EXHIBIT 99.1
AUDITED FINANCIAL STATEMENTS OF
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AUDITED FINANCIAL STATEMENTS
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
YEARS ENDED DECEMBER 31, 2003 AND 2002
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
(INCORPORATED IN THE PEOPLE'S REPUBLIC OF CHINA WITH LIMITED LIABILITY)
We have audited the accompanying consolidated balance sheets of Zhejiang
University Pharmaceutical Co., Ltd. and its subsidiary (the "Company") as of
December 31, 2003 and 2002 and the related consolidated statements of
operations, stockholders' equity and cash flows of the Company for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 the Company as of December 31,
2003 and 2002 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ MOORES ROWLAND MAZARS
MOORES ROWLAND MAZARS
CHARTERED ACCOUNTANTS
CERTIFIED PUBLIC ACCOUNTANTS
Hong Kong
Date: April 30, 2004
Page 1 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
=========================================================================================================================
AS OF DECEMBER 31,
-----------------------------------------------------------
2003 2003 2002
ASSETS NOTE US$ RMB RMB
CURRENT ASSETS
Cash and cash equivalents 1,909,602 15,824,297 11,852,058
Marketable equity securities - - 13,500
Trade receivables 62,232 515,695 219,263
Deposits, prepayments
and other receivables 360,040 2,983,548 6,270,122
Interest receivable 36,203 300,000 3,913,541
Loans receivable maturing
within one year 3 4,947,687 41,000,000 97,800,000
Inventories 4 103,692 859,269 716,471
----------------- ---------------- ----------------
TOTAL CURRENT ASSETS 7,419,456 61,482,809 120,784,955
Property, plant and equipment, net 5 1,112,140 9,215,975 7,697,276
Construction in progress 6 5,072,709 42,036,017 3,401,051
Intangible assets, net 7 919,747 7,621,666 8,579,333
Loans receivable maturing in
more than one year 3 - - 21,000,000
Long-term investment 8 1,086,078 9,000,000 -
----------------- ---------------- ----------------
TOTAL ASSETS 15,610,130 129,356,467 161,462,615
================= ================ ================
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt 9 - - 20,000,000
Current portion of long-term debt 10 47,114 390,419 -
Trade payables 129,040 1,069,319 1,121,257
Accrued charges and other payables 230,981 1,914,073 1,834,199
Due to related parties 11 1,529,197 12,672,000 18,600,000
Income tax payable - - 497,376
----------------- ---------------- ----------------
TOTAL CURRENT LIABILITIES 1,936,332 16,045,811 42,052,832
Long-term debt 10 6,086,845 50,439,856 50,000,000
----------------- ---------------- ----------------
TOTAL LIABILITIES 8,023,177 66,485,667 92,052,832
----------------- ---------------- ----------------
COMMITMENTS AND CONTINGENCIES 15
STOCKHOLDERS' EQUITY
Registered capital 9,654,024 80,000,000 80,000,000
Accumulated losses (2,067,071) (17,129,200) (10,590,217)
----------------- ---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 7,586,953 62,870,800 69,409,783
----------------- ---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 15,610,130 129,356,467 161,462,615
================= ================ ================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 2 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
========================================================================================================================
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2003 2003 2002
NOTE US$ RMB RMB
OPERATING REVENUE
Net sales 119,714 992,038 675,717
Cost of sales (217,597) (1,803,163) (1,578,717)
--------------- --------------- ---------------
GROSS LOSS (97,883) (811,125) (903,000)
--------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and
administrative expenses 689,886 5,716,883 4,618,434
Research and development expenses 259,099 2,147,077 2,002,489
--------------- --------------- ---------------
Total operating expenses 948,985 7,863,960 6,620,923
--------------- --------------- ---------------
LOSS FROM OPERATIONS (1,046,868) (8,675,085) (7,523,923)
NON-OPERATING INCOME (EXPENSES)
Interest income from loans receivable 497,789 4,125,028 8,469,577
Bank interest income 15,721 130,280 83,774
Interest expense, net (236,152) (1,956,919) (2,271,031)
Other (expense) income, net (19,584) (162,287) 51,166
--------------- --------------- ---------------
LOSS BEFORE INCOME TAX (789,094) (6,538,983) (1,190,437)
Provision for income tax 12 - - (606,755)
--------------- --------------- ---------------
NET LOSS (789,094) (6,538,983) (1,797,192)
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 3 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
========================================================================================================================
