EXHIBIT 99.2
UNAUDITED FINANCIAL STATEMENTS OF
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
FOR THE THREE MONTHS ENDED MARCH 31, 2004
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
================================================================================
AS OF MARCH 31, AS AT DEC 31,
-------------------------------------- --------------------
2004 2004 2003
ASSETS NOTE US$ RMB RMB
CURRENT ASSETS
Cash and cash equivalents 4,026,320 33,286,372 15,824,297
Marketable equity securities - -
Trade receivables 964,875 7,976,810 515,695
Deposits, prepayments
and other receivables 1,659,900 13,722,720 2,983,548
Interest receivable 62,332 515,309 300,000
Loans receivable maturing 41,000,000
within one year 3 2,540,160 21,000,000
Inventories 4 332,516 2,748,973 859,269
----------------- ----------------- ----------------
TOTAL CURRENT ASSETS 9,586,103 79,250,183 61,482,809
Property, plant and equipment, net 5 1,614,549 13,347,791 9,215,975
Construction in progress 6 5,898,191 48,761,503 42,036,017
Intangible assets, net 7 882,117 7,292,637 7,621,666
Loans receivable maturing in
more than one year 3 - -
Long-term investment 8 1,088,640 9,000,000 9,000,000
----------------- ----------------- ----------------
TOTAL ASSETS 19,069,600 157,652,114 129,356,467
================= ================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt 9 0 0 390,419
Current portion of long-term debt 10 2,661,120 22,000,000 0
Trade payables 429,165 3,547,988 1,069,319
Accrued charges and other payables 924,113 7,639,822 1,914,073
Due to related parties 11 1,532,805 12,672,000 12,672,000
Income tax payable 29,052 240,181
----------------- ----------------- ----------------
TOTAL CURRENT LIABILITIES 5,576,255 46,099,991 16,045,811
Long-term debt 10 6,048,000 50,000,000 50,439,856
----------------- ----------------- ----------------
TOTAL LIABILITIES 11,624,255 96,099,991 66,485,667
----------------- ----------------- ----------------
COMMITMENTS AND CONTINGENCIES 14
STOCKHOLDERS' EQUITY
Registered capital 9,676,800 80,000,000 80,000,000
Accumulated losses (2,231,455) (18,447,877) (17,129,200)
----------------- ----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 7,445,345 61,552,123 62,870,800
----------------- ----------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 19,069,600 157,652,114 129,356,467
================= ================= ================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 1
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
QUARTER ENDED MARCH 31, YEAR ENDED
--------------------------------------- --------------------
2004 2004 2003
NOTE US$ RMB RMB
OPERATING REVENUE
Net sales 1,066,094 8,813,604 992,038
Cost of sales (1,049,349) (8,675,172) (1,803,163)
---------------- ----------------- ---------------
GROSS PROFIT 16,745 138,432 (811,125)
---------------- ----------------- ---------------
OPERATING EXPENSES
Selling, general and
administrative expenses 159,902 1,321,939 5,716,883
Research and development expenses 46,414 383,714 2,147,077
---------------- ----------------- ---------------
Total operating expenses 206,316 1,705,653 7,863,960
---------------- ----------------- ---------------
LOSS FROM OPERATIONS (189,571) (1,567,221) (8,675,085)
NON-OPERATING INCOME (EXPENSES)
Interest income from loans receivable 62,332 515,309 4,125,028
Bank interest income 3,915 32,365 130,280
Interest expense, net (37,307) (308,426) (1,956,919)
Other (expense) income, net 5,376 44,444 (162,287)
---------------- ----------------- ---------------
LOSS BEFORE INCOME TAX (155,255) (1,283,529) (6,538,983)
Provision for income tax 12 4,252 35,149 -
---------------- ----------------- ---------------
NET LOSS (159,507) (1,318,677) (6,538,983)
================ ================= ===============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 2
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
REGISTERED ACCUMULATED
CAPITAL LOSSES TOTAL
---------------- ----------------- -----------------
RRmb RRmb RRmb
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 January 1, 2004 80,000,000 (17,129,200) 62,870,800
Net loss - (1,318,677) (1,318,677)
---------------- ----------------- -----------------
Balance as of March 31, 2004 80,000,000 (18,447,877) 61,552,123
================ ================= =================
US$ US$ US$
9,676,800 (2,231,455) 7,445,345
================ ================= =================
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 3
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
QUARTER ENDED MARCH 31, YEAR END DEC 31
-----------------------------------------------------------
2004 2004 2003
US$ RMB RMB
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (159,507) (1,318,677) (6,538,983)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 20,340 126,926 967,552
Amortization 39,799 329,029 957,667
Loss on disposal of property, plant and equipment - - 103,586
Gain on disposal of marketable securities - - (1,949)
Changes in operating assets and liabilities:
Trade receivables (902,496) (7,461,115) (296,432)
Deposits, prepayments and other receivables (1,299,010) (10,739,172) 595,574
Interest receivable (26,044) (215,309) 3,613,541
Inventories (228,579) (1,889,704) (142,798)
Trade payables 299,820) 2,478,669 (51,938)
Accrued charges and other payables 692,587 5,725,749 79,874
Income tax payable 29,052 240,181 (497,376)
-------------- ---------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (1,534,038) (12,682,197) (1,211,682)
-------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in loans receivable - - (20,000,000)
Collections on loans receivable 2,419,200 20,000,000 97,800,000
Purchases of marketable equity securities - - -
Purchases of property, plant and equipment (515,137) (4,258,741) (1,438,088)
