cash used in investing activities 546,435
-----------
NET CASH FROM FINANCING ACTIVITIES:
Issue of stocks 50,000
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 692,099
===========
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 692,099
===========
The accompanying notes are an integral part of these financial statements.
40
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Company was incorporated in the British Virgin Islands ("BVI") on
February 1, 2002 as a limited liability company and is known as
Australia China Investments Limited. As of December 31, 2002, the
Company has authorized and outstanding common stock of 5,000,000
shares. All outstanding common stocks are issued to Mr Tang Yuxiang
and Mr Qu Shuzhi, equally. The Company had no operations until the
investing transactions described below.
2. BASIS OF CONSOLIDATION
On June 28, 2002, Australia China Investment Pty Limited ("ACIP"),
Yantai Longda Paper Industry Company Limited ("YLPI") and the Company
entered into an agreement (the "Agreement") in which ACIP agreed to
transfer its entire interest and YLPI agreed to transfer its 59%
interest in Yantai Dahua Paper Industry Company Limited ("YDPI") to
the Company (the "Transfer"). The aggregate consideration of the
Transfer is US$8,242,836 which represented 85% of net asset value of
YDPI as of September 30, 2002. Upon completion of the transaction, the
Company and YLPI own 85% and 15% interest in YDPI respectively. On
July 30, 2002, the Yantai Foreign Investment Bureau approved the above
transfers of interest.
The Company acts as an investment holding company and is designated by
its stockholders and directors, Mr. Tang Yuxiang and Mr Qu Shuzhi, to
hold their interest in YDPI.
The consolidated financial statements have been prepared using the
purchase accounting method incorporating the results of YDPI from
October 1, 2002, the effective date of acquisition.
3. INVESTMENT
Details of the investment are as follows:
YDPI was established in the People's Republic of China ("PRC") on
April 14, 1994 as a sino-foreign equity joint venture.
YDPI was an equity joint venture with an initial equity capital of
Rmb38,177,000 and planned to operate for a term of 15 years until
April 14, 2009. The initial equity capital was contributed by YLPI
(formerly known as "Muping Paper Manufacturer", a company established
in the PRC) and ACIP, a company incorporated in Australia in the ratio
of 77% and 23% respectively.
On May 28, 1996, YDPI's application for capital reduction to
Rmb33,590,000 was approved by the Muping Foreign Economic Trade
Committee. After the reduction, the ratio of the contribution between
YLPI and ACIP was changed to 74% and 26% respectively.
YDPI is principally engaged in manufacturing and selling various paper
products, including printing paper, writing paper and computer paper,
etc.
41
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
3. INVESTMENT (Continued)
On July 30, 2002, Yantai Foreign Investment Bureau approved YDPI's
application for the extension of operating period for an additional 15
years to 2024.
The amount assigned to each major asset and liability caption of YDPI
at the acquisition date are as follows:
US$
Assets acquired
Cash and cash equivalent 846,047
Accounts receivable, trade 7,111,714
Prepayments and other receivables 740,533
Inventories 1,723,693
Due from related parties 810,772
Property and equipment, net 9,424,375
Construction in progress 362,111
-----------
21,019,245
-----------
Liabilities assumed
Short-term loans (3,613,075)
Accounts payable, trade (2,142,729)
Accrued charges and other payables (2,146,033)
Due to a related party (3,223,999)
Income tax payables (10,643)
Deferred tax (184,591)
-----------
(11,321,070)
-----------
Net assets acquired 9,698,175
Shared by minority interest (1,455,339)
-----------
Consideration (note 2) 8,242,836
===========
4. BASIS OF PRESENTATION
The financial statements have been presented in United States dollars
(US$) and prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP").
42
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
The financial statements include the accounts of the Company and its
subsidiary (see note 2) in which the Company has a controlling
financial interest. The results of operations of the subsidiary
acquired during the period is included from the effective date of
acquisition. All significant intercompany accounts and transactions
have been eliminated.
SUBSIDIARY
A subsidiary is an affiliate controlled by the Company directly, or
indirectly through one or more intermediaries. The term control
(including the terms controlling, controlled by and under common
control with) means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting stocks, by contract,
or otherwise.
(b) REVENUE RECOGNITION
Net sales represent the invoiced value of goods, net of value-added
tax ("VAT") and returns. The Group generally recognizes product
revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable, and collectibility is
probable.
INCOME TAXES
The Group did not carry on any business and did not maintain any
branch office in the United States of America.
Provision for income and other related taxes has been made in
accordance with the tax rates and laws in effect in the PRC.
Income tax expense is computed based on pre-tax income included in the
consolidated statements of operations. The Group provides for deferred
income taxes using the liability method, by which deferred income
taxes are recognized for all significant temporary differences between
the carrying amounts and tax bases assets and liabilities and their
reported amounts. The tax consequences of those differences are
classified as current or non-current based upon the classification of
the related assets or liabilities in the financial statements.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost less accumulated
depreciation. The cost of an asset consists of its purchase price and
any directly attributable costs of bringing the asset to its present
working condition and location for its intended use. Expenditures
incurred after the assets have been put into operation, such as
repairs and maintenance, are charged to the consolidated statement of
operations in the year in which they are incurred. In situations where
it can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from
the use of the assets, the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are removed from the accounts and any gain or loss
resulting from their disposal is included in the consolidated
statement of operations.
