SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 20-F ___________  £REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR  SANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR  £TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                      to OR  £SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report  Commission file number 000-50184 ______________ Yantai Dahua Holdings Company Limited (Exact Name of Registrant as Specified in Its Charter) ______________ Belize (Jurisdiction of Incorporation or Organization) East of Muping, Yantai, Shandong, Peoples Republic of China (Address of Principal Executive Offices)   Securities registered or to be registered pursuant to Section 12(b) of the Act:  Title of Each ClassName of Each Exchange
on Which RegisteredNoneNone Securities registered or to be registered pursuant to Section 12(g) of the Act:  Common Shares Common Shares, par value US$0.001 each (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class) _______________ Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.  As of December 31, 2006, 33,447,000 Common Shares, par value US$0.001 each were outstanding.  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  £    No  S  If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or (15)(d) of the Securities Exchange Act of 1934.    Yes £      No  S  Indicate by check mark whether the registrant:    (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  S    No  £    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):  Large Accelerated Filer£Accelerated Filer£Non-Accelerated Filer  £  Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  £      Item 18  S  If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £      No  S   TABLE OF CONTENTS  PAGEFORWARD LOOKING STATEMENTSPART I1ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS1ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE1ITEM 3 KEY INFORMATION2A. SELECTED FINANCIAL DATA2B. CAPITALIZATION AND INDEBTEDNESS3C. REASONS FOR THE OFFER AND USE OF PROCEEDS3D. RISK FACTORS3ITEM 4 INFORMATION ON THE COMPANY10A. HISTORY AND DEVELOPMENT OF THE COMPANY10B. BUSINESS OVERVIEW11C. ORGANIZATIONAL STRUCTURE13D. PROPERTY, PLANTS AND EQUIPMENT13ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS13A. OPERATING RESULTS13B. LIQUIDITY AND CAPITAL RESOURCES16C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES17D. TREND INFORMATION17E. OFF-BALANCE SHEET ARRANGEMENTS17F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS17G. SAFE HARBOR17ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES17A. DIRECTORS AND SENIOR MANAGEMENT17B. COMPENSATION19C. BOARD PRACTICES20D. EMPLOYEES20E. SHARE OWNERSHIP21ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS21A. MAJOR SHAREHOLDERS21B. RELATED PARTY TRANSACTIONS21    C. INTERESTS OF EXPERTS AND COUNSEL23ITEM 8 FINANCIAL INFORMATION23A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION23B. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE23ITEM 9 THE OFFER AND LISTING23ITEM 10 ADDITIONAL INFORMATION23A. SHARE CAPITAL23B. MEMORANDUM AND ARTICLES OF ASSOCIATION24C. MATERIAL CONTRACTS24D. EXCHANGE CONTROLS24E. TAXATION25F. DIVIDENDS AND PAYING AGENTS26G. STATEMENTS BY EXPERTS26H. DOCUMENTS ON DISPLAY27I. SUBSIDIARY INFORMATION27ITEM 11 QUANTITATIVE INFORMATION ABOUT MARKET RISK27ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES27  PART IIITEM 13 DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES27ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS27ITEM 15 CONTROLS AND PROCEDURES28ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT28ITEM 16B CODE OF ETHICS28ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES28PART IIIITEM 17 FINANCIAL STATEMENTS30ITEM 18 FINANCIAL STATEMENTS30ITEM 19 EXHIBITS31SIGNATURES31REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMF-2    (A)   Pursuant to General Instructions E(b) of Form 20-F, this annual report includes the information specified in Parts I, II, III  (B)   Pursuant to General Instructions E(c) of Form 20-F, the registrant has elected to provide the financial statements and related information specified in Item 18.   FORWARD-LOOKING STATEMENTS  The statements in this report and the documents incorporated by reference contain certain forward-looking statements concerning future economic performance and the plans and objectives of the management for future operations. These forward-looking statements can be identified by the use of such words as "project," "expect" and "anticipate," and variations of such words. Actual results might differ materially from such projections, expectations and anticipations, due to general economic conditions, supply and demand for paper, labor conditions, the availability of requisite financing and other factors. We intend those forward looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for the purposes of complying with the safe harbor provisions.  You are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this annual report on Form 20-F and are not intended to give any assurance as to future results.  PART I   ITEM 1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS  Not applicable, pursuant to Instructions to Item 1.   ITEM 2   OFFER STATISTICS AND EXPECTED TIMETABLE  Not applicable, pursuant to Instructions to Item 2.    1   ITEM 3   KEY INFORMATION   A.    SELECTED FINANCIAL DATA  The following selected consolidated statement of operations data for the fiscal years ended December 31, 2005 and 2006 and consolidated balance sheet data as of December 31, 2005 and 2006 have been derived from our audited consolidated financial statements that are included in this annual report beginning on page F-1.  The following selected consolidated statement of operations data for the fiscal year ended December 31, 2003 and 2004 and consolidated balance sheet date as of December 31, 2003 and 2004 have been derived from out audited consolidated financial statements that are not included in this annual report. The financial data to period ended December 31, 2002 is for reference only. The following selected consolidated financial data should be read in conjunction with Managements Discussion and Analysis of Operating and Financial Review and the Consolidated Financial Statements and Notes included elsewhere in this annual report.   Year ended December 31,Period from February 1, 2002 (date of incorporation to December 31,20062005200420032002US$US$US$US$US$Operating revenue
Sales of goods12,954,19612,034,36311,012,64611,954,0953,469,026Cost of sales(11,068,592)(10,529,806)(9,647,787)(8,757,307)(2,345,510)Gross profit1,885,6041,504,5571,364,8593,195,7881,123,516Operating expensesDepreciation(56,905)(50,604)(46,924)(45,996)--Handling and shipping costs(157,596)(340,236)(312,837)(407,935)--Selling, general and administrative expenses(1,667,460)(4,126,781)(6,083,399)(1,312,727)--Profit/(Loss) from operations3,643(3,013,064)(5,078,301)1,429,130466,135Non-operating income (expense)Sundry income31,87330,35943,55221,14821,475Finance costs(629,014)(593,381)(526,015)(465,215)--Loss before income taxes(593,498)(3,576,086)(5,560,764)985,063487,610Provision for income taxes(2,500)(10,590)570,188(321,135)(147,907)Loss after income taxes(595,998)(3,586,676)(4,990,576)663,928339,703Share of operating results from an associate----(3)----Minority interest11,099520,587748,586(99,608)(50,953)Net loss(584,899)(3,066,089)(4,241,993)564,320288,750(Loss) Earnings per share
Basic common shares outstanding33,447,00033,447,00033,447,00033,447,00011,149,000Basic net (loss) income per common share(US$0.02)(US$0.1)(US$0.13)US$0.02US$0.01   2    As at December 31,20062005200420032002US$US$US$US$US$ASSETSCurrent assets14,948,20412,511,6298,966,93711,844,66010,584,585Non-current assets12,703,7719,711,19110,126,00811,111,4709,956,551Total assets27,651,97522,222,82019,092,94522,956,13020,541,136LIABILITIESCurrent liabilities25,886,10619,998,25313,392,19912,129,66310,415,466Non-current liabilities------135,14287,793Total liabilities25,886,10619,998,25313,392,19912,264,80510,503,259  The principal operating subsidiary of the Company is Yantai Dahua Paper Industry Company Limited ("Yantai Dahua Paper"), which was acquired as a result of the merger with Australia China Investment Limited ("Australia China") pursuant to the Agreement and Plan of Share Exchange dated January 10, 2003 (see Item 4A for more information about the transaction).   B.    CAPITALIZATION AND INDEBTEDNESS  Not Applicable   C.    REASONS FOR THE OFFER AND USE OF PROCEEDS  Not Applicable   D.    RISKS FACTORS  The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may also become important factors that affect us. If any of the following risks actually occurs, our business, operating results, or financial condition could be materially adversely affected.   3   Risks Related to Our Business  The Company's Operating Results May Fluctuate Significantly  The Company's operating results may be affected by a wide variety of factors that could materially adversely affect revenues and profitability, including: competitive pressures on selling prices; the timing of customer orders and the deferral or cancellation of orders previously received; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; the introduction of products and technologies by the Company's competitors; market acceptance of the Company's and the Company's competitors' products; fulfilling backlog on a timely basis. As a result of the foregoing and other factors, from time to time we experience material fluctuations in future operating results on a quarterly or annual basis which could materially and adversely affect the Company's business, financial condition and operating results.  