Addition of construction in progress (813,515) (6,725,486) (35,943,966)
Acquisition of long-term investment - - (9,000,000)
Proceeds on sale of marketable equity securities - - 15,449
Proceeds on disposal of property, plant and equipment - - 31,251
-------------- ---------------- ---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,090,548 9,015,773 31,464,646
-------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of long-term debt 2,661,120 22,000,000 -
Repayment of long-term debt (100,430) (830,275) (20,352,725)
Advances from related parties - - 10,000,000
Repayments to related parties - - (15,928,000)
-------------- ---------------- ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 2,560,690) 21,169,725 (26,280,725)
-------------- ---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,117,200 17,462,075 3,972,239
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 1,909,120 15,824,297 11,852,058
-------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR 4,026,320 33,286,372 15,824,297
============== ================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income tax paid - - 497,376
Interest paid, net 37,122 308,426 1,956,919
============== ================ ===============
NON-CASH TRANSACTION
Purchase of property, plant and equipment financed by
long-term debt - - 1,183,000
============== ================ ===============
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page 4
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
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 Rmb
64,000,000 (US$7,723,219) to Rmb 80,000,000 (US$9,654,024) in the form
of cash of Rmb 56,000,000 (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 Rmb 5,000,000. On February 2, 2004, the
registered capital of the subsidiary was increased to Rmb 20,000,000.
The additional capital of Rmb 15,000,000 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 Rmb
7,000,000.
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.
Page 5
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
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 inter-company balances
and transactions have been eliminated on consolidation.
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 those 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 un-collectibility of trade receivables
included in "Selling, general and administrative expenses" amounting to
Rmb 487,387 for the year ended December 31, 2003 No provision was made
for the period ended March 31, 2004
Page 6
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Page 7
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Rmb 689,300 (US$ 83,181) for the year ended
December 31, 2003. No advertising costs or promotion expenses were
incurred for the period ended March 31, 2004.
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 Rmb 450,000
(US$54,301) from the PRC government to subsidize interest expense
related to the construction in progress. The Company recognized the
grant as a reduction of interest expense incurred for the construction
in progress as detailed in note 6 to the financial statements.
INCOME TAXES
Income taxes have been provided in accordance with the tax rates and
laws in effect in the PRC.
Page 8
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Deferred taxes are provided under the provisions of SFAS No. 109
"Accounting for Income Taxes", which requires recognition of the
estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating loss carry
forwards under the liability method. Deferred tax assets and
liabilities are measured using expected tax rates in effect for the
period in which those temporary differences are expected to be
recovered or settled.
FOREIGN CURRENCY TRANSLATION
The Company considers Rmb as its functional currency as the Company's
business activities are based in Rmb.
Transactions in currencies other than functional currencies during the
period are translated into the respective functional currencies at the
applicable rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in currencies
other than functional currencies are translated into respective
functional currencies at the applicable rates of exchange in effect at
the balance sheet date. Exchange gains and losses are recorded in the
consolidated statements of operations.
For the convenience of the readers of these financial statements,
translation of amounts from Rmb into US$ has been made at the exchange
rate of US$1.00 = Rmb 8.2672 as of March 31, 2004 US$1.00 = Rmb 8.2867
as of December 31, 2003 and. No representation is made that the Rmb
amounts could have been or could be converted into the US$ amounts at
these rates or at any other rates on March 31, 2004 and 2003.
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.
Page 9
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Page 10
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
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 MARCH 31,
--------------------------------------------------------
2004 2004 DEC 2003
US$ RMB RMB
Kinghing Trust (NOTE (A)) 2,540,160 21,000,000 21,000,000
Shenzhen Trust (NOTE (B)) 20,000,000
-------------- ----------------- ----------------
2,540,160 21,000,000 41,000,000
Less: Current portion (2,540,160) (21,000,000) (41,000,000)
-------------- ----------------- ----------------
Non-current portion - - -
============== ================= ================
(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, Rmb 16,000,000 of the amount
was repayable on September 4, 2003 while Rmb 5,000,000 was
repayable on July 5, 2003. Pursuant to the supplemental agreement
dated December 26, 2003, the due dates of repayment of the amounts
of Rmb 16,000,000 and Rmb 5,000,000 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 Rmb
16,000,000 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.
