JINAN INDUSTRIAL MATERIAL COMPANY
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1993, 1994 AND 1995
TOGETHER WITH AUDITORS' REPORT AND PRO FORMA
FINANCIAL INFORMATION OF CHINA
BASIC INDUSTRIES, INC.
<PAGE>
ARTHUR ANDERSEN
Arthur Andersen & Co
Certified Public Accountants
25/F., Wing On Centre
111 Connaught Road Central
Hong Kong
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Jinan Industrial Material Company
We have audited the accompanying balance sheets of Jinan Industrial Material
Company (the "Company"), incorporated in the People's Republic of China, as of
December 31, 1994 and 1995, and the related statements of income, cash flows and
changes in equity for the years ended December 31, 1993, 1994 and 1995,
expressed in Chinese Renminbi. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1994 and 1995, and the results of its operations and cash flows for the years
ended December 31, 1993, 1994 and 1995 in conformity with generally accepted
accounting principles in the United States of America.
Arthur Andersen & Co.
Hong Kong
June 19, 1996.
<PAGE>
<TABLE>
<CAPTION>
JINAN INDUSTRIAL MATERIAL COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,1993,1994 AND 1995
(Amounts in thousands)
For the year ended December 31,
1993 1994 1995 1995
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Sales 149,699 150,975 220,056 26,441
-------- --------- --------
Cost of goods sold (109,230) (111,528) (182,823) (21,967)
Selling and
administrative
expenses (32,099) (28,192) (23,526) (2,827)
Interest (expenses)
income, net (1,593) (6,429) 27 3
Other (expenses)
income, net (1,138) (1,005) 1,762 212
-------- --------- --------
Total costs and expenses (144,060) (147,154) (204,560) (24,579)
-------- --------- --------
Income before income
taxes 5,639 3,821 15,496 1,862
Write back of (provision
for) income taxes 1,340 (1,458) (2,755) (331)
-------- --------- --------
Net income 6,979 2,363 12,741 1,531
-------- --------- --------
<FN>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (Rmb) into United States dollars (US$) for
the convenience of the reader has been made at the rate of US$1.00=Rmb8.3224
announced by the People's Bank of China on June 19, 1996. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 19, 1996 or at any other certain
rate.
</FN>
<PAGE>
<CAPTION>
JINAN INDUSTRIAL MATERIAL COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995
(Amounts in thousands)
December 31,
1994 1995 1995
Rmb Rmb US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 2,816 5,917 711
Accounts receivable, net 69,931 82,306 9,890
Inventories 24,465 41,735 5,015
Prepayments and other current assets 25,728 24,841 2,985
-------- --------- --------
Total current assets 122,940 154,799 18,601
Property, plant and equipment, net 83,395 127,192 15,283
Investment in associated companies - 5,516 663
Long-term investments 225 718 86
Value added tax credit 6,551 2,521 303
Deferred tax assets 4,833 8,698 1,045
-------- --------- --------
Total assets 217,944 299,444 35,981
-------- --------- --------
LIABILITIES
Current liabilities:
Short-term bank loans 54,522 68,736 8,259
Other short-term loans 20,820 21,947 2,637
Accounts payable 69,835 89,391 10,741
Accrued expenses and other liabilities 28,581 38,578 4,636
Debentures 5,177 - -
Taxation payable 12,089 24,716 2,970
-------- --------- --------
Total current liabilities 191,024 243,368 29,243
Long-term bank loans 8,755 18,390 2,210
Other long-term loans - 6,780 815
-------- --------- --------
Total liabilities 199,779 268,538 32,268
-------- --------- --------
INVESTORS' EQUITY
Capital 22,939 22,939 2,756
Specific reserves 62,093 88,811 10,671
Accumulated deficit (66,867) (80,844) (9,714)
-------- --------- --------
Total investors' equity 18,165 30,906 3,713
-------- --------- --------
Total liabilities and equity 217,944 299,444 35,981
-------- --------- --------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
JINAN INDUSTRIAL MATERIAL COMPANY
BALANCE SHEETS (Cont'd)
AS OF DECEMBER 31, 1994 AND 1995
(Amounts in thousands)
Translation of amounts from Renminbi (Rmb) into United States dollars (US$)
for the convenience of the reader has been made at the rate of US$1.00=Rmb8.3224
announced by the People's Bank of China on June 19, 1996. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 19, 1996 or at any other certain
rate.