We Depend On Our Subsidiaries' Factories  We have no direct business operations, other than through our ownership of our subsidiaries for the manufacturing and sales of paper principally for printing and writing in the PRC. Our results of operations and financial condition are currently solely dependent on our subsidiary's factories in the PRC. We currently maintain fire, casualty and theft insurance covering various of our stock in trade, goods and merchandise, furniture and equipment, and factory buildings in the PRC. The proceeds of this insurance may not sufficiently cover material damage to, or the loss of, any of our factories due to fire, severe weather, flooding or other cause, and such damage or loss would have a material adverse effect on our financial condition, business and prospects. However, we have not suffered from such material damage or loss to date.    4   Competition  The Company is engaged in, through its subsidiaries, the manufacturing and sales of paper principally for printing and writing in China. Yantai Dahua Paper is a leading paper manufacturer in Shandong, PRC. There are competitors in the industry that provide similar products and services to those which are provided by Yantai Dahua Paper. Yantai Dahua Paper's future success will depend to an extent upon its ability to remain competitive in the areas of service, quality, price, marketing, product development, service delivery, distribution and client processing. There can be no assurance that Yantai Dahua Paper will be able to compete successfully. Prices for the Yantai Dahua Paper's products and services are typically determined by market conditions. To remain competitive, the Company reviews and adjusts its pricing structure from time to time in response to such industry-wide price changes. To the extent that the Company may be obligated to adjust Yantai Dahua Paper's pricing policies to meet competition, the Company's financial performance may be adversely affected by its inability to reduce its costs in response to industry-wide price reductions or by its inability to increase its prices in response to increases in its costs and expenses.   Losses From Recent Operations And Poor Financial Condition  We incurred substantial net loss in the fiscal years ended December 31, 2005 and 2006 as a result of increased costs of sales, high selling, general and administrative expenses and increased financing costs. See Items 5 and 18 elsewhere in this annual report for more complete financial information about the Company's financial condition and results of operation.  The Company's Dependence On Key Personnel  The Company's ability to compete is largely dependent on the personal efforts and abilities of its senior management. The Company believes that the loss of the services of any of these executives could have a material adverse effect on the Company. In addition, the Company believes that its success is dependent on its ability to attract and retain additional qualified employees, and the failure to recruit and retain additional skilled personnel could have a materially adverse effect on the Company's financial condition and results of operations. The Company currently does not maintain key employee insurance on any of its employees.    5   Dividend Policy  The Company anticipates that all of its earnings in the foreseeable future will be retained for the development and expansion of its business and, therefore, has no current plans to pay cash dividends. The Company's future dividend policy will depend on the Company's earnings, capital requirements, financial condition, bank facilities and other factors considered relevant by the Board of Directors. However, at present, the Company does not have any plans to pay cash dividends in the future.   Effect Of Changes In Belize Laws Could Negatively Impact Shareholders  Because the Company is incorporated in Belize, it is subject to potential changes in Belize law. The effects of any change in Belize laws on the Company are unknown at this time, but such effects may be adverse to the Company's stockholders' best interests. These potential changes include changes in tax law, corporate law, political instability, economic collapse, and currency fluctuations.   Risks Related to Doing Business in China  Political And Economic Instability In The PRC May Result In Loss To The Company's Stockholders  The Company is organized under the laws of Belize but engages in business in the PRC. Since 1979, the PRC adopted an open-door policy and the country gradually shifting itself towards a more market-oriented economy. Such reforms have resulted in significant economic growth and social progress. Many of the reforms are unprecedented or experimental and will be refined and improved upon.  The reforms over the past 25 years have significantly opened up the country's investment and business environment compared with the past, but as the economy is now at a transitional stage, a number of reforms are subject to further refinements and readjustments. We are operating on the assumption that, in the long term, such refinements and readjustments should in most cases improve the overall investment and business environment that would be advantageous to us.  However, there is no assurance that such reforms will benefit us immediately, and it is difficult to determine whether such reforms may have direct or indirect negative impacts on our business and operations in the future.   6   The Legal And Regulatory Framework Of The PRC Could Create Losses For The Company Stockholders  The National People's Congress, or its Standing Committee, is responsible for the passing of new laws of the PRC and any amendments thereto. The PRC legal system is based on written statutes. Court judgments are therefore not legally binding - although judges in subsequent cases will often make reference to them in forming their judgments. The interpretation of the PRC laws may be subject to policy changes reflecting the domestic, political and social developments at the time. Since 1979, to facilitate foreign investments and to meet the needs of Investors, the PRC government has been developing and modifying its economic systems by promulgating a series of economic related laws and regulations. As the legal system of the PRC keeps evolving, the promulgation of new legislation, the changes to existing laws and regulations and the precedence of national laws over local regulations may have negative impacts on foreign investors. Although throughout the past 25 years, the legal system of the PRC in general has been evolving in favor of foreign investors, there is no guarantee that the changes and modifications of laws and regulations in the future will be advantageous to foreign investors as in the past. Therefore uncertainty exists as to changes to and/or development of any PRC laws and regulations and of the legal system itself. There is no assurance that any change in and interpretation of the PRC laws and regulations in future will not have any adverse effect on our business and prospects.   The Currency Of Our Operating Subsidiary Is Not Freely Convertible  The State Administration for Foreign Exchange ("SAFE"), under the authority of the People's Bank of China (the "PBOC"), controls the conversion of Renminbi into foreign currency. The value of the Renminbi is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.  Since substantially all of our raw materials are provided by local suppliers using Renminbi and the majority of our expenses are denominated in Renminbi, restrictions on currency conversions did not and likely will not materially affect our operations. Also, since we do not expect to require any raw material that are not permitted or are limited to purchase using foreign currencies, our management believes that such restriction will not materially affect our operations in the future.  However, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and our other holdings and investments, and our operating subsidiaries located in China may be subject to restrictions on the conversion of Renminbi to U.S. dollars and, as a result, may be restricted to make distributions to us.   7   In view of the current economy of China, the control and review of the foreign exchange rate by the central government and the People's Bank of China has announced in July 2005 that Renminbi would be pegged to a basket of foreign currencies rather than being strictly tied to the U.S. dollar. This change in policy has resulted in an appreciation of the Renminbi against the U.S. dollar. Basically the international reaction the Renminbi revaluation has been positive, there is still significant international pressure on the PRC government to adopt an even more flexible currency policy, which might result in further appreciation of Renminbi .   Risks Related to the Securities of Our Company   Lack Of Liquidity Or Difficulty In Buying And Selling The Company's Shares, Which Are Considered A "Penny Stock," As Defined.  The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure in connection with trades in any stock defined as a "penny stock." The SEC's regulations generally define a penny stock to be an equity security that has a price of less than $5.00 per share, subject to certain exceptions. No exceptions are applicable to the Company. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. In addition, unless and until the securities of the Company are listed for trading on NASDAQ or the Company has $2 million in net tangible assets, trading in the Company's securities will be subject to Rule 15c2-6 promulgated under the Securities Exchange Act of 1934 for non-NASDAQ and non-exchange listed securities.  Under the penny stock rules, broker-dealers who recommend such securities to persons other than institutional accredited investors (generally institutions with assets in excess of $5,000,000) must make a special written suitability determination for the purchaser, receive the purchaser's written agreement to the transaction prior to sale and provide the purchaser with risk disclosure documents which identify certain risks associated with investing in penny stock and which describe the market as well as the purchaser's legal remedies. Further, the broker-dealer must also obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a penny stock can be consummated.  These requirements may have the effect of reducing the level of trading activity in the secondary market for securities that become subject to the penny stock rules. With the Company's securities being subject to the penny stock rules, investors may find it more difficult to sell such securities, which could have an adverse effect on the market price thereof. Because our common stock would be characterized as penny stock, the market liquidity for the Company's securities could be adversely affected. In such an event, the penny stocks regulations could limit the ability of broker-dealers to sell the Company's securities and the ability of stockholders to sell their securities in the secondary market.  8    Indemnification Of Officers And Directors For Securities Liabilities Could Create Loss Of Return On Investment For Stockholders  The laws of Belize provide that the Company may indemnify any director,  officer, agent and/or employee as to those liabilities and on those terms and conditions as provided for by law. Further, the Company may purchase and maintain insurance (but has not done so) on behalf of any such persons whether or not the corporation would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by the Company and prevent any recovery from such officers, directors, agents and employees for losses incurred by the Company as a result of their actions.  