Page 11
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
4. INVENTORIES
INVENTORIES CONSISTED OF:
AS OF MARCH 31,
--------------------------------------------------------
2004 2004 DEC 2003
US$ RMB RMB
Raw materials 112,220 925,727 522,532
Work-in-progress 30,363 250,469 41,142
Finished goods 189,933 1,572,777 295,595
--------------- --------------- ----------------
332,516 2,748,973 859,269
=============== =============== ================
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of:
AS OF MARCH 31,
--------------------------------------------------------
2004 2004 DEC 2003
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 1,158,383 9,555,674 5,552,581
Furniture and equipment 48,953 403,820 378,470
Motor vehicles 290,830 2,413,993 2,183,694
-------------- ----------------- -----------------
Cost 2,130,275 17,611,587 13,352,845
Less: Accumulated depreciation (515,726) (4,263,796) (4,136,870)
-------------- ----------------- -----------------
Property, plant and equipment, net 1,614,549 13,347,791 9,215,975
============== ================= =================
The leasehold land is situated in the PRC and is held under medium term
lease for a period of fifty years.
*As of March 31, 2004 and December 31, 2003, the cost of property,
plant and equipment pledged to secure bank loans of the Company
amounted to approximately Rmb 5,600,000 (US$ 677,351) and Rmb 1,547,299
(US$186,721) and the related accumulated depreciation amounted to Rmb
161,868 (US$ 19,579 ) and Rmb121,508 (US$14,662) respectively.
Depreciation expense amounted to Rmb 168,152 (US$ 20,340) and Rmb
967,552 (US$ 116,760) for the period ended March 31, 2004 and year
ended December 31, 2003 respectively. Depreciation expenses for the
first quarter were included in the "Cost of Sales" on the Income
Statements.
Page 12
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
6. CONSTRUCTION IN PROGRESS
Construction in progress consisted of:
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 DEC 2003
US$ RMB RMB
Leasehold land 1,093,214 9,059,138 9,059,138
Construction costs 1,944,078 16,072,664 13,581,991
Machinery 2,675,397 22,096,059 18,474,619
-------------- ----------------- -----------------
5,712,689 47,227,861 41,115,748
-------------- ----------------- -----------------
Interest expense capitalized 185,502 1,533,642 1,302,001
Less: Government grants (NOTE 2) nil nil (381,732)
-------------- ----------------- -----------------
185,502 1,533,642 920,269
-------------- ----------------- -----------------
5,898,191 48,761,503 42,036,017
============== ================= =================
The leasehold land is situated in the PRC and is held under medium term
lease for a period of fifty years.
7. INTANGIBLE ASSETS, NET
Intangible assets consisted of:
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 DEC2003
US$ RMB RMB
Trademark 361,502 2,969,923 2,910,000
Patent 965,403 8,000,000 8,000,000
--------------- ---------------- ----------------
Cost 1,326,905 10,969,923 10,910,000
Less: Accumulated amortization (444,788) (3,677,286) (3,288,334)
--------------- ---------------- ----------------
Intangible assets, net 882,117 7,292,637 7,621,666
=============== ================ ================
The patent was acquired from a director and former stockholder, Mr. Han
Honglu ("Mr. Han"), at a consideration of Rmb 8,000,000 (US$965,403)
which was settled by the capital of the Company as discussed in note 1
to the financial statements. The consideration was determined based on
a valuation provided by professional appraisers in the PRC based on a
discounted estimated future cash flows basis. The formal transfer of
ownership of the patent is still in progress and an agreement has been
entered into between the Company and Mr. Han that Mr. Han is holding
the patent on behalf of the Company until the completion of the formal
transfer.
The patent has not been used for commercial production up to December
31, 2003. However, the Company has already developed a new medicine
based on the patent, which is expected to be put into commercial
production in 2004.
Page 13
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
7. INTANGIBLE ASSETS, NET (CONTINUED)
Amortization expense amounted to Rmb 329,029 (US$ 39,799) and Rmb
957,667 (US$ 115,567 for the period ended March 31, 2004 and year ended
December 2003 respectively. Amortization expenses for the first quarter
were included in "Selling, general and administrative expenses" in the
Income Statement".
The estimated amortization expense of the intangible assets in the
following periods is as follows:
AS OF MARCH 31,
--------------------------------------------------------
2004 2004 2003
US$ RMB RMB
Amortization expense:
Within one year 159,188 1,316,116 957,667
Over 1 year but not exceeding 2 years 159,188 1,316,116 957,667
Over 2 years but not exceeding 3 years 159,188 1,316,116 957,667
Over 3 years but not exceeding 4 years 159,188 1,316,116 957,667
Over 4 years but not exceeding 5 years 159,188 1,316,116 957,667
=============== ================ ===============
8. LONG-TERM INVESTMENT
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 DEC 2003
US$ RMB RMB
Unlisted equity investment, at cost 1,088,640 9,000,000 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 Rmb 10,000,000 (US$1,206,753)
(see note 11 to the financial statements).