REGISTERED ACCUMULATED TOTAL
CAPITAL LOSSES
---------------- --------------- ---------------
mb mb mb
Balance as of January 1, 2002 80,000,000 (8,793,025) 71,206,975
Net loss - (1,797,192) (1,797,192)
---------------- --------------- --------------
Balance as of January 1, 2003 80,000,000 (10,590,217) 69,409,783
Net loss - (6,538,983) (6,538,983)
---------------- --------------- --------------
Balance as of December 31, 2003 80,000,000 (17,129,200) 62,870,800
================ =============== ==============
US$ US$ US$
9,654,024 (2,067,071) 7,586,953
================ =============== ==============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 4 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
=========================================================================================================================
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2003 2003 2002
US$ RMB RMB
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (789,094) (6,538,983) (1,797,192)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation of property, plant and equipment 116,760 967,552 762,859
Amortization of intangible assets 115,567 957,667 957,667
Loss on disposal of property, plant and equipment 12,500 103,586 -
Gain on disposal of marketable securities (235) (1,949) (57,023)
Changes in operating assets and liabilities:
Trade receivables (35,772) (296,432) (217,451)
Deposits, prepayments and other receivables 71,871 595,574 (897,920)
Interest receivable 436,065 3,613,541 (3,548,208)
Inventories (17,232) (142,798) 147,211
Trade payables (6,267) (51,938) (49,436)
Accrued charges and other payables 9,638 79,874 1,673,406
Income tax payable (60,021) (497,376) 446,929
-------------- -------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (146,220) (1,211,682) (2,579,158)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in loans receivable (2,413,506) (20,000,000) (168,800,000)
Repayment of loans receivable 11,802,044 97,800,000 109,000,000
Purchase of marketable equity securities - - (108,920)
Purchase of property, plant and equipment (173,542) (1,438,088) (468,744)
Addition of construction in progress (4,337,549) (35,943,966) (2,863,287)
Acquisition of long-term investment (1,086,078) (9,000,000) -
Proceeds on sale of marketable equity securities 1,865 15,449 152,443
Proceeds on disposal of property, plant and equipment 3,771 31,251 -
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,797,005 31,464,646 (63,088,508)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Inception of short-term debt - - 20,000,000
Repayment of short-term debt (2,413,506) (20,000,000) -
Inception of long-term debt - - 50,000,000
Repayment of long-term debt (42,565) (352,725) -
Advances from related parties 1,206,753 10,000,000 18,600,000
Repayments to related parties (1,922,116) (15,928,000) (14,600,000)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,171,434) (26,280,725) 74,000,000
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 479,351 3,972,239 8,332,334
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 1,430,251 11,852,058 3,519,724
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR 1,909,602 15,824,297 11,852,058
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax paid 60,021 497,376 159,826
Interest paid, net 236,152 1,956,919 2,271,031
============== ============== ==============
NON-CASH TRANSACTION
Purchase of property, plant and equipment financed by
long-term debt 142,759 1,183,000 -
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 5 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Zhejiang University Pharmaceutical Co., Ltd. (the "Company") was
incorporated in the People's Republic of China (the "PRC") on March 8,
2000 with registered capital of Rmb16,000,000 (US$1,930,805).
On April 24, 2001, the capital of the Company was increased by
Rmb64,000,000 (US$7,723,219) to Rmb80,000,000 (US$9,654,024) in the
form of cash of Rmb56,000,000 (US$6,757,816) and a patent of
Rmb8,000,000 (US$965,403). Details of the patent are described in note
7 to the financial statements.
On August 7, 2003, the Company converted into a sino-foreign joint
venture enterprise in the PRC. The principal stockholder is Sheung Tai
Investments Limited, a company incorporated in the British Virgin
Islands, which holds 87.475% of the registered capital of the Company.
The remaining registered capital is held by Zhejiang University
Enterprises Group (Holding) Co., Ltd., The First Affiliated Hospital of
School of Medicine of Zhejiang University, The Second Affiliated
Hospital of School of Medicine of Zhejiang University, Sir Run Run Shaw
Hospital of School of Medicine of Zhejiang University, The Hospital for
Genecology and Obstetrics of School of Medicine of Zhejiang University,
The Children's Hospital of School of Medicine of Zhejiang University.
