-3-

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(amounts in thousands except share and per share value)

 

		Three Months Ended									Six Months Ended
		Jun. 30, 2007						Jun. 30, 2006			Jun. 30, 2007						Jun. 30, 2006
		RMB			US$			RMB			RMB			US$			RMB
		(unaudited)									(unaudited)
Net sales			120,929			15,750			122,886			220,194			28,529			219,939
Cost of sales			88,264			11,496			94,470			163,257			21,152			167,594
Gross profit			32,665			4,254			28,416			56,937			7,377			52,345
Operating expenses
Selling expenses			5,090			663			5,111			8,754			1,134			8,858
Administrative expenses			3,528			459			2,943			5,718			741			3,194
Depreciation and amortization			416			54			266			737			96			540
Total operating expenses			(9,034	)		(1,176	)		(8,320	)		(15,209	)		(1,971	)		(12,592	)
Operating income			23,631			3,078			20,096			41,728			5,406			39,753
Other income/(expense)
- Interest income			87			11			3			277			36			7
- Interest expense			(1,684	)		(219	)		(3,649	)		(4,835	)		(626	)		(6,940	)
- Others, net			(178	)		(23	)		(153	)		(562	)		(73	)		(299	)
Total other income/(expense)			(1,775	)		(231	)		(3,799	)		(5,120	)		(663	)		(7,232	)
Income before income tax /(benefit)			21,856			2,847			16,297			36,608			4,743			32,521
Income tax /(benefit)			1,770			231			(44	)		3,258			422			233
Net income			20,086			2,616			16,341			33,350			4,321			32,288
Other comprehensive income
- Foreign currency translation adjustments			(4,547	)		(592	)		(721	)		(571	)		1,492			—
Comprehensive income			15,539			2,024			15,620			32,779			5,813			32,288
Earnings per share (basic and diluted)
- Basic			1.54			0.20			21,195			2.55			0.33			41,878
- Diluted			1.54			0.20			21,195			2.55			0.33			41,878
Weighted average number ordinary shares
- Basic			13,062,500			13,062,500			771			13,062,500			13,062,500			771
- Diluted			13,062,500			13,062,500			771			13,062,500			13,062,500			771

The accompanying notes are an integral part of this condensed consolidated statement.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(amounts in thousands except share and per share value)

 

		Ordinary Shares
		Number of shares			Amount			Additional paid-in capital			Accumulated other comprehensive income			Retained earnings			Total shareholders' equity
					RMB			RMB			RMB			RMB			RMB
Balance as of December 31, 2005			771			1						1,732			71,227			72,960
Issue of new shares
Net income															32,288			32,288
Appropriation to statutory reserves
Foreign currency translation adjustment
Balance as of Jun. 30, 2006			771			1						1,732			103,515			105,248
Conversion of shareholders loans			8,749,229			8,936			80,426									89,362
Issue of ordinary shares, net of expenses			4,312,500			4,386			225,839									230,225
share-based payment transactions									5,643									5,643
Net income															35,376			35,376
Foreign currency translation adjustment												53						53
Balance as of December 31, 2006			13,062,500			13,323			311,908			1,785			138,891			465,907
Issue of new shares
Net income															33,350			33,350
Appropriation to statutory reserves
Foreign currency translation adjustment												(571	)					(571	)
Balance as of Jun. 30, 2007-unaudited			13,062,500			13,323			311,908			1,214			172,241			498,686
Balance as of Jun. 30, 2007 - US$			13,062,500			1,707			39,967			1,721			22,119			65,514

The accompanying notes are an integral part of this condensed consolidated statement.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(amounts in thousands except share and per share value)

		Periods Ended Jun. 30, 2007						Periods Ended Jun. 30, 2006
		RMB			US$			RMB
Cash flow from operating activities
Net income			33,350			4,321			32,288
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities
- Depreciation of property, plant and equipment			11,742			1,521			11,700
- Amortization of lease prepayments and intangible assets			429			56			254
- Deferred income taxes			664			51			233
Changes in operating assets and liabilities, net of effect of purchase of Shandong Fuwei
- Accounts receivable			17,334			2,033			(26,105	)
- Inventories			(13,140	)		(1,803	)		4,808
- Prepaid expenses and other current assets			(28,360	)		(3,789	)		(6,119	)
- Accounts payable			4,257			601			(1,713	)
- Accrued expenses and other payables			3,357			504			(2,172	)
Net cash provided by operating activities			29,633			3,495			13,174
Cash flow from investing activities
Purchases of property, plant and equipment			(83,365	)		(12,077	)		(1,435	)
Payment of land use rights			(15	)		(2	)		(2,649	)
Net cash used in investing activities			(83,380	)		(12,079	)		(4,084	)
Cash flow from financing activities
Principal payments of short-term bank loans			(239,678	)		(30,712	)		(18,016	)
Proceeds from short-term bank loans			169,090			22,214			10,000
Payments of expenses relating to the proposed offering			—			—			(3,046	)
Net cash used in financing activities			(70,588	)		(8,498	)		(11,062	)
Effect of foreign exchange rate changes			(571	)		1,492			—
Net increase in cash			(124,906	)		(15,590	)		(1,972	)
Cash
At beginning of period/year			253,250			32,451			7,427
At end of year			128,344			16,861			5,455
Supplemental disclosure of cash flow information
Cash paid during the period/year for
Interest paid			7,413			960			7,910
Income taxes paid			981			127			—