9. SHORT-TERM DEBT
The short-term debt represents a bank loan which is repayable within
one year, bears interest at 5.841% per annum and is secured by a
guarantee provided by Tonhe. The debt was fully repaid in 2004.
Page 14
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
10. LONG-TERM DEBT
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 DEC2003
US$ RMB RMB
Current portion nil nil 390,419
Non-current portion 6,048,000 50,000,000 50,439,856
--------------- ---------------- -----------------
6,048,000 50,000,000 50,830,275
=============== ================ =================
The Company has various long-term bank loans to finance the purchase of
property, plant and equipment and the construction in progress. Rmb
50,000,000 of the balances as of March 31, 2004 and year ended
December, 2003 is wholly repayable in 2006, bears interest at 5.58% per
annum and is secured by a guarantee provided by Tonhe.
Aggregate maturities of the long-term debt as of March 31, 2004 are as
follows:
PRINCIPAL PAYABLE IN THE FOLLOWING PERIODS
-------------------------- --------------------------------------
US$ RMB
2,661,120 2,200,000 Within 1 year
----------- ------------
Nil Nil Over 1 year but not exceeding 2 years
Nil Nil Over 2 years but not exceeding 3 years
----------- ------------
6,048,000 50,000,000
----------- ------------
8,709,120 72,000,000
=========== ============
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 MARCH 31,
---------------------------------------------------------
2004 2004 2004
US$ RMB RMB
Due to a related party 1,206,753 10,000,000 10,000,000
Due to related parties with a common director 326,052 2,672,000 2,672,000
--------------- --------------- ---------------
1,532,805 12,672,000 12,672,000
=============== =============== ===============
Page 15
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
The related party, Mr. Han, has indemnified the Company against any
loss that may result from the investment by an amount due to him of Rmb
10,000,000 (US$1,206,753)
The amounts due are unsecured, interest-free and have no fixed
repayment terms.
12. INCOME TAX
The Company is subject to the PRC Enterprise Income Tax at a rate of
33%. Income tax expense consisted of:
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 2003
US$ RMB RMB
Current tax:
Charge for the year 4,252 35,149 -
=============== ============== ===============
The reconciliation of the statutory tax rate to the effective tax rate
based on the loss before income tax is as follows:
AS AT ,
-------------------------------------
MARCH 2004 DEC 2003
Statutory tax rate 33% 33%
Non-deductible expenses (9%) (9%)
Valuation allowance for deferred tax asset (24%) (24%)-
---------------- ----------------
Effective tax rate (51%) (51%)
================ ================
As of March 31, 2004 and December 31, 2003, the Company has operating
losses carried forward for tax purposes amounted to Rmb 2,850,755 (US$
344,814) and Rmb 1,532,078 (US$ 184,884) 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:
Page 16
ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD.
NOTES TO FINANCIAL STATEMENTS
FOR PERIOD ENDING MARCH 31, 2004
(UNAUDITED)
12. INCOME TAX (CONTINUED) [RIGHT AMOUNTS?]
AS OF MARCH 31,
---------------------------------------------------------
2004 2004 2003
US$ RMB RMB
Deferred tax asset - Tax effect of net operating 344,814 2,850,755 1,532,078
losses carried forward
Valuation allowance for deferred tax asset (344,814) (2,850,755) (1,532,078)
--------------- ----------------- -----------------
Net deferred taxes Nil- nil- nil-
=============== ================= =================
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 year ended December 31, 2003 amounted to Rmb
358,292 (US$14,501). No pension cost has incurred for the quarter ended
March 31, 2004
14. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURE COMMITMENTS
As of March 31, 2004 and December 2003, the Company had capital
expenditure commitments contracted but not provided for net of deposit
paid amounting to Rmb 5,786,172 (US$ 699,870) and Rmb 9,499,993 (US$
1,146,415) respectively.
OPERATING LEASE COMMITMENTS
The Company leases certain staff quarters and office premises under
non-cancelable operating leases. Rental expense under operating leases
amounted to Rmb 60,000.00 (US$ 7,257) and Rmb 140,201 (US$16,919) for
the quarter ended March 31, 2004 and year ended December 31, 2003
respectively.
Future minimum rental payments under non-cancelable operating leases
which are payable within one year amounted to Rmb 274,366 (US$ 33,186)
and Rmb 17,367 (US$ 2,096) as of March 31, 2004 and December 31, 2003
respectively.
Page 17