FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 2005
Meditech Pharmaceuticals, Inc.
---------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 000-12561 95-3819300
- ------------------------ --------------------- -------------------
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)
558 Lime Rock Road, Lime Rock, Connecticut 06039
(Address of principal execute offices, including zip code)
(860)435-7000
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[_] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
ITEM 9.01 Financial Statements and Exhibits
---------------------------------
INDEX TO FINANCIAL STATEMENTS
MEDITECH PHARMACEUTICALS, INC.
(PRO-FORMA FINANCIAL STATEMENTS)
PRO-FORMA CONSOLIDATED BALANCE SHEET F-1
(UNAUDITED), MARCH 31, 2005.
PRO-FORMA STATEMENTS OF OPERATIONS F-2
(UNAUDITED)FOR THE YEAR
ENDED DECEMBER 31, 2004.
PRO-FORMA STATEMENTS OF OPERATIONS F-3
(UNAUDITED) FOR THE THREE MONTHS
ENDED MARCH 31, 2005.
NOTES TO UNAUDITED PRO-FORMA F-4
CONSOLIDATED FINANCIAL STATEMENTS.
BAZHOU DELI SOLAR ENERGY
HEATING CO., LTD
(UNAUDITED FINANCIAL STATEMENTS)
BALANCE SHEET (UNAUDITED) F-6
MARCH 31, 2005.
STATEMENT OF OPERATIONS (UNAUDITED) F-7
FOR THE THREE MONTHS ENDED
MARCH 31, 2005,AND 2004.
STATEMENT OF CHANGES IN EQUITY (UNAUDITED) F-8
FOR THREE MONTHS ENDED, MARCH 31, 2005
AND YEAR ENDED DECEMBER 31,2004.
STATEMENTS OF CASH FLOWS (UNAUDITED) F-9
FOR THREE MONTHS ENDED MARCH 31, 2005
AND 2004.
NOTES TO UANAUDITED FINANCIAL STATEMENTS. F-10
BAZHOU DELI SOLAR ENERGY
HEATING CO., LTD
(AUDITED FINANCIAL STATEMENTS)
REPORT OF INDEPENDENT REGISTERED PUBLIC F-15
ACCOUNTING FIRM, CHILD, SULLIVAN
& COMPANY, DATED MARCH 22, 2005.
BALANCE SHEETS (AUDITED), F-16
DECEMBER 31, 2004 AND 2003.
STATEMENTS OF OPERATIONS (AUDITED) FOR F-18
YEARS ENDED DECEMBER 31, 2004 AND 2003.
STATEMENTS OF CHANGES IN EQUITY (AUDITED) F-19
FOR YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002.
STATEMENTS OF CASH FLOWS (AUDITED) F-20
FOR YEARS ENDED DECEMBER 31, 2004 AND 2003.
NOTES TO AUDITED FINANCIAL STATEMENTS F-21
DECEMBER 31, 2004 AND 2003.
MEDITECH PHARMACEUTICALS INC.
PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 2005
<TABLE>
BVI Bazhou Consolidating Pro-forma
----------- ----------- ------------- ------------
ASSETS Meditech Deli Solar Deli Solar Entries Consolidated
--------- ----------- ----------- ------------- ------------
Current assets
Cash and cash equivalents $ 4,432,630 $ 200,442 $ 893,552 $ 5,526,624
Trade accounts receivable - - 255,049 255,049
Allowances for doubtful accounts - - (88,600) - (88,600)
------------- ------------ ------------ ------------ ------------
Net trade accounts receivable - - 166,449 - 166,449
Prepaid expenses - - 384,164 384,164
Related party receivable 500,000 205,797 451,077 (705,797) 451,077
Subscription receivable 252,000 - - 252,000
Inventories - - 487,470 - 487,470
------------- ------------ ------------ ------------ ------------
Total current assets 5,184,630 406,239 2,382,712 (705,797) 7,267,784
Property, plant and equipment
Buildings - - 1,575,401 1,575,401
Machinery and equipment - - 42,236 42,236
Vehicles - - 61,474 61,474
Computer equipment - - 5,818 5,818
Office equipment - - 3,512 3,512
Construction in progress - - 1,030,199 - 1,030,199
------------- ------------ ------------ ------------ ------------
Total - - 2,718,640 - 2,718,640
Accumulated depreciation - - (131,391) - (131,391)
------------- ------------ ------------ ------------ ------------
Net property, plant and equipment - - 2,587,249 - 2,587,249
Investment in subsidiary 3,761,649 4,377,166 - (8,138,815) -
Prepaid land lease - - 67,715 - 67,715
------------- ------------ ------------ ------------ ------------
Total other assets 3,761,649 4,377,166 67,715 (8,138,815) 67,715
------------- ------------ ------------ ------------ ------------
Total assets $ 8,946,279 $ 4,783,405 $ 5,037,676 $ (8,844,612) $ 9,922,748
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ - $ - $ 67,431 $ 67,431
Related party payable - 821,756 - (705,797) 115,959
Other payables - 200,000 54,607 254,607
Accrued expenses - - 668 668