Their stockholdings are 7.5%, 1.65%, 1.65%, 0.5%, 0.625% and 0.6%
respectively.
On October 17, 2003, the Company set up a wholly-owned subsidiary,
Zhejiang University Pharmaceutical Sales Co., Ltd., a company
incorporated in the PRC to be operated for a period of 20 years with
registered capital of Rmb5,000,000. On February 2, 2004, the registered
capital of the subsidiary was increased to Rmb20,000,000. The
additional capital of Rmb15,000,000 was made by the Company in the form
of cash. The subsidiary has not commenced operations as of December 31,
2003.
On February 2, 2004, the subsidiary acquired the 100% equity interest
in a PRC company engaged in sale of medicine at a consideration of
Rmb7,000,000.
The Company is principally engaged in the development and manufacturing
of medicine and health products for customers in the PRC. Pursuant to a
notice issued by Zhejiang Food and Drug Administration Authority, a
Good Manufacturing Practice ("GMP") certificate has to be obtained in
order to continue the production of medicine. In order to fulfill the
requirements for application of the GMP certificate, the Company is
undergoing the construction of a new factory which is expected to be
completed in 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("USGAAP").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial information
of the Company and its subsidiary. All material intercompany balances
and transactions have been eliminated on consolidation.
- --------------------------------------------------------------------------------
Page 6 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting shares, by contract, or
otherwise.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with original
maturities of three months or less that are readily convertible to
known amounts of cash and are so near maturity that they represent
insignificant risk of changes in value because of changes in interest
rates.
MARKETABLE EQUITY SECURITIES
Equity securities designated as available-for-sale, whose fair values
are readily determinable, are carried at fair value with unrealized
gains or losses included as a component of other comprehensive income.
Equity securities classified as trading securities are carried at fair
value with unrealized gains or losses included in the consolidated
statements of operations. Realized gains and losses are determined on
the average cost method and reflected in consolidated statements of
operations. The balance as of December 31, 2002 represents
available-for-sale listed equity securities. As the cost approximated
to the estimated fair value as of December 31, 2002, no unrealized gain
or loss was recognized.
TRADE RECEIVABLES
Trade receivables are recorded at original invoice amount, less an
estimated allowance for uncollectible accounts. Trade credit is
generally granted on a short-term basis, thus trade receivables do not
bear interest. Trade receivables are periodically evaluated for
collectibility based on past credit history with customers and their
current financial condition. Changes in the estimated collectibility of
trade receivables are recorded in the results of operations for the
period in which the estimate is revised. Trade receivables that are
deemed uncollectible are offset against the allowance for uncollectible
accounts. The Company generally does not require collateral for trade
receivables. Provision for uncollectibility of trade receivables
included in "Selling, general and administrative expenses" amounting to
Rmb49,648 and Rmb487,387 for the years ended December 31, 2003 and 2002
respectively.
INVENTORIES
All inventories are stated at the lower of weighted average cost or
market. Potential losses from obsolete and slow-moving inventories are
provided for when identified. Costs of work-in-progress and finished
goods are composed of direct materials and an attributable portion of
manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are recorded at cost less accumulated
depreciation. Repairs and maintenance expenditures, which are not
considered improvements and do not extend the useful life of property,
plant and equipment, are expensed as incurred. The cost and related
accumulated depreciation applicable to property, plant and equipment
sold or no longer in service are eliminated from the accounts and any
gain or loss is included in the consolidated statements of operations.
- --------------------------------------------------------------------------------
Page 7 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION (CONTINUED)
Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives as set out below, from the
date on which they become fully operational and after taking into
account of their estimated residual values, using the straight-line
method:
Leasehold land Over the unexpired term of lease
Buildings 20 years
Plant and machinery 5 - 10 years
Furniture and equipment 5 - 10 years
Motor vehicles 8 years
CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost. Cost includes all
construction expenditures and other direct costs, including borrowing
costs, attributable to such projects. Borrowing costs incurred, net of
any investment income on the temporary investment of the specific
borrowings, are capitalized as part of the cost of the construction in
progress. Capitalization of such borrowing costs ceases when the assets
are substantially ready for their intended use or sale. Costs on
completed construction works are transferred to the appropriate asset
category. No depreciation is provided in respect of construction in
progress until it is completed and put into commercial operation.