Further, the Company has been advised that in the opinion of the Securities and Exchange Commission, indemnification is against public policy and is, therefore, unenforceable. Pursuant to the International Business Companies Act (the "Act") and Articles of Association of Yantai Dahua Holdings Company Limited (previously known as Equity Finance Holding Corporation), every director or other officer of the Company shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto, and no director or other officer shall be liable for any loss, damage or misfortune which may happen to or be incurred by the Company in the execution of the duties of his office or in relation thereto. But this Article shall only have effect insofar as its provisions are not avoided by the Securities Act of 1933.   Stockholder Loss Might Result Because A U.S. Citizen Who Purchases Shares Of Common Stock May Have Difficulty In Enforcing His Rights Against The Company  The Company is incorporated in Belize and engages in business in the People's Republic of China (`PRC"); its directors and officers and certain of its advisers are citizens and/or residents of the PRC. The Company engages in, through its subsidiaries, the manufacturing and sales of paper principally for printing and writing in the PRC. The main assets of its subsidiaries are located outside the United States. As a result, it may be difficult for stockholders to initiate a lawsuit within the United States against the Company or its subsidiaries or these non-resident persons, or to enforce judgments in the United States against the Company or its subsidiaries or these persons that are obtained in a non-United States court. It also may be difficult for stockholders to enforce a judgment of a United States court or to succeed in a lawsuit in Belize or China on the assets of the Company's subsidiaries based only on the United States securities laws.    9   Stockholder Rights May Be At Risk As A Result Of The Company's Organizing In Belize  In Belize, there is no established body of corporate law on which stockholders can rely for clarifying and protecting their rights. These rights differ materially from typical rights of investors in most U.S. companies. For example, (1) stockholders do no have the right to approve mergers and sales of substantially all of the Company assets, and (2) dissenters' rights of appraisal do not exist by law.    ITEM 4   INFORMATION ON THE COMPANY   A.    HISTORY AND DEVELOPMENT OF THE COMPANY  Equity Finance Holding Corporation (Equity Finance), a Belize corporation, the predecessor of the Company, was a management consulting corporation and marketer of management and financial consulting services offered principally to small businesses. On February 18, 2003 Equity Finance announced the closing of an Agreement and Plan of Share Exchange dated January 10, 2003 pursuant to which it acquired Australia China Investments Limited ("Australia China"), a British Virgin Islands limited corporation incorporated on February 1, 2002, engaged, by and through a subsidiary, in the production and sale principally of printing and writing papers in the PRC. In connection with the exchange, Equity Finance changed its name to Yantai Dahua Holdings Company Limited.  The Companys subsidiary, Yantai Dahua Paper Industry Company Limited (Yantai Dahua), is a Sino-foreign joint venture established on April 14, 1994 and is 85% owned by Australia China. It has registered capital of Rmb38,177,000 and a joint venture term until 2024.  Yantai Longda Paper Industry Company Limited, a company incorporated in the PRC, formerly known as "Muping Paper Manufacturer", an originally state-owned enterprise that is now a private company jointly owned by management and employees, is the PRC partner holding 15% of Yantai Dahua Paper.  Yantai Dahua Paper is principally engaged in manufacturing and selling various paper products, including printing paper, writing paper and computer paper, etc.  At a meeting held on April 3, 2003, the Board of Directors resolved to issue two additional shares for each common stock issued and outstanding, as a stock split, for no consideration, to its stockholders of record on April 13, 2003, to be effected on April 23, 2003. The additional shares would be of the same class of common stock outstanding, with the same right and privileges and without change in the par value. Prior to the split, the Company has a total of 11,149,000 shares of common stock issued and outstanding. The stock split increased the total issued and outstanding shares to 33,447,000.   10   B.    BUSINESS OVERVIEW  The Company, through its subsidiary, is engaged in the manufacturing and sales of paper principally for printing and writing.  The Company sells substantially all of its products in China. Yantai Dahua Paper is a one of the leading paper manufacturers in Shandong, China and employs about 1,000 staff.  The Company's production facilities are based at Yantai Dahua Paper, situated at Muping, Yantai City, Shandong Province. Yantai Dahua Paper's current designed production capacity is about 28,000 tons of paper per year.  The major types of paper products manufactured by Yantai Dahua Paper comprise of printing paper, writing paper and computer paper, etc.  In 2006, about 93% of the Companys sales were from printing paper, of which special light weight printing paper accounted for about 48% of the Companys sales. During 2006, the Company has sold about 19,700 tons of paper, a 6.3% decrease as compared with 2005.  Sales of the Company's paper products are conducted by Yantai Dahua Paper's sales teams based at the head office in Muping and 6 representative offices located at Beijing, Shijiazhuang (capital city of Hebei Province), Guangzhou (capital city of Guangdong province), Lanzhou (capital city of Gansu Province), Shanghai and Hangzhou.  With representative offices covering the capital city and major cities in northern, eastern, western and southern China, the Company has established a sales and distribution network serving an established customer base all over China.  In 2006, the Company has a list of more than 240 customers throughout China. Of these, the top five major customers account for about 30% of the yearly sales. These major customers include book publishers, printers, and state-owned enterprises and they are material to the Company's business and profitability. The loss of any one or more of these major customers would have a material adverse effect on the Company's results of operation.  The Company's sales in the second half of the year are usually higher than those in the first half of the year because the Company usually repairs the equipment during the Chinese New Year. The sales are affected by the drop in production because of the repairs.  Due to the environmental requirement, the Company has ceased the production of wheat stalk pulp and waste paper pulp in its plant.  At present, the Company purchases of its raw materials, i.e. wheat stalk pulp and wood pulp, from local suppliers.  It also imports some high-quality wood pulp from North America.   11   The manufacturing of paper products also requires substantial amount of water, heat and electricity. At present, the Company supplies its own heat with its 35 metric tons boiler, which commenced operation in April 2001. The Company has built in 2001 a new 3,000 kilowatt electricity generator within its site at Muping by using internally generated funds for the new generator. With this new facility, the Company is no longer dependent on the local grid to supply its electricity, and the Company expects to save on its electricity bill.  In 2006, we estimate there are more than 500 paper manufacturers in the PRC. Of these, about 200 have an annual production capacity of over 20,000 tons. In Shandong province alone, there are about 70 paper manufacturers. The Company competes with them mainly in the aspects of brand name recognition, distribution capability, product quality and capability of mass production.  The paper manufacturing industry, because of the process of cleaning and bleaching of the pulp, does produce effluents which contaminate the environment and consume a great deal of water. In a country where water is a valuable resource, the PRC government is implementing stringent measures to protect the environment. A number of these paper plants that fail to meet the environmental standards have been and will be closed. Only those that comply with the environmental standards can continue to produce. The Company has complied with the said standards.   New Associate Company  On April 3, 2004, Australia China entered into an agreement with Yantai Longda to establish Yantai Longxiang Paper Industry Limited ("YLXP"), a sino-foreign equity joint venture with registered capital of US$2,491,200. Each of Australia China and Yantai Longda beneficially owns 25% and 75% equity interest, respectively, in YLXP and is classified as an associate of the Company.  As at December 31, 2006, YLXP was still in development stage and has not yet in operation.  therefore the Company has received no share of profit or loss from YLXP; and both shareholders of YLXP have never paid their share of investment cost for YLXP.  As a result, there is no investment in YLXP recorded in the balance sheet in 2004, and we also have not recorded any investment cost in associated accompany in the balance sheet    12   C.    ORGANIZATIONAL STRUCTURE  The Company100%Australia ChinaYantai Longda85%15%Yantai Dahua Paper  D.    PROPERTY, PLANTS AND EQUIPMENT  Yantai Dahua Paper is situated at Muping East at a site close to the Yantai-Weihai Highway. The area of the site is about 110,000 square meters. On the site, the total built-up area is about 22,000 square meters. The built-up area includes 4 paper making plants, storage warehouse, administration block, boiler plant, electricity generation plant, effluent treatment plant, and other amenities.  There are 4 paper-making plants in Yantai Dahua Paper, with a total production capacity of 28,000 tons of paper per year. In each of these plants, there is one paper making machine. Three of the plants produce up to a maximum of 22,000 tons of paper with a width of 1.76 meters and one produces up to 6,000 tons of paper with width of 1.575 meters.   ITEM 5   OPERATING AND FINANCIAL REVIEW AND PROSPECTS   A.    OPERATING RESULTS   General -"Forward Looking Statements"  All statements contained herein that are not historical facts, such as statements regarding the Company's current business strategy and plans for future operations are "Forward-Looking Statements" based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Such risks and uncertainties include, but are not limited to, those described herein under "Risk Factors" under Item 3 and also include, among others:   13   (1)   significant increases in competitive pressure in the paper industry; (2)   general global economic conditions; (3)   changes in the regulatory environment; and (4)   changes in the securities markets.  