UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
of the
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported June 30, 2006): July 8, 2006
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 814-00063 13-2949462
-------- --------- ----------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
Suite 602, China Life Tower
16 Chaowai Street, Chaoyang Dist.
Beijing, China 100020
--------------------------
(Address of principal executive offices)
86-10-85251616
-------------------------------------
(Registrant's telephone number, including area code)
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(former name or former address, if changed since last report)
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))
EXPLANATORY NOTE:
- -----------------
In a Current Report on Form 8-K filed by the Registrant on July 5, 2006, the
Registrant announced the conditional purchase of a 100% interest in RACP
Pharmaceutical Holdings Ltd, the parent company of Shenyang Enshi Pharmaceutical
Co., Ltd ("Enshi"), a pharmaceutical manufacturer. This Form 8-K/A is being
filed to include the Report of Independent Registered Public Accounting Firm was
inadvertently left out and certain pro forma financial information required by
Article 11 of SEC Regulation S-X.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
Audited financial statements of Shenyang Enshi Pharmaceutical Co, Ltd.
together with the Report of Independent Registered Public Accounting Firm
for the years ended December 31, 2004 and 2005.
(b) Pro Forma Financial Information
Pro Forma Financial Information as required by Article 11 of Regulation S-X
(UNAUDITED).
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.
China Biopharmaceuticals Holdings, Inc.
By: /s/ Chris Peng Mao
------------------------------------
Name: Chris Peng Mao
Title: Chief Executive Officer
Dated: May 8, 2007
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
of Shenyang Enshi Pharmaceutical Co., Ltd
We have audited the accompanying balance sheets of Shenyang Enshi Pharmaceutical
Co., Ltd. (the Company) as of December 31, 2005 and 2004, and the related
statements of income and other comprehensive income, shareholders' equity and
cash flows 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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shenyang Enshi Pharmaceutical
Co., Ltd. as of December 31, 2005 and 2004, and the results of their operations
and cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
- -----------------------------------------------
Walnut, California
April 24, 2006
SHENYANG ENSHI PHARMACEUTICAL CO., LTD.
BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
ASSETS
------
2005 2004
------------ ------------
CURRENT ASSETS:
Cash $ 566,941 $ 686,281
Accounts receivable, trade, net of allowance
for doubtful accounts of $136,928 and
$157,580 as of 2005 and 2004, respectively 2,806,496 1,884,717
Accounts receivable - related parties 23,800 17,430
Notes receivable 96,389 --
Other receivables 106,514 211,094
Advances to suppliers-short term 1,046,095 232,859
Prepaid expenses 22,263 44,083
Inventories 1,124,899 726,313
------------ ------------
Total current assets 5,793,397 3,802,777
------------ ------------
PLANT AND EQUIPMENT, net 6,297,631 5,519,699
------------ ------------
OTHER ASSETS:
Land use right, net 1,689,707 1,687,547
Other intangibles, net 857,546 738,158
Advances to suppliers-long term 434,000 423,500
------------ ------------
Total other assets 2,981,253 2,849,205
------------ ------------
Total assets $ 15,072,281 $ 12,171,681
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,184,788 $ 468,725
Short-term loans 2,480,000 1,815,000
Other payables 61,988 92,093
Taxes payable 151,450 (13,824)
Accrued liabilities 48,480 14,259
Dividends payable 831,036 2,096,097
------------ ------------
Total current liabilities 4,757,742 4,472,350
------------ ------------
SHAREHOLDERS' EQUITY:
Paid-in capital 3,630,000 3,630,000
Statutory reserves 1,842,414 1,074,251
Capital reserves 4,356 4,356
Retained earnings 4,639,553 2,990,724
Accumulated other comprehensive income 198,216 --
------------ ------------
Total shareholders' equity 10,314,539 7,699,331
------------ ------------
Total liabilities and shareholders' equity $ 15,072,281 $ 12,171,681
============ ============
The accompanying notes are an integral part of this statement.
-2-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD.