<PAGE>
<TABLE>
<CAPTION>
JINAN INDUSTRIAL MATERIAL COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994 AND 1995
(Amounts in thousands)
For the year ended December 31,
1993 1994 1995 1995
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 6,979 2,363 12,741 1,531
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation of property,
plant and equipment 3,287 2,781 4,460 536
Loss on disposals of property,
plant and equipment 651 - 2,018 242
(Increase) decrease in assets:
Accounts receivable (12,931) (29,174) (12,375) (1,487)
Inventories (7,367) (888) (17,270) (2,075)
Prepayments and other
current assets (2,360) (10,202) 887 107
Value added tax credit - (6,551) 4,030 484
Deferred tax assets (2,740) (2,094) (3,865) (464)
Increase (decrease) in liabilities:
Accounts payable 29,908 2,415 19,556 2,350
Accrued expenses and other
liabilities 586 25,491 9,997 1,201
Taxation payable 3,001 7,296 12,627 1,517
------ ------ ------ -----
Net cash provided by
(used in) operating
activities 19,014 (8,563) 32,806 3,942
------ ------ ------ -----
Cash flows from investing activities:
Additions to property, plant
and equipment (28,088) (37,843) (50,275) (6,041)
Investment in associated
companies - - (5,516) (663)
(Increase) decrease in long
term investments (208) 163 (493) (59)
------ ------ ------ -----
Net cash used in investing
activities (28,296) (37,680) (56,284) (6,763)
------ ------ ------ -----
<PAGE>
<CAPTION>
JINAN INDUSTRIAL MATERIAL COMPANY
STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994 AND 1995
(Amounts in thousands)
For the year ended December 31,
1993 1994 1995 1995
Rmb Rmb Rmb US$
<S> <C> <C> <C> <C>
Cash flows from financing
activities:
(Repayment of) net proceeds
from short-term bank loans (2,419) 40,861 14,214 1,708
Net proceeds from other short-
term loans 5,195 8,120 1,127 135
Redemption of debentures - - (5,177) (622)
Net proceeds from (repayment
of) long-term bank loans 4,214 (464) 9,635 1,158
Net proceeds from other long-
term loans - - 6,780 815
Contributions from
government 350 - - -
Others 125 (21) - -
------ ------ ------ -----
Net cash provided by
financing activities 7,465 48,496 26,579 3,194
------ ------ ------ -----
Net (decrease) increase in cash
and cash equivalents (1,817) 2,253 3,101 373
------ ------ ------ -----
Cash and cash equivalents,
beginning of year 2,380 563 2,816 338
------ ------ ------ -----
Cash and cash equivalents, end
of year 563 2,816 5,917 711
------ ------ ------ -----
<FN>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (Rmb) into United States dollars (US$)
for the convenience of the reader has been made at the rate of US$1.00=Rmb8.3224
announced by the People's Bank of China on June 19, 1996. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 19, 1996 or at any other certain
rate.
</FN>
<PAGE>
<CAPTION>
JINAN INDUSTRIAL MATERIAL COMPANY
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1993, 1994 AND 1995
(Amounts in thousands)
Specific Accumulated
Capital reserves deficit Total
Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C>
Balance as of January 1, 1993 21,691 584 (13,906) 8,369
Net income - - 6,979 6,979
Transfer to capital and specific
reserves 776 44,185 (44,961) -
Contributions from investors 350 - - 350
Others - 125 - 125
------ ------ ------ -----
Balance as of December 31,
1993 22,817 44,894 (51,888) 15,823
Net income - - 2,363 2,363
Transfer to capital and specific
reserves 122 17,220 (17,342) -
Others - (21) - (21)
------ ------ ------ -----
Balance as of December 31,
1994 22,939 62,093 (66,867) 18,165
Net income - - 12,741 12,741
Transfer to specific reserves - 26,718 (26,718) -
------ ------ ------ -----
Balance as of December 31,
1995 22,939 88,811 (80,844) 30,906
------ ------ ------ -----
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
JINAN INDUSTRIAL MATERIAL COMPANY
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Jinan Industrial Material Company (the "Company") was incorporated in the
People's Republic of China (the "PRC") in 1971 as a state-owned enterprise
directly under the Ministry of Finance of the Jinan Government. The Company was
principally engaged in the manufacturing of pig iron, an alloy of iron and
carbon.
