United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
October 1, 2007
(Date of Report)
Vella Productions Inc.
(Exact name of registrant as specified in its charter)
Nevada 333-137134 71-1021813
(State of (Commission File (IRS Employer
incorporation) Number) Identification No.)
999 3rd Avenue, Suite 3800 Seattle, WA 98104
(Address of principal executive offices, including zip code)
(206) 224-3725
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report.)
- --------------------------------------------------------------------------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
- --------------------------------------------------------------------------------
Item 1.01 Entry into a Material Definitive Agreement.
Merger Agreement
On October 1, 2007, Vella Productions Inc. (the "Registrant") entered into
an agreement and plan of merger with its wholly-owned subsidiary, VLLA Merger
Sub, Inc., and each of Guoxi Holding Limited ("GHL"), Hua-Cai Song, Fu-Lan Chen,
Mei-Ling Chen, Cheng-Qing Luo, Mei-Qing Zhang, Song-Mao Cai, Shenzhen Hua Yin
Guaranty & Investment Company Limited, Top Good International Limited, Total
Giant Group Limited, Total Shine Group Limited, Sure Believe Enterprises
Limited, Think Big Trading Limited, Huge Step Enterprises Limited and Billion
Hero Investments Limited (the "Merger Agreement"). A copy of the Merger
Agreement is being filed as Exhibit 10.2 to this Current Report.
The transaction described in the Merger Agreement is referred to in this
Current Report as the "Merger Transaction." A summary of the Merger Transaction,
as well as the material terms and conditions of the Merger Agreement, are set
forth below, but such summary is qualified in its entirety by the terms and
conditions of the Merger Agreement, which are incorporated herein by this
reference.
1. The Parties to the Merger Agreement
Prior to the completion of the Merger Transaction on October 1, 2007, VLLA
Merger Sub, Inc. was a Nevada corporation and a wholly owned subsidiary of the
Registrant.
Guoxi Holding Limited ("GHL") is a corporation formed on July 28, 2006
under the laws of the British Virgin Islands. GHL owns all of the issued and
outstanding stock and ownership of Jiangxi Xi Cheong Lacquer, Inc. Additional
information about GHL and Jiangxi Xi Cheong Lacquer, Inc., including audited
financial statements for the past two fiscal years and the six months ended June
30, 2007, is contained elsewhere in this Current Report (see Section 9.01
"Financial Statements").
Prior to the completion of the Merger Transaction on October 1, 2007,
Hua-Cai Song, Fu-Lan Chen, Mei-Ling Chen, Cheng-Qing Luo, Mei-Qing Zhang,
Song-Mao Cai, Shenzhen Hua Yin Guaranty & Investment Company Limited, Top Good
International Limited, Total Giant Group Limited, Total Shine Group Limited,
Sure Believe Enterprises Limited, Think Big Trading Limited, Huge Step
Enterprises Limited and Billion Hero Investments Limited were the shareholders
of GHL (the "GHL Shareholders"). In addition, Hua-Cai Song is the president and
sole director of GHL.
2. The Merger Transaction
Pursuant to the Merger Agreement, GHL merged with VLLA Merger Sub, Inc,
with GHL as the surviving entity. As a result of the Merger Transaction, GHL
became a wholly-owned subsidiary of the Registrant, which, in turn, made the
Registrant the indirect owner of the operating company subsidiary of GHL,
Jiangxi Xi Cheong Lacquer, Inc.
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3. The Merger Consideration
Under the Merger Agreement, in exchange of surrendering their shares in
GHL, the GHL Shareholders received an aggregate of (i) 68,900,000 newly-issued
shares of the Registrant's common stock, par value $.001 per share (the "Common
Stock") and (ii) $14,334,500, in the form of promissory notes payable on or
before the first year anniversary of the Merger Transaction. Consideration shall
be distributed pro ratably among the GHL Shareholders in accordance with their
respective ownership interests in GHL immediately before the completion of the
Merger Transaction. The form of the promissory note is attached as an exhibit to
the Merger Agreement.
4. The Merger Agreement; Effective Date
The Merger Agreement was executed on October 1, 2007 and contains
customary terms and conditions for a transaction of this type, including
representations, warranties and covenants, as well as provisions describing the
consideration, the process of exchanging the consideration and the effect of the
merger. The Merger Agreement contains reciprocal indemnification provisions that
provide for indemnification in the event of a breach of a representation or
warranty. The indemnification provisions survive the closing of the Merger
Transaction for 18 months.
The Articles of Merger were filed with the State of Nevada on October 2,
2007, the effective date of the Merger Transaction.
5. Material Relationships
There were no material relationships between the Registrant or its
affiliates and any of the parties to the Merger Agreement, other than in respect
of the Merger Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets.
On October 1, 2007, the Registrant entered into the Merger Agreement,
pursuant to which the Registrant completed the Merger Transaction and acquired
GHLfrom the GHL Shareholders and thereby indirectly acquired GHL's Chinese
operating subsidiary companies. Further information about the Merger Agreement
and the Merger Transaction is provided above under Item 1.01 of this Current
Report.
The Articles of Merger were filed with the State of Nevada on October 2,
2007, the effective date of the Merger Transaction.
In exchange for transferring GHL to the Registrant, the GHL Shareholders
received an aggregate of 68,900,000 newly-issued shares of the Registrant's
Common Stock and $14,334,500, which consideration was distributed pro ratably
among the GHL Shareholders in accordance with their respective ownership
interests in GHL immediately before the completion of the Merger Transaction.
Further information about the merger consideration is provided above under Item
1.01 of this Current Report.
There were no material relationships between the Registrant or its
affiliates and any of the parties to the Merger Agreement, other than in respect
of the Merger Agreement.
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Item 3.02 Unregistered Sales of Equity Securities.
The 68,900,000 aggregate shares of Common Stock issued to the GHL
Shareholders in the Merger Transaction were issued without registration under
Section 5 of the Securities Act of 1933, as amended (the "Securities Act") in
reliance on the exemptions from registration contained (i) in Section 4(2) of
the Securities Act and (ii) under Regulation S of the Securities Act afforded
generally to offshore transactions involving non-U.S. residents.
Item 5.01 Changes in Control of Registrant.
Immediately prior to the completion of the Merger Transaction, Max Time
Enterprises Limited controlled the Registrant by virtue of his holdings in the
Registrant's Common Stock. With the completion of the Merger Transaction, each
of Hua-Cai Song, Fu-Lan Chen, Mei-Ling Chen, and Shenzhen Hua Yin Guaranty and
Investment Company Limited own more than five percent of the outstanding
securities of the Registrant and, if these GHL Shareholders were to act as a
group, it is conceivable that they could influence management. The Registrant is
not aware of any arrangement or understanding among these GHL Shareholders to
act as a group.
For information about the Merger Transaction, please see the information
set forth above under Item 1.01 and Item 2.01 of this Current Report, which
information is incorporated hereunder by this reference.
Item 5.06 Change in Shell Company Status.
Because the Registrant may be deemed to be a "shell company" (as such term
is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) immediately before the completion of the Merger
Transaction, in accordance with Item 2.01(a)(f) of Form 8-K set forth below is
the information that would be required if the Registrant were filing a form for
registration of securities on Form 10-SB under the Exchange Act. The Registrant
believes that, as a result of its acquisition of subsidiaries having operating
businesses in the Merger Transaction, it is can no longer be deemed to be a
shell company.
Description of Business
Guoxi Holding Limited ("GHL") is a holding company founded on July 28,
2006 under the laws of the British Virgin Islands. GHL owns all of the issued
and outstanding stock and ownership of Jiangxi Xi Cheong Lacquer, Inc., which
began as a small family-operated hand-made wood carving business, currently
provides highly specialized products and services of superior quality and value
to consumers in a diverse set of industries in countries throughout the world.
The core business of Jiangxi Xi Cheong Lacquer, Inc. is the wood carving
business. Guoxi Holding Limited is a holding company which does not generate any
financial or operating transactions.
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Jiangxi Xi Cheong Lacquer, Inc. ("JXC"), founded in 1973, manufactures
wood products, including both traditional hand-carved and machine-carved pieces,
which represent the majority of the company's operations. Specializing in
mantels, panels, furniture, ornamental bands, religious decorations and
architectural accents, Jiangxi Xi Cheung Lacquer, Inc. has been nationally
recognized for its beautifully crafted products.