43
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment and depreciation (Continued) When assets are
transferred between property and equipment and other classes of
assets, the cost of such an asset on transfer is deemed to be the
carrying amount of the asset as stated under its original
classification.
Depreciation is calculated to write off the cost of property and
equipment using the straight-line method at rates based on their
estimated useful lives from the date on which they become fully
operational and after taking into account their estimated residual
values.
Accounting for the impairment of long-lived assets The long-lived
assets held and used by the Group are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other
industry changes. Determination of recoverability of assets to be held
and used is by comparing the carrying amount of an asset to the future
net undiscounted cash flows to be generated by the assets. If such
assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of
inventories is determined using the weighted average cost method.
Potential losses from obsolete and slow-moving inventories are
provided for when identified. Costs of work-in-progress and finished
goods include direct materials, direct labor and an attributable
portion of manufacturing overhead.
STATEMENT OF CASH FLOWS
Cash equivalents are defined as short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. An investment
normally qualifies as a cash equivalent only when it has a maturity of
three months or less from its acquisition date.
FOREIGN CURRENCY TRANSLATION
The Company maintains its accounting books and records in US$. Foreign
currency transactions during the year are translated to US$ at the
approximate rates of exchange on the dates of transactions. Monetary
assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the approximate rates of exchange
at that date. Non-monetary assets and liabilities are translated at
the rates of exchange prevailing at the time the asset or liability
was acquired. Exchange gains or losses are recorded in the
consolidated statement of operations.
On consolidation, the financial statements of the PRC subsidiary is
translated into US$ using the closing rate method. The balance sheet
items are translated into US$ using the exchange rates at the
respective balance sheet dates. The capital and various reserves are
translated at historical exchange rates prevailing at the time of the
transactions while income and expenses items are translated at the
average exchange rate for the year. All exchange differences arising
on consolidation are recorded within equity. The amount of such
translation adjustments were not significant for the period, no other
comprehensive income was recognized.
44
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS PER SHARE
The basic earnings per share are computed by dividing income available
to common stockholders by the weighted average number of common stocks
outstanding. The computation of diluted earnings per share is similar
to the computation of basic earnings per share except that the
weighted average number of common stocks outstanding is adjusted to
include estimates of additional shares that would be issued if
potentially dilutive common stocks had been issued. In addition,
income available to common stockholders is adjusted to include any
changes in income or loss that would result from the assumed issuance
of the dilutive common stocks. There were no dilutive securities
outstanding during the period.
USES OF ESTIMATES
The preparation of the Group's financial statements in conformity with
US GAAP requires the management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual amounts could differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Group provides an allowance for doubtful accounts equal to the
estimated uncollectable amounts. The Group's estimate is based on
historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Group's
estimate of the allowance for doubtful accounts will change. Accounts
receivable are presented net of an allowance for doubtful accounts of
US$277,129 as of December 31, 2002.
SEGMENT INFORMATION
Operating segments are defined as components of a company about which
separated financial information is available that is evaluated
regularly by the operating decision maker in deciding how to allocate
resources and in assessing performance. The Group operates in a single
business segment of manufacturing and selling of paper products which
are sold in the PRC. There are no reportable business or geographical
segments identified and no segment information is disclosed
accordingly.
RELATED PARTIES
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
45
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting standards In June 2002, the FASB issued
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 requires that a liability for a cost that is
associated with an exit or disposal activity be recognized when the
liability is incurred. This standard nullifies the guidance of EITF
Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". Under EITF Issue No.
94-3, an entity recognized a liability for an exit cost on the date
that the entity committed itself to an exit plan. Under SFAS No. 146,
the FASB concludes that an entity's commitment to an exit plan does
not, by itself, create a present obligation to other parties that
meets the definition of a liability. SFAS No. 146 also establishes
that fair value is the objective for the initial measurement of the
liability. SFAS No. 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. The Group does
not expect that this standard will have a material effect on its
financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions". SFAS No. 147 provides interpretive
guidance on the application of all acquisitions of financial
institutions, except transactions between two or more mutual
enterprises. Restatement of previously issued financial statements
will be required. Those transition provisions are effective as of
October 1, 2002; however, early application is permitted. The Group
does not expect that this standard will have any effect on its
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of
FASB Statement No. 123". This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results.
This Statement requires that companies having a year-end after
December 15, 2002 follow the prescribed format and provide the
additional disclosures in their annual reports. In other words,
calendar year-end companies must comply when issuing their 2002 annual
reports. Companies must also provide the disclosures in their
quarterly reports containing condensed financial statements for
interim periods beginning after December 15, 2002 (first quarter 2003
for calendar year-end companies). The adoption of SFAS No. 148 did not
have an impact on the Group's financial statements.
46
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
6. PROVISION FOR INCOME TAXES
The Group is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates.
The subsidiary is established and is carrying on business in the PRC.
The subsidiary is subject to the PRC enterprise income tax at a rate
of 24%.