Based on a joint venture agreement dated October 12, 1995 and a subsequently
amended agreement entered into between the Company and China Basic Industries
Limited ("China Basic"), a company incorporated in the British Virgin Islands, a
Sino-foreign equity joint venture enterprise - Jinan Dongguang Foundational
Materials Company Limited ("Jinan Dongguang") was formally established on
November 23, 1995. Pursuant to the aforesaid agreements, China Basic will pay
Jinan Dongguang US$6.6 million in cash as its capital contribution for 55% of
the equity interests in Jinan Dongguang. The Company will own 45% of the equity
interests in Jinan Dongguang and will inject all of its assets and liabilities
totaling approximately US$5.4 million as its capital contribution. In addition,
Jinan Dongguang will succeed to the pig iron manufacturing business originally
conducted by the Company. As of June 19, 1996, the injection of assets,
liabilities and operations of the Company into Jinan Dongguang has not been
completed.
Other key provisions of the joint venture agreement between China Basic and the
Company, and supplements thereto, include:
* the joint venture period is 20 years from the formation of Jinan Dongguang on
November 15, 1995;
* the profit and loss sharing ratio is the same as the percentage of equity
interest held by the respective investors; and
* the Board of Directors consists of 5 members; 3 designated by China Basic and
2 designated by the Company.
The Company conducts its operations in the PRC and accordingly is subject to
special considerations and significant risks not typically associated with
investments in equity securities of the United States and Western European
companies. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. These risks are
described further in the following paragraphs:
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
a. Political Environment
The Company's results may be adversely affected by changes in the political and
social conditions in the PRC and by, among other things, changes in governmental
policies with respect to laws and regulations, inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation. While the
PRC government is expected to continue its economic reform policies, many of the
reforms are new or experimental and may be refined or changed. It is also
possible that a change in the PRC leadership could lead to changes in economic
policy.
b. Economic Environment
The economy of the PRC differs significantly from the United States economy in
many respects, including its structure, levels of development and capital
reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. The
adoption of economic reform policies since 1978 has resulted in a gradual
reduction in the role of state economic plans in the allocation of resources,
pricing and management of such assets, an increased emphasis on the utilization
of market forces, and rapid growth in the PRC economy. However, such growth has
been uneven among various regions of the country and among various sectors of
the economy.
In recent years, the PRC economy has experienced periods of rapid economic
expansion and high rates of inflation, which have led to the adoption by the
central government from time to time of various corrective measures designed to
regulate growth and contain inflation. High inflation may cause the government
to take other actions which could inhibit economic activity in the PRC and may
thereby delay planned expansion. Such actions could adversely affect the
Company's results of operations and expansion plans.
c. Legal Environment
The PRC's legal system is based on written statutes under which prior court
decisions may be cited as authority but do not have binding precedential effect.
The PRC's legal system is relatively new, and the government is still in the
process of developing a comprehensive system of laws, a process that has been
ongoing since 1979. Considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
Such legislation has significantly enhanced the protection afforded to foreign
investors. However, experience with respect to the implementation,
interpretation and enforcement of such laws is limited.
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
d. Foreign Currency Exchange
The Company (or Jinan Dongguang) expects that substantially all of its revenue
will be denominated in Renminbi. A portion of the future profits of Jinan
Dongguang, if any, will need to be converted to other currencies to meet foreign
currency obligations such as payment of any dividends declared. Both the
conversion of Renminbi into foreign currencies and the remittance of foreign
currencies abroad require the PRC government approvals.
No assurance can be given that Jinan Dongguang will be able to convert
sufficient amounts of foreign currencies in the PRC foreign exchange markets in
the future for the payment of dividends.
2. BASIS OF PRESENTATION
The accompanying financial statements were prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). This
basis of accounting differs from that used in the statutory accounts of the
Company, which were prepared in accordance with the accounting principles and
other relevant financial regulations applicable to state-owned enterprises as
established by the Ministry of Finance of the PRC.