Therefore, the information set forth in such Forward-Looking Statements should be carefully considered when evaluating the business prospects of the Company.   Financial Results  Fiscal year 2005 vs. Fiscal year 2004  For the year ended December 31, 2005, the Company had a net loss of US$3,066,089 compared to a net loss of US$4,241,993 for the previous year.  Sales slightly increased from $11,012,646 in 2004 to $12,034,363 in 2005 whereas gross profit margin maintains at around 12.4%.  The decrease in loss is mainly due to our effort to improve control of operating expenses, including better control of sales team expenses, reduced repair & maintenance expenses, and less advertising and promotion expenses. Operating expenses also include the provision for doubtful accounts with amount of US$1,945,329  As the price of paper products remained at similar level, but our costs of production and expenses are very high, together with a large amount of provision of doubtful receivables, we suffered net loss of US$3,066,089 in 2005.  Starting from mid 2004, the Company has gradually ceased its pulp production operations and all of the pulp for making paper is purchased from third-party suppliers.  Prepayment increased from $27,350 to $1,083,231.  It includes mainly the deposits paid for the purchase of pulp.  For the purchase of pulp, accounts payable also increased from $2,047,842 to $8,019,588.   The use of third-party supply of pulp has also significant decreased the Companys gross profit margin from 26.7% in 2003 to 12.4% in 2005.  The decrease of short term bank loan from $5,835,110 to $4,545,006 is due to the repayment of certain short term loans.   14   As at December 31, 2005, the Company has advances of $1,364,432 from its stockholders as working capital for the Company.   Fiscal year 2006 vs. Fiscal year 2005  For the year ended December 31, 2006, the Company had a net loss of US$584,899 compared to a net loss of US$3,066,089 for the previous year.  Sales slightly increased from $12,034,363 in 2005 to $12,954,196 in 2006 whereas gross profit margin increased from 12.5% in 2005 to 14.6% in 2006.  This is mainly due to the increase in the sales of light weight printing paper which generally has a higher profit margin.  Quantity of light weight printing paper to be manufactured in the future will depend on market demand which may fluctuate.  The decrease in loss is mainly due to our effort to improve control of operating expenses, including better control of sales team expenses, reduced overseas traveling expenses. Also, bad debt written off has decreased by about US$1.1 million, reflecting our improved credit control management.  Due to the high production costs and operating expenses, we suffered net loss of US$584,899 in 2006.  Starting from mid 2004, the Company has gradually ceased its pulp production operations and all of the pulp for making paper is purchased from third-party suppliers.  Prepayment increased from $27,350 in 2004 to $1,083,231 to 2005. During 2006, prepayment increased to US$2,369,365.  It includes mainly the deposit paid for the purchase of pulp.  The increase of short term bank loan from $4,545,006 to $5,674,180 is due to increase of certain short term bank loans for working capital..  As at December 31, 2006, the Company has advances of $1,417,838 from its stockholders as working capital for the Company.   Information Regarding Significant Financial Factors  Inflation generally affects companies by the cost of labor, equipment, and raw materials. The Company does not believe that inflation has had, or will have, any material effect on the Company's business.    15   B.    LIQUIDITY AND CAPITAL RESOURCES   The Company's primary sources of funding are (i) cash flow from operating activities, (ii) borrowings from credit agreements with various banks and (iii) loans from staff and other third-parties.  During 2006, the Company has capital expenditure of about US$4 million in purchasing new paper equipment and upgrading existing equipment, in particular for making special light weight printing paper. As at December 31, 2006, the Company negative cash balance of $800,145 related to bank overdraft.  Operating activities Net cash provided by operating activities increased to $1,719,616 for the year ended December 31, 2006, from $359,556 for the year ended December 31, 2005.  The increase was due primarily to increase of sales, decrease in net loss and decrease in accounts receivable, partially offset by the increase in inventory and prepaid expenses.  Net cash provided by operating activities was $359,556 for the year ended December 31, 2005, as compared to $2,353,317 net cash used in operating activities. It is mainly because of increase in revenue, decrease of other receivables, and decrease of net loss, partially offset by increase in inventory and prepayments.  Investing Activities Net cash used in investing activities was $4,049,485 for the year ended December 31, 2006, compared to net cash used in investing activities of $580,170 for the year ended December 31, 2005.  Net cash used in investing activities for the year ended December 31, 2006 consisted primarily of purchase of machinery for the Companys production facility.  Net cash used in investing activities increased to $580,170 for the year ended December 31, 2005, from $70,392 for the year ended December 31, 2004, mainly because new equipment was purchased for the Companys production facility.  Financing Activities Net cash provided by financing activities increased to $2,023,411 for the year ended December 31, 2006 from $134,915 for the year ended December 31, 2005.  This increase was due primarily to increase of loan from a related party and short-term bank loans.  Net cash provided by financing activities was $1,482,928 for the year ended December 31, 2004, as compared to $134,915 for the year ended December 31, 2005.  It is mainly because of the decrease in short-term bank loan during 2005.    16   We have incurred significant operating losses since 2004.  We have funded our operations principally with financial support from our shareholders and related parties.  As our operating loss decreased during the last two years and with the continuous financial support from our majority shareholders and related parties, we anticipate that our cash flows from operating and financing activities will be sufficient to meet our anticipated cash requirements based on our current operations needs.  C.    RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES  The Company has not invested into research and development.   D.    TREND INFORMATION   Price  Due to the keen competition in the paper market, the Company is unlikely to increase the price of its products.  E.    OFF-BALANCE SHEET ARRANGEMENTS  The Company has not made any off-balance sheet arrangement.   F.    TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS  None/Not Applicable   G.    SAFE HARBOR  None/Not Applicable   ITEM 6   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   A.    DIRECTORS AND SENIOR MANAGEMENT  The Company's key management team consists of the following persons:   17   Mr. TANG Yuxiang, age 59, is Chairman & Chief Executive Officer of the Company. He has been working in the paper industry since 1984, when he was appointed as Party Secretary and then Plant Manager of Yantai Longda. Since the inception of Yantai Dahua Paper in 1994, he has been General Manager and Chairman of the Board of the joint venture. His previous experience includes 18 years experience in an agricultural machinery plant in Yantai Longda, where he was promoted to Deputy Plant Manager, a position he held from 1979 to 1982. He is a graduate of Shandong Agricultural Machinery Institute and is a Chinese government endorsed Senior Economist.  Mr. YU Shou Ping, age 60, is Director & Chief Operating Officer of the Company. He has been Deputy General Manager and Director of Yantai Dahua Paper since 1994. He is responsible for its manufacturing operations. He has been working in the paper industry since August 1984. He is a graduate of Shandong Muping Electricity University.  Mr. QIAO Xuezhou, age 45, is Director and Deputy General Manager of the Company. He joined Yantai Longda in 1980 and was promoted to Deputy Plant Manger in 1989.  He is a graduate of Yantai University. To accommodate the market changes, Mr. Qiao has now taken other administrative roles.  Mr. WANG Xian, age 42, is Director and Deputy General Manager of the Company. He manages the sales and purchasing operations, including the six offices in the PRC since 2002. He joined Yantai Longda in 1984 and was promoted to Deputy Plant Officer and Plant Officer in 1988. He has been Deputy General Manager since 2000, in charge of production and raw materials. He is a graduate of Yantai University Professional Economic Management.  Ms. JIANG Min, age 45, is Director and Chief Engineer of the Company. She is responsible for its engineering, technical and quality operations. She joined Yantai Longda in 1982 and was appointed to her present position in 1994. She is a graduate of Shandong Technical College of Light Industry, majoring in pulp and paper manufacturing.  Mr. QU Shuzhi, age 47, is Director and Deputy General Manager & Chief Financial Officer of the Company. He is responsible for its accounting and general administration. He joined Yantai Longda in 1979 as an accountant, and was promoted to Chief Accountant in 1988. He was appointed Deputy General Manager & Chief Accountant in 2001. He was appointed as Chief Financial Officer in December 2003. He is a graduate in Finance Management at the China Agricultural University.  Mr. YU Zhou, Independent Director, aged 49. He is working for an information technology company since 1996.   18   Mr. XIONG Shi Gui, Independent Director, aged 72. He was a law graduate in PRC in 1958. Since graduation, Mr. Xiong has been working for the Government in respect of education work. He is now working for Sincere College Shanghai as an Associate Dean.  Mr. QU Dongqing, age 42, has been an Assistant to Mr. TANG Yuxiang since June 2000. He is responsible for Human Resources and General Administration. He joined Yantai Longda in 1980 as an officer of the trade union within Yantai Longda.  From 1986 to 1996, he served as Manager, General Administration of Yantai Longda. From 1996 to 2000, he served as Plant Manager of an iron lid manufacturer branch of Yantai Longda.   B.    