Deposits - - 4,962 4,962
Short-term notes payable - - 533,213 - 533,213
------------ ------------- ------------ ------------ ------------
Total current liabilities - 1,021,756 660,881 -705,797 976,840
Stockholders' equity
Common stock 36,850 50,000 821,256 (871,256) 36,850
Additional paid in capital 24,151,594 2,838,189 - (21,636,264) 5,353,519
Retained earnings (15,242,165) 873,460 3,555,539 14,368,705 3,555,539
------------ ------------- ------------ ------------ ------------
Total stockholders' equity 8,946,279 3,761,649 4,376,795 -8,138,815 8,945,908
------------ ------------- ------------ ------------ ------------
Total Liabilities and stockholders' equity $ 8,946,279 $ 4,783,405 $ 5,037,676 $ (8,844,612) $ 9,922,748
============ ============= ============ ============ ============
</TABLE>
See notes to unaudited pro-forma consolidated financial statements
F-1
MEDITECH PHARMACEUTICALS INC.
PRO-FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2004
<TABLE>
BVI Bazhou Consolidating Pro-forma
----------- ----------- ------------- ------------
Meditech Deli Solar Deli Solar Entries Consolidated
---------- ----------- ----------- ------------- ------------
Sales revenues $ - $ - $ 9,380,246 $ - $ 9,380,246
Cost of goods sold - - 6,633,836 - 6,633,836
---------- ---------- ----------- ---------- ------------
Gross profit - - 2,746,410 - 2,746,410
Operating expenses
Advertising - - 249,084 - 249,084
Other selling expenses - - 86,217 - 86,217
Salaries and benefits - - 170,008 - 170,008
Depreciation - - 31,471 - 31,471
Other general and administrative 307,936 - 118,739 - 426,675
---------- ---------- ----------- ---------- ------------
Total operating expenses 307,936 - 655,519 - 963,455
---------- ---------- ----------- ---------- ------------
Net operating income (307,936) - 2,090,891 - 1,782,955
Other income (expense)
Interest income 70 - - - 70
Interest expense (43) (43)
Gain on asset disposal - - (3,971) - (3,971)
Other - - 50,148 - 50,148
---------- ---------- ----------- ---------- ------------
Total other income (expense) 70 - 46,134 - 46,204
---------- ---------- ----------- ---------- ------------
Net income before taxes (307,866) - 2,137,025 - 1,829,159
Taxes - - - - -
---------- ---------- ----------- ---------- ------------
Net income $ (307,866) $ - $ 2,137,025 $ - $ 1,829,159
========== ========== =========== ========== ============
</TABLE>
See notes to unaudited pro-forma consolidated financial statements
F-2
MEDITECH PHARMACEUTICALS INC.
PRO-FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005
<TABLE>
BVI Bazhou Consolidating Pro-forma
----------- ----------- ------------- ------------
Meditech Deli Solar Deli Solar Entries Consolidated
---------- ----------- ----------- ------------- ------------
Sales revenues $ - $ - $ 1,199,033 $ - $ 1,199,033
Cost of goods sold - - 950,114 - 950,114
----------- -------- ----------- ----------- -----------
Gross profit - - 248,919 - 248,919
Operating expenses
Advertising - - 60,067 - 60,067
Other selling expenses - - 6,704 - 6,704
Salaries and benefits - - 28,966 - 28,966
Depreciation - - 7,221 - 7,221
Other general and administrative 44,041 58 28,509 - 72,608
----------- -------- ----------- ----------- -----------
Total operating expenses 44,041 58 131,467 - 175,566
----------- -------- ----------- ----------- -----------
Net operating income (44,041) (58) 117,452 - 73,353
Other income (expense)
Interest income 23 - - - 23
Interest expense (10,857) (10,857)
Gain on debt forgiveness 2,278,158 - - (2,278,158) -
----------- -------- ----------- ----------- -----------
Total other income (expense) 2,278,181 - (10,857) (2,278,158) (10,834)
----------- -------- ----------- ----------- -----------
Net income before taxes 2,234,140 (58) 106,595 (2,278,158) 62,519
Taxes - - - - -
----------- -------- ----------- ----------- -----------
Net income $ 2,234,140 $ (58) $ 106,595 $(2,278,158) $ 62,519
=========== ======== =========== =========== ===========
</TABLE>
See notes to unaudited pro-forma consolidated financial statements
F-3
MEDITECH PHARMACEUTICALS INC.