INTANGIBLE ASSETS
Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill
and Other Intangible Assets" requires that intangible asset with
estimated useful lives be amortized over their respective estimated
useful lives and reviewed for impairment in accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
Intangible assets of the Company are comprised of a trademark and a
patent, which are stated at cost and are amortized over their
respective unexpired registration periods. The trademark was originally
registered for a period of 10 years and will expire in 2008 while the
patent was originally registered for a period of 20 years and will
expire in 2013.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable in accordance with SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets". An asset is
considered impaired if its carrying amount exceeds the future net cash
flows the asset is expected to generate. If such asset is considered to
be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds its fair market
value. The recoverability of long-lived assets is assessed by
determining whether the unamortized balances can be recovered through
undiscounted future net cash flows of the related assets. The amount of
impairment, if any, is measured based on projected discounted future
net cash flows using a discount rate reflecting the Company's average
cost of capital.
REVENUE RECOGNITION
Net sales represent the invoiced value of goods, net of value-added tax
and returns. The Company recognizes revenue when there is persuasive
evidence of an agreement with customers, with a fixed fee that is
collectible and when delivery has occurred.
- --------------------------------------------------------------------------------
Page 8 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES
Cost of sales includes materials, direct labor and factory overhead
which included mainly depreciation, utilities and indirect wages.
RESEARCH AND DEVELOPMENT
All cost of research and development activities are expensed as
incurred, which included mainly external costs related to services
contracted by the Company.
ADVERTISING AND PROMOTION
Advertising and promotion expenses are expensed when incurred.
Advertising costs included in "Selling, general and administrative
expenses" amounted to Rmb689,300 (US$83,181) and Rmb567,374 (US$68,465)
for the years ended December 31, 2003 and 2002 respectively.
GOVERNMENT GRANTS
Government grants, including non-monetary grants at fair value, are
recognized as income or set off to the respective items of the grants,
as appropriate.
In 2002, the Company received a grant amounting to Rmb450,000
(US$54,301) from the PRC government to subsidize interest expense
related to the construction in progress. The Company recognized the
grant as a reduction of interest expense incurred for the construction
in progress as detailed in note 6 to the financial statements.
INCOME TAXES
Income taxes have been provided in accordance with the tax rates and
laws in effect in the PRC.
Deferred taxes are provided under the provisions of SFAS No. 109
"Accounting for Income Taxes", which requires recognition of the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss carry
forwards under the liability method. Deferred tax assets and
liabilities are measured using expected tax rates in effect for the
period in which those temporary differences are expected to be
recovered or settled.
FOREIGN CURRENCY TRANSLATION
The Company considers Rmb as its functional currency as the Company's
business activities are based in Rmb.
Transactions in currencies other than functional currencies during the
period are translated into the respective functional currencies at the
applicable rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in currencies
other than functional currencies are translated into respective
functional currencies at the applicable rates of exchange in effect at
the balance sheet date. Exchange gains and losses are recorded in the
consolidated statements of operations.
For the convenience of the readers of these financial statements,
translation of amounts from Rmb into US$ has been made at the exchange
rate of US$1.00 = Rmb8.2867 as of December 31, 2003 and US$1.00 =
Rmb8.2871 as of December 31, 2002. No representation is made that the
Rmb amounts could have been or could be converted into the US$ amounts
at these rates or at any other rates on December 31, 2003 and 2002.
- --------------------------------------------------------------------------------
Page 9 of 19
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with USGAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include provisions for doubtful
accounts, sales returns and allowances, long-lived assets and income
tax. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments under SFAS No. 107
"Disclosures about Fair Value of Financial Instruments" are determined
at discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with
precision. The estimated fair values of the Company's financial
instruments, which includes cash, loans receivable, accounts
receivable, accounts payable and debts, approximate their carrying
values in the financial statements.