COMPENSATION   Compensation to Director For the years ended December 31, 2005 and 2006, there was no compensation paid by the Company to any director or to its directors as a group. During the year of 2006, the Company has no plans to pay the directors any compensation. There are no stock options, retirement plans, nor agreements for compensation upon separation from the Board of Directors.   Compensation to Officers For the Company, the salaries paid by the Company or its subsidiaries to the officers for the year ended December 31, 2006 are:  NameAnnual SalaryTANG YuxiangUS$6,520YU Shou PingUS$4,685QIAO XuezhounilWANG Xi AnUS$4,807JIANG MinUS$4,815QU ShuzhiUS$4,807YU ZhounilXIONG Shi GuinilQU DongqingUS$4,497   19   C.    BOARD PRACTICES  The following persons serve as a member of the Company's Board of Directors:  NamePositionDirector sinceMr. TANG YuxiangChairman & Chief Executive OfficerMarch 2003Mr. YU Shou PingDirector & Chief Operating OfficerMarch 2003Mr. QIAO XuezhouDirector & Deputy General ManagerMarch 2003Mr. WANG Xi AnDirector & Deputy General ManagerFebruary 2004Ms. JIANG MinDirector & Chief EngineerMarch 2003Mr. QU ShuzhiDirector & Chief Financial OfficerMarch 2003Mr. YU ZhouIndependent DirectorMarch 2003Mr. XIONG Shi GuiIndependent DirectorMarch 2003  Each director is elected to serve until the next annual meeting of shareholders and until his successor is elected. All officers serve at the discretion of the Board of Directors.  There are no directors' service contracts with us or any of our subsidiaries providing for benefits upon termination of employment. There is no audit or compensation committee of the Company's Board of Directors   D.    EMPLOYEES  The Company has about 1,200 employees as of December 31, 2006. Management considers the relationship with employees to be excellent. As stipulated by PRC regulations, the Company participates in a retirement plan for all employees. Pursuant to the plan, all retired employees of Yantai Dahua Paper are entitled to certain retirement benefits. Yantai Dahua Paper is required to make contributions to a state sponsored retirement plan at approximately 20% of the basic amount which is within the range from RMB400 to RMB468 stipulated by the PRC government. Yantai Dahua Paper determines the base amount with reference to the basic salary of its employees and has no further obligations for the actual payments of any post-retirement benefits. The state sponsored retirement plan is responsible for the entire pension obligations payable to the employees.  The Company's pension expense for the period ended December 31, 2004 and the year ended December 31, 2005 was US$296,019 and US$198,566 respectively.    20   E.    SHARE OWNERSHIP  The following table set forth the share ownership of Common Stock of the Company as at December 31, 2006.  NameSharesPercentageOwned byMagic Growth Investments Limited18,000,00053.82%TANG YuxiangSuccess Channel Limited3,000,0008.97%QU ShuzhiEverwell Strategy Limited3,000,0008.97%QU Dongqing  Tang Yuxiang is a director and shareholder of Magic Growth Investments Limited. Qu Shuzhi is a director and shareholder of Success Channel Limited. Qu Dongqing is a director and shareholder of Everwell Strategy Limited. Tang Yuxiang and Qu Shuzhi are directors of the Company. Qu Dongqing is not a director of the Company.  On or about July 22, 2006, the Company issued 10,000 shares of its Preferred Stock to LEA Management in exchange for paying expenses of the Company valued at $50,000 and for consulting services.  The 10,000 shares of Preferred Stock represent a controlling voting interest in the Company until such time as the Company approves and closes on a target acquisition.   ITEM 7   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   A.    MAJOR SHAREHOLDERS  Please see Item 6E for share ownership information regarding our principal shareholders and directors.  B.    RELATED PARTY TRANSACTIONS  From time to time, the Company may enter into transaction with parties that have a relationship with our officers or directors or entities in which we have an ownership interest. Such transactions are reviewed by the Board of Directors and are subject to the approval of members of the Board of Directors who do not have a personal interest in the applicable transaction. We disclose all material transactions that, in our judgment, constitute related party transactions; related parties include our subsidiaries, investments accounted for under the equity method, members of our management and owners of a significant percentage of our common stock and their family members, and any other party that we significantly influence. In the opinion of management, the terms of the related party transactions are fair to the Company.  21    (a)   Name and relationship of related partiesExisting relationships with the CompanyYantai LongdaJoint venturer of a subsidiaryMuping Iron Cover Manufacturing Factory (MIC)Branch of YLDPMuping Paper Product Manufacturing Factory (MPP)Branch of YLDPMuping Vegetable Processing Factory (MVP)Branch of YLDPMr. Tang YuxiangStockholder / DirectorMr. Qu ShuzhiStockholder / DirectorYantai Long Xiang Paper Industry Co. Ltd. (YLXP)An associate of a subsidiary   20052004US$US$(i)
Due from related parties (Note )MVP13,02112,523MPP26,99225,961MIC731,849168,129771,862206,613(ii)
Due to a related party (Note)Yantai Longda4,292,627422,582(iii)
Due to stockholders (Note)Mr. Tang Yuxiang117,606113,080Mr. Qu Shuzhi1,300,2321,251,3521,417,8381,364,432  Note: The amounts due represent non-trade unsecured advances which are interest-free and repayable on demand.  22    Apart from the above, the Company has not entered into any transactions with related parties.   C.    INTERESTS OF EXPERTS AND COUNSEL  None/Not Applicable   ITEM 8   FINANCIAL INFORMATION   A.    CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION  The financial statements, together with the independent auditors report thereon of Gruber & Company, LLC, appear beginning on page F-1 of this report.   B.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   No significant changes occurred since the date of our annual consolidated financial statements included elsewhere in this Annual Report.  ITEM 9   THE OFFER AND LISTING  There is no established trading market in the United States or elsewhere for shares of the Company's common stock and there has been no established trading market at any time.   ITEM 10   ADDITIONAL INFORMATION   A.    SHARE CAPITAL  See the balance sheet included in the financial statements for information about the share capital as of December 31, 2006.  See Item 19 for a list of exhibits filed as part of this annual report or incorporated herein by reference.    23   B.    MEMORANDUM AND ARTICLES OF ASSOCIATION  This information, contained in the by-laws of Equity Finance Holding Corporation and the Memorandum of Association and Articles of Association of Equity Finance Holding Corporation, IBC No. 6825, incorporated, Belize, 6 March 1998, is hereby incorporated by specific reference in this annual report to Exhibits 1 and 2 to the registration statement on Form 8-A12G dated February 20, 2003.   C.    MATERIAL CONTRACTS  None/Not applicable  D.    EXCHANGE CONTROLS  Belize has no system of exchange controls. There are no Belize restrictions on the repatriation of capital or earnings of a Belize public company to non-resident investors. There are no laws in Belize or exchange restrictions affecting the remittance of dividends, profits, interest, royalties and other payments to non-resident holders of the Company's securities.  Chinas government imposes control over the convertibility of RMB into foreign currencies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the Peoples Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 3.0% appreciation of the RMB against the U.S. dollar by the end of 2005. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.   24   Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29, 1996 and effective as of April 1, 1996 (and amended on January 14, 1997) and the Administration of Settlement, Sale and Payment of Foreign Exchange Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations, conversion of RMB into foreign exchange by foreign investment enterprises for current account items, including the distribution of dividends and profits to foreign investors of joint ventures, is permissible. Foreign investment enterprises are permitted to remit foreign exchange from their foreign exchange bank account in China on the basis of, inter alia, the terms of the relevant joint venture contracts and the board resolutions declaring the distribution of the dividend and payment of profits. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account items, including direct investment, loans, security investment, is still subject to the approval of SAFE, in each such transaction. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, as Article 5 provides that the State shall not impose restrictions on recurring international payments and transfers.  Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial documents and, in the case of capital account item transactions, document approval from SAFE.  Currently, foreign investment enterprises are required to apply to SAFE for foreign exchange registration certificates for foreign investment enterprises. With such foreign exchange registration certificates (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which are subject to review and renewal by SAFE on an annual basis) or with the foreign exchange sales notices from the SAFE (which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.   E.    TAXATION  Yantai Dahua Paper is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which it operates. The tax jurisdiction of the Company is National Tax Bureau of Yantai District, Shandong Province.  Yantai Dahua Paper is established and is carrying on business in the PRC and subject to the PRC enterprise income tax at a rate of 24%.   25   As the Company has encountered losses for both 2005 and 2006, it records no deferred tax liabilities at both December 31, 2005 and 2006.  The Company is incorporated in Belize and the Belize tax laws are summarized as follows. Unless exempt under an investment incentive, resident companies are liable for corporate income tax on all of their income, whether derived from Belize or not, although foreign earned income is taxed only on remittances to Belize. A company is resident if it is incorporated in Belize or if it's central management and control are exercised in Belize. If a company does not operate under a Fiscal Incentives (Approved Enterprise Order) the total tax payable is 35% of the chargeable income. The Company status is a resident company in Belize.  Corporate income tax is charged on net profits, as adjusted for tax purposes.  