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
1. BASIS OF PRESENTATION
The unaudited pro-forma consolidated financial statements include the accounts
of Meditech Pharmaceuticals, Inc. (Meditech), Deli Solar Holding Ltd. (BVI Deli
Solar), and Bazhou Deli Solar Energy Heating Co., Ltd. (Bazhou Deli Solar).
Meditech acquired BVI Deli Solar in a stock exchange on March 31, 2005. Prior to
that, BVI Deli Solar acquired Bazhou Deli Solar. Both acquisition transactions
are treated as reverse mergers, in which Bazhou Deli Solar is treated as the
accounting acquirer. Thus, the financial statements will be primarily those of
Bazhou Deli Solar with the adoption of the capital structure of Meditech.
Meditech is the registrant, a Nevada development stage company incorporated on
March 21, 1983. Meditech has a fiscal year end of May 31, and currently has no
operations other than the acquisition of BVI Deli Solar on March 31, 2005. The
balance sheet of Meditech on February 28, 2005, as filed with Form 10-QSB,
contained no assets and no liabilities. The balance sheet of Meditech as of
March 31, 2005 is presented in the pro-forma consolidated balance sheet. It
includes the effects of the private placement that occurred on March 31, 2005.
The statement of operations of Meditech for the year ended May 31, 2004, as
filed with Form 10-KSB is presented in the pro-forma consolidated statement of
operations for the year ended December 31, 2004. The statement of operations of
Meditech for the three months ended February 28, 2005, as filed with Form 10-QSB
is presented in the pro-forma consolidated statement of operations for the three
months ended March 31, 2005. During the three months ended February 28, 2005,
Meditech had no operations other than general and administrative expenses. The
income from debt forgiveness will be non-recurring, and has therefore been
eliminated on pro-forma consolidation.
BVI Deli Solar was incorporated in the British Virgin Islands on June 10, 2004,
for the purpose of acquiring and holding Bazhou Deli Solar, and has no other
operations. The unaudited balance sheet of BVI Deli Solar as of March 31, 2005
is included in the pro-forma consolidated balance sheet. BVI Deli Solar had no
revenues or expenses for the period from inception to December 31, 2004. BVI
Deli Solar had no revenues and only minimal expenses for the three months ended
March 31, 2005. Accordingly, those expenses are included on the pro-forma
consolidated statement of operations for the three months ended March 31, 2005.
Bazhou Deli Solar was incorporated on August 19, 1997 in the People's Republic
of China (the PRC), and is in the business of manufacturing and selling solar
energy heaters, heating stoves, related accessories, and other solar energy
products within the PRC. Bazhou Deli Solar's audited balance sheet as of
December 31, 2004 is included in the pro-forma consolidated balance sheet.
Bazhou Deli Solar's audited statement of operations for the year ended December
31, 2004 is included in the pro-forma consolidated statement of operations for
the year ended December 31, 2004, and its unaudited statement of operations for
the three months ended March 31, 2005 is included in the pro-forma consolidated
statement of operations for the three months ended March 31, 2005.
F-4
MEDITECH PHARMACEUTICALS INC.
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
2. CONSOLIDATING ENTRIES
The consolidating entries on the pro-forma consolidated balance sheet eliminate
related party receivables against corresponding related party payables. There
are also entries to eliminate investments in subsidiary accounts, to agree
retained earnings to those of Bazhou Deli Solar, and to adjust common stock and
additional paid in capital accounts to the capital structure of the registrant.
The consolidating entries on the pro-forma consolidated statement of operations
for the three months ended March 31, 2005 eliminate the effect of a
non-recurring gain on debt forgiveness.