Major adjustments made to conform to US GAAP included the following:
* Addition of an allowance for doubtful accounts receivable;
* Reversal of the gain on revaluation of fixed assets;
* Adjustment for depreciation of fixed assets to reflect the useful economic
lives of fixed assets;
* Adjustment to recognize sales and cost of sales upon delivery of goods and
passage of title to customers; and
* Adjustment for certain items, designated as "capital/specific reserves
appropriated from/transferred to net income", as charges or credits to income.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Sales
Sales represent the invoiced value of goods, net of sales tax or value-added
tax, supplied to customers. Sales are recognized upon delivery of goods and
passage of title to customers.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
b. Taxation
i. Income taxes
Prior to December 31, 1993, the Company, being a state-owned enterprise, was
subject to PRC income taxes at the unified income tax rate of 55% on taxable
income as reported in the statutory accounts. However, the Company agreed with
the Ministry of Finance of Jinan Municipal to pay a pre-determined amount of
taxes covering Industrial and Commercial Consolidated Tax, income tax and other
taxes.
In December 1993, the PRC government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax regulations
replaced a number of former tax laws and regulations, and represented
significant changes to the PRC taxation system. Under the new tax regulations,
the Company was subject to PRC income taxes at the applicable tax rate of 33% on
the taxable income as reported in its statutory accounts for the years ended
December 31, 1994 and 1995.
The Company provides deferred income taxes using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of assets
and liabilities. The tax consequences of those differences expected to occur in
the subsequent year are classified as a current asset or liability.
ii. Other taxes
Prior to December 31, 1993, the Company was subject to Industrial and Commercial
Consolidated Tax at an effective tax rate of 10% on the sales amount. Under the
new tax regulations effective on January 1, 1994 (see section i above), the
Company was subject to value-added tax ("VAT") which is currently the principal
indirect tax on the sales of tangible goods and the provision of certain
specified services, and replaced the old Industrial and Commercial Consolidated
Tax. The general VAT rate applicable to the Company is 17%.
In addition, for each of the years ended December 31, 1993, 1994 and 1995, the
Company was subject to other taxes, such as city maintenance and construction
tax ("CMCT") and education surtax ("EST"). The general rates for CMCT and EST
rates were 7% and 2% on the net VAT amount, respectively.
c. Cash and Cash Equivalent
Cash and cash equivalents include cash on hand and demand deposits with
banks.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
d. Inventories
Inventories are stated at the lower of cost, on a first-in first-out basis, or
net realizable value. Costs of work-in-progress and finished goods include
direct materials, direct labor and an attributable portion of production
overheads. Net realizable value is calculated based on the estimated normal
selling price less all further costs of production and the related costs of
marketing, selling and distribution. Provision is made for obsolete, slow moving
or defective items, where appropriate.
e. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation of property, plant and equipment is computed using the
straight-line method over the assets' estimated useful lives, after taking into
account the estimated residual value of 5% of the costs of the fixed assets. The
estimated useful lives are as follows:
Buildings 20 years
Machinery and equipment 10 years
Furniture, fixtures and office equipment 5 years
Construction-in-progress represents factories and office buildings under
construction, and machinery and equipment pending installation. No depreciation
is provided in respect of construction-in-progress until the construction work
is completed.
f. Investment in Associated Companies
A company is an associated company if not less than 20% nor more than 50% of the
issued capital is held as a long-term investment and the Company can exercise
significant influence in its management. Investment in associated companies is
stated at cost less provision for any permanent diminution in value, plus the
Company's share of the undistributed post-acquisition income/losses and reserves
of the associated companies.
g. Long-term Investments
Long-term investments comprise investments in government bonds and unlisted PRC
enterprises, and are stated at cost less provision for any permanent diminution
in value. Income from such investments is accounted for to the extent of
dividends received and receivable.
h. Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
<PAGE>
<TABLE>
<CAPTION>
4. PROVISION FOR INCOME TAXES
Provision for income taxes comprised:
For the year ended December 31,
1993 1994 1995
Rmb'000 Rmb'000 Rmb'000 US$'OOO
<S> <C> <C> <C> <C>
Current (1,400) (3,552) (6,620) (795)
Deferred 2,740 2,094 3,865 464
----- ----- ----- -----
Write back of (provision for)
income taxes 1,340 (1,458) (2,755) (331)
----- ----- ----- -----
<CAPTION>
The reconciliation of the effective income tax rate as stated in the statements
of income to the statutory income tax rate in the PRC is as follows:
For the year ended December 31,
1993 1994 1995
<S> <C> <C> <C>
Statutory tax rate 55.00% 33.00% 33.00%
Effect of adjustments made to
statutory accounts to conform to
US GAAP: (48.59%) 1.36% (6.91%)
Impact of pre-determined tax (30.17%) -
Special tax refund - - (9.98%)
Permanent differences - 3.80% 1.67%
----- ----- -----
Effective tax rate (23.76%) 38.16% 17.78%
----- ----- -----
<FN>
The Company agreed with the Ministry of Finance of Jinan Municipal to pay a
predetermined amount of taxes of approximately Rmb 1,400,000 covering Industrial
and Commercial Consolidated Tax, income tax and other taxes for the year ended
December 31, 1993. In 1995, the Company received a special income tax refund of
approximately Rmb 1,533,000.