Income tax expense is comprised of the following:
US$
Current tax 25,446
Deferred tax 122,461
---------
Income tax expenses 147,907
=========
The reconciliation of the PRC statutory income tax rate to the
effective income tax rate based on income stated in the statement of
operations is as follows: %
Statutory rate 24
Non-deductible activities 6
----------
Effective tax rate 30
==========
7. INVENTORIES
Inventories comprise the following:
US$
Raw materials 1,148,035
Finished goods 514,038
-----------
1,662,073
===========
47
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
8. PROPERTY AND EQUIPMENT
Estimated useful
lives
-------------------
Years US$
Cost
Buildings and fixtures 20-50 4,184,088
Plant and machinery 10-25 9,868,128
Motor vehicles 10 279,586
----------------
14,331,802
Accumulated depreciation (4,517,360)
----------------
Property and equipment, net 9,814,442
================
9. BANKING FACILITIES
The Group had various lines of credit under banking facilities as
follows:
US$
FACILITIES GRANTED
Committed credit lines 4,552,935
============
UTILIZED FACILITIES
Committed credit lines 3,613,075
============
UNUTILIZED FACILITIES
Committed credit lines 939,859
============
There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
As of December 31, 2002, the Group had the following banking
facilities:
US$164,506 Collateralized by certain property and equipment of the Group
US$759,629 Collateralized by guarantee of a third party (note)
US$3,628,800 Collateralized by certain property and equipment of the Group and guarantee of a
third party (note)
Note: These guarantees are given by Yantai Yinhe Knitting Company
Limited.
48
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
10. RELATED PARTY TRANSACTIONS
(a) Name and relationship of related parties Existing relationships with the Company
YLPI Joint venturer of the subsidiary
Muping Iron Cover Manufacturing Factory (MIC) Branch of YLPI
Muping Paper Product Manufacturing Factory (MPP) Branch of YLPI
Muping Vegetable Processing Factory (MVP) Branch of YLPI
Mr. Tang Yuxiang Stockholder
Mr. Qu Shuzhi Stockholder
(b) Related party transactions
US$
(i) Due from related parties
MVP 13,521
MPP 43,390
MIC 165,042
-----------------
221,953
=================
(ii) Due to a related party
YLPI (Note) 2,571,843
=================
(iii) Due to stockholders
Mr. Tang Yuxiang 4,098,455
Mr. Qu Shuzhi 4,098,455
-----------------
8,196,910
=================
Note: Loans from YLPI amounting to US$2,552,256 as of December 31, 2002
represented loans borrowed from banks by YLPI on behalf of the
subsidiary.
11. EQUITY CAPITAL
As of December 31, 2002, the authorized capital of the Company is
US$50,000 consisting of 5,000,000 shares of common stock, par value
US$0.01 each.
On February 1, 2002, 5,000,000 shares of common stock par value
US$0.01 each were allotted to Mr. Tang Yuxiang and Mr. Qu Shuzhi
equally.
On January 15, 2003, the authorized capital of the Company was
increased to US$10,000,000 by the creation of 995,000,000 shares of
common stock, par value US$0.01 each. On January 28, 2003, 819,283,600
shares of common stock, par value US$0.01 each, were allotted to Mr.
Tang Yuxiang and Mr. Qu Shuzhi equally.
49
AUSTRALIA CHINA INVESTMENTS LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Period from February 1, 2002 (date of incorporation) to December 31, 2002
- --------------------------------------------------------------------------------
12. STATUTORY RESERVES
According to the Articles of Association of the subsidiary, income of
the subsidiary is distributable to its joint venture partners after
transfer to statutory reserves. Being a sino-foreign equity joint
venture, the subsidiary is required to maintain a reserve fund, an
enterprise development fund and a staff welfare and bonus fund as a
percentage of profit after tax.
Statutory reserves of the subsidiary include the reserve fund and the
staff welfare and bonus fund. Pursuant to the Articles of Association
of the subsidiary, the board of directors determine the percentage of
appropriations to the reserve fund and the staff welfare and bonus
fund. The reserve fund can be used to make good losses in previous
years.
The staff welfare and bonus fund, which is to be used for the welfare
of the staff and workers of the subsidiary, is of a capital nature.
The nature of enterprise development fund is set aside for the future
development of the subsidiary.
13. RETIREMENT BENEFITS AND OTHER EMPLOYMENT BENEFITS
As stipulated by the PRC rules and regulations, the subsidiary
participates in a retirement plan for all employees. Pursuant to the
plan, all retired employees of the subsidiary are entitled to certain
retirement benefits. The subsidiary is required to make contributions
to a state sponsored retirement plan at approximately 20% of the basic
amount which is within the range from US$57 to US$278 stipulated by
the PRC government. The subsidiary determines the base amount with
reference to the basic salary of its employees and has no further
obligations for the actual payments of any post-retirement benefits.
The state sponsored retirement plan is responsible for the entire
pension obligations payable to the employees.
The pension expense for the period ended December 31, 2002 was
US$40,620.
14. CAPITAL COMMITMENT
As of December 31, 2002, the Group had outstanding capital commitments
amounting to approximately US$702,778.
50
Australia China Investments Limited
Notes to the Financial Statements
Period from February 1, 2002 (date of incorporation) to December 31, 2002
================================================================================
15. OPERATING RISK
(a) Country risk
Currently, the Group's revenues are derived from sale of paper
products to customers in the PRC. The Group'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. The Group's
management does not believe these risks to be significant.
There can be no assurance, however, those changes in political
and other conditions will not result in any adverse impact.
(b) Credit risk
Financial instruments consist principally of temporary cash
investments and accounts receivable.The Group places its
temporary cash investments with various financial institutions
in the PRC. The Group believes that no significant credit risk
exists as these investments are placed principally with
government-owned financial institutions in the PRC.The Group's
business activities and accounts receivable are principally
with customers in PRC. The Group believes that no significant
credit risk exists as credit losses, when realized, have been
within the range of management's expectations.