The accompanying notes are an integral part of this condensed consolidated statement.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share value)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and related notes. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2006.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the consolidated balance sheets of Fuwei Films (Holdings) Co., Ltd and subsidiaries as of June 30, 2007 and December 31, 2006 and the condensed results of their operations for the three and six months period ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006. The results of operations for the six periods ended June 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the entire year.

 

Exchange Rate Information

 

Foreign Currency - The Company’s principal country of operations is in The People’s Republic of China. The financial position and results of operations of the Company are determined using the local currency (“Renminbi”) as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.

 

Unless otherwise noted, all translations from Renminbi to U.S. dollars in this quarter report that assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the market rate of exchange ruling at that date. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as a separate component within shareholders’ equity. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated above, or at all.

The following table sets forth various information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.

		Average			Period-end
		(Rmb per U.S. $1.00)
2006 (1)			7.9723			7.8041
January 2006 (2)			8.0659			8.0608
February 2006 (2)			8.0512			8.0415
March 2006(2)			8.0450			8.0167
April 2006 (2)			8.0143			8.0165
May 2006 (2)			8.0136			8.0215
June 2006 (2)			8.0042			7.9943
January 2007 (2)			7.7888			7.7714
February 2007 (2)			7.7498			7.7410
March 2007(2)			7.7370			7.7232
April 2007 (2)			7.7247			7.7090
May 2007 (2)			7.6762			7.6463
June 2007 (2)			7.6333			7.6120

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1、Annual averages are calculated by averaging the rates on the last business day of each month during the relevant period.

2、Monthly average is calculated by averaging the daily rates during the relevant period.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share value)

 

NOTE 1 - BACKGROUND

 

Fuwei Films (Holdings) Co., Ltd (the “Company”) and its subsidiaries (the “Group”) are principally engaged in the production and distribution of BOPET film, a high quality plastic film widely used in packaging, imaging, electronics, electrical and magnetic products in the People’s Republic of China (the “PRC”). The Company is incorporated in the Cayman Islands, established on August 9, 2004 under the Cayman Islands Companies Law as an exempted company with limited liability.

 

On December 18, 2006, the Company became listed on the Nasdaq Global Market and offered 3,750,000 ordinary shares, at an IPO price of US$8.28 per ordinary share. On December 18, 2006, an additional 562,500 ordinary shares were sold at the IPO price of US$8.28 per ordinary share pursuant to the underwriter’s exercise of its over-allotment option. As of June 30, 2007, the number of total issued ordinary shares issued and outstanding was 13,062,500.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Group’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Principles of Consolidation

 

The condensed consolidated financial statements include the financial statements of the Company and its two subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. 

Foreign Currency Transactions

 

The Group’s reporting currency is the Renminbi (“RMB”).

 

The Company and Fuwei (BVI) operate in Hong Kong as investment holding companies and their financial records are maintained in Hong Kong dollars, being the functional currency of these two entities. Assets and liabilities are translated into RMB at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates and income, expenses, and cash flow items are translated using the average rate for the period. The translation adjustments are recorded in accumulated other comprehensive income in the statements of shareholders’ equity and comprehensive income.

 

Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. The resulting exchange differences are recorded in the statements of income.

 

RMB is not fully convertible into foreign currencies. All foreign exchange transactions involving RMB must take place either through the PBOC or other institutions authorized to buy and sell foreign currency. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC which are determined largely by supply and demand.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share value)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)

Trade Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount after deduction of trade discounts, value added taxes and allowances, if any, and do not bear interest. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

 

The Group reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by aging of such balances. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group does not have any off-balance-sheet credit exposure related to its customers.

 

The Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. These receivables are due within 7 to 60 days from the date of billing. Normally, the Group does not obtain collateral from customers.

Inventories

 

Inventories are stated at the lower of cost or market value. Cost is determined using the average cost method. Cost of work in progress and finished goods comprises of direct material, direct production cost and an allocated portion of production overheads based on normal operating capacity. 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and impairment.

 

Depreciation on property, plant and equipment is calculated on the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets. There are as follows:

 

		Years
Buildings and improvements			25 - 30
Plant and equipment			10-15
Computer equipment			5
Furniture and fixtures			5
Motor vehicles			5

Depreciation of property, plant and equipment attributable to manufacturing activities is capitalized as part of the inventory, and expensed to cost of goods sold when inventory is sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of goods sold for the period incurred.

 

Construction in progress represented capital expenditure in respect of the third production line and the testing line. No depreciation is provided in respect of construction in progress.