</FN>
<CAPTION>
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Trade and other receivables 85,177 103,785 12,471
Less: Allowance for doubtful debts (15,246) (21,479) (2,581)
------ ------ -----
Accounts receivable, net 69,931 82,306 9,890
------ ------ -----
<PAGE>
<CAPTION>
6. INVENTORIES
Inventories comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'OOO
<S> <C> <C> <C>
Raw materials 17,483 28,514 3,426
Work-in-progress - 166 20
Finished goods 4,823 8,197 985
Consumables 2,159 4,858 584
------ ------ -----
Total 24,465 41,735 5,015
------ ------ -----
<CAPTION>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'OOO
<S> <C> <C> <C>
Buildings 15,142 24,667 2,964
Machinery and equipment 10,064 48,162 5,787
Furniture, fixtures and office
equipment 25,279 33,453 4,020
Construction-in-progress 59,502 47,242 5,676
------- ------- ------
109,987 153,524 18,447
Less: Accumulated depreciation (26,592) (26,332) (3,164)
------- ------- ------
Net book value 83,395 127,192 15,283
------- ------- ------
<PAGE>
<CAPTION>
8. INVESTMENT IN ASSOCIATED COMPANIES
Investment in associated companies comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Unlisted capital, at cost - 5,516 663
----- ----- -----
<FN>
Details of the associated companies as of December 31, 1995, which are held
directly by the Company and are incorporated and operate in the PRC, are:
</FN>
<CAPTION>
Percentage of
equity interest Principal
Name of associated company held activities
<S> <C> <C>
Jinan Yanshan Roll Limited Company 38% Manufacturing
of parts for
industrial use
Jinan Shuntong Modular Casting Pipe Factory 40% Manufacturing
of parts for
industrial use
<FN>
The post-acquisition income/loss of the associated companies was immaterial
relative to the financial statements of the Company as a whole.
</FN>
<CAPTION>
9. LONG-TERM INVESTMENTS
Long-term investments comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Investment in PRC government bonds 125 118 14
Investment in other PRC enterprises 100 600 72
--- --- ---
Total 225 718 86
--- --- ---
</TABLE>
<PAGE>
10. VALUE-ADDED TAX CREDIT
Pursuant to a Supplementary Notice (the "Notice") issued by the Ministry of
Finance and the State Administration of Taxation, a deemed input value-added tax
("VAT") credit, calculated at 14% of the opening inventories balance was
segregated from the carrying value of inventories of the Company as of January
1, 1994. As a result, an amount of approximately Rmb 6,551,000, being the deemed
input VAT paid, was transferred from the opening inventories balance and
recorded as VAT credit. The Notice also stipulated that this amount would be
available to offset future VAT payable under certain specified circumstances.
For the year ended December 31, 1995, approximately Rmb 4,030,000 had been
utilized by the Company to offset against VAT payable. There was no utilization
for the year ended December 31, 1994. As of December 31, 1995, the Company had
remaining net VAT credit of approximately Rmb 2,521,000, which can be utilized
to offset future output VAT payable over three years, subject to final approval
by the PRC Tax Bureau.
11. DEFERRED TAXATION
Deferred taxation mainly represents the taxation effect of the adjustments made
to the financial statements of the Company to conform to US GAAP and other
adjustments made to the statutory financial statements of the Company.
12. SHORT-TERM BANK LOANS
Short-term bank loans are unsecured, bear interest at rates ranging from 12.1%
to 13.2% per annum and are repayable within one year. These loans are renewable
with the consent of the relevant banks.
Supplemental information with respect to short-term bank loans for the year
ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'OOO
<S> <C> <C> <C>
Maximum amount outstanding during
the year: 56,336 76,966 9,248
Average amount outstanding during
the year: 31,521 69,246 8,320
Weighted average interest rate at the 14.7% 12.4% 12.4%
end of the year: per annum per annum per annum
Weighted average interest rate during 16.6% 12.8% 12.8%
the year: per annum per annum per annum
<PAGE>
<CAPTION>
13. OTHER SHORT-TERM LOANS
Other short-term loans comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Loans from customers 10,540 7,236 869
Other loans 10,280 14,711 1,768
------ ------ ------
20,820 21,947 2,637
------ ------ ------
<FN>
Loans from customers are unsecured, bear interest at rates ranging from 12% to
14.4% per annum and have no fixed repayment dates.