F-5
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
BALANCE SHEET (UNAUDITED)
March 31,
---------
ASSETS 2005
----
Current assets
Cash and cash equivalents $ 893,552
Trade accounts receivable 255,049
Allowances for doubtful accounts (88,600)
-----------
Net trade accounts receivable 166,449
Prepaid expenses 384,164
Related party receivable 451,077
Inventories 487,470
-----------
Total current assets 2,382,712
Property, plant and equipment
Buildings 1,575,401
Machinery and equipment 42,236
Vehicles 61,474
Computer equipment 5,818
Office equipment 3,512
Construction in progress 1,030,199
-----------
Total 2,718,640
Accumulated depreciation (131,391)
-----------
Net property, plant and equipment 2,587,249
Other receivables -
Prepaid land lease 67,715
-----------
Total other assets 67,715
-----------
Total assets $ 5,037,676
===========
LIABILITIES AND EQUITY
Current liabilities
Trade accounts payable $ 67,431
Other payables 54,607
Accrued expenses 668
Deposits 4,962
Short-term notes payable 533,213
-----------
Total current liabilities 660,881
Equity
Registered Capital 821,256
Retained earnings 3,555,539
-----------
Total Equity 4,376,795
-----------
Total Liabilities and Equity $ 5,037,676
===========
See notes to unaudited financial statements
F-6
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended
March 31,
---------------------------
2005 2004
----------- --------
Sales revenues $ 1,199,033 $938,884
Cost of goods sold 950,114 738,679
----------- --------
Gross profit 248,919 200,205
Operating expenses
Advertising 60,067 2,077
Other selling expenses 6,704 3,624
Salaries and benefits 28,966 12,326
Depreciation 7,221 8,046
Other general and administrative expenses 28,509 48,514
----------- --------
Total operating expenses 131,467 74,587
----------- --------
Net operating income 117,452 125,618
Other income (expense)
Interest expense (10,857) -
Other - 1,568
----------- --------
Total other income (expense) (10,857) 1,568
----------- --------
Net income before taxes 106,595 127,186
Taxes - -
----------- --------
Net income $ 106,595 $127,186
=========== ========
See notes to unaudited financial statements
F-7
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
REGISTERED RETAINED
CAPITAL EARNINGS TOTALS
----------- ----------- -----------
Balances at January 1, 2004 $ 821,256 $ 1,467,716 $ 2,288,972
Net income 2,137,025 2,137,025
Dividends paid -- (155,797) (155,797)
----------- ----------- -----------
Balance at December 31, 2004 821,256 3,448,944 4,270,200
Net income -- 106,595 106,595
----------- ----------- -----------
Balance at March 31, 2005 $ 821,256 $ 3,555,539 $ 4,376,795
=========== =========== ===========
See notes to unaudited financial statements
F-8
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net earnings $ 106,595 $ 127,186
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 7,295 8,046
Provision for allowance on accounts receivable -- (1,316)
Changes in operating liabilities and assets:
Trade accounts receivable (38,994) 2,490
Prepaid expenses (31,120) (283,380)
Related party receivables 105,416 45,319
Inventories (188,472) (2,760)
Other receivables 18,116 --
Prepaid land lease 371 371
Trade accounts payable 19,460 53,729
Other payables (27,139) (18,189)
Accrued expenses (211,566) 4,722
Deposits (7,486) 4,529
----------- -----------
Net cash provided by operations (247,524) (59,253)
Cash flows from investing activities:
Purchases of property, plant and equipment (49,991) (167,545)
----------- -----------
Net cash used in investing activities (49,991) (167,545)
Cash flows from financing activities:
Proceeds from short-term notes payable -- 84,541
----------- -----------
Net cash provided by financing activities -- 84,541
----------- -----------
Increase in cash and cash equivalents (297,515) (142,257)
Cash and cash equivalents, beginning of period 1,191,067 1,109,110
----------- -----------
Cash and cash equivalents, end of period $ 893,552 $ 966,853
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid in cash $ 10,857 $ 4,041
=========== ===========
See notes to unaudited financial statements
F-9
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Bazhou Deli Solar Energy Heating Co., Ltd. (the Company) was incorporated on
August 19, 1997 under the laws of the People's Republic of China (the PRC). In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (US).
The Company primarily manufactures and sells solar energy heaters, heating
stoves, related accessories, and other solar energy products within the PRC.