Lease Prepayments

Lease prepayments represent the costs of land use rights in the PRC. Land use rights are carried at cost and charged to expense on a straight-line basis over the respective periods of rights of 30 years. The current portion of lease prepayments has been included in prepayments and other receivables in the balance sheet.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share value)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)

Intangible Assets

 

The Group acquired a trademark for use in the production and distribution of plastic flexible packaging materials. The trademark is carried at cost less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful life of 5 years of the trademark.

 

Goodwill

Goodwill represents the excess of purchased cost over fair value of net assets of the Shandong Fuwei’s acquired business. Goodwill is evaluated for impairment annually. The Company evaluates the carrying value of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company’s evaluation of goodwill completed during the year resulted in no impairment losses.

Impairment of Long-lived Assets

 

Long-lived assets, other than goodwill, including property, plant, and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset.

Revenue Recognition 

 

Sales of plastic flexible packaging materials are reported, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The standard terms and conditions under which the Group generally delivers allow a customer the right to return product for refund only if the product does not conform to product specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies the Group within 7 days and 30 days of receipt for sales to customers in the PRC and overseas, respectively. The Group recognizes revenue when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.

 

In the PRC, VAT of 17% on invoice amount is collected in respect of the sales of goods on behalf of tax authorities. The VAT collected is not revenue of the Group; instead, the amount is recorded as a liability on the consolidated balance sheet until such VAT is paid to the authorities.

 

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FUWEI FILMS (HOLDINGS) CO., LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands except share and per share value)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)

Government Grants

 

Government grants are recognized in the consolidated balance sheet initially as deferred income when they have been received. Grants that compensate the Group for expenses incurred are recognized as a reduction of expenses in the consolidated statement of income in the same period in which the related expenses are incurred.

Retirement and Other Postretirement Benefits

Contributions to retirement schemes (which are defined contribution plans) are charged to expense as and when the related employee service is provided.

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Results of operations for the six months ended June 30, 2007 compared to June 30, 2006.

The company entered the second quarter with a number of favorable factors including the active markets requirements and the sales price increase of our products. The results of the second quarter were as good as expected largely due to the sales price increase of our products.

The table below sets forth certain line items from our Statement of Income as a percentage of Net sales:

		Periods Ended Jun 30, 2007			Periods Ended Jun 30, 2006
		(as % of Net sales)
Gross profit			26			24
Operating expenses			(7	)		(6	)
Operating income			19			18
Other income/(expense)			(2	)		(3	)
Income tax benefit/(expense)			(1.5	)		(0.1	)
Net income			15			15

Net sales 

The Group’s net sales is primarily derived from the manufacture and sale of plastic flexible packaging materials.

Net sales during the year ended June 30, 2007 amounted to RMB 220.2 million (US$ 28.5 million), compared to RMB 219.9 million (US$ 27.4 million) during the same period 2006, representing 0.14% increase.

The sales of special films during the year ended June 30, 2007 were RMB86.5 million (US$11.2 million), 10.7% higher than the same period last year. Sales of specialty films in the first half 2007 reflected 39.3% of Fuwei’s total net revenues as compared to 35.5% in the same period of 2006.

The following is a breakdown of commodity and specialty film sales (amounts in thousands):

 

		Periods ended June 30,2007						% of Total			Periods ended June 30, 2006			% of Total
		RMB			US$						RMB
Printing film			13,605			1,763			6.20	%		19,177			8.72	%
Stamping film			27,407			3,551			12.40	%		26,621			12.10	%
Metallization film			51,072			6,617			23.20	%		48,547			22.07	%
Base film for other applications			41,654			5,397			18.90	%		47,526			21.61	%
Special film			86,456			11,201			39.30	%		78,068			35.50	%
			220,194			28,529			100.00	%		219,939			100.00	%

Overseas sales during the year ended June 30, 2007 were RMB71.7 million (US$ 9.3 million), which accounted for 32.6% of our total net revenues as compared to RMB 46.4 million (US$ 5.8 million) and 21.1% in the same period of 2006, 11.5% higher than the same period last year.

 

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The following is a breakdown of PRC domestic and overseas sales (amounts in thousands):

 

		June 30, 2007						% of Total			June 30, 2006			% of Total
		RMB			US$						RMB
Sales in China			148,467			19,236			67.40	%		173,551			78.90	%
Sales in other countries			71,727			9,293			32.60	%		46,388			21.10	%
			220,194			28,529			100.00	%		219,939			100.00	%

Cost of Goods Sold

 

Our cost of goods sold comprises mainly of materials costs, factory overheads, packaging materials and direct labor. The breakdown of our cost of goods sold in percentage is as follows:

		June 30,2007			June 30,2006
		(% of total)
Materials costs			86.7	%		88.3	%
Factory overhead			9.7	%		8.4	%
Packaging materials			2.8	%		2.6	%
Direct labor			0.8	%		0.7	%

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