Net profits comprise the aggregate amount of net income derived from conducting business in Belize. Inventory valuation is not specifically addressed in income tax law and, in any event, is inapplicable to the Company. Methods that conform to generally accepted accounting principles may be used as long as they are consistently applied. Dividends are taxable in the hands of recipients, the cash amount of the dividends paid being grossed up by the amount of corporate income tax paid by the distributing company, although the latter is liable only for corporate income tax and does not actually account to the tax authorities for any withholding. Some dividends are not taxable on recipients, including those a paid to exempt entities and those paid under specified tax incentives.   F.    DIVIDENDS AND PAYING AGENTS  The Company has not paid any dividends and does not expect to in the future, but rather to use any earnings in the growth and development of its business.  See Item 19 for a list of exhibits filed as part of this annual report or incorporated herein by reference.   G.    STATEMENT BY EXPERTS  The Consolidated Financial Statements of the Company for the year ended December 31, 2005 and 2006 included under Item 18 in this annual report have been audited by Gruber & Company, LLC, to the extent indicated in their report thereon and have been included in this annual report given upon the authority of such firm as experts in accounting and auditing.  See Item 19 for a list of exhibits filed as part of this annual report or incorporated herein by reference.    26   H.    DOCUMENTS ON DISPLAY  See Item 18 and Item 19 for a list of exhibits filed as part of this annual report or incorporated herein by reference.   I.    SUBSIDIARY INFORMATION  Not Applicable   ITEM 11   QUANTITATIVE INFORMATION ABOUT MARKET RISK  The Company does not maintain nor invest in market sensitive or interest rate sensitive holdings. Therefore, the Company has no quantitative or qualitative exposure to market risk associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments.   ITEM 12   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES  None/Not Applicable.   PART II   ITEM 13   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES  None/Not Applicable.   ITEM 14   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS  Not Applicable.     27   ITEM 15   CONTROLS AND PROCEDURES  Based on their evaluation of the Company's internal disclosure controls and procedures completed in December 2006, Mr. Tang Yuxiang, Chief Executive Officer, and Mr. Qu Shuzhi, Chief Financial Officer, have concluded that the Company's controls and procedures (as defined in Rule 13a -15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934) are adequate and effective in ensuring the adequacy and effectiveness of the information in this annual report.  There have not been any significant changes made in the Company's internal controls and procedure or any other factors that could significantly affect these controls.    ITEM 16A   AUDIT COMMITTEE FINANCIAL EXPERT  The Company does not have an audit committee financial expert (as defined in Instruction (b) to Item 16A) serving on our board of directors other than Mr. Qu Shuzhi, the Deputy General Manager and Chief Financial Officer who is not "independent." If and when the Company is successful in raising capital, the Company will seek to retain an independent audit committee financial expert. At present, there is no requirement for forming an audit committee but the Company will form the committee upon further requirement from the change of law.   ITEM 16B   CODE OF ETHICS  The Company has not yet adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, but is in the course of preparing such code.   ITEM 16C   PRINCIPAL ACCOUNTANT FEES AND SERVICES   (A)  AUDIT FEES  For fiscal year ended December 31, 2006, the Company paid US$43,000 to Gruber & Company, LLC, the principal accountant for the audit of the Company's financial statement and for professional services in connection with statutory and regulatory filings.   (B)   AUDIT-RELATED FEES  The Company did not pay any audit-related fees to its auditors in either of the last two fiscal years.    28   (C)   TAX FEES  The Company did not pay any tax fees to its auditors in either of the last two fiscal years.   (D)   ALL OTHER FEES  The Company did not pay any other fees to its auditors in either of the last two fiscal years.   (E)   PRE-APPROVAL POLICIES AND PROCEDURES  The board of directors adopted resolutions in accordance with the Sarbanes-Oxley Act of 2002 requiring pre-approval of all auditing services and all audit-related, tax or other services not prohibited under Section 10A(g) of the Securities Exchange Act of 1934 to be performed for us by our independent auditors, subject to the de minimus exception described in Section 10A(i)(1)(B) of that Act. These resolutions authorized our independent auditor to perform audit services required in connection with the annual audit relating to the fiscal year ended December 31, 2006. Our board of directors also appointed and authorized Mr. Qu Shuzhi, our Chief Financial Officer, to grant pre-approvals of other audit, audit-related, tax and other services requiring board approval to be performed for us by our independent auditor, provided that the designee, following any such pre-approvals, thereafter reports the pre-approvals of such services at the next following regular meeting of the Board.  Neither the board of directors nor Mr. Qu Shuzhi approved any audit-related, tax and other services.   (F)  NOT APPLICABLE  Item 16D Exemptions from the Listing Standards for Audit Committees  Not Applicable  Item 16E Purchase of Equity Securities by the Issuer and Affiliated Purchasers  Not Applicable    29   PART III   ITEM 17   FINANCIAL STATEMENTS  Not Applicable   ITEM 18   FINANCIAL STATEMENTS  For Years ended December 31, 2006 and 2005   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMF-2CONSOLIDATED STATEMENTS OF OPERATIONSF-3CONSOLIDATED BALANCE SHEETSF-4CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYF-5CONSOLIDATED STATEMENTS OF CASH FLOWSF-6NOTES TO THE FINANCIAL STATEMENTSF-7   30   ITEM 19 EXHIBITS  The following exhibits are filed as part of this annual report on Form 20-F:  12.1Certification of Tang Yuxiang Pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2Certification of Qu Shuzhi Pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1Certification of Tang Yuxiang Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2Certification of Qu Shuzhi Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  SIGNATURES  The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report registration statement on its behalf.  YANTAI DAHUA HOLDINGS COMPANY LIMITED  By: /s/ TANG Yuxiang TANG Yuxiang, Chairman and Chief Executive Officer  /s/ QU Shuzhi QU Shuzhi Director and Chief Financial Officer  /s/ YU Shou Ping YU Shou Ping Director  Date: June 6, 2007  31


PAGE NO.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMF-2CONSOLIDATED STATEMENTS OF OPERATIONSF-3CONSOLIDATED BALANCE SHEETSF-4CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITYF-5CONSOLIDATED STATEMENTS OF CASH FLOWSF-6NOTES TO THE FINANCIAL STATEMENTSF-7     F-1   Gruber & Company, LLC    Report of Independent Registered Public Accounting Firm  To the Board of Directors and Stockholders of Yantai Dahua Holdings Company Limited (A company incorporated in Belize)  We have audited the accompanying consolidated balance sheets of Yantai Dahua Holdings Company Limited and its subsidiaries (the "Company") as of December 31, 2006 and 2005 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three year period  ended December 31, 2006.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2006,in conformity with generally accepted accounting principles in the United States.  /s/ Gruber & Company, LLC Lake Saint Louis, Missouri  63367  February 18, 2007     F-2   Yantai Dahua Holdings Company Limited Consolidated Statements of Operations   Year ended December 31,200620052004NoteUS$US$US$Operating revenue
Sales of goods12,954,19612,034,36311,012,646Cost of sales(11,068,592)(10,529,806)(9,647,787)Gross profit1,885,6041,504,5571,364,859Operating expensesDepreciation(56,905)(50,604)(46,924)Handling and shipping costs(157,596)(340,236)(312,837)Selling, general and administrative expenses(1,667,460)(4,126,781)(6,083,399)Profit/(Loss) from operations3,643(3,013,064)(5,078,301)Non-operating income (expense)Sundry income31,87330,35943,552Finance costs(629,014)(593,381)(526,015)Loss before income taxes(593,498)(3,576,086)(5,560,764)Provision for income taxes3(2,500)(10,590)570,188Loss after income taxes(595,998)(3,586,676)(4,990,576)Share of operating results from an associate----(3)Minority interest11,099520,587748,586Net loss(584,899)(3,066,089)(4,241,993)(Loss) Earnings per share
Basic common shares outstanding33,447,00033,447,00033,447,000Basic net (loss) income per common share(US$0.017)(US$0.092)(US$0.13)     The accompanying notes are an integral part of these financial statements.   F-3   Yantai Dahua Holdings Company Limited Consolidated Balance Sheets   December 31,20062005ASSETSNoteUS$US$Current assetsCash and cash equivalents--227,776Accounts receivable, trade4,835,3625,746,522Prepayments2,369,3261,083,231Others receivables660,987871,895Inventories45,895,0993,956,357Due from related parties8b(i)771,862206,613Pledged bank deposits415,568419,235Total current assets14,948,20412,511,629Property and equipment, net512,703,7719,711,191Total assets27,651,97522,222,820LIABILITIES AND STOCKHOLDERS'
EQUITYCurrent liabilitiesBank overdraft800,145--Other short-term loans61,391,3461,357,275Short-term bank loans75,674,1804,545,006Accounts payable, trade8,233,2028,019,588Accrued charges922,6491,826,589Other payables3,034,7202,367,183Due to a related party8b(ii)4,292,627422,582Due to stockholders8b(iii)1,417,8381,364,432Due to an associate90,84787,899Income tax payable28,5527,699Total current liabilities25,886,10619,998,253Non-current liabilitiesMinority interest in subsidiary345,179342,660Stockholders' equityPreferred stock, par value US$0.001;
10,000 shares issued and outstanding10--Common stock, par value US$0.001;100,000,000 shares authorized
33,447,000 shares issued and outstanding33,44733,447Additional paid-in capital8,747,8848,368,511Accumulated losses(7,079,773)(6,494,874)Statutory reserves1042,24940,634Accumulated other comprehensive loss(323,127)(65,811)Total stockholders' equity1,420,6901,881,907Total liabilities and stockholders' equity27,651,97522,222,820 The accompanying notes are an integral part of these financial statements.  F-4    Yantai Dahua Holdings Company Limited Consolidated Statement of Stockholders' Equity    Common StockPreferred StockNo.