The fair values of all of the Group's financial instruments
approximate their carrying values.
Audited Consolidated Financial Statements
Australia China Investments Limited
Period from February 1, 2002 (date of
incorporation) to December 31, 2002
51
Report of Independent Certified Public Accountants
To the Board of Directors and Owners of
Yantai Dahua Paper Industry Company Limited
(A Sino-foreign Equity Joint Venture established in the People's Republic of
China)
We have audited the accompanying balance sheets of Yantai Dahua Paper Industry
Company Limited (the "Company") (an equity joint venture established in the
People's Republic of China ("PRC")) as of December 31, 2000, 2001 and 2002 and
the related statements of operations, changes in owners' equity and cash flows
for each of the years then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 the Company as of December 31,
2000, 2001 and 2002 and the results of its operations and its cash flows for
each of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Date: April 25, 2003
52
Yantai Dahua Paper Industry Company Limited
Statements of Operations
Years ended December 31, 2000, 2001 and 2002
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
2000 2001 2002 2002
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
RMB RMB RMB US$
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Operating revenue
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Sale of goods 96,585,857 93,616,071 102,149,716 12,356,030
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Costs of sales (75,050,872) (71,455,136) (72,207,917) (8,734,270)
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Gross profit 21,534,985 22,160,935 29,941,799 3,621,760
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Operating expenses
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Depreciation (328,313) (376,070) (401,642) (48,583)
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Handling and shipping costs (6,084,348) (5,900,783) (4,752,591) (574,873)
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Selling, general and administrative expenses (15,797,505) (14,524,343) (14,321,978) (1,732,386)
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
(Loss) Income form operations (675,181) 1,359,739 10,465,588 1,265,918
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Non-operating income
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Sundry income 709,030 260,178 520,695 62,983
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Income before income taxes 33,849 1,619,917 10,986,283 1,328,901
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Provision for income taxes (409,790) (131,149) (2,834,106) (342,813)
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
Net (loss) income (375,941) 1,488,768 8,152,177 986,088
- ----------------------------------------------- -------------- --- --------------- --- --------------- --- ---------------
The accompanying notes are an integral part of these financial statements.
53
Yantai Dahua Paper Industry Company Limited
Balance Sheets
As of December 31, 2000, 2001 and 2002
================================================================================
As of December 31,
-----------------------------------------------------
2000 2001 2002 2002
Note RMB RMB RMB US$
ASSETS
Current assets
Cash and bank balances 7,817,564 7,596,125 5,667,121 685,495
Accounts receivable, trade 50,039,379 47,125,357 56,421,029 6,824,688
Prepayments and other receivables 7,672,862 7,678,627 9,786,474 1,183,771
Inventories 5 13,431,722 14,762,938 13,740,686 1,662,073
Income tax recoverable 8 94,161 -- -- --
Due from related parties 8 5,252,782 6,064,545 1,889,523 228,557
----------- ----------- ----------- -----------
Total current assets 84,308,470 83,227,592 87,504,833 10,584,584
Property and equipment, net 6 67,248,351 74,134,902 81,137,911 9,814,442
Construction in progress 3,416,927 1,599,673 1,174,844 142,109
----------- ----------- ----------- -----------
Total assets 154,973,748 158,962,167 169,817,588 20,541,135
----------- ----------- ----------- -----------
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Short-term loans 7 2,745,000 7,395,000 29,870,000 3,613,075
Accounts payable, trade 13,434,005 16,215,222 15,190,144 1,837,401
Accrued charges and other payables 19,635,865 15,769,353 17,647,605 2,134,655
Due to related parties 8 27,218,806 26,449,009 21,261,928 2,571,843
Income tax payable -- 36,988 205,399 24,845
Deferred tax -- -- 1,897,935 229,574
----------- ----------- ----------- -----------
Total current liabilities 63,033,676 65,865,572 86,073,011 10,411,393
----------- ----------- ----------- -----------
Non-current liabilities
Long-term loans 9 18,230,000 18,230,000 -- --
Deferred tax -- -- 725,805 87,793
----------- ----------- ----------- -----------
18,230,000 18,230,000 725,805 87,793
----------- ----------- ----------- -----------
Owners' equity
Registered capital 10 33,590,000 33,590,000 33,590,000 4,063,046
Retained earnings 36,575,466 37,648,928 45,667,872 5,523,985
Statutory reserves 11 3,544,606 3,627,667 3,760,900 454,918
----------- ----------- ----------- -----------
Total owners' equity 73,710,072 74,866,595 83,018,772 10,041,949
----------- ----------- ----------- -----------
Total liabilities and owners'
equity 154,973,748 158,962,167 169,817,588 20,541,135
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
54
Yantai Dahua Paper Company Limited
Statements of Owners' Equity
Years ended December 31, 2000, 2001 and 2002
================================================================================
Registered Retained Statutory
capital earnings reserves Total
RMB RMB RMB RMB
----------- ----------- ----------- -----------
Balances as of January 1, 2000 33,590,000 37,281,737 3,478,540 74,350,277
Net loss for the year -- (375,941) -- (375,941)
Dividends declared -- (264,264) -- (264,264)
Transfer to statutory reserves -- (66,066) 66,066 --
----------- ----------- ----------- -----------
Balances as of December 31, 2000 33,590,000 36,575,466 3,544,606 73,710,072
Net income for the year -- 1,488,768 -- 1,488,768
Dividends declared -- (332,245) -- (332,245)