2. BASIS OF PRESENTATION
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company's business.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks. Cash deposits in banks are not
insured by any government agency or entity.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. Management reviews past due
accounts on a regular basis and determines collectibility based on a customer's
current financial condition and recent payment history, and success in recent
collection efforts. An estimate for doubtful accounts is made when collection of
the full amount becomes questionable.
F-10
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories consist of raw materials and low cost consumables for the
construction of the company's products, as well as finished goods. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis. If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts.
Property, Plant, and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives of the assets. Amortization of
leasehold improvements is calculated on a straight-line basis over the life of
the asset or the term of the lease, whichever is shorter. Major renewals and
betterments are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
Depreciation related to property and equipment used in production is reported in
cost of sales. Property and equipment are depreciated over their estimated
useful lives as follows:
Buildings 50 years
Machinery and equipment 10 years
Vehicles 7 years
Computer equipment 3 years
Office equipment 7 years
Land and buildings have historically been owned by the government in the PRC. As
is generally the case with most businesses in the PRC, the Company has leased
such assets on a lease term of 50 years and is depreciating the building over
that term.
Construction in progress consists of the development of a new building intended
for use as a warehouse and for additional operating capacity. Capitalized
interest is included in construction in progress on the balance sheet. This new
building will be owned by the Company, not by the PRC, but the land on which the
building sits is still owned by the PRC and is under a 50 year lease, similar to
the other land and buildings.
F-11
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant, and Equipment (continued)
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established in
Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets." The Company also evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of assets was recorded in the
periods reported.
Registered Capital
Companies in the PRC are not held by stock ownership as is the case in the US.
Those creating a company register and pay in a given amount of required
registered capital at formation of the company, as required by laws in the PRC
governing business entity formation.
Revenue Recognition
Revenues are recognized when (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred and title has passed according to the sale terms, (3)
the seller's price to the buyer is fixed or determinable; and (4) collectibility
is reasonably assured.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$60,067 and $2,077 for the three months ended March 31, 2005 and 2004,
respectively.
Foreign Currency and Comprehensive Income
The accompanying financial statements are presented in United States (US)
dollars. The functional currency is the Renminbi (RMB). The financial statements
are translated into US dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
The exchange rate for RMB to US dollars has varied by only 100ths during 2005
and 2004. Thus, the consistent exchange rate used has been 8.28 RMB per each US
dollar. Since there have been no greater fluctuations in the exchange rate,
there is no gain or loss from foreign currency translation and no resulting
other comprehensive income or loss.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There is
no guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
F-12
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date. A valuation allowance
is provided for deferred tax assets if it is more likely than not these items
will either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.
Currently, the Company has recorded no income taxes and no deferred taxes
because it pays a fixed tax as assessed, and annually adjusted, by the State
Administration of Taxation of Bazhou and Bazhou Local Taxation Bureau.
Therefore, there is no income tax, per se, and there are no temporary
differences in assets or liabilities.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
4. PREPAID LAND LEASE
The Company paid in advance for the lease of one of its buildings and land for a
fifty year time period, consisting of approximately $75,000 (see note 6). The
amount is being amortized and recorded as rent expense over the 50 year term of
the lease.
5. SHORT-TERM NOTES PAYABLE
Short-term notes payable consist of renewable notes. The notes bear interest at
rates ranging from 7.98% to 8.85%, are collateralized by the Company's inventory
and building, and fall due during 2005.
6. RELATED PARTY TRANSACTIONS
Transactions with related parties can be substantiated by the Company as `arms
length' transactions. Trade accounts receivable from related parties at March
31, 2005, and 2004, respectively, were $451,077, and $37,777.
F-13
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
7. CONTINGENCIES
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack of
insurance. Management believes the chances of such an obligation arising are
remote.
Deposits in banks in the PRC are not insured by any government entity or agency,
and are consequently exposed to risk of loss. Management believes the
probability of a bank failure, causing loss to the Company, is remote.
F-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Stockholders
Bazhou Deli Solar Energy Heating Co., Ltd.
We have audited the accompanying balance sheet of Bazhou Deli Solar Energy
Heating Co., Ltd. as of December 31, 2004 and the related statements of
operations, changes in equity, and cash flows for the years ended December 31,
2004 and 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bazhou Deli Solar Energy
Heating Co., Ltd. as of December 31, 2004 and the results of its operations and
its cash flows for the years ended December 31, 2004 and 2003, in conformity
with accounting principles generally accepted in the United States of America.