JXC is most famous for its small and intricately designed Buddhist
Shrines. In general, shrines house a particular relic or cult image, which is
the object of worship or veneration. Most commonly, shrines are constructed out
of wood and can even be inlaid with precious metals. The company's Buddhist
Shrines are desktop sized works of art that contain a miniature Buddha figure as
its focal point. These Buddha Shrines can be found in temples, homes and offices
throughout China and many other East-Asian countries. Currently, JXC has 4
departments, with approximately 520 employees, that are responsible for the
entire manufacturing process. To further develop its wood carving business and
compete in the Japanese market, JXC began cooperating with wood carving
companies based in Japan with the intent to develop a world-class comprehensive
wood carving production line.
There are no bankruptcy, receivership or similar proceedings for GHL and
its subsidiaries.
Due to the special properties of the wood carving industry, there are only
around 10 manufactures in China, most of which are still run under the old
family-operated business model, which results in low manufacturing capacities
and imperfect techniques. JXL's main competitors are: (1) Dongyang San Sheng
Wood Carving Furniture Co., Ltd, (2) Dongyang Qin Feng Wood Carving Furniture
Co., Ltd, (3) Shanghai Jin Chang Wood Carving Furniture Co., Ltd, (4) Shanghai
San Chun Song Carving Co., Ltd, and (5) Dongyang Xin Long Wang Da Carving Co.,
Ltd.
JXL's main suppliers are Anfu Fei Xiang Art Craft Company Limited, Wenzhou
Rui An Gold Leaf Art Craft Company Limited, Zixi Guang Mao Art Craft and Carving
Company Limited, Dean Rui Xiang Wood Carving Company Limited, and Pingxiang Wang
Da Carving Company Limited.
JXL's main customers are Wenzhou Yong Cheng Art Craft Company Limited,
Dongguan Da Wei Art Crafts Company Limited, Fujian Xia Men Ji Fu Art Crafts
Trading Company Limited, Shanghai Wei An Art Crafts Import and Export Company
Limited, and Japan Shari Company Limited.
Risk Factors
Following the Merger Transaction, management intends to change the
Registrant's business focus to the wood carving and manufactured wood products
business operations in which GHL's subsidiary, JXL, is currently engaged in
China. The following are risks associated with the Registrant and such business
operations. If any of these risks were to develop into actual events, the
Registrant's business, financial condition or results of operations could be
materially adversely affected and the trading price of the Registrant's Common
Stock could decline significantly.
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Risk Related to the Registrant Business and Industry
Market Competition Risk
In the wood carving industry, the Registrant faces different market
dynamics and competition which come from other countries. The Registrant's
international expansion plans subject it to risks inherent in doing business
internationally. The Registrant's long-term business strategy relies on the
expansion of the Registrant's international sales outside China by targeting
markets, such as Japan. Risks affecting the Registrant's international expansion
include challenges caused by distance, language and cultural differences,
conflicting and changing laws and regulations, foreign laws, international
import and export legislation, trading and investment policies, foreign currency
fluctuations, the burdens of complying with a wide variety of laws and
regulations, protectionist laws and business practices that favor local
businesses in some countries, foreign tax consequences, higher costs associated
with doing business internationally, restrictions on the export or import of
technology, difficulties in staffing and managing international operations,
trade and tariff restrictions, and variations in tariffs, quotas, taxes and
other market barriers. These risks could harm the Registrant's international
expansion efforts, which could in turn materially and adversely affect the
Registrant's business, operating results and financial condition. The Registrant
may not be as successful as its competitors in generating revenues in
international markets due to the lack of recognition of its products or other
factors. Developing product recognition overseas is expensive and time-consuming
and the Registrant's international expansion efforts may be more costly and less
profitable than it expects. If the Registrant is not successful in its target
markets, its sales could decline, its margins could be negatively impacted and
the Registrant could lose market share, any of which could materially harm the
Registrant's business, results of operations and profitability.
Patents and Proprietary Technology Risk
The Registrant's strategy is to protect its innovations with patents, and
to vigorously protect and defend its patents, trademarks and know-how against
infringement and unauthorized use. Although the Registrant believes that its
products and technology do not infringe upon the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Registrant in the future. There can also be no assurance that any
patent now owned by the Registrant will afford protection against competitors
that develop similar technology.
Our Expanding Operations Risk
We may not be able to manage our expanding operations effectively. We
anticipate significant continued expansion of this business as we address growth
in its user and customer base and market opportunities. To manage the potential
growth of our operations and personnel, we will be required to improve
operational and financial systems, procedures and controls, and expand, train
and manage our growing employee base. Furthermore, our management will be
required to maintain and expand our relationships with other websites, Internet
companies and other third parties. We cannot assure you that our current and
planned personnel, systems, procedures and controls will be adequate to support
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our future operations. There can be no assurance that new management will be
able to properly manage the direction of the Registrant or that any ultimate
change in the Registrant's business focus will be successful. If management
fails to properly manage and direct the Registrant, the Registrant may be forced
to scale back or abandon its existing operations, which will cause the value of
the Registrant's shares to decline.
Risks Related to Doing Business in China
Adverse changes in economic and political policies of the People's Republic of
China government could have a material adverse effect on the overall economic
growth of China, which could adversely affect our business.
Because the Registrant's operations are all located outside of the United
States and are subject to Chinese laws, any change of Chinese laws may adversely
affect the Registrant's business.
All of the Registrant's operations are outside the United States and are
located in China, which exposes it to risks, such as exchange controls and
currency restrictions, currency fluctuations and devaluations, changes in local
economic conditions, changes in Chinese laws and regulations, exposure to
possible expropriation or other Chinese government actions, and unsettled
political conditions. These factors may have a material adverse effect on the
Registrant's operations or on the Registrant's business, results of operations
and financial condition.
China's economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of
resources. While the People's Republic of China economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The People's Republic of
China government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall People's Republic of China economy, but may also have a
negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. Since early
2004, the People's Republic of China government has implemented certain measures
to control the pace of economic growth. Such measures may cause a decrease in
the level of economic activity in China, which in turn could adversely affect
our results of operations and financial condition.
The Registrant faces risks associated with currency exchange rate fluctuation,
any adverse fluctuation may adversely affect the Registrant's operating margins.
Although the Registrant is incorporated in the United States, the majority
of its current revenues are in Chinese currency. Conducting business in
currencies other than US dollars subjects the Registrant to fluctuations in
currency exchange rates that could have a negative impact on the Registrant's
reported operating results. Fluctuations in the value of the US dollar relative
6
to other currencies impact the Registrant's revenue; cost of revenues and
operating margins and result in foreign currency translation gains and losses.
Historically, the Registrant has not engaged in exchange rate hedging
activities. Although the Registrant may implement hedging strategies to mitigate
this risk, these strategies may not eliminate the Registrant's exposure to
foreign exchange rate fluctuations and involve costs and risks of their own,
such as ongoing management time and expertise, external costs to implement the
strategy and potential accounting implications.
The Chinese legal and judicial system may negatively impact foreign investors.
In 1982, the National Peoples Congress amended the Constitution of China
to authorize foreign investment and guarantee the "lawful rights and interests"
of foreign investors in China. However, China's system of laws is not yet
comprehensive. The legal and judicial systems in China are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may be varied to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption
of local regulations by national laws may adversely affect foreign investors.
However, the trend of legislation over the last 20 years has significantly
enhanced the protection of foreign investment and allowed for more control by
foreign parties of their investments in Chinese enterprises. There can be no
assurance that a change in leadership, social or political disruption, or
unforeseen circumstances affecting China's political, economic or social life,
will not affect the Chinese government's ability to continue to support and
pursue these reforms. Such a shift could have a material adverse effect on the
Registrant business and prospects.
The practical effect of the Peoples Republic of China legal system on the
Registrant business operations in China can be viewed from two separate but
intertwined considerations. First, as a matter of substantive law, the Foreign
Invested Enterprise laws provide significant protection from government
interference. In addition, these laws guarantee the full enjoyment of the
benefits of corporate Articles and contracts to Foreign Invested Enterprise
participants. These laws, however, do impose standards concerning corporate
formation and governance, which are not qualitatively different from the general
corporation laws of the several states. Similarly, the Peoples Republic of China
accounting laws mandate accounting practices, which are not consistent with U.S.
Generally Accepted Accounting Principles. China's accounting laws require that
an annual "statutory audit" be performed in accordance with Peoples Republic of
China accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the Peoples Republic of China Wholly Foreign-Owned Enterprise Law requires
a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designate financial and tax authorities, at the risk of business
7
license revocation. Second, while the enforcement of substantive rights may
appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Economic Reform Issues
Although the Chinese government owns the majority of productive assets in
China, during the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
o The Registrant will be able to capitalize on economic reforms;
o The Chinese government will continue its pursuit of economic
reform policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time
to time; and
o Business operations in China will not become subject to the
risk of nationalization.
Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect the Registrant operations.
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi (RMB), restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
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and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets.
To date, reforms to China's economic system have not adversely impacted
the Registrant operations and are not expected to adversely impact operations in
the foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that the Registrant will not be
adversely affected by changes in China's political, economic, and social
conditions and by changes in policies of the Chinese government, such as changes
in laws and regulations, measures which may be introduced to control inflation,
changes in the rate or method of taxation, imposition of additional restrictions
on currency conversion and remittance abroad, and reduction in tariff protection
and other import restrictions
Risks Related to the Company
The Registrant will continue to incur significant increased costs as a result of
operating as a public company, and management will be required to devote
substantial time to new compliance requirements.
As a public company the Registrant incurs significant legal, accounting
and other expenses under the Sarbanes-Oxley Act of 2002, together with rules
implemented by the Securities and Exchange Commission and applicable market
regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Management and other
personnel will need to devote a substantial amount of time to these new
compliance requirements. Moreover, these rules and regulations will increase the
Registrant's legal and financial compliance costs and will make some activities
more time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that the
Registrant maintains effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in 2007, the
Registrant must perform system and process evaluations and testing of the
Registrant's internal controls over financial reporting to allow management and
the Registrant's independent registered public accounting firm to report on the
effectiveness of the Registrant's internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act. The Registrant's testing, or
the subsequent testing by the Registrant's independent registered public
accounting firm, may reveal deficiencies in the Registrant's internal controls
over financial reporting that are deemed to be material weaknesses. Compliance
with Section 404 may require that the Registrant incurs substantial accounting
expenses and expend significant management efforts. If the Registrant is not
able to comply with the requirements of Section 404 in a timely manner, or if
the Registrant's accountants later identify deficiencies in the Registrant's
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of the Registrant's stock could decline and the
Registrant could be subject to sanctions or investigations by the SEC or other
applicable regulatory authorities.
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Risks Related to the Common Stock
There is a limited public market for the common stock.
There is currently a limited public market for the common stock. Holders
of the Registrant's common stock may, therefore, have difficulty selling their
common stock, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any shares of common stock,
which may be purchased, may be sold without incurring a loss. Any such market
price of the common stock may not necessarily bear any relationship to the
Registrant's book value, assets, past operating results, financial condition or
any other established criteria of value, and may not be indicative of the market
price for the common stock in the future. Further, the market price for the
common stock may be volatile depending on a number of factors, including
business performance, industry dynamics, and news announcements or changes in
general economic conditions.
The common stock may be deemed penny stock with a limited trading market.
The Registrant's common stock is currently listed for trading in the
Over-The-Counter Market on the NASD Electronic Bulletin Board or in the "pink
sheets" maintained by the National Quotation Bureau, Inc., which are generally
considered to be less efficient markets than markets such as NASDAQ or other
national exchanges, and which may cause difficulty in conducting trades and
difficulty in obtaining future financing. Further, the Registrant's securities
are subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The penny
stock rules apply to non-NASDAQ companies whose common stock trades at less than
$5.00 per share or which have tangible net worth of less than $5,000,000
($2,000,000 if the Registrant has been operating for three or more years). Such
rules require, among other things, that brokers who trade "penny stock" to
persons other than "established customers" complete certain documentation, make
suitability inquiries of investors and provide investors with certain
information concerning trading in the security, including a risk disclosure
document and quote information under certain circumstances. Many brokers have
decided not to trade "penny stock" because of the requirements of the penny
stock rules and, as a result, the number of broker-dealers willing to act as
market makers in such securities is limited. In the event that the Registrant
remains subject to the "penny stock rules" for any significant period, there may
develop an adverse impact on the market, if any, for the Registrant securities.
Because the Registrant's securities are subject to the "penny stock rules"
investors will find it more difficult to dispose of the Registrant's securities.
Further, for companies whose securities are traded in the Over-The-Counter
Market, it is more difficult: (i) to obtain accurate quotations; (ii) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
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The Registrant has not and does not anticipate paying any dividends on its
common stock; because of this the Registrant's securities could face devaluation
in the market.
The Registrant has paid no dividends on its common stock to date and it is
not anticipated that any dividends will be paid to holders of its common stock
in the foreseeable future. While the Registrant's dividend policy will be based
on the operating results and capital needs of the business, it is anticipated
that any earnings will be retained to finance the Registrant's future expansion
and for the implementation of the Registrant's new business plan. Lack of a
dividend can further affect the market value of the Registrant's common stock,
and could significantly affect the value of any investment in the Registrant.
Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding the Registrant's capital needs, business strategy and expectations.
Any statements contained herein that are not statements of historical facts may
be deemed to be forward-looking statements. In some cases, forward-looking
statements can be identified by terminology such as "may", "will", "should",
"expect", "plan", "Intend", "anticipate", "believe", estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. The Registrant
disclaims any obligation to publicly update these statements, or disclose any
difference between its actual results and those reflected in these statements.
The information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
General
Following the Merger Transaction, GHL becomes a direct subsidiary which
owns JXL. GHL is a holding company which does not generate any financial
transactions. The following discussion and analysis summarizes the significant
factors affecting GHL's results of operations for fiscal year 2006 compared to
fiscal year 2005. This discussion and analysis should be read in conjunction
with the financial statements and notes included with this Current Report.
Results Of Operations
The following table presents the statement of operations for the year
ended December 31, 2006 as compared to the comparable period of the year ended
December 31, 2005 for GHL. The discussion following the table is based on these
results.
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2006 2005
----------- -----------
Sales, net $17,718,196 $10,984,497
Cost of sales 8,864,598 3,919,797
----------- -----------
Gross profit
General and administrative expenses 525,080 446,715
----------- -----------
Income from operations 8,328,518 6,617,985
----------- -----------
Other income net 19,759 1,898
----------- -----------
Total Other (Income) Expense 19,759 1,898
----------- -----------
Income before income taxes 8,348,277 6,619,883
Net income $ 6,969,214 $ 5,527,657
=========== ===========
Net sales
Compared to the year 2005, net sales for 2006 climbed 61.30 percent,
reached $17,718,196, driven primarily by:
a. GHL launched a successful market expansion plan, increased the sales
volume in domestic market.
b. The appreciation of Chinese currency (Yuan) by almost five percent (5%)
against the US Dollar. The exchange rate of Chinese Yuan to U.S. dollar was 8.2:
1 in 2005 to 7.8: 1 in 2006.
Cost of Sales
Cost of sales in 2006 was $8,864,598 or 50.03% of the net sales in the
same period, compared to $ 3,919,797 or 35.68% of the net sales in 2005. The
absolute number increased $ 4,944,801 due to the larger scale of net sales and
the appreciation of the exchange rate of Chinese currency, also, it increased
14.35% in terms of net sales, mainly because of increased raw material cost. The
average overall raw material cost kept rising in the year of 2006.
Gross Profit Margin
Compared to 2005, in which the profit margin was 64.32%, the profit margin
of 2006 reached 49.97, decreased 14.35 percent attributed to the higher raw
material cost.
12
General and Administrative Expense
For 2006, the general and administrative expense was $525,080, compared to
$446,715 in 2005, it increased about $78,365 or 17.54%. This is because with the
expanding marketing plan and higher sales volume, the fees related to that also
kept increasing.
Income ( Loss ) from Operations
Income from operations for 2006 came in at $ 8,328,518, higher than the
number of 2005, which was $6,617,985. This is primarily due to the higher net
sales.
Net Income
Net income for 2006 was $6,969,214, an increase of $1,441,557 or 26.08%
compared 2005, which was $5,527,657. The absolutely number increased because of
the higher sales volume, but percentage number 26.08% is not as high as 61.30%,
which was the growth rate of net sales, because the larger net sales were
slightly offset by the higher raw material cost.
Liquidity and Capital Resource
Cash has historically been generated from operations. Operations and
liquidity needs are funded primarily through cash flows from operations and
short-term borrowings. Cash and cash equivalents were $154,173 at December 31,
2006 and current assets totaled $ 2,818,489 at December 31, 2006. The
Registrant's total current liabilities were $1,392,731 at December 31, 2006.