Transfer to statutory reserves -- (83,061) 83,061 --
----------- ----------- ----------- -----------
Balances as of December 31, 2001 33,590,000 37,648,928 3,627,667 74,866,595
Net income for the year -- 8,152,177 -- 8,152,177
Transfer to statutory reserves -- (133,233) 133,233 --
----------- ----------- ----------- -----------
Balances as of December 31, 2002 33,590,000 45,667,872 3,760,900 83,018,772
=========== =========== =========== ===========
Balances as of December 31, 2002 (in US$) 4,063,046 5,523,985 454,918 10,041,949
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
55
Yantai Dahua Paper Industry Company Limited
Statement of Cash Flows
Years ended December 31, 2000 and 2001
================================================================================
2000 2001 2002 2002
RMB RMB RMB US$
Cash flows from operating activities:
Net (loss) income (375,941) 1,488,768 8,152,177 986,088
Adjustments to reconcile net profit to net cash
used in operating activities:
Depreciation 4,715,320 5,366,651 5,427,626 656,526
Loss on disposal of property and
equipment 251,770 231,897 445,474 53,885
Changes in working capital:
Accounts receivable, trade 1,266,927 2,914,022 (9,295,672) (1,124,404)
Prepayments and other receivables 4,708,482 (5,765) (2,107,847) (254,965)
Inventories 7,224,775 (1,331,216) 1,022,252 123,651
Due from related parties (96,384) (811,763) 1,005,350 121,607
Due to related parties (23,574) (434,550) -- --
Accounts payable, trade (6,457,746) 2,781,217 (1,025,078) (123,993)
Accrued charges and other payables 686,095 (3,866,512) 1,878,252 227,193
Income tax 309,790 131,149 2,792,151 337,739
----------- ----------- ----------- -----------
Net cash provided by operating activities 12,209,514 6,463,898 8,294,685 1,003,327
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (2,775,163) (3,627,234) -- --
Additions of construction in progress (11,437,199) (7,040,611) (12,451,280) (1,506,108)
----------- ----------- ----------- -----------
Net cash used in investing activities (14,212,362) (10,667,845) (12,451,280) (1,506,108)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings of short-term loans 1,035,000 7,395,000 10,280,000 1,243,469
Borrowings of long-term loans 18,230,000 -- -- --
Repayments of short-term loans (26,090,000) (2,745,000) (6,035,000) (729,994)
Due from related parties -- -- 3,169,672 383,404
Due to related parties 11,502,520 (335,247) (5,187,081) (627,429)
Dividend paid (264,264) (332,245) -- --
----------- ----------- ----------- -----------
Net cash used in financing activities 4,413,256 3,982,508 2,227,591 269,450
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 2,410,408 (221,439) (1,929,004) (233,331)
Cash and cash equivalents at beginning of year 5,407,156 7,817,564 7,596,125 918,826
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year 7,817,564 7,596,125 5,667,121 685,495
=========== =========== =========== ===========
Analysis of balances of cash and cash equivalents
Cash and bank balances 7,817,564 7,596,125 5,667,121 685,495
=========== =========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the fiscal period for:
Interest paid 3,370,405 3,355,317 3,195,353 386,510
Income tax 100,000 -- 41,955 5,075
=========== =========== =========== ===========
Non-cash investing and financing activities
Reclassification of long-terms loans to short
terms loans -- -- 18,230,000 2,204,007
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
56
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Yantai Dahua Paper Industry Company Limited (the "Company") was
established in the People's Republic of China ("PRC") on April 14, 1994
as a sino-foreign equity joint venture.
The Company was an equity joint venture with an initial registered
capital of Rmb38,177,000 and planned to operate for a term of 15 years
until April 14, 2009. The initial registered capital was contributed by
Yantai Longda Paper Industry Company Limited ("YLPI", a company
incorporated in the PRC) (formerly known as "Muping Paper
Manufacturer", a company established in the PRC)) and Australia China
Investment Pty Limited ("ACIP", a company incorporated in Australia) in
the ratio of 77% and 23% respectively.
On May 28, 1996, the Company's application for capital reduction to
Rmb33,590,000 was approved by Muping Foreign Economic Trade Committee.
After the reduction, the ratio of the contribution between YLPI and
ACIP was changed to 74% and 26% respectively.
The Company is principally engaged in manufacturing and selling various
paper products, including printing paper, writing paper and computer
paper, etc.
On June 28, 2002, ACIP, YLPI and Australia China Investment Limited
("ACIL") entered into an agreement (the "Agreement") in which ACIP
agreed to transfer its entire interest and YLPI agreed to transfer its
59% interest in the Company to ACIL (the "Transfer"). The aggregate
consideration of the Transfer is US$8,242,836 which represented 85% of
net asset value of of the Company as of September 30, 2002. Upon
completion of the transaction, ACIL and YLPI own 85% and 15% interest
in the Company respectively. On July 30, 2002, the Yantai Foreign
Investment Bureau approved the above transfers of interest.
2. BASIS OF PRESENTATION
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP").
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT") and returns. The Company generally recognizes product revenue
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is
probable.
57
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
Provision for income and other related taxes has been made in
accordance with the tax rates and laws in effect in the PRC.
Income tax expense is computed based on pre-tax income included in the
statements of operations. The Company provides for deferred income
taxes using the liability method, by which deferred income taxes are
recognized for all significant temporary differences between the
carrying amounts and tax bases assets and liabilities and their
reported amounts. The tax consequences of those differences are
classified as current or non-current based upon the classification of
the related assets or liabilities in the financial statements.