RELATED PARTIES
Parties are considered to be related if one party has the ability,
directly 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees. It also clarifies that at the time a company
issues a guarantee, it must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that
guarantee. However, the provisions related to recognizing a liability
at inception of the guarantee for the fair value of the guarantor's
obligations does not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial
measurement provisions apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements
of FIN 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company does not expect the
adoption of FIN 45 will have a material impact on the Company's results
of operations or financial position.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21 ("EITF 00-21") "Revenue Arrangements with Multiple
Deliverables". EITF 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company does not expect the adoption
of EITF 00-21 will have a material impact on its results of operations
or financial position.
- --------------------------------------------------------------------------------
Page 10 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
"Consolidation of Variable Interest Entities". Until this
interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity
through voting interests. FIN 46 requires a variable interest entity,
as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns. In December 2003, the FASB issued a revised FIN 46. The
revised standard, FIN 46-R, modifies or clarifies various provisions of
FIN 46 and incorporates many FASB Staff Positions previously issued by
the FASB. This standard replaces the original FIN 46 that was issued in
January 2003. The Company does not expect the adoption of FIN 45 will
have a material impact on its results of operations or financial
position.
In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how certain financial instruments
with characteristics of both liabilities and equity shall be classified
and measured. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The Company does not expect the adoption of SFAS 150 will have a
material impact on its results of operations or financial position.
3. LOANS RECEIVABLE
The loans receivable represent cash placed with two trust companies in
the PRC, namely Kinghing Trust & Investment Co., Ltd. ("Kinghing
Trust") and Shenzhen International Trust & Investment Co., Ltd.
("Shenzhen Trust").
AS OF DECEMBER 31,
-----------------------------------------------------
2003 2003 2002
US$ RMB RMB
Kinghing Trust (NOTE (A)) 2,534,181 21,000,000 118,800,000
Shenzhen Trust (NOTE (B)) 2,413,506 20,000,000 -
-------------- --------------- ---------------
4,947,687 41,000,000 118,800,000
Less: Current portion (4,947,687) (41,000,000) (97,800,000)
-------------- --------------- ---------------
Non-current portion - - 21,000,000
============== =============== ===============
- --------------------------------------------------------------------------------
Page 11 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. LOANS RECEIVABLE (CONTINUED)
(a) Kinghing Trust is a related party of Tonhe Investment Holding Co.,
Ltd. ("Tonhe"), a former major stockholder of the Company.
Pursuant to the original agreements entered into between the
Company and Kinghing Trust, the amounts placed with Kinghing Trust
bear interests ranging from 5.31% to 6.903% per annum. However,
the actual interest rate was agreed orally at 10% per annum and
all related interest income (calculated at 10% per annum) was
received by December 31, 2003.
In addition, pursuant to the original agreements, Kinghing Trust
will not bear the risk of non-recovery of the amounts due.
However, pursuant to a supplemental agreement on December 26,
2003, Kinghing Trust has agreed to provide a guarantee to the
Company for the recovery of the balance as of December 31, 2003.
According to the original agreements, Rmb16,000,000 of the amount
was repayable on September 4, 2003 while Rmb5,000,000 was
repayable on July 5, 2003. Pursuant to the supplemental agreement
dated December 26, 2003, the due dates of repayment of the amounts
of Rmb16,000,000 and Rmb5,000,000 were extended to March 5, 2004
and July 5, 2004 respectively. Pursuant to another supplemental
agreement on April 5, 2004, the due date of repayment of the
Rmb16,000,000 was further extended to July 5, 2004.
(b) The amount placed with Shenzhen Trust bears interests at 7.5% per
annum. Pursuant to the original agreement, Shenzhen Trust will not
bear the risk of non-recovery of the amount due and the period of
the loan is 5 years. However, a supplemental agreement was entered
into between the Company and Shenzhen Trust on December 26, 2003
pursuant to which Shenzhen Trust has agreed to provide a guarantee
to the Company for the recovery of the balance as of December 31,
2003. In addition, the period of the loan was revised from 5 years
to 4 months, i.e. the amount was repayable on February 20, 2004.
Pursuant to another supplemental agreement on February 27, 2004,
the due date of repayment was extended to March 31, 2004 and the
supplemental agreement dated December 26, 2003 was terminated. The
amount was received on March 31, 2004.