Working capital at December 31, 2006 was $1,425,758. We believe that the funds
available to us are adequate to meet our operating needs for market expansion.
During 2006, net cash provided by operating activities was $6,908,123. Cash used
by financing activities was $6,851,645.
Working Capital Requirements
Historically operations and short term financing have been sufficient to
meet our cash needs. We believe that we will be able to generate revenues from
sales. However, our actual working capital needs for the long and short term
will depend upon numerous factors, including operating results, competition, and
the availability of credit facilities, none of which can be predicted with
certainty. Future expansion will be limited by the availability of financing
products and raising capital.
Plan of Operation
As a result of the closing of the Merger, the Registrant became a holding
company and has no significant business operations or assets other than its
interest in the three operating subsidiaries, its accounting predecessor
companies. The Registrant's operating subsidiaries' short to mid-term strategic
plan is to focus on market expansion in the Chinese domestic market. The
long-term strategic goal is to focus on market expansion in the international
market, especially Japanese market.
13
The Registrant may issue additional shares of capital stock to raise
additional cash for working capital in the next twelve months. If the Registrant
issues additional shares of capital stock, the stockholders will experience
dilution in their respective percentage ownership in the Registrant. The
Registrant has not decided on the amount of the cash needed for working capital
at this point. Working capital will be used for expanding domestic market by
establishing more production lines and purchasing new equipments.
Description of Property
The assets of the Registrant and its subsidiaries on a consolidated,
post-merger basis include cash and cash equivalents, accounts receivable from
customers, notes receivables, inventories, trade deposits, and prepaid expenses.
GHL's headquarters are located in China at No. 35 Bai Ta Zhong Road,
Yujiang District, Jiangxi Province, P.R. China. As a result of the Merger, the
corporate office of the Registrant will be relocated to the above address. There
are no present plans for the improvement or development for all the properties.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of September 28,
2007, concerning shares of Common Stock of the Registrant, the only class of its
securities that are issued and outstanding, held by (1) each stockholder known
by the Registrant to own beneficially more than five percent of the common
stock, (2) each director of the Registrant, (3) each executive officer of the
Registrant, and (4) all directors and executive officers of the Registrant as a
group:
Amount and Nature Percentage of
Name and Address of Beneficial Owner(1) of Beneficial Ownership Common Stock
(2)
- ----------------------------------------------------------- ----------------------- -------------
Max Time Enterprise Limited - Hui Ping Cheng 3,500,000 57.57 %
ADirectors and executive officers as a group (1 person) 3,500,000 57.57 %
- ----------
(1) Unless otherwise indicated in the footnotes to the table, each stockholder
shown on the table has sole voting and investment power with respect to
the shares beneficially owned by him or it. Percentages of less than one
percent have been omitted from the table.
(2) Based on 6,080,000 shares of common stock of the Registrant outstanding.
The following table sets forth the ownership of our common stock as of
October 2, 2007 (after giving effect to the issuance of 68,900,000 shares of the
Registrant's Common Stock pursuant to the Merger Agreement) by each person known
by the Registrant to be the beneficial owner of more than 5% of its outstanding
Common Stock, its directors and executive officers and directors as a group.
14
Shareholder No. of Shares Percentage
- ----------- ------------- ----------
Hua-Cai Song 20,670,000 27.57%
Fu-Lan Chen 9,094,800 12.13%
Mei-Ling Chen 5,512,000 7.35%
Max Time Enterprises Limited 3,500,000 4.67%
Shenzhen Hua Yin Guaranty & Investment Co., Ltd 4,340,700 5.79%
All directors and named executive officers as a group (1
person, Hui Ping Cheng)
3,500,000 4.67%
The above table is based upon information derived from the Registrant's
stock records after the issuance of the 68,900,000 shares of Common Stock.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the shareholders named in this
table has sole or shared voting and investment power with respect to the shares
indicated as beneficially owned.
Change in Control Arrangements
There are currently no arrangements that would result in a change in
control of the Registrant.
Directors and Executive Officers, Promoters and Control Persons
Hui Ping Cheng, Director, President and Chief Financial Officer
Ms. Cheng, born in April 1964, age 43, has been employed as a senior
accountant and accounting department director by Shenzhen Yi Zhi Pharmaceutical
Company Limited from September 1998 until April 2007, where she manage and
oversee the company's accounting department. She was then employed as the
director and President by Max Time Enterprise Limited from April 2007 until now.
There are no family relationships between Ms. Cheng and the directors,
executive officers, or persons nominated or chosen by the Registrant to become
directors or executive officers. During the last two years, there have been no
transactions, or proposed transactions, to which the Registrant was or is to be
a party, in which Ms. Cheng (or any member of his immediate family) had or is to
have a direct or indirect material interest.
15
Ms. Cheng has not, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors). Ms.
Cheng has not, during the last five years, been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and, as a result of
such proceeding, was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject
to, federal or state securities laws, or finding any violation with respect to
such laws. Ms. Cheng has not, during the last five years, been a party of any
bankruptcy petition filed by or against any business of which he was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time.
Executive & Director Compensation
There are no formal written employment arrangements in place. We have
agreed to pay Ms. Lenova $500 per month for her management services with payment
to be made as the services are performed. During the period ended July 31, 2006
management services of $1,000 were charged to operations. In addition, we have
agreed to reimburse Ms. Lenova for expenses incurred on our behalf. We do not
have any agreements or understandings that would change the terms of
compensation during the course of the year.
The table below shows what we have paid to our directors since our
inception of September 30, 2005 through July 31, 2006.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------- ----------------------- -------
Other Restricted Securities All Other
Name and Annual Stock Underlying LTIP Compen-
Principal Year Salary Bonus Compen- Awards Options/ Payouts sation
Position Ended ($) ($) sation ($) ($) SARs (#) ($) ($)
- ------------------- ------------ -------- ------- ---------- ------------ ----------- -------- -----------
Olga Lenova, 09-30-05 $1,000 -0- -0- -0- -0- -0- -0-
President, (inception) (1)
Chief to
Executive 07-31-06
Officer,
Director
Svetlana 09-30-05 -0- -0- -0- -0- -0- -0- -0-
Kovaleva, (inception)
Secretary, to
Chief 07-31-06
Financial
Officer,
Treasurer,
Director
(1) Ms. Lenova has been paid $1,000 for management services
16
The Registrant currently does not have employment agreements with its
executive officers. The executive officer/director of the Registrant has agreed
to take no salary until the Registrant can generate enough revenues to support
salaries on a regular basis. The officer will not be compensated for services
previously provided. They will receive no accrued remuneration.
Compensation of Directors
No director receives any fee, salary or commission for service as a
director. In addition, no such arrangement is contemplated for the foreseeable
future.
Options
There are no options currently outstanding.
Certain Relationships and Related Transactions
Except as otherwise disclosed herein or incorporated herein by reference,
there have not been any transactions, or proposed transactions, during the last
two years, to which the Registrant was or is to be a party, in which any
director or executive officer of the Registrant, any nominee for election as a
director, any security holder owning beneficially more than five percent of the
common stock of the Registrant, or any member of the immediate family of the
aforementioned persons had or is to have a direct or indirect material interest.
Description of Securities
Each share of common stock is entitled to one vote on all matters upon
which such shares can vote. All shares of common stock are equal to each other
with respect to the election of directors and cumulative voting is not
permitted. There are no preemptive rights. In the event of liquidation or
dissolution, holders of common stock are entitled to receive, pro rata, the
assets remaining, after creditors, and holders of any class of stock having
liquidation rights senior to holders of shares of common stock, have been paid
in full. All shares of common stock are entitled to such dividends as the Board
of Directors may declare from time to time. There are no provisions in the
articles of incorporation or bylaws that would delay, defer or prevent a change
of control. The Registrant does not have any other classes of issued and
outstanding capital stock.
17
Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters
The Registrant's common stock is traded on the OTCBB under the symbol
"VLLA". As of October 2, 2007, the market price for the Registrant's common
stock was $0.00 per share. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. There is currently no trading volume.
As of October 2, 2007, there were approximately 15 holders of record of
the Registrant's common stock.
The Registrant has no plans to declare cash dividends on its common stock
in the future and has not declared any thus far during fiscal year 2007 or
during the last two completed fiscal years. There are no restrictions that limit
the ability of the Registrant to declare cash dividends on its common stock and
the Registrant does not believe that there are any that are likely to do so in
the future.
Legal Proceedings
The Registrant, its subsidiaries and its property are not a party to any
pending legal proceeding.
Changes in and Disagreements with Accountants
Not applicable.