Other loans represent unsecured loans obtained from third party entities. These
loans bear interest at rates ranging from 10.8% to 21.6% per annum and are
repayable within one year.
</FN>
<CAPTION>
14. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Accrued expenses 6,886 2,166 261
Other payables 21,695 36,412 4,375
------ ------ -----
28,581 38,578 4,636
<FN>
Other payables mainly represent outstanding payments for purchases and
construction of property, plant and equipment.
</FN>
</TABLE>
15. DEBENTURES
Debentures were issued by the Company to the public in 1992 with the approval of
the People's Bank of China to obtain funding for the Company's expansion plan.
The debentures were unsecured, bore interest at 10% per annum and were fully
redeemed in 1995.
<PAGE>
<TABLE>
<CAPTION>
16. TAXATION PAYABLE
Taxation payable comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Value-added tax 7,286 12,501 1,502
Income tax (253) 6,264 753
Other taxes and levies 5,056 5,951 715
------ ------ -----
12,089 24,716 2,970
------ ------ -----
</TABLE>
17. LONG-TERM BANK LOANS
Long-term bank loans are unsecured, bear interest at 13.5% per annum and are
repayable after 1996.
<TABLE>
<CAPTION>
18. OTHER LONG-TERM LOANS
Other long-term loans comprised:
December 31,
1994 1995 1995
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Loans from financial institutions other
than banks - 1,100 132
Loans from various government bodies - 5,680 683
----- ----- -----
- 6,780 815
----- ----- -----
<FN>
Other long-term loans are unsecured, bear interest at 13.5% per annum and are
repayable after 1996.
</FN>
</TABLE>
<PAGE>
19. DISTRIBUTION OF PROFITS
Before July 1, 1993, as stipulated by the relevant laws and regulations of the
PRC applicable to state-owned industrial enterprises, the Company was required
to appropriate all of its annual statutory net income to the following specific
purpose reserves: fixed fund, current fund, depreciation fund, enterprise
expansion fund, repair and maintenance fund, new product development fund,
reserve fund, salary fund and staff welfare fund. The Company was required to
reflect these funds separately in its statutory accounts and all such funds were
not distributable in the form of cash dividends. To be in conformity with US
GAAP, appropriations to certain funds such as those designated for payment of
repair and maintenance expenses, and staff welfare and bonus to employees have
been charged to income.
Effective from July 1,1993, following the new accounting regulations applicable
to state-owned industrial enterprises issued by the PRC government (the "new
accounting regulations"), the balances of the fixed fund, current fund and
depreciation fund outstanding as of June 30, 1993 were combined and reclassified
as the Company's capital; the enterprise expansion fund, repair and maintenance
fund, new product development fund and reserve fund were reclassified as
specific reserves which are not distributable in the form of cash dividends. In
addition, the balances for the salary fund and staff welfare funds were included
as liabilities.
20. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the Company has
established a defined contribution retirement plan for all of its staff. Under
this plan, all staff are entitled to a fixed life-long pension equal to their
basic salaries at their retirement dates. The Company is required to make
specific contributions to the state sponsored retirement plan at a rate of
approximately 22% of the basic salaries of its staff. The Company has no further
obligations for the pension payment or any post-retirement benefits beyond the
annual contributions made. The PRC government is responsible for the ultimate
pension liabilities to these retired employees. During the years ended December
31, 1993, 1994 and 1995, the Company made pension contributions of approximately
Rmb 375,000, Rmb 921,000 and Rmb 2,388,000 respectively.
<PAGE>
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF CHINA BASIC INDUSTRIES, INC.