of sharesAmount
US$No.
of sharesAmount
US$Additional paid-in paid capital
US$Accumulated loss
US$Statutory reserves
US$Accumulated Other comprehensive loss
US$Total
US$Balance as of January 1, 200433,447,00033,447----8,209,389821,90331,167--9,095,906Net loss for the year charge----------(4,241,993)----(4,241,993)Transfer to statutory reserves----------(8,695)8,695----Balance as of December 31, 200533,447,00033,447----8,209,389(3,428,785)39,862--4,853,913Net loss for the year charge----------(3,066,089)----(3,066,089)Change of exchange rate--------159,122--772(65,811)94,083Balance as of December 31, 20053,447,00033,447----8,368,511(6,494,874)40,634(65,811)1,881,907Issuance of preferred stock----10,0001044,990------45,000Net loss for the year charge----------(584,899)----(584,899)Change of exchange rate--------334,383--1,615(257,316)78,682Balances as of December 31, 200633,447,00033,44710,000108,747,884(7,079,773)42,249(323,127)1,420,690   The accompanying notes are an integral part of these financial statements.   F-5   Yantai Dahua Holdings Company Limited Consolidated Statements of Cash Flows  Year ended December 31,200620052004US$US$US$Cash flows from operating activities:
Net loss(584,899)(3,066,089)(4,241,993)Adjustments to reconcile net loss to net cash (used in) provided by operating activities:Share of loss from an associate----3Depreciation1,056,905994,987994,987Provision for impairment loss of property, plant and equipment----60,867Minority interest2,519(504,173)(748,586)Provision for bad and doubtful debts489,4421,577,7581,333,296Changes in working capital:Accounts receivable, trade886,962(2,108,204)1,033,394Other receivables(254,336)827,037(940,391)Prepayments(1,286,095)(1,055,881)73,164Inventories(1,938,742)(2,656,254)791,230Due from related parties(565,249)(3,930)(51,351)Accounts payable, trade213,6145,971,746470,153Other creditors667,537651,281467,639Accrued charges(858,940)563,404451,658Due to a related party3,870,045(770,671)(1,453,323)Income tax20,853(61,455)(594,064)Net cash provided by operating activities1,719,616359,556(2,353,317)Cash flows from investing activities:Purchases of property and equipment(4,049,485)(580,170)(70,392)Net cash used in investing activities(4,049,485)(580,170)(70,392)Net cash from financing activities:Due to an associate2,9481,67286,225Due to stockholders53,4061,236,77222,295(Repayment)/addition of bank loans(1,365,206)(2,520,896)1,832,543New other loans34,071303,4101,053,865Bank overdraft800,145----Pledged bank deposits3,667(116,835)(302,400)Addition/(repayment) of amount borrowed2,494,3801,230,792(1,209,600)Net cash provided by financing activities2,023,411134,9151,482,928Cumulative translation adjustments78,68294,083--Net (decrease) increase in cash and cash equivalents(227,776)8,384(940,781)Cash and cash equivalents at the beginning of year227,776219,3921,160,173Cash and cash equivalents at end of year--227,776219,392Supplemental disclosure informationInterest paid615,475567,870526,015Income taxes paid2,50010,59023,876 The accompanying notes are an integral part of these financial statements.  F-6    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  1.    ORGANIZATION AND PRINCIPAL ACTIVITIES  Yantai Dahua Holdings Company Limited ("YDHC") and its subsidiaries (collectively referred to as the "Company") are principally engaged in manufacturing and selling various paper products, including printing, writing paper and computer paper, etc. The head office of its operating subsidiary is located at East of Muping City, Yantai, Shandong, the People's Republic of China (the "PRC").  Yantai Dahua Paper Industry Limited ("YDPI"), the Company's principal operating subsidiary, was established in the PRC on April 14, 1994 as a sino-foreign equity joint venture which was planned to operate for a term of 15 years until April 14, 2009. On July 30, 2002, Yantai Foreign Investment Bureau also approved YDPI's application for the extension of operating period for an additional 15 years to 2024. As of the balance sheet date, the Company owns an 85% equity interest in YDPI through its wholly owned subsidiary, Australia China Investment Limited ("ACIL"), a company incorporated in the British Virgin Islands.  On April 3, 2004, ACIL entered into an agreement with Yantai Longda Paper Industry Limited ("YLDP") (see relationship in note 8(a) to the financial statements) to establish Yantai Longxiang Paper Industry Limited ("YLXP"), a sino-foreign equity joint venture with registered capital of US$2,491,200. ACIL and YLDP beneficially own 25% and 75% equity interest respectively in YLXP and is classified as an associate of the Company.  YLXP was established on May 11, 2004 and plans to operate for a term of 20 years until May 10, 2024. As of December 31, 2006, the registered capital of YLXP was not fully paid-up by ACIL and YLDP.  YLXP has had no operations since its establishment, therefore it has no assets, liabilities or equity and no items of income or expenses or included in the consolidated financial statements, and since YDPI has made on investment inYLXP there is no investment recorded on the consolidated balance sheets.  Since the financial position or results of operations of YLXP are not in the aggregate material to the consolidated financial statements summarized information required by Accounting Principles Board 18, (APB 18) are not presented in the notes or in separate statements.  2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of accounting  The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("USGAAP"). The measurement basis used in the preparation of the financial statements is historical cost.  Principles of consolidation  The consolidated financial statements include the accounts of Yantai Dahua Holdings Company Limited and its wholly owned subsidiaries.All material intercompany balances and transactions have been eliminated from the consolidated financial statements.  Subsidiary  A subsidiary is an affiliate controlled by the Company directly, or indirectly through one or more intermediaries. The term control (including the terms controlling, controlled by and under common control with) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stocks, by contract, or otherwise.     F-7   Yantai Dahua Holdings Company Limited Notes to the Financial Statements  2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Associate  An associate is an enterprise in which the Company has significant influence but not control or joint control, over its management. The Company has significant influence in the financial and operating policy decisions.  The interest in an associate is accounted for in the consolidated financial statements under the equity method and is initially recorded at cost and adjusted thereafter for the post acquisition change in the Company's share of the associate's net assets, unless it is acquired and held exclusively with a view to subsequent disposal in the near future or operates under severe long-term restrictions that significantly impair its ability to transfer funds to the investor, in which case the investment is accounted for as trading securities or non-trading securities. The consolidated income statement reflects the Company's share of the post-acquisition results of the associate for the year, including any amortization of goodwill. When the Company's share of losses exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has incurred obligations in respect of the associate.  Revenue recognition  Net sales represent the invoiced value of goods, net of value-added tax ("VAT") and returns. The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Nos. 101 and 104, "Revenue Recognition in Financial Statements", when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred, the sales price is determinable, and collectibility is reasonably assured.  Income taxes  The Company did not carry on any business and did not maintain any branch office in the United States of America.  Provision for income and other related taxes has been made in accordance with the tax rates and laws in effect in the PRC.  Income tax expense is computed based on pre-tax income included in the consolidated statements of operations. The Company provides for deferred income taxes using the liability method, by which deferred income taxes are recognized for all significant temporary differences between the carrying amounts and tax bases assets and liabilities and their reported amounts. The tax consequences of those differences are classified as current or non-current based upon the classification of the related assets or liabilities in the financial statements.   F-8    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Property and equipment and depreciation  Property, plant and equipment are stated at cost less accumulated depreciation.  The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Major costs incurred in restoring assets to their normal working conditions are charged to the statement of operations. Improvements are capitalized and depreciated over their expected useful lives.  The gain or loss arising from the retirement or disposal of property, and equipment is determined as the difference between the estimated net sales proceeds and the carrying amount of the assets and is recognized as income or expense in the income statement.  Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values, using the straight-line method, at the annual rate per annum:  Building and fixtures13-33 yearsPlant and machinery10-25 yearsMotor vehicles10 years  Impairment of long-lived assets  Long-lived assets are reviewed at least annually for impairment whenever events or changes in circumstances indicate that the carrying amount of the 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 undiscounted future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, impairment is measured as the difference between the carrying amount and fair value of the asset.  Goodwill will not be allocated to long-lived assets when tested for impairment.  Inventories  Inventories are stated at the lower of cost or market. Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the weighted average cost method.  Estimated losses on inventories represent reserves for obsolescence, excess quantities, irregular and slow moving inventory. The Company estimates the loss / write-down on the basis of its assessment of the inventory's net realized value based upon current market conditions and historical experience.   F-9   Yantai Dahua Holdings Company Limited Notes to the Financial Statements  2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Statement of cash flows  Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date.  Translation of foreign currency  Subsidiaries maintain their accounting books and records in Renminbi ("RMB"). Foreign currency transactions during the year are translated to RMB at the approximate rates of exchange on the dates of transactions.  