Property and equipment and depreciation
Property and equipment are stated at cost less accumulated
depreciation. The cost of an asset consists of its purchase price and
any directly attributable costs of bringing the asset to its present
working condition and location for its intended use. Expenditures
incurred after the assets have been put into operation, such as repairs
and maintenance, are charged to the statement of operations in the year
in which they are incurred. In situations where it can be clearly
demonstrated that expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the assets,
the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are removed from the accounts and any gain or loss
resulting from their disposal is included in the statement of
operations.
When assets are transferred between property and equipment and other
classes of assets, the cost of such an asset on transfer is deemed to
be the carrying amount of the asset as stated under its original
classification.
Depreciation is calculated to write off the cost of property and
equipment using the straight-line method at rates based on their
estimated useful lives from the date on which they become fully
operational and after taking into account of their estimated residual
values.
Accounting for the impairment of long-lived assets
The long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. It is
reasonably possible that these assets could become impaired as a result
of technology or other industry changes. Determination of
recoverability of assets to be held and used is by comparing the
carrying amount of an asset to the future net undiscounted cash flows
to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
58
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined using the weighted average cost method.
Potential losses from obsolete and slow-moving inventories are provided
for when identified. Costs of work-in-progress and finished goods
include direct materials, direct labor and an attributable portion of
manufacturing overheads.
Statement of cash flows
Cash equivalents are defined as short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. An investment
normally qualifies as a cash equivalent only when it has a maturity of
three months or less from its acquisition date.
Foreign currency translation
The Company considers Renminbi (RMB), the official currency of the PRC,
as its functional currency as a substantial portion of the Company's
business activities are based in RMB.
Transactions in currencies other than the functional currency during
the year are translated into the functional currency at the applicable
rates of exchange prevailing at the time of the transactions. Monetary
assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at the
applicable rates of exchange in effect at the balance sheet date.
Exchange gains and losses are dealt with in the statement of
operations.
For the convenience of the readers of these financial statements,
translation of amounts from RMB into United States dollars (US$) has
been made at the exchange rate of RMB1 equals to US$0.12096 on December
31, 2002. No representation is made that the RMB amounts could have
been or could be converted into US$ at the rate on December 31, 2002 or
at any other rates.
Uses of estimates
The preparation of the Company's financial statements in conformity
with US GAAP requires the management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual amounts could differ from those estimates.
Allowance for doubtful accounts
The Company provides an allowance for doubtful accounts equal to the
estimated uncollectable amounts. The Company's estimate is based on
historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change. Accounts
receivable are presented net of an allowance for doubtful accounts of
RMB963,000, RMB1,107,000 and RMB2,291,080 (US$277,129) as of December
31, 2000, 2001 and 2002 respectively.
Related parties
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
59
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New accounting pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities". Statement of Financial Accounting Standard ("SFAS") No.
146 requires that a liability for a cost that is associated with an
exit or disposal activity be recognized when the liability is incurred.
This standard nullifies the guidance of EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". Under EITF Issue No. 94-3, an entity recognized a
liability for an exit cost on the date that the entity committed itself
to an exit plan. Under SFAS No. 146, the FASB concludes that an
entity's commitment to an exit plan does not, by itself, create a
present obligation to other parties that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the
objective for the initial measurement of the liability. SFAS No. 146
will be effective for exit or disposal activities that are initiated
after December 31, 2002. The Group does not expect that this standard
will have a material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123". This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This Statement requires
that companies having a year-end after December 15, 2002 follow the
prescribed format and provide the additional disclosures in their
annual reports. In other words, calendar year-end companies must comply
when issuing their 2002 annual reports. Companies must also provide the
disclosures in their quarterly reports containing condensed financial
statements for interim periods beginning after December 15, 2002 (first
quarter 2003 for calendar year-end companies). The adoption of SFAS No.
148 did not have an impact on the Group's financial statements.
4. PROVISION FOR INCOME TAXES
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates.
The Company is established and is carrying on business in the PRC. The
Company is subject to the PRC enterprise income tax at a rate of 24%.
Deferred income tax has not been provided for in 2000 and 2001 as the
effect of temporary differences is insignificant as of December 31,
2000 and 2001.