Recent Sales of Unregistered Securities
Not applicable
Indemnification of Directors and Officers
The Registrant will indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Nevada.
18
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following financial statements are hereby included as part of this
Current Report.
Jiangxi Xi Cheong Lacquer, Inc.
-------------------------------
Report of Independent Registered Public Accounting Firm ......... F-1
Balance Sheets at December 31, 2006 and 2005 .................... F-2
Statements of Operations for the Periods Ended December 31, 2006
and 2005 ........................................................ F-3
Statements of Cash Flows for the Periods Ended December 31, 2006
and 2005 ........................................................ F-4
Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2006 and 2005 ................................ F-5
Notes to Financial Statements ................................... F-6
Condensed Consolidated Balance Sheet as of June 30, 2007
(unaudited) ..................................................... F-2
Condensed Consolidated Statements of Income for the six months
ended June 30, 2007 (unaudited) ................................. F-3
Condensed Consolidated Statements of Comprehensive Income for
the six months ended June 30, 2007 (unaudited) .................. F-4
Condensed Consolidated Statements of Stockholders' Equity for
the six months ended June 30, 2007 (unaudited) .................. F-4
Condensed Consolidated Statements of Cash Flow for the six
months ended June 30, 2007 (unaudited) .......................... F-5
Notes to Financial Statements ................................... F-6
(b) Pro forma financial information.
The following pro forma financial statements are hereby included as part
of this Current Report.
Vella Productions Inc.
----------------------
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 2007 ................................................... F-15
Unaudited Pro Forma Condensed Consolidated Statement of
Operations as of December 31, 2006 .............................. F-16
Unaudited Pro Forma Condensed Consolidated Statement of
Operations as of June 30, 2007 .................................. F-17
19
(c) Exhibits.
Exhibit No. Description
----------- -----------
10.1 Agreement and Plan of Merger, dated as of October 1,
2007, among the Registrant, VLLA Merger Sub, Inc.,
Guoxi Holding Limited, Hua-Cai Song, Fu-Lan Chen,
Mei-Ling Chen, Cheng-Qing Luo, Mei-Qing Zhang,
Song-Mao Cai, Shenzhen Hua Yin Guaranty & Investment
Company Limited, Top Good International Limited,
Total Giant Group Limited, Total Shine Group Limited,
Sure Believe Enterprises Limited, Think Big Trading
Limited, Huge Step Enterprises Limited, and Billion
Hero Investments Limited
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VELLA PRODUCTIONS, INC.
Date: October 1, 2007 By: /s/ Hui Ping Cheng
-------------------------------
Hui Ping Cheng,
Chairman of the Board &
Chief Executive Officer
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Jiangxi XiDa
(Formerly Jiangxi Xi Cheong Lacquer, Inc.)
Jiangxi, PR China
We have audited the accompanying balance sheets of Jiangxi XiDa (formerly
Jiangxi Xi Cheong Lacquer, Inc.) as of December 31, 2006 and 2005 and the
related statements of operations, stockholders' equity, and cash flows for 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 the standards of the PCAOB (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, audits of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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 Jiangxi XiDa (formerly Jiangxi
Xi Cheong Lacquer, Inc.) as of December 31, 2006 and 2005, and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Chisholm, Bierwolf & Nilson LLC
Bountiful, Utah
July 16, 2007
F-1
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC)
Balance Sheets
ASSETS
December 31,
June 30, --------------------------
2007 2006 2005
----------- ----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents (Note 2) $ 157,085 $ 154,173 $ 55,739
Accounts receivable, net (Note 2) 2,251,285 1,141,011 203,059
Receivable - related party (Note 8) -- 206,053 225,353
Prepaid expenses -- 46,963 151,996
Inventories (Note 2 & 3) 1,297,784 1,270,289 1,215,746
Other assets -- -- 1,823
----------- ----------- -----------
Total Current Assets 3,706,154 2,818,489 1,853,716
----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET (Notes 2 & 4) 221,596 235,469 306,234
----------- ----------- -----------
TOTAL ASSETS $ 3,927,750 $ 3,053,958 $ 2,159,950
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,089,423 $ 311,560 $ 94,063
Short-term loans (Note 9) 215,914 172,654 --
Other payables - related party (Note 10) 656,582 -- --
Income taxes payable (Note 2) 567,878 828,952 358,100
Unearned revenue 30,570 79,565 37,432
----------- ----------- -----------
Total Current Liabilities 2,560,367 1,392,731 489,595
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,395,000
shares authorized, 5,395,000 shares
issued and outstanding 784,152 674,375 674,375
Accumulated other comprehensive income (loss) (11,820) 25,661 (20,296)
Retained earnings 595,051 961,191 1,016,276
----------- ----------- -----------
Total Stockholders' Equity 1,367,383 1,661,227 1,670,355
----------- ----------- -----------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 3,927,750 $ 3,053,958 $ 2,159,950
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC)
Statements of Operations
For the
Six Months For the Years Ended
Ended December 31,
June 30, ----------------------------------------------
2007 2006 2005 2004
------------ ------------ ------------ ------------
(Unaudited)
NET SALES $ 12,462,123 $ 17,718,196 $ 10,984,497 $ 7,070,526
COST OF SALES 7,227,680 8,864,598 3,919,797 2,473,625
------------ ------------ ------------ ------------
GROSS PROFIT 5,234,443 8,853,598 7,064,700 4,596,901
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 288,048 525,080 446,715 383,433
------------ ------------ ------------ ------------
Total Operating Expenses 288,048 525,080 446,715 383,433
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 4,946,395 8,328,518 6,617,985 4,213,468
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income, net -- 19,759 1,898 1,425
------------ ------------ ------------ ------------
Total Other Income -- 19,759 1,898 1,425
------------ ------------ ------------ ------------
NET INCOME BEFORE INCOME TAXES 4,946,395 8,348,277 6,619,883 4,214,893
INCOME TAX EXPENSE (Note 2) (959,392) (1,379,063) (1,092,226) (695,457)
------------ ------------ ------------ ------------
NET INCOME $ 3,987,003 $ 6,969,214 $ 5,527,657 $ 3,519,436
============ ============ ============ ============
BASIC INCOME PER SHARE $ 0.74 $ 1.29 $ 1.02 $ 0.65
============ ============ ============ ============
DILUTED INCOME PER SHARE $ 0.74 $ 1.29 $ 1.02 $ 0.65
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 5,395,000 5,395,000 5,395,000 5,395,000
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME
NET INCOME $ 3,987,003 $ 6,969,214 $ 5,527,657 $ 3,519,436
Foreign currency translation adjustment (37,481) 45,957 34,178 35
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 3,949,522 $ 7,015,171 $ 5,561,835 $ 3,519,471
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC)
Statements of Stockholders' Equity
Accumulated
Common Stock Other
------------------------------ Comprehensive Retained
Shares Amount Income Earnings Totals
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 5,395,000 $ 674,375 $ (54,509) $ 966,595 $ 1,586,461
Foreign currency translation -- -- 35 -- 35
Dividends -- -- -- (3,382,955) (3,382,955)
Net income for the year
ended December 31, 2004 -- 3,519,436 3,519,436
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 5,395,000 674,375 (54,474) 1,103,076 1,722,977
Foreign currency translation -- -- 34,178 -- 34,178
Dividends -- -- -- (5,614,457) (5,614,457)
Net income for the year
ended December 31, 2005 -- -- -- 5,527,657 5,527,657
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2005 5,395,000 674,375 (20,296) 1,016,276 1,670,355
Foreign currency translation -- -- 45,957 -- 45,957
Dividends -- -- -- (7,024,299) (7,024,299)
Net income for the year
ended December 31, 2006 -- -- -- 6,969,214 6,969,214
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2006 5,395,000 674,375 25,661 961,191 1,661,227
Foreign currency translation
(unaudited) -- -- (37,481) -- (37,481)
Dividends (unaudited) -- -- -- (4,353,143) (4,353,143)
Capital distributions (unaudited) -- (674,375) -- -- (674,375)
Capital contributions (unaudited) -- 784,152 -- -- 784,152
Net income for the six months
ended June 30, 2007 (unaudited) -- -- -- 3,987,003 3,987,003
------------- ------------- ------------- ------------- -------------
Balance, June 30, 2007
(unaudited) 5,395,000 $ 784,152 $ (11,820) $ 595,051 $ 1,367,383
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-4
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC)
Statements of Cash Flows
For the
Six Months For the Years Ended
Ended December 31,
June 30, -------------------------------------------
2007 2006 2005 2004
----------- ----------- ----------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,987,003 $ 6,969,214 $ 5,527,657 $ 3,519,436
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 19,195 74,766 72,368 71,411
Change in operating assets and liabilities:
Accounts receivable (1,110,274) (937,952) (170,894) 136,530
Other receivables - related parties 206,053 19,300 (10,558) (30,061)
Prepaid expenses 46,963 105,033 (151,996) --
Inventories (27,495) (54,543) 128,013 (493,751)
Other assets -- 1,823 (177) (1,646)
Accounts payable and accrued expenses 777,863 217,497 91,887 (70,464)
Income taxes payable (261,074) 470,852 115,421 153,433
Unearned revenue (48,995) 42,133 (13,395) 31,516
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities 3,589,239 6,908,123 5,588,326 3,316,404
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (5,322) (4,001) (2,646) (776)
----------- ----------- ----------- -----------
Net Cash Used in Investing Activities (5,322) (4,001) (2,646) (776)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term loans 43,260 172,654 -- --
Net increase in other payables - related party 656,582 -- -- --
Capital contributions, net of distributions 109,777 -- -- --
Dividends paid (4,353,143) (7,024,299) (5,614,457) (3,382,955)
----------- ----------- ----------- -----------
Net Cash Used in Financing Activities (3,543,524) (6,851,645) (5,614,457) (3,382,955)
----------- ----------- ----------- -----------
EFFECT OF FOREIGN CURRENCY
TRANSLATION ADJUSTMENT (37,481) 45,957 34,178 35
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,912 98,434 5,401 (67,292)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 154,173 55,739 50,338 117,630
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 157,085 $ 154,173 $ 55,739 $ 50,338
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ -- $ -- $ -- $ --
Cash paid for income taxes $ 1,220,466 $ 908,211 $ 976,805 $ 542,024
The accompanying notes are an integral part of these financial statements.