Child, Sullivan & Company
Kaysville, Utah
March 22, 2005
F-15
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
BALANCE SHEETS
December 31,
------------------------------
ASSETS 2004 2003
----------- -----------
Current assets
Cash and cash equivalents $ 1,191,067 $ 1,109,110
Trade accounts receivable 216,055 208,797
Allowances for doubtful accounts (88,600) (85,002)
----------- -----------
Net trade accounts receivable 127,455 123,795
Prepaid expenses 353,044 29,180
Related party receivable 556,493 83,096
Inventories 298,998 360,740
----------- -----------
Total current assets 2,527,057 1,705,921
Property, plant and equipment
Buildings 1,575,401 911,150
Machinery and equipment 42,236 41,716
Vehicles 61,474 66,236
Computer equipment 5,818 4,972
Office equipment 3,512 3,512
Construction in progress 980,208 226,177
----------- -----------
Total 2,668,649 1,253,763
Accumulated depreciation (124,096) (95,100)
----------- -----------
Net property, plant and equipment 2,544,553 1,158,663
Other receivables 18,116 -
Prepaid land lease 68,086 69,571
----------- -----------
Total other assets 86,202 69,571
----------- -----------
Total assets $ 5,157,812 $ 2,934,155
=========== ===========
See notes to financial statements
F-16
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
BALANCE SHEETS (CONTINUED)
December 31,
------------------------------
LIABILITIES AND EQUITY 2004 2003
----------- -----------
Current liabilities
Trade accounts payable $ 47,971 $ 39,342
Other payables 81,746 98,229
Accrued expenses 212,234 212,256
Deposits 12,448 5,501
Short-term notes payable 533,213 289,855
---------- ----------
Total current liabilities 887,612 645,183
Equity
Registered Capital 821,256 821,256
Retained earnings 3,448,944 1,467,716
---------- ----------
Total Equity 4,270,200 2,288,972
---------- ----------
Total Liabilities and Equity $5,157,812 $2,934,155
========== ==========
See notes to financial statements.
F-17
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF OPERATIONS
Year ended
December 31,
------------------------------
2004 2003
----------- -----------
Sales revenues $ 9,380,246 $ 6,011,870
Cost of goods sold 6,633,836 4,783,989
----------- -----------
Gross profit 2,746,410 1,227,881
Operating expenses
Advertising 249,084 278,329
Other selling expenses 86,217 11,648
Salaries and benefits 170,008 168,181
Depreciation 31,471 27,054
Other general and administrative expenses 118,739 82,354
----------- -----------
Total operating expenses 655,519 567,566
----------- -----------
Net operating income 2,090,891 660,315
Other income (expense)
Interest expense (43) (63,508)
Gain on asset disposal (3,971) 5,446
Other 50,148 (8)
----------- -----------
Total other income (expense) 46,134 (58,070)
----------- -----------
Net income before taxes 2,137,025 602,245
Taxes - -
----------- -----------
Net income $ 2,137,025 $ 602,245
=========== ===========
See notes to financial statements.
F-18
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CHANGES IN EQUITY
REGISTERED RETAINED
CAPITAL EARNINGS TOTALS
---------- ----------- -----------
Balances at January 1, 2002 $ 821,256 $ 598,275 $ 1,419,531
Net income - 267,196 267,196
---------- ----------- -----------
Balance at December 31, 2002 821,256 865,471 1,686,727
Net income - 602,245 602,245
---------- ----------- -----------
Balance at December 31, 2003 821,256 1,467,716 2,288,972
Net income 2,137,025 2,137,025
Dividends paid - (155,797) (155,797)
---------- ----------- -----------
Balance at December 31, 2004 $ 821,256 $ 3,448,944 $ 4,270,200
========== =========== ===========
See notes to financial statements.
F-19
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
Year ended
December 31,
----------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net earnings $ 2,137,025 $ 602,245
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 31,471 27,054
Provision for allowance on accounts receivable 3,598 29,501
Gain/Loss on disposal of fixed assets (3,971) (5,446)
Changes in operating liabilities and assets:
Trade accounts receivable (7,258) 9,889
Prepaid expenses (323,864) (22,247)
Related party receivables (473,397) 36,000
Inventories 61,742 (53,781)
Other receivables (18,116) -
Prepaid land lease 1,485 1,486
Trade accounts payable 8,629 (157,777)
Other payables (16,483) 27,425
Accrued expenses (22) 114,525
Deposits 6,947 (756)
----------- -----------
Net cash provided by operations 1,407,786 608,118
Cash flows from investing activities:
Purchases of property, plant and equipment (1,413,390) (306,655)
----------- -----------
Net cash used in investing activities (1,413,390) (306,655)
Cash flows from financing activities:
Proceeds from short-term notes payable 243,358 78,502
Payment of dividends (155,797) -
----------- -----------
Net cash provided by financing activities 87,561 78,502
----------- -----------
Increase in cash and cash equivalents 81,957 379,965
Cash and cash equivalents, beginning of period 1,109,110 729,145
----------- -----------
Cash and cash equivalents, end of period $ 1,191,067 $ 1,109,110
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid in cash $ 56,006 $ 74,333
=========== ===========
</TABLE>
See notes to financial statements.