60
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
4. PROVISION FOR INCOME TAXES (Continued)
Income tax expense is comprised of the following:
As of December 31,
------------------------------------------------------
2000 2001 2002 2002
RMB RMB RMB US$
Current tax
- current year 370,258 131,149 210,366 25,446
- underprovision for previous years 39,532 -- -- --
Deferred tax -- -- 2,623,740 317,367
--------- --------- --------- ---------
Income tax expenses 409,790 131,149 2,834,106 342,813
========= ========= ========= =========
The reconciliation of the PRC statutory income tax rate to the effective income
tax rate based on income stated in the statements of operations is as follows:
For the year ended December 31,
-------------------------------------------------
2000 2001 2002
% % %
Statutory rate 24 24 24
Non-taxable activities (69) - -
Non-deductible activities 797 28 2
Provision for doubtful debts 322 12 -
Net effect on unprovided deferred tax 20 (56) -
Underprovision for previous years 117 - -
-------------- -------------- --------------
Effective tax rate 1,211 8 26
============== ============== ==============
5. INVENTORIES
Inventories comprise the following:
As of December 31,
----------------------------------------------------------
2000 2001 2002 2002
RMB RMB RMB US$
Raw materials 5,508,236 7,868,369 9,491,030 1,148,035
Finished goods 7,923,486 6,894,569 4,249,656 514,038
---------- ---------- ---------- ----------
13,431,722 14,762,938 13,740,686 1,662,073
========== ========== ========== ==========
61
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
6. PROPERTY AND EQUIPMENT
Estimated
useful
lives As of December 31,
----------------------------------------------------------------------------------
Years 2000 2001 2002 2002
RMB RMB RMB US$
Cost Buildings and fixtures 20-50 29,803,411 29,853,204 34,590,678 4,184,088
Plant and machinery 10-25 62,140,136 74,023,890 81,581,744 9,868,128
Motor vehicles 10 2,630,208 2,827,542 2,311,391 279,586
-------------- ------------- -------------- -------------
94,573,755 106,704,636 118,483,813 14,331,802
Accumulated depreciation (27,325,404) (32,569,734) (37,345,902) (4,517,360)
-------------- ------------- -------------- -------------
Property and equipment, net 67,248,351 74,134,902 81,137,911 9,814,442
============== ============= ============== =============
7. BANKING FACILITIES
The Company had various lines of credit under banking facilities as
follows:
As of December 31,
---------------------------------------------------------------------
2000 2001 2002 2002
RMB RMB RMB US$
Facilities granted
Committed credit lines 32,745,000 37,395,000 37,640,000 4,552,935
============== =============== ============== =============
Utilized facilities
Committed credit lines 20,975,000 25,625,000 29,870,000 3,613,075
============== =============== ============== =============
Unutilized facilities
Committed credit lines 11,770,000 11,770,000 7,770,000 939,859
============== =============== ============== =============
There are no significant commitment fees or requirements for compensating
balances associated with any lines of credit.
As of December 31,
---------------------------------------------------------------------
2000 2001 2002 2002
RMB RMB RMB US$
Collateralized by certain property and
equipment of the Company 1,710,000 1,360,000 1,360,000 164,506
============== =============== ============== =============
Collateralized by guarantee of a third
party (note) 1,035,000 6,035,000 6,280,000 759,629
============== =============== ============== =============
Collateralized by certain property and
equipment of the Company and guarantee
of a third party (note) 30,000,000 30,000,000 30,000,000 3,628,800
============== =============== ============== =============
Note: These guarantees are given by Yantai Yinhe Knitting Company Limited.
62
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
8. RELATED PARTY TRANSACTIONS
(a) Name and relationship of related parties Existing relationships with the Company
YLPI PRC Joint venturer
ACIP Foreign Joint venturer (ceased on October 1, 2002)
Muping Iron Cover Manufacturing Factory (MIC) Branch of PRC Joint venturer
Muping Paper Product Manufacturing Factory (MPP) Branch of PRC Joint venturer
Muping Vegetable Processing Factory (MVP) Branch of PRC Joint venturer
ACIL Holding company (since October 1, 2002)
(b) Related party transactions
2000 2001 2002 2001
RMB RMB RMB US$
(i) Due from related parties
ACIP 3,224,265 3,224,265 - -
MVP - 297,349 111,780 13,521
MPP 489,085 1,017,784 358,716 43,390
MIC 1,539,432 1,525,147 1,364,434 165,042
ACIL - - 54,593 6,604
------------- ------------- -------------- -------------
5,252,782 6,064,545 1,889,523 228,557
============= ============= ============== =============
(ii) Due to related parties
YLPI (Note) 26,784,256 26,449,009 21,261,928 2,571,843
MVP 434,550 - - -
------------- ------------- -------------- -------------
27,218,806 26,449,009 21,261,928 2,571,843
============= ============= ============== =============
Note: Loans from YLPI amounting to RMB25,680,000, RMB22,880,000
and RMB21,100,000 (US$2,552,256) as of December 31, 2000,
2001 and 2002 respectively were borrowed from banks on
behalf of the Company.
The amounts due are unsecured, interest-free and have no fixed
repayment terms.
9. LONG-TERM LOANS
Long-term loans, summarized below, consisted primarily of bank loans.
Interest rate and maturity set out in the table below were for the
amounts outstanding as of December 31:
Interest rates Maturities Outstanding loan amounts
% RMB US$
As of December 31,
2000 7.128 12/00 - 12/03 18,230,000 2,204,007
2001 7.128 12/00 - 12/03 18,230,000 2,204,007
2002 - - - -
63
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
10. REGISTERED CAPITAL
As of December 31, 2000 and 2001, the Company has registered capital of
RMB33,590,000 which was contributed by YLPI (74%) and ACIP (26%). As of
December 31, 2002, the Company's registered capital of RMB33,590,000
(US$4,061,031) was contributed by ACIL (85%) and YLPI (15%).
11. STATUTORY RESERVES
According to the Company's articles of association, income of the
Company is distributable to its joint venture partners after transfer
to statutory reserves. Being a sino-foreign equity joint venture, the
Company is required to maintain a reserve fund, an enterprise
development fund and a staff welfare and bonus fund as a percentage of
profit after tax.
Statutory reserves of the Company include the reserve fund and the
staff welfare and bonus fund. Pursuant to the Articles of Association
of the Company, the board of directors determine the percentage of
appropriations to the reserve fund and the staff welfare and bonus
fund. The reserve fund can be used to make good losses in previous
years.