4. INVENTORIES
INVENTORIES CONSISTED OF:
AS OF DECEMBER 31,
--------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Raw materials 63,056 522,532 275,840
Work-in-progress 4,965 41,142 189,448
Finished goods 35,671 295,595 251,183
-------------- -------------- --------------
103,692 859,269 716,471
============== ============== ==============
- --------------------------------------------------------------------------------
Page 12 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of:
AS OF DECEMBER 31,
--------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Leasehold land 170,816 1,415,499 1,415,499
Buildings 461,293 3,822,601 3,822,601
Plant and machinery 670,059 5,552,581 4,901,493
Furniture and equipment 45,672 378,470 253,768
Motor vehicles 263,518 2,183,694 605,175
-------------- --------------- ---------------
Cost 1,611,358 13,352,845 10,998,536
Less: Accumulated depreciation (499,218) (4,136,870) (3,301,260)
-------------- --------------- ---------------
Property, plant and equipment, net 1,112,140 9,215,975 7,697,276
============== =============== ===============
The leasehold land is situated in the PRC and is held under medium term
lease for a period of fifty years.
As of December 31, 2003 and 2002, the cost of property, plant and
equipment pledged to secure bank loans of the Company amounted to
approximately Rmb1,547,299 (US$186,721) and Rmb- (US$-) and the related
accumulated depreciation amounted to Rmb121,508 (US$14,662) and Rmb-
(US$-) respectively.
Depreciation expense amounted to Rmb967,552 (US$116,760) and Rmb762,859
(US$92,054) for the years ended December 31, 2003 and 2002
respectively.
6. CONSTRUCTION IN PROGRESS
Construction in progress consisted of:
AS OF DECEMBER 31,
---------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Leasehold land 1,093,214 9,059,138 -
Construction costs 1,639,011 13,581,991 3,401,051
Machinery 2,229,430 18,474,619 -
--------------- --------------- --------------
4,961,655 41,115,748 3,401,051
--------------- --------------- --------------
Interest expense capitalized 157,119 1,302,001 68,268
Less: Government grants (NOTE 2) (46,065) (381,732) (68,268)
--------------- --------------- --------------
111,054 920,269 -
--------------- --------------- --------------
5,072,709 42,036,017 3,401,051
=============== =============== ==============
The leasehold land is situated in the PRC and is held under medium term
lease for a period of fifty years.
- --------------------------------------------------------------------------------
Page 13 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. INTANGIBLE ASSETS, NET
Intangible assets consisted of:
AS OF DECEMBER 31,
---------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Trademark 351,165 2,910,000 2,910,000
Patent 965,403 8,000,000 8,000,000
--------------- --------------- ---------------
Cost 1,316,568 10,910,000 10,910,000
Less: Accumulated amortization (396,821) (3,288,334) (2,330,667)
--------------- --------------- ---------------
Intangible assets, net 919,747 7,621,666 8,579,333
=============== =============== ===============
The patent was acquired from a director and former stockholder, Mr. Han
Honglu ("Mr. Han"), at a consideration of Rmb8,000,000 (US$965,403)
which was settled by the capital of the Company as discussed in note 1
to the financial statements. The consideration was determined based on
a valuation provided by professional appraisers in the PRC based on a
discounted estimated future cash flows basis. The formal transfer of
ownership of the patent is still in progress and an agreement has been
entered into between the Company and Mr. Han that Mr. Han is holding
the patent on behalf of the Company until the completion of the formal
transfer.
The patent has not been used for commercial production up to December
31, 2003. However, the Company has already developed a new medicine
based on the patent, which is expected to be put into commercial
production in 2004.
Amortization expense amounted to Rmb957,667 (US$115,567) and Rmb957,667
(US$115,561) for the years ended December 31, 2003 and 2002
respectively.