Monetary assets and liabilities denominated in foreign currencies at year end are translated at the approximate rates of exchange at the balance sheet date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the consolidated statement of operations.  On consolidation, the financial statements of the subsidiaries are translated into US$ using the closing rate method, whereby the balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The share capital and various reserves are translated at exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year.  All exchange differences arising on consolidation are recorded within. Historically, foreign exchange transactions have not been material to the financial statements.  (Loss) Earnings per share  Basic (loss) earnings per share are computed by dividing (loss) income available to common stockholders by the weighted average number of common stocks outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the weighted average number of common stocks outstanding is adjusted to include estimates of additional shares that would be issued if potentially dilutive common stocks had been issued. In addition, income available to common stockholders is adjusted to include any changes in income or loss that would result from the assumed issuance of the dilutive common stocks.  There were no dilutive securities outstanding during the period.  Uses of estimates  The preparation of the financial statements in conformity with US GAAP requires the Company's 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 reported periods. Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowances for doubtful accounts, depreciation, taxes and contingencies.  Allowance for doubtful accounts  The Company provides an allowance for doubtful accounts equal to the estimated uncollectable amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change.   F-10    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)  Allowance for doubtful accounts (Continued)  The charge for the year ended December 31, 2006 of US$24,198 is included in selling, general and administrative expenses.  Segment information  Operating segments are defined as components of a company about which separated financial information is available that is evaluated regularly by the operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in a single business segment of manufacturing and selling of paper products which are sold in the PRC. There are no reportable business or geographical segments identified and no segment information is disclosed accordingly.  Related parties  Parties are considered to be related if one party has the ability, or indirectly, to control the other party, or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.  New accounting pronouncements  In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 151 "Inventory Costs, an Amendment of ARB No. 43, Chapter 4". This statement amends ARB No. 43, Chapter 4 to clarify that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" and that fixed production overheads should be allocated to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005; however, earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of SFAS No. 151 should be applied prospectively.  The Company believes that SFAS No. 151 will not have a significant impact on its financial statements when it is adopted.  In July 2005, the FASB issued FSP No APB 18-1, "Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence". This pronouncement states that an investor's proportionate share of an investee's equity adjustments for other comprehensive income (OCI) should be offset against the carrying value of the investment at the time significant influence is lost. To the extent that the offset results in a carrying value of the investment that is less than zero, an investor should (a) reduce the carrying value of the investment to zero and (b) record the remaining balance in income. This guidance is effective as of the first reporting period beginning after July 12, 2005.  Accumulated Other Comprehensive Income  Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments.  These transactions are deemed immaterial for the year presented.  F-11    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  3.    PROVISION FOR INCOME TAXES  The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which it operates.  The operating subsidiary is established and is carrying on business in the PRC. It is subject to the PRC enterprise income tax at a rate of 24%.  Income tax expense comprised the following:  Year ended December 31,20062005US$US$Current tax2,50010,590Deferred tax----Income tax (benefit) expense2,50010,590   The reconciliation of the PRC statutory income tax rate to the effective income tax rate based on income stated in the statement of operations is as follows:   %%Statutory rate2424Underprovision in respect of prior year----Unrecognized timing difference----Non-deductible activities----Effective tax rate2424   4.    INVENTORIES  Inventories comprise the following:  As of December 31,20062005US$US$Raw materials2,451,8231,606,152Finished goods3,443,2762,350,2055,895,0993,956,357     F-12    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  5.    PROPERTY AND EQUIPMENT  As of December 31,20062005US$US$Buildings and fixtures4,557,5634,557,563Plant and machinery16,378,90312,329,418Motor vehicles299,558299,55821,236,02417,186,539Less: Accumulated depreciation(8,532,253)(7,475,348)Property and equipment, net12,703,7719,711,191  6.    OTHER SHORT-TERM LOANS  The amount of US$1,327,244 represent loans from employees of the Company which are unsecured, interest-free and without fixed repayment terms. The other amount of US$64,102 loans from an un-related third party at 20%p.a. interest rate and repaid on demand.  7.    BANKING FACILITIES  The Company had various lines of credit under banking facilities as follows:  As of December 31,20062005US$US$Facilities grantedCommitted credit lines5,674,1804,545,006   There are no significant commitment fees or requirements for compensating balances associated with any lines of credit.  The Company had the following banking facilities:  As of December 31,20062005US$US$Collateralized by guarantee of a third party (note)2,539,5652,226,880Collateralized by certain property and equipment
of the Company and guarantee of a third party (note)1,839,7442,071,517Collateralized by bank deposit of the Company1,294,871246,6095,674,1804,545,006   Note: These guarantees are given by Yantai Yinhe Knitting Company Limited.   F-13   Yantai Dahua Holdings Company Limited Notes to the Financial Statements  8.    RELATED PARTY TRANSACTIONS  (a)Name and relationship of related partiesExisting relationships with the CompanyYLDPJoint venturer of a subsidiary and the associateMuping Iron Cover Manufacturing Factory (MIC)Branch of YLDPMuping Paper Product Manufacturing Factory (MPP)Branch of YLDPMuping Vegetable Processing Factory (MVP)Branch of YLDPMr. Tang YuxiangStockholder / DirectorMr. Qu ShuzhiStockholder / Director(b)Summary of related party balances   As of December 31,20062005US$US$(i)Due from related partiesMVP13,02112,523MPP26,99225,961MIC731,849168,129771,862206,613(ii)Due to a related partyYLDP4,292,627422,582(iii)Due to stockholdersMr. Tang Yuxiang117,606113,080Mr. Qu Shuzhi1,300,2321,251,3521,417,8381,364,432   Note: All amounts due represent non-trade unsecured advances which are interest-free and repayable on demand.  9. CONTINGENCIES AND COMMITMENTS  As of December 31, 2006, the company did not have any contingent liabilities and commitments.   F-14    Yantai Dahua Holdings Company Limited Notes to the Financial Statements  10.   STATUTORY RESERVES  According to the Articles of Association of YDPI, its income is distributable to its joint venture partners after any required transfer to statutory reserves. Being a sino-foreign equity joint venture, YDPI is required to maintain a reserve fund, an enterprise development fund and a staff welfare and bonus fund.  Statutory reserves include the reserve fund and the staff welfare and bonus fund. Pursuant to the Articles of Association, YDPI's board of directors determines the percentage of appropriations to the reserve fund and the staff welfare and bonus fund. The reserve fund can be used to make good losses in previous years. The staff welfare and bonus fund, which is to be used for the welfare of the staff and workers of YDPI, is of a capital nature.  The nature of enterprise development fund is set aside for future development.   11.   RETIREMENT BENEFITS AND OTHER EMPLOYMENT BENEFITS  As stipulated by the PRC rules and regulations, YDPI participates in a retirement plan for all employees. Pursuant to the plan, all retired employees of YDPI are entitled to certain retirement benefits. YDPI is required to make contributions to a state sponsored retirement plan at approximately 20% of the base amount which is within the range from US$57 to US$278 per employee as stipulated by the PRC government. YDPI determines the base amount with reference to the basic salary of its employees and has no further obligations for the actual payments of any post-retirement benefits. The state sponsored retirement plan is responsible for the entire pension obligations payable to the employees.  The pension expense for the year ended December 31, 2006 was US$517,644   12.   OPERATING RISK  (a)   Country risk  Currently, revenues are derived from sale of paper products to customers in the PRC. The results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The management does not believe these risks to be significant. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact.  (b)   Credit risk  Financial instruments consist principally of temporary cash investments and accounts receivable.  The Company places its temporary cash investments with various financial institutions in the PRC. The management believes that no significant credit risk exists as these investments are placed principally with financial institutions with fair reputation in the PRC.  The business activities and accounts receivable are principally with customers in the PRC. Management assesses credit risks associated with accounts receivable critically on the basis as set out in note 3 to the financial statements. The management believes that no   F-15   Yantai Dahua Holdings Company Limited Notes to the Financial Statements  12.   OPERATING RISK (CONTINUED)  (b)   Credit risk  significant credit risk exists for the balance carried on the balance sheet. No single customer accounted for greater than 10% of total revenue in each year.  The fair values of all of the financial instruments approximate their carrying values.  F-16