F-5
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 1 - NATURE OF ORGANIZATION
The financial statements presented are those of Jiangxi XiDa
(formerly Jiangxi Xi Cheong Lacquer, Inc.) ("the Company"). The
Company was incorporated under the laws of the People's Republic of
China on December 22, 1995. The Company is capitalized with
5,395,000 authorized shares of no par common stock. The Company was
initially capitalized with the sale of 5,395,000 shares of common
stock sold for cash and property valued at $674,375. On May 31,
2007, the Company distributed all of its equity to the shareholders
and the Company was re-capitalized with a cash contribution of
$784,152. The Company is located in Jiangxi. The Company is engaged
in the production of traditional art products, including religious
woodcut lacquer, woodcut decorated furniture and woodcut decorations
used for building and display.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year-end.
b. Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments with
maturities of three months or less at the time of acquisition.
d. Inventories
Raw materials and supplies are stated at the lower of cost (computed
on an average cost basis) or market. Work-in-process and finished
goods are stated at the lower of average cost or market. The Company
provides inventory allowances based on excess and obsolete
inventories determined principally by customer demand.
e. Accounts Receivable
The Company extends unsecured credit to its customers in the
ordinary course of business but mitigates the associated risks by
performing credit checks and actively pursuing past due accounts. An
allowance for doubtful accounts is established and recorded based on
management's assessment of the credit history with the customer and
current relationships with them. As of June 30, 2007 (unaudited),
December 31, 2006 and 2005, the Company considered all accounts and
other receivables collectable and has not recorded a provision for
doubtful accounts.
F-6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Concentrations of Credit Risk
Cash
The Company's cash accounts are held in foreign bank accounts which
are not insured by the FDIC. At June 30, 2007 (unaudited), December
31, 2006 and 2005, the Company's cash balances, net of outstanding
checks, in its foreign bank accounts were $157,085, $154,173 and
$55,739, respectively.
Foreign Currency Translation
The functional currency of the Company is the Chinese Yuan Renminbi
("CNY"). Transactions denominated in foreign currencies are
translated into United States Dollars using period end exchange
rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transaction occurred. Net
gains and losses resulting from foreign exchange translations are
included in the statements of operations and stockholder's equity as
other comprehensive income/(loss).
Since the Company's financial statements must be translated into
U.S. Dollars from the base currency of Chinese Yuan Renminbi
("CNY"), major changes in the currency exchange rate between the CNY
and U.S. Dollars may have a significant impact on the operations of
the Company. Although the Company does not anticipate the currency
exchange rate to be significantly different over the next 12 months,
no such assurances can be given.
Foreign Operations
All of the Company's operations and assets are located in China. The
Company may be adversely affected by possible political or economic
instability in this foreign country. The effect of these factors
cannot be accurately predicted.
g. Revenue Recognition
The Company applies the provisions of SEC Staff Accounting Bulletin
("SAB") No. 104, Revenue Recognition in Financial Statements
("SAB104"), which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the
SEC. SAB 104 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to
revenue recognition policies. Sales revenue is recognized when (1)
persuasive evidence of an arrangement exists; (2) delivery has
occurred or services rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured. The
Company determines whether criteria (3) and (4) are met based on
judgments regarding the nature of the price charged for products
delivered and the collectibility of those fees. Payments received
before all of the relevant criteria for revenue recognition are
satisfied are recorded as unearned revenue.
F-7
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
h. Advertising
The Company follows the policy of charging the costs of advertising
to expense as incurred.
i. Property and Equipment
Property and equipment is stated at cost. Betterments and
improvements are capitalized over their estimated useful lives,
whereas repairs and maintenance expenditures on the assets are
charged to expense as incurred. When assets are disposed of, the
cost and accumulated depreciation (net book value of the assets) is
eliminated and any resulting gain or loss is reflected accordingly.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are
as follows:
Buildings 20 years
Plant and machinery 10 years
Furniture and equipment 5 years
j. Basic and Diluted Net Income per Share of Common Stock
In accordance with Financial Accounting Standards No. 128, "Earnings
per Share," basic net income per common share is based on the
weighted average number of shares outstanding during the periods
presented. Diluted earnings per share is computed using weighted
average number of common shares plus dilutive common share
equivalents outstanding during the period. At June 30, 2007
(unaudited), December 31, 2006 and 2005, the Company had no dilutive
common share equivalents.
December 31,
June 30, ------------------------
2007 2006 2005
---------- ---------- ----------
(Unaudited)
Numerator - net income $3,987,003 $6,969,214 $5,527,657
Denominator - weighted average
number of shares outstanding,
basic and diluted 5,395,000 5,395,000 5,395,000
---------- ---------- ----------
Basic and diluted income per share $ 0.74 $ 1.29 $ 1.02
========== ========== ==========
F-8
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Recent Accounting Pronouncements
SFAS No. 155 - In February 2006, the FASB issued SFAS No. 155,
"Accounting for Certain Hybrid Financial Instruments" ("SFAS 155").
SFAS 155 allows any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" to be carried at fair value in its entirety, with
changes in fair value recognized in earnings. In addition, SFAS 155
requires that beneficial interests in securitized financial assets
be analyzed to determine whether they are freestanding derivatives
or contain an embedded derivative. SFAS 155 also eliminates a prior
restriction on the types of passive derivatives that a qualifying
special purpose entity is permitted to hold. SFAS 155 is applicable
to new or modified financial instruments in fiscal years beginning
after September 15, 2006, though the provisions related to fair
value accounting for hybrid financial instruments can also be
applied to existing instruments. Early adoption, as of the beginning
of an entity's fiscal year, is also permitted, provided interim
financial statements have not yet been issued. The Company is
currently evaluating the potential impact, if any, that the adoption
of SFAS 155 will have on its financial statements
FIN No. 48 - In July 2006, the FASB issued Financial Interpretation
No. (FIN) 48, Accounting for Uncertainty in Income Taxes, which
applies to all tax positions related to income taxes subject to No.
109 (SFAS 109), Accounting for Income Taxes. This includes tax
positions considered to be "routine" as well as those with a high
degree of uncertainty. FIN 48 utilizes a two-step approach for
evaluating tax positions. Recognition (step one) occurs when an
enterprise concludes that a tax position, based solely on its
technical merits, is more-likely-than-not to be sustained upon
examination. Measurement (step two) is only addressed if step one
has been satisfied (i.e., the position is more-likely-than-not to be
sustained). Under step two, the tax benefit is measured as the
largest amount of benefit, determined on a cumulative probability
basis that is more-likely-than-not to be realized upon ultimate
settlement. FIN 48's use of the term "more-likely-than-not" in steps
one and two is consistent with how that term is used in SFAS 109
(i.e., a likelihood of occurrence greater than 50 percent).