The estimated amortization expense of the intangible assets in the
following periods is as follows:
AS OF DECEMBER 31,
---------------------------------------------------
2003 2003 2002
US$ RMB RMB
Amortization expense:
Within one year 115,567 957,667 957,667
Over 1 year but not exceeding 2 years 115,567 957,667 957,667
Over 2 years but not exceeding 3 years 115,567 957,667 957,667
Over 3 years but not exceeding 4 years 115,567 957,667 957,667
Over 4 years but not exceeding 5 years 115,567 957,667 957,667
============== ============== =============
- --------------------------------------------------------------------------------
Page 14 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. LONG-TERM INVESTMENT
AS OF DECEMBER 31,
-----------------------------------------------
2003 2003 2002
US$ RMB RMB
Unlisted equity investment, at cost 1,086,078 9,000,000 -
============= ============= ============
On January 6, 2003, the Company acquired an 18% equity interest in a
company incorporated in the PRC. The Company has no significant control
and influence over its operating and financial policies. Mr. Han has
indemnified the Company against any loss that may result from the
investment by an amount due to him of Rmb10,000,000 (US$1,206,753) (see
note 11 to the financial statements).
9. SHORT-TERM DEBT
The short-term debt represents a bank loan which is repayable within
one year, bears interest at 5.841% per annum and is secured by a
guarantee provided by Tonhe. The debt was fully repaid in 2003.
10. LONG-TERM DEBT
AS OF DECEMBER 31,
---------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Current portion 47,114 390,419 -
Non-current portion 6,086,845 50,439,856 50,000,000
--------------- --------------- ---------------
6,133,959 50,830,275 50,000,000
=============== =============== ===============
The Company has various long-term bank loans to finance the purchase of
property, plant and equipment and the construction in progress.
Rmb50,000,000 of the balances as of December 31, 2003 and 2002 is
wholly repayable in 2006, bears interest at 5.58% per annum and is
secured by a guarantee provided by Tonhe. Rmb830,275 of the balance as
of December 31, 2003 is repayable in fixed monthly installments, bears
interest at 5.49% per annum and is secured by certain property, plant
and equipment of the Company (see note 5 to the financial statements).
- --------------------------------------------------------------------------------
Page 15 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. LONG-TERM DEBT (CONTINUED)
Aggregate maturities of the long-term debt as of December 31, 2003 are
as follows:
PRINCIPAL PAYABLE IN THE FOLLOWING PERIODS
---------------------------- ------------------------------------
US$ RMB
------------ --------------
47,114 390,419 Within 1 year
------------ --------------
50,265 416,534 Over 1 year but not exceeding 2 years
6,036,580 50,023,322 Over 2 years but not exceeding 3 years
------------ --------------
6,086,845 50,439,856
------------ --------------
6,133,959 50,830,275
============ ==============
11. RELATED PARTY TRANSACTIONS
In addition to the transactions / information disclosed elsewhere in
the financial statements, during the years, the Company had the
following transactions with related parties.
Balances with related parties are as follows:
AS OF DECEMBER 31,
-------------------------------------------------------
2003 2003 2002
US$ RMB RMB
Due to Mr. Han * 1,206,753 10,000,000 -
Due to related parties with a common director 322,444 2,672,000 18,600,000
--------------- ---------------- ----------------
1,529,197 12,672,000 18,600,000
=============== ================ ================
* Mr. Han has used the amount due to him to indemnify the Company
against any loss that may result from the long-term investment of
Rmb9,000,000 (US$1,086,078) (see note 8 to the financial
statements).
The amounts due are unsecured, interest-free and have no fixed
repayment terms.
12. INCOME TAX
The Company is subject to the PRC Enterprise Income Tax at a rate of
33%. Income tax expense consisted of:
AS OF DECEMBER 31,
-----------------------------------------------------
2003 2003 2002
US$ RMB RMB
CURRENT TAX:
Charge for the year - - 606,755
============== ============== ================
- --------------------------------------------------------------------------------
Page 16 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. INCOME TAX (CONTINUED)
The reconciliation of the statutory tax rate to the effective tax rate
based on the loss before income tax is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
Statutory tax rate 33% 33%
Non-deductible expenses (9%) (84%)
Valuation allowance for deferred tax asset (24%) -
---------- ----------
Effective tax rate - (51%)
========== ==========
As of December 31, 2003 and 2002, the Company has operating losses
carried forward for tax purposes amounted to Rmb4,642,662 (US$560,254)
and Rmb- (US$-) respectively. Under current PRC tax laws, the Company's
losses will expire after five years from the year of the losses were
incurred.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The significant components of the Company's deferred tax
assets are as follows:
AS OF DECEMBER 31,
----------------------------------------------------
2003 2003 2002
US$ RMB RMB
Deferred tax asset - Tax effect of net 184,884 1,532,078 -
operating losses carried forward
Valuation allowance for deferred tax asset (184,884) (1,532,078) -
-------------- --------------- -------------
Net deferred taxes - - -
============== =============== =============
13. RETIREMENT PLAN AND POST-EMPLOYMENT BENEFITS
As stipulated by the rules and regulations in the PRC, the Company is
required to contribute to a state-sponsored social insurance plan for
all of its employees who are residents of PRC at a rate of 22% on an
amount based on the remuneration of employees. The Company has no
further obligations for the actual pension payments or post-retirement
benefits beyond the annual contributions. The state-sponsored
retirement plan is responsible for the entire pension obligations
payable to all employees.