The staff welfare and bonus fund, which is to be used for the welfare
of the staff and workers of the Company, is of a capital nature. The
nature of enterprise development fund is set aside for the future
development of the Company.
Pursuant to the PRC rules and regulations applicable to a sino-foreign
joint venture enterprise, the Articles of Association of the Company
stipulate that the percentage of appropriations to these funds are
determined at the discretion of the board of directors.
12. RETIREMENT BENEFITS AND OTHER EMPLOYMENT BENEFITS
As stipulated by PRC regulations, the Company participates in a
retirement plan for all employees. Pursuant to the plan, all retired
employees of the Company are entitled to certain retirement benefits.
The Company is required to make contributions to a state sponsored
retirement plan at approximately 20% of the basic amount which is
within the range from RMB400 to RMB468 stipulated by the PRC
government. The Company determines the base amount with reference to
the basic salary of its employees and has no further obligations for
the actual payments of any post-retirement benefits. The state
sponsored retirement plan is responsible for the entire pension
obligations payable to the employees.
The pension expense for the years ended December 31, 2000, 2001 and
2002 was RMB1,175,625, RMB1,175,625 and RMB1,370,584 (US$165,786)
respectively.
64
Yantai Dahua Paper Industry Company Limited
Notes to the Financial Statements
Years ended December 31, 2000, 2001 and 2002
================================================================================
13. CAPITAL COMMITMENTS
As of December 31, 2000, 2001 and 2002, the Company has outstanding
capital commitments amounting to approximately RMB1,187,155,
RMB1,031,875 and RMB5,810,000 (US$702,778) respectively.
14. OPERATING RISK
(a) Country risk
Currently, the Company's revenues are derived from sale of paper
products to customers in PRC. 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. The Company's management does not
believe these risks to be significant. There can be no assurance,
however, those changes in political and other conditions will not
result in any adverse impact.
(b) Credit risk
Financial instruments consist principally of temporary cash
investments and accounts receivable.
The Company places its temporary cash investments with various
financial institutions in PRC. The Company believes that no
significant credit risk exists as these investments are placed
principally with government-owned financial institutions in the
PRC.
The Company's business activities and accounts receivable are
principally with customers in the PRC. The Company believes that
no significant credit risk exists as credit losses, when realized,
have been within the range of management's expectations.
The fair values of all of the Company's financial instruments
approximate their carrying values.
Audited Financial Statements
Yantai Dahua Paper Industry Company Limited
Years ended December 31, 2000, 2001 and 2002
65
ITEM 19. EXHIBITS
(a) The following financial statement are being filed as part of this annual
report on Form 20-F- incorporated by reference to Item 18 of this report:
(i) Equity
Balance Sheets
Statements of Operations
Statement of Changes in Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
Independent Auditors Report
(ii) Australia China
Statements of Operations for the period from February 2002 (date of
incorporation) to December 31, 2002
Consolidated Balance Sheets at December 31, 2002
Consolidated Statements of Stakeholders' Equity for the period from
February 2002 (date of incorporation) to December 31, 2002
Consolidated Statements of Cash Flows for the period from February 2002
(date of incorporation) to December 31, 2002
(iii) Yantai Dahua Paper
Statements of Operations for the years ended December 31, 2000, 2001
and 2002
Balance Sheets at December 31, 2000, 2001 and 2002
Statements of Owners' Equity for the years ended December 31, 2000,
2001 and 2002
Statements of Cash Flows for the years ended December 31, 2000, 2001
and 2002
(b) The following exhibits are being filed as part of this annual report on Form
20-F:
Exhibit 1.1 Memorandum of Association and Articles of Association of Equity
Finance Holding Corporation - incorporated by reference to the Exhibits to our
Registration Statement on Form 8-A12G, SEC File No. 00050184 effective on March
6, 1998.
Exhibit 1.2 The International Business Companies Act Memorandum of Association
of Equity Finance Holding Corporation - incorporated by reference to the
Exhibits to our Registration Statement on Form 8-A12G, SEC File No. 00050184
effective on March 6, 1998.
Exhibit 1.3 The International Business Companies Act Articles of Association of
Equity Finance Holding Corporation (Interpretation) - incorporated by reference
to the Exhibits to our Registration Statement on Form 8-A12G, SEC File No.
00050184 effective on March 6, 1998.
Exhibit 1.4 The Agreement and Plan of Share Exchange dated January 10, 2003.
66
Signature
The registrant hereby certifies that it meets all the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report registration statement on its behalf
YANTAI DAHUA HOLDINGS COMPANY LIMITED
By: /s/ Tang Yuxiang
----------------------------------------------
Tang Yuxiang, Chairman and Chief Executive Officer
Date: July 23, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Tang Yuxiang, certify that:
1. I have reviewed this annual report on Form 20-F of Yantai Dahua Holdings
Company Limited
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
YANTAI DAHUA HOLDINGS COMPANY LIMITED
By: /s/ Tang Yuxiang
----------------------------------------------
Tang Yuxiang, Chairman and Chief Executive Officer
Date: July 23, 2003
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, LEUNG Wai Chiu Albert, certify that:
1. I have reviewed this annual report on Form 20-F of Yantai Dahua Holdings
Company Limited
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
YANTAI DAHUA HOLDINGS COMPANY LIMITED
By: /s/ Leung Wai Chiu Albert
----------------------------------------------
LEUNG Wai Chiu Albert, Chief Financial Officer
Date: July 23, 2003