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
------------ ------------
REVENUES $ 11,351,050 $ 6,439,595
COST OF GOOD SOLD 4,783,389 2,053,037
------------ ------------
GROSS PROFIT 6,567,661 4,386,558
------------ ------------
OTHER OPERATING INCOME 17,833 8,168
------------ ------------
OPERATING EXPENSES
Research and development expenses 45,358 56,914
Selling expenses 468,953 188,076
General and administrative expenses 861,743 847,389
------------ ------------
Total Operating Expenses 1,376,054 1,092,379
------------ ------------
INCOME FROM OPERATIONS 5,209,440 3,302,347
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (61,937) (26,927)
Financial income (expense) (4,222) 7,008
Other income (expense) (1,225) 784,151
------------ ------------
Total Other Income (expenses) (67,384) 764,232
------------ ------------
INCOME BEFORE INCOME TAXES 5,142,056 4,066,579
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET INCOME 5,142,056 4,066,579
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 198,216 --
------------ ------------
COMPREHENSIVE INCOME $ 5,340,272 $ 4,066,579
============ ============
The accompanying notes are an integral part of this statement.
-3-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Accumulated
Unappropriated other
Paid-in Statutory Capital Retained comprehensive
Capital Reserves Reserves Earnings income (loss) Totals
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2003 $ 3,630,000 $ 473,134 $ 4,356 $ 2,206,352 $ -- $ 6,313,842
Net income -- -- -- 4,066,579 -- 4,066,579
Statutory reserves -- 601,117 -- (601,117) -- --
Distributions -- -- -- (2,681,090) -- (2,681,090)
Foreign currency translation adjustments -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2004 3,630,000 1,074,251 4,356 2,990,724 -- 7,699,331
Net income -- -- -- 5,142,056 -- 5,142,056
Statutory reserves -- 768,163 -- (768,163) -- --
Distributions -- -- -- (2,725,064) -- (2,725,064)
Foreign currency translation adjustments -- -- -- -- 198,216 198,216
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 2005 $ 3,630,000 $ 1,842,414 $ 4,356 $ 4,639,553 $ 198,216 $ 10,314,539
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of this statement.
-4-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,142,056 $ 4,066,579
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 524,823 442,981
Allowance for doubtful accounts (24,202) (58,199)
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (838,146) (1,731,034)
Accounts receivable - related parties (5,852) 466,682
Notes receivable (94,990) --
Other receivables 131,245 (20,918)
Other receivables - related parties -- 300,560
Advances to suppliers (795,741) (575,168)
Prepaid expenses (446) 8,734
Inventories (375,054) (435,613)
Increase (decrease) in liabilities:
Accounts payable 694,216 (272,675)
Other payables and accrued liabilities 1,458 (39,787)
Other payables - related parties -- (1,843,909)
Dividends payable (1,297,913) 2,096,098
Taxes payable 163,213 (13,910)
----------- -----------
Net cash provided by operating activities 3,224,667 2,390,421
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in construction in progress (822,780) (438,439)
Purchase of Intangible assets (201,141) (256,266)
Purchase of property and equipment (193,191) (632,642)
----------- -----------
Net cash used in investing activities (1,217,112) (1,327,347)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan 611,000 1,609,300
Distribution to shareholders (2,752,090) (2,681,090)
----------- -----------
Net cash used in financing activities (2,141,090) (1,071,790)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 14,195 --
----------- -----------
DECREASE IN CASH (119,340) (8,716)
CASH, beginning of year 686,281 694,997
----------- -----------
CASH, end of year $ 566,941 $ 686,281
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest expense $ 628,353 $ 330,977
=========== ===========
The accompanying notes are an integral part of this statement.
-5-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 1 - Organization Background and principal activities
Shenyang Enshi Pharmaceutical Co., Ltd. (the Company) was established in Daoyi
Economic Development Zone, Shenyang, and the People's Republic of China (PRC) on
May 15, 1998. The Company is a Chinese registered limited liability company with
a legal structure similar to a regular corporation and a limited liability
company organized under state laws in the United States of America. The Articles
of Association provides for a 20 year term with original registered capital of
approximately $3,630,000 (RMB 30,000,000). The Company was originally owned by
three Chinese individuals. The Company principally engages in development,
manufacture and distribution of pharmaceutical products.