Pension expense for the years ended December 31, 2003 and 2002 amounted
to Rmb358,292 (US$43,237) and Rmb120,170 (US$14,501) respectively.
- --------------------------------------------------------------------------------
Page 17 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. REPORT ON SEGMENT INFORMATION
The Company adopted SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" in respect to its operating
segments. The Company's income is derived from its operations in a
single business segment which is the development and manufacturing of
medicine and health products. In addition, the Company's products are
only sold to customers in the PRC. Therefore, no geographical segment
information is presented.
15. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURE COMMITMENTS
As of December 31, 2003 and 2002, the Company had capital expenditure
commitments contracted but not provided for net of deposit paid
amounting to Rmb9,499,993 (US$1,146,415) and Rmb17,331,264
(US$2,091,355) respectively.
OPERATING LEASE COMMITMENTS
The Company leases certain staff quarters and office premises under
non-cancellable operating leases. Rental expense under operating leases
amounted to Rmb140,201 (US$16,919) and Rmb55,000 (US$6,637) for the
years ended December 31, 2003 and 2002 respectively.
Future minimum rental payments under non-cancellable operating leases
which are payable within one year amounted to Rmb17,367 (US$2,096) and
Rmb- (US$-) as of December 31, 2003 and 2002 respectively.
16. OPERATING RISKS
COUNTRY RISKS
The Company may be exposed to the risks as a result of its sales
operations being carried out in the PRC. These include risks associated
with, among others, the political, economic and legal environmental and
foreign currency exchange. The Company's results may be adversely
affected by change 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 Company's 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.
CASH, TIME DEPOSITS AND LOAN RECEIVABLES
The Company maintains its cash balances and investments in time
deposits and loans receivable with various banks and trust companies
located in the PRC. In common with local practice, such amounts are not
insured or otherwise protected should the amounts placed with the banks
and trust companies be non-recoverable. There has been no history of
credit losses in these regards and there are neither material
commitment fees nor compensating balance requirements for all
outstanding loans of the Company.
- --------------------------------------------------------------------------------
Page 18 of 19
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
16. OPERATING RISKS (CONTINUED)
CONCENTRATION OF CREDIT RISK
As of December 31, 2003, two customers had trade receivable balances
representing 26% and 11% of the total trade receivables respectively.
As of December 31, 2002, three customers had trade receivable balances
representing 40%, 30% and 27% of the total trade receivables
respectively. No other customer had trade receivable balance that
exceeded 10% of the total trade receivables as of December 31, 2003 and
2002.
Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions. The major concentration of credit risk arises from the
Company's receivables. Even though the Company does have major
customers and the provision for doubtful accounts as a percentage of
sales are relatively high in 2002, it does not consider itself be
exposed to significant credit risk with regards to collection of the
related receivables. It is because the high level of provision in 2002
was arisen from a customer who accounted for Rmb396,741 of the
provision. The Company has already ceased trading with that customer.
In addition, the management has tightened controls over the recovery of
trade receivables and the level of provision has been significantly
improved in 2003.
17. SUBSEQUENT EVENTS
On January 17, 2004, a new bank loan amounted to Rmb20,000,000
(US$2,413,506) was arranged to finance the acquisition of the 100%
interest in a PRC company as stated in note 1 to the financial
statements and to provide for additional working capital of the
Company. The bank loan is repayable in one year and is secured by the
Company's construction in progress and land and buildings included in
the property, plant and equipment.
- --------------------------------------------------------------------------------
Page 19 of 19