F-20
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS
Bazhou Deli Solar Energy Heating Co., Ltd. (the Company) was incorporated on
August 19, 1997 under the laws of the People's Republic of China (the PRC). In
the PRC, Ltd, or Limited, is equivalent to Inc, or Incorporated, in the United
States (US).
The Company primarily manufactures and sells solar energy heaters, heating
stoves, related accessories, and other solar energy products with the PRC.
2. BASIS OF PRESENTATION
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company's business.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and demand deposits held by banks. Cash deposits in banks are not
insured by any government agency or entity.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. Management reviews past due
accounts on a regular basis and determines collectibility based on a customer's
current financial condition and recent payment history, and success in recent
collection efforts. An estimate for doubtful accounts is made when collection of
the full amount becomes questionable.
F-21
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories consist of raw materials and low cost consumables for the
construction of the company's products, as well as finished goods. The
inventories are valued at the lower of cost (first-in, first-out method) or
market. Impairment and changes in market value are evaluated on a per item
basis. If the cost of the inventory exceeds the market value evaluation based on
total inventory, provisions are made for the difference between the cost and the
market value. Provision for potential obsolete or slow moving inventory is made
based on analysis of inventory levels, age of inventory and future sales
forecasts. Inventories consisted of the following:
December 31, 2004 December 31, 2003
----------------- -----------------
Raw materials 38,148 166,753
Consumables 14,394 -
Finished goods 246,456 193,987
----------------- -----------------
Totals 298,998 360,740
Property, Plant, and Equipment
Property, plant and equipment is carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over the useful lives of the assets. Amortization of
leasehold improvements is calculated on a straight-line basis over the life of
the asset or the term of the lease, whichever is shorter. Major renewals and
betterments are capitalized and depreciated; maintenance and repairs that do not
extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in income.
Depreciation related to property and equipment used in production is reported in
cost of sales. Property and equipment are depreciated over their estimated
useful lives as follows:
Buildings 50 years
Machinery and equipment 10 years
Vehicles 7 years
Computer equipment 3 years
Office equipment 7 years
F-22
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant, and Equipment (continued)
Land and buildings have historically been owned by the government in the PRC. As
is generally the case with most businesses in the PRC, the Company has leased
such assets on a lease term of 50 years and is depreciating the building over
that term.
Construction in progress consists of the development of a new building intended
for use as a warehouse and for additional operating capacity. During the years
ended December 31, 2004 and 2003, respectively, the Company capitalized
interest, related to the new building under construction, totaling approximately
$55,963, and $10,825. The capitalized interest is included in construction in
progress on the balance sheet. This new building will be owned by the Company,
not by the PRC, but the land on which the building sits is still owned by the
PRC and is under a 50 year lease, similar to the other land and buildings.
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established in
Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets." The Company also evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. No impairment of assets was recorded in the
periods reported.
Registered Capital
Companies in the PRC are not held by stock ownership as is the case in the US.
Those creating a company register and pay in a given amount of required
registered capital at formation of the company, as required by laws in the PRC
governing business entity formation.
Revenue Recognition
Revenues are recognized when (1) pervasive evidence of an arrangement exists;
(2) delivery has occurred and title has passed according to the sale terms, (3)
the seller's price to the buyer is fixed or determinable; and (4) collectibility
is reasonably assured.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$249,084 and $278,329 for the years ended December 31, 2004 and 2003,
respectively.
F-23
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency and Comprehensive Income
The accompanying financial statements are presented in United States (US)
dollars. The functional currency is the Renminbi (RMB). The financial statements
are translated into US dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
The exchange rate for RMB to US dollars has varied by only 100ths during 2004
and 2003. Thus, the consistent exchange rate used has been 8.28 RMB per each US
dollar. Since there have been no greater fluctuations in the exchange rate,
there is no gain or loss from foreign currency translation and no resulting
other comprehensive income or loss.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There is
no guarantee the RMB amounts could have been, or could be, converted into US
dollars at rates used in translation.