Those tax positions failing to qualify for initial recognition are
recognized in the first subsequent interim period they meet the
more-likely-than-not standard, or are resolved through negotiation
or litigation with the taxing authority, or upon expiration of the
statute of limitations. Derecognition of a tax position that was
previously recognized would occur when a company subsequently
determines that a tax position no longer meets the
more-likely-than-not threshold of being sustained. FIN 48
specifically prohibits the use of a valuation allowance as a
substitute for derecognition of tax positions. Additionally, FIN 48
requires expanded disclosure requirements, which include a tabular
rollforward of the beginning and ending aggregate unrecognized tax
benefits as well as specific detail related to tax uncertainties for
which it is reasonably possible the amount of unrecognized tax
benefit will significantly increase or decrease within twelve
months. These disclosures are required at each annual reporting
period unless a significant change occurs in an interim period. FIN
48 is effective for fiscal years beginning after December 15, 2006.
The Company does not believe the adoption will have material impact
on its results of operation.
F-9
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Recent Accounting Pronouncements (Continued)
SFAS No. 157 - In September 2006, the FASB issued SFAS 157, Fair
Value Measurements, which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 will be effective for fiscal years
beginning after November 15, 2007, and interim periods within those
fiscal years. Management does not believe that the application of
SFAS 157 will have a material impact on the Company's financial
statements.
EITF No. 06-03 - In March 2006, the Emerging Issues Task Force
(EITF) reached a tentative consensus on Issue No. 06-03, How Sales
Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is,
Gross Versus Net Presentation) ("EITF 06-03"). EITF 06-03 addresses
income statement classification and disclosure requirements of
externally-imposed taxes on revenue-producing transactions. EITF
06-03 is effective for periods beginning after December 15, 2006.
Management is currently evaluating the effect implementation of EITF
06-03 will have on the Company's financial statements.
l. Income Taxes
The Company is organized and operates in the People's Republic of
China ("PRC"). The Company's income tax rate in the PRC is currently
15% and taxable income is computed according to the relevant laws
and regulations in the PRC. Income tax expense for the six months
ended June 30, 2007 (unaudited) and for the years ended December 31,
2006, 2005 and 2004 was $959,392, $1,379,063, $1,092,226 and
$695,457, respectively. At June 30, 2007 (unaudited), December 31,
2006 and 2005, the Company had income taxes payable of $567,878,
$828,952 and $358,100, respectively.
NOTE 3 - INVENTORIES
Inventories consisted of the following at June 30, 2007 (unaudited),
December 31, 2006 and 2005:
December 31,
June 30, ------------------------
2007 2006 2005
---------- ---------- ----------
(Unaudited)
Raw materials $ 417,886 $ 678,661 $ 747,433
Work in process 204,043 66,270 --
Finished goods 675,855 525,358 468,313
---------- ---------- ----------
Totals $1,297,784 $1,270,289 $1,215,746
========== ========== ==========
At June 30, 2007 (unaudited), December 31, 2006 and 2005, no
provision for obsolete inventory was recorded by the Company.
F-10
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2007
(unaudited), December 31, 2006 and 2005:
December 31,
June 30, -----------------------
2007 2006 2005
--------- --------- ---------
(Unaudited)
Buildings $ 200,478 $ 200,478 $ 200,478
Plant and machinery 656,590 655,453 654,788
Furniture and office equipment 78,691 74,506 71,170
--------- --------- ---------
Total property and equipment 935,759 930,437 926,436
Less: accumulated depreciation (714,163) (694,968) (620,202)
--------- --------- ---------
Property and equipment, net $ 221,596 $ 235,469 $ 306,234
========= ========= =========
Depreciation expense on property and equipment was $19,195, $74,766,
$72,368 and $71,411 for the six months ended June 30, 2007
(unaudited) and for the years ended December 31, 2006, 2005 and
2004, respectively.
NOTE 5 - STATUTORY COMMON WELFARE FUND AND DIVIDENDS PAYABLE
As stipulated by the Company Law of the People's Republic of China
(PRC), net income after taxation can only be distributed as
dividends after appropriation has been made for the following: (i)
making up cumulative prior years' losses, if any; (ii) allocations
to the "statutory surplus reserve" of at least 10% of income after
tax, as determined under PRC accounting rules and regulations, until
the fund amounts to 50% of the Company's registered capital; (iii)
allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "statutory common
welfare fund" which is established for the purpose of providing
employee facilities and other collective benefits to the Company's
employees; and (iv) allocations to the discretionary surplus
reserve, if approved in the stockholders' general meeting. The
Company has not yet established a reserve for the annual
contribution of 5% of net income to the welfare.
In accordance with the shareholders' general meeting, the Company
approved dividends of $4,353,143, $7,024,299, $5,614,457 and
$3,382,955 during the six months ended June 30, 2007 (unaudited) and
the years ended December 31, 2006, 2005 and 2004, respectively. The
balance of the dividends were paid in full in the period that they
were approved.
F-11
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Employee Benefits
The employees of the company in the PRC are members of the
state-managed retirement benefit scheme operated by the local
government. The Company is required to contribute a fixed percentage
of payroll costs to the retirement benefit scheme to fund the
benefits. The only obligation of the Company with respect to the
retirement scheme is to make the specified contributions. The
Company's contribution to the scheme for the six months ended June
30, 2007 (unaudited) and for the years ended December 31, 2006, 2005
and 2004 was $35,009, $187,931, $101,037 and $114,306, respectively.
NOTE 7 - FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107),
"Disclosures about Fair Value of Financial Instruments" requires
disclosure of the fair value of financial instruments held by the
Company. SFAS 107 defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a
current transaction between willing parties. The following methods
and assumptions were used to estimate fair value:
The carrying amount of cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value due to
their short-term nature.
NOTE 8 - RELATED PARTY RECEIVABLE
The Company occasionally advances funds to the majority shareholder
(parent company). These advances are non-interest bearing,
short-term in nature, unsecured, and due on demand. The balances due
from this related party at June 30, 2007 (unaudited), December 31,
2006 and 2005 were $-0-, $206,053 and $225,353, respectively.
NOTE 9 - SHORT-TERM LOANS
During the year ended December 31, 2006, the Company implemented the
use of short-term loans from a bank to cover the costs associated
with foreign shipments (specifically exports to Japan). These short
term loans are secured by the related goods being shipped and bear
interest at a variable rate. The loans and any interest are usually
paid off within fifteen (15) days. The balance due on these loans
was $215,914, $172,654 and $-0- at June 30, 2007 (unaudited),
December 31, 2006 and 2005, respectively.
NOTE 10 - OTHER PAYABLES - RELATED PARTY
During the six months ended June 30, 2007, the Company received
loans from a related party. These loans are considered short-term in
nature, non-interest bearing and due on demand. The balance owed at
June 30, 2007 (unaudited) was $656,582.
F-12
JIANGXI XIDA
(FORMERLY JIANGXI XI CHEONG LACQUER, INC.)
Notes to the Financial Statements
June 30, 2007 (Unaudited), December 31, 2006 and 2005
NOTE 11 - MAJOR CUSTOMERS
For the six months ended June 30, 2007, one customer generated sales
in excess of 10% of the Company's total sales. Sales to this
customer totaled $1,970,582 or 16% of total revenues. At June 30,
2007, the receivable balance from this customer was $366,744 or 16%
of accounts receivable.
For the year ended December 31, 2006, one customer generated sales
in excess of 10% of the Company's total sales. Sales to this
customer totaled $3,625,040 or 20% of total revenues. At December
31, 2006, the receivable balance from this customer was $147,270 or
13% of accounts receivable.
F-13
VELLA PRODUCTIONS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On September 24, 2007, Vella Products, Inc., (the "Company), entered into a
Letter of Agreement and Plan of Merger with Guoxi Holding Limited, a British
Virgin Islands corporation., ("GHL"). GHL is the parent company and 100% owner
of Jiangxi XiDa, a China Corporation, ("JXD"). Under the Letter of Agreement and
Plan of Merger, in exchange for surrendering their shares in GHL, the GHL
Shareholders received both stock consideration and cash consideration. The stock
consideration consisted of 68,900,000 newly issued shares of the Company's
common stock, which were divided proportionally among the GHL Shareholders in
accordance with their respective ownership interests in GHL immediately before
the completion Merger Transaction. The cash consideration consisted of
$14,334,500 in cash, again divided proportionally among the GHL Shareholders in
accordance with their respective ownership interests in GHL immediately before
the completion Merger Transaction and payable no later than the first
anniversary of the Merger Transaction. The obligation to pay the cash
consideration is evidenced by interest-free promissory notes between the Company
and each of the GHL Shareholders.