The unaudited pro forma consolidated statement of income of China Basic
Industries, Inc. ("China Basic US"), a company incorporated in the United States
of America for the year ended December 31, 1995 has been prepared to give effect
to the formation of Jinan Dongguang Foundational Materials Company Limited
("Jinan Dongguang"), a joint venture between Jinan Industrial Material Company
and China Basic Industries Limited ("China Basic BVI" - the wholly owned
subsidiary of China Basic US), a company incorporated in the British Virgin
Islands, pursuant to a joint venture agreement dated October 12, 1995 as amended
(see Note 1 to the financial statements of Jinan Industrial Material Company for
further details of the formation of Jinan Dongguang). The unaudited pro forma
statement of income is based upon the historical statements of China Basic US,
China Basic BVI and Jinan Industrial Material Company after giving effect to the
pro forma adjustment described in the notes thereto as if the formation of Jinan
Dongguang had occurred on January 1, 1995.
The unaudited pro forma statement of income does not purport to represent what
the results of operations of China Basic US would actually have been if the
events described above had in fact occurred on such date or at the beginning of
1995, or to project the results of operations of China Basic US for any future
date.
The unaudited pro forma statement of income should be read in conjunction with
the historical financial statements of Jinan Industrial Material Company,
including the notes thereto.
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL STATEMENTS OF INCOME OF
CHINA BASIC INDUSTRIES, INC.,
CHINA BASIC INDUSTRIES LIMITED AND
JINAN INDUSTRIAL MATERIAL COMPANY AND
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
OF CHINA BASIC INDUSTRIES, INC.
FOR THE YEAR ENDED DECEMBER 31,1995
(Amounts in thousands)
Unaudited historical statements of income
China Basic Jinan Industrial Pro forma consolidated
China Basic Industries Material Pro forma statement of income
Industries, Inc. Limited company Adjustment of China Basic Industries, Inc.
US$ US$ Rmb Rmb Rmb US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
--------- --------- --------- -------- -------- --------
Sales - - 220,056 220,056 26,441
Cost of goods sold - - (182,823) (182,823) (21,967)
General and
administrative
expenses (2) (7) (23,526) (23,601) (2,836)
Interest income, net - - 27 27 3
Other income, net - - 1,762 1,762 212
--------- --------- --------- -------- -------- --------
Total costs and
expenses (2) (7) (204,560) (204,635) (24,588)
--------- --------- --------- -------- -------- --------
Income (loss) before
income taxes (2) (7) 15,496 15,421 1,853
Provision for income
taxes - - (2,755) (2,755) (331)
--------- --------- --------- -------- -------- --------
Income (loss) before
minority interests (2) (7) 12,741 l2,666 1,522
Minority interests - - - (5,733) (5,733) (689)
--------- --------- --------- -------- -------- --------
Net income (loss) 2 (7) 12,741 6,933 833
--------- --------- --------- -------- -------- --------
<FN>
The accompanying notes are an integral part of this unaudited pro forma
financial statement of income.
Translation of amounts from Renminbi (Rmb) into United States dollars (US$) for
the convenience of the reader has been made at the rate of US$1.00=Rmb8.3224
announced by the People's Bank of China on June 19, 1996. No representation is
made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 19, 1996 or at any other certain
rate.
</FN>
</TABLE>
<PAGE>
CHINA BASIC INDUSTRIES, INC.
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF INCOME
1. Description of the pro forma adjustment
The pro forma adjustment is based on the assumption that Jinan Dongguang had
been a 55% owned subsidiary of China Basic BVI for the whole year ended December
31, 1995. This adjustment is to record the minority interests in Jinan Dongguang
held by Jinan Industrial Material Company.
Jinan Dongguang is eligible to apply for total exemption from PRC income taxes
for two years starting from the first profitable year of operations and 50%
reduction in PRC income taxes for three years thereafter. Jinan Dongguang has
not made such application as the injection of assets, liabilities and operations
into Jinan Dongguang has not been completed. Accordingly, the potential tax
benefit of this exemption has not been reflected in the unaudited pro forma
statement of income.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013328
<NAME> Jinan Industrial Material Company Form 10-12G/A
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 711
<SECURITIES> 0
<RECEIVABLES> 12471
<ALLOWANCES> 2581
<INVENTORY> 5015
<CURRENT-ASSETS> 18601
<PP&E> 18447
<DEPRECIATION> 3164
<TOTAL-ASSETS> 35981
<CURRENT-LIABILITIES> 29243
<BONDS> 3025
0
0
<COMMON> 3713
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35981
<SALES> 26441
<TOTAL-REVENUES> 26441
<CGS> 21967
<TOTAL-COSTS> 24579
<OTHER-EXPENSES> (212)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> 1862
<INCOME-TAX> 331
<INCOME-CONTINUING> 1531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1531
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