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date. A valuation allowance
is provided for deferred tax assets if it is more likely than not these items
will either expire before the Company is able to realize their benefits, or that
future deductibility is uncertain.
Currently, the Company has recorded no income taxes and no deferred taxes
because it pays a fixed tax as assessed, and annually adjusted, by the State
Administration of Taxation of Bazhou and Bazhou Local Taxation Bureau.
Therefore, there is no income tax, per se, and there are no temporary
differences in assets or liabilities.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
F-24
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
In May 2004, the Emerging Issues Task Force of the FASB came to a consensus
regarding EITF 02-14 "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock". The consensus of the task
force is that the equity method of accounting is to be used for investments in
common stock or in-substance common stock, effective for reporting periods
beginning after September 15, 2004. The Company currently has no equity
investments, and therefore no impact will be made on the financial statements of
the Company.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs". SFAS No.
151 requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current period charges and
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The statement is
effective for fiscal periods beginning after June 15, 2005. The Company believes
that the application of SFAS No. 151 will have no significant impact on the
financial statements.
In December 2004, the FASB issued Statement No. 153, "Exchange of Non-Monetary
Assets". SFAS No. 153 confirms that exchanges of nonmonetary assets are to be
measured based on the fair value of the assets exchanged, except for exchanges
of nonmonetary assets that do not have commercial substance. Those transactions
are to be measured at entity specific values. The Company believes that the
application of SFAS No. 153 will have no significant impact on the financial
statements, as the Company has no immediate plans for the exchange of
nonmonetary assets.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which amends SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123, as revised, requires public entities to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. The effective date for the
Company is the first reporting period beginning after December 15, 2005.
Management expects that the application of SFAS No. 123 (revised 2004) may have
an adverse effect on its results of operations in the future, should the Company
choose to compensate its employees with equity instruments of the Company.
F-25
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
4. PREPAID LAND LEASE
The Company paid in advance for the lease of one of its buildings and land for a
fifty year time period, consisting of approximately $75,000 (see note 6). The
amount is being amortized and recorded as rent expense over the 50 year term of
the lease.
5. SHORT-TERM NOTES PAYABLE
Short-term notes payable consist of renewable notes. The notes bear interest at
rates ranging from 7.98% to 8.85%, are collateralized by the Company's inventory
and building, and fall due between February and May 2005.
6. LEASES
The Company leases land and buildings under non-cancelable lease arrangements
accounted for as operating leases. One of the leases is a fifty year lease (see
note 4) and the other, which was not paid in advance, is a twenty year lease.
Rent expense under non-cancelable leases was $13,901, and $7,186 during the
years ended December 31, 2004 and 2003, respectively.
Future minimum lease payments of lease obligations are as follows:
2005 $ 14,500
2006 14,500
2007 14,500
2008 14,500
2009 14,500
Thereafter 193,229
-------------
$ 265,729
============
7. RELATED PARTY TRANSACTIONS
Transactions with related parties can be substantiated by the Company as `arms
length' transactions. Sales to a related party consisted of $149,995, and
$33,888 during the years ended December 31, 2004, and 2003, respectively.
Accounts receivable from related parties at December 31, 2004, and 2003,
respectively, were $556,493, and $83,096.
F-26
BAZHOU DELI SOLAR ENERGY HEATING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
8. CONTINGENCIES
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack of
insurance. Management believes the chances of such an obligation arising are
remote.
Deposits in banks in the PRC are not insured by any government entity or agency,
and are consequently exposed to risk of loss. Management believes the
probability of a bank failure, causing loss to the Company, is remote.
9. SUBSEQUENT EVENTS
During June and July 2004, the Company began activities with the intent to
become registered as a public company in the US, most likely through a reverse
merger. A new company was formed in the British Virgin Isles (BVI) to acquire
the Company, in order to move the domicile from the PRC, after which it will
likely be acquired by a public shell in the US. No further transactions or
agreements related to these plans have been effected as of the issuance date of
these financial statements.
F-27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 14, 2005 Meditech Pharmaceuticals, Inc.
(Registrant)
By: /s/ John D. Kuhns
---------------------------------
John D. Kuhns, Chairman