The acquisition will be accounted for as a purchase, with the assets acquired
and liabilities assumed recorded at fair value, and the results of GHL's
operations included in the Company's condensed financial statements from the
date of acquisition.
The unaudited pro forma condensed balance sheet shows the effect to the
financial position at June 30, 2007 as if the acquisition occurred at January 1,
2007. Such financial position of the Company is not necessarily indicative of
the financial position as it may be in the future, or as it may have been had
these events been effective January 1, 2007. The unaudited pro forma condensed
statement of operations for the year ended December 31, 2006 gives effect to the
results of operations as if the acquisition occurred at January 1, 2006. The
unaudited pro forma condensed statement of operations for the six months ended
June 30, 2007 gives effect to the results of operations as if the acquisition
occurred at January 1, 2007.
The pro forma condensed financial statements may not be indicative of the actual
results of the acquisition. In particular, the pro forma condensed financial
statements are based on management's current estimate of the allocation of the
purchase price, the actual allocation of which may differ.
The accompanying condensed pro forma financial statements should be read in
connection with the historical financial statements of the Company and GHL.
F-14
VELLA PRODUCTIONS, INC.
Unaudted Pro Forma
Condensed Consolidated Balance Sheets
At June 30, 2007
Jiangxi XiDa, a
wholly-owned Subsidiary
of Guoxi Holding, Ltd. Vella Productions, Inc.
As of June 30, 2007 As of July 31, 2007 Adjustments Pro Forma
ASSETS
Cash and equivalents 157,085 265 - 157,350
Accounts receivable, net 2,251,285 - - 2,251,285
Inventories 1,297,784 - - 1,297,784
Property and equipment 221,596 - - 221,596
Prepaid expenses - 244 - 244
Investment in Jiangxi XiDa - - 34,450,000 (1) 33,082,617
(1,367,383) (2)
- ------------------------------------------------------------------------------------------------------------------ -------------
TOTAL ASSETS 3,927,750 509 33,082,617 37,010,876
================================================================================================================== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses 1,089,423 3,321 - 1,092,744
Short term loans 215,914 - - 215,914
Other payables - related party 656,582 - - 656,582
Income taxes payable 567,878 - - 567,878
Unearned revenue 30,570 30,570
Notes payable, Zhe Jiang 9D shareholders - - 14,334,500 (1) 14,334,500
- ------------------------------------------------------------------------------------------------ -------------
Total liabilities 2,560,367 3,321 16,898,188
- ------------------------------------------------------------------------------------------------ -------------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock 784,152 6,080 689,000 (1) 695,080
(784,152) (2)
Paid in capital - 49,020 33,761,000 (1) 33,810,020
Retained earnings 595,051 - (595,051) (2) -
Deficit accumulated during the development
stage - (57,912) (57,912)
Dividends - - (14,334,500) (1) (14,334,500)
Foreign currency translation (11,820) - 11,820 (2) -
- ------------------------------------------------------------------------------------------------ -------------
Total shareholders' equity (deficit) 1,367,383 (2,812) 20,112,688
- ------------------------------------------------------------------------------------------------ -------------
- ------------------------------------------------------------------------------------------------------------------ -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT) 3,927,750 509 33,082,617 37,010,876
================================================================================================================== =============
F-15
VELLA PRODUCTIONS, INC.
Unaudted Pro Forma
Condensed Consolidated Statement of Operations
Year Ended December 31, 2006
Jiangxi XiDa, a
wholly-owned Subsidiary
of Guoxi Holding, Ltd. Vella Productions, Inc. Adjustments Pro Forma
For the Year Ending For the Year Ending
December 31, 2006 January 31, 2007
REVENUES
Sales, net 17,718,196 - 17,718,196
- -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL REVENUES 17,718,196 - 17,718,196
- ------------------------------------------------------------------------------------------------ -------------
COST OF SALES
Cost of sales 8,864,598 - 8,864,598
- -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL COST OF SALES 8,864,598 - 8,864,598
- ------------------------------------------------------------------------------------------------ -------------
GROSS PROFIT 8,853,598 - 8,853,598
GENERAL AND ADMINISTRATIVE EXPENSES (525,080) (60,336) (585,416)
- ------------------------------------------------------------------------------------------------ -------------
INCOME FROM OPERATIONS 8,328,518 (60,336) 8,268,182
- ------------------------------------------------------------------------------------------------ -------------
OTHER INCOME (EXPENSE):
Other income 19,759 - 19,759
- - -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL OTHER INCOME, NET 19,759 - 19,759
- ------------------------------------------------------------------------------------------------ -------------
INCOME BEFORE INCOME TAXES 8,348,277 (60,336) 8,287,941
INCOME TAXES 1,379,063 - 1,379,063
- ------------------------------------------------------------------------------------------------ -------------
NET INCOME 6,969,214 (60,336) 6,908,878
================================================================================================ =============
OTHER COMPREHENSIVE INCOME
Foreign currency translation 45,957 - 45,957
- ------------------------------------------------------------------------------------------------ -------------
COMPREHENSIVE LOSS 7,015,171 (60,336) 6,954,835
================================================================================================ =============
BASIC AND DILUTED LOSS PER SHARE (0.01) 0.09
- ------------------------------------------------------------------------------------------------------------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,331,739 68,900,000 (1) 74,231,739
================================================================================================================== =============
F-16
VELLA PRODUCTIONS, INC.
Unaudted Pro Forma
Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2007
Jiangxi XiDa, a
wholly-owned Subsidiary
of Guoxi Holding, Ltd. Vella Productions, Inc. Adjustments Pro Forma
For the Six Months For the Six Months
Ending June 30, 2007 Ending July 31, 2007
REVENUES
Sales, net 12,462,123 - 12,462,123
- -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL REVENUES 12,462,123 - 12,462,123
- ------------------------------------------------------------------------------------------------ -------------
COST OF SALES
Cost of sales 7,227,680 - 7,227,680
- -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL COST OF SALES 7,227,680 - 7,227,680
- ------------------------------------------------------------------------------------------------ -------------
GROSS PROFIT 5,234,443 - 5,234,443
GENERAL AND ADMINISTRATIVE EXPENSES (288,048) (23,725) (311,773)
- ------------------------------------------------------------------------------------------------ -------------
INCOME FROM OPERATIONS 4,946,395 (23,725) 4,922,670
- ------------------------------------------------------------------------------------------------ -------------
OTHER INCOME (EXPENSE):
- - -
Gain on write off of related party
amounts - 26,613 26,613
- - -
- ------------------------------------------------------------------------------------------------ -------------
TOTAL OTHER INCOME, NET - 26,613 26,613
- ------------------------------------------------------------------------------------------------ -------------
INCOME BEFORE INCOME TAXES 4,946,395 2,888 4,949,283
INCOME TAXES 959,392 - 959,392
- ------------------------------------------------------------------------------------------------ -------------
NET INCOME 3,987,003 2,888 3,989,891
================================================================================================ =============
OTHER COMPREHENSIVE INCOME
Foreign currency translation (37,481) - (37,481)
- ------------------------------------------------------------------------------------------------ -------------
COMPREHENSIVE LOSS 3,949,522 2,888 3,952,410
================================================================================================ =============
BASIC AND DILUTED LOSS PER SHARE 0.00 0.05
- ------------------------------------------------------------------------------------------------------------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,241,096 68,900,000 (1) 74,141,096
================================================================================================================== =============
F-17
VELLA PRODUCTIONS, INC.
NOTES TO PRO FORMA CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: The pro forma adjustments to the condensed balance sheet at June 30,
2007 are as follows:
(1) Reflects the final issuance of the Company's common stock,
68,900,000 shares, and promissory notes in exchange for 100%
ownership interest in GHL.
(2) Reflects the allocation of the equity of GHL to the appropriate
accounts of the Company.
The Company is still in the process of evaluating the fair value of the assets
acquired and the liabilities assumed in order to make a final determination of
the cost in excess of net assets acquired. Accordingly, the purchase accounting
information is preliminary and has been made sole for the purpose of developing
such pro forma condensed financial information. Based on current information,
the preliminary determination of the cost in excess of net assets acquired
should not materially differ from the final determination.
F-18