On December 26, 2003, the Company's board of directors decided to increase its
registered capital to RMB 50,000,000 by obtaining the additional capital
contribution of RMB 7,000,000 from Liaoning Xiehe Industry Ltd and RMB
13,000,000 from Fan Xing Enterprises Ltd, a Canadian corporation. On September
10, 2004, the Company decided to terminate the transactions. On September 17,
2004, all the shareholders of the Company transferred their ownerships to Enshi
Pharmaceutical Investment Ltd, a BVI corporation.
On May 15, 2005, Enshi Pharmaceutical Investment Ltd entered an ownership
transfer agreement, the BVI Corporation transferred its 100% ownership to Enshi
International (Holding) Pte, Ltd which was incorporated under the Companies Act
of Singapore on May 13, 2005.
In May 2005, the Company obtained the certificate of approval for establishment
of enterprises with foreign investment in PRC from the Foreign Trade and
Economic Cooperation Commission of PRC in Shenyang city. The business term is 20
years and registered capital of RMB 30,000,000 (approximately US$3,627,570) was
fully paid.
Note 2 - Summary of significant accounting policies
Basis of presentation
- ---------------------
The financial statements represent the activities of the Company. The Company's
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America.
Foreign currency translation
- ----------------------------
The reporting currency of the Company is the US dollar. The Company uses their
local currency, Renminbi (RMB), as their functional currency. Results of
operations and cash flow are translated at average exchange rates during the
period, and assets and liabilities are translated at the unified exchange rate
as quoted by the People's Bank of China at the end of the period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statement of shareholders' equity. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred.
-6-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, continued
Foreign currency translation, continued
- ---------------------------------------
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to $198,216 and $0 as of December 31, 2005 and 2004, respectively.
The balance sheet amounts with the exception of equity at December 31, 2005 were
translated at 8.06 RMB to $1.00 USD as compared to 8.26 RMB at December 31,
2004. The equity accounts were stated at their historical rate. The average
translation rates applied to income statement accounts for the years ended
December 31, 2005 and 2004 were 8.18 RMB and 8.26 RMB, respectively.
Revenue recognition
- -------------------
The Company recognizes revenue when the goods are delivered and title has
passed. Sales revenue represents the invoiced value of goods, net of a
value-added tax (VAT). All of the Company's products that are sold in the PRC
are subject to a Chinese value-added tax at a rate of 17% of the gross sales
price or at a rate approved by the Chinese local government. This VAT may be
offset by VAT paid by the Company on raw materials and other materials included
in the cost of producing their finished product.
Property and equipment
- ----------------------
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets with 3% residual value. The depreciation expense for
the years ended December 31, 2005 and 2004 amounted to $389,855 and $343,640,
respectively. Estimated useful lives of the assets are as follows:
Estimated
Useful Life
---------------
Buildings 20-30 years
Machinery and equipment 10-15 years
Other equipment 5-8 years
Furniture and Fixtures 5-10 years
Construction in progress represents the costs incurred in connection with the
construction of buildings or new additions to the Company's plant facilities. No
depreciation is provided for construction in progress until such time as the
assets are completed and are placed into service.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
-7-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Property and equipment, (continued)
- -----------------------------------
Long-lived assets of the Company are reviewed annually as to whether their
carrying value has become impaired. The Company considers assets to be impaired
if the carrying value exceeds the future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2005, the Company expects these assets to be
fully recoverable.
Plant and equipment consist of the following at December 31:
2005 2004
---------- ----------
Buildings and improvements $3,524,213 $3,423,958
Furniture and Fixture 137,482 144,779
Machinery 1,884,630 1,703,327
Transportation equipment 347,237 338,836
Other 396,836 336,520
Construction in progress 1,405,503 556,798
---------- ----------
Totals 7,695,901 6,504,218
Less accumulated depreciation 1,398,270 984,519
---------- ----------
Totals $6,297,631 $5,519,699
========== ==========
Interest expense of $33,750 was capitalized into construction in progress for
the year ended December 31, 2005 as compared to $0 for the prior year.
Use of estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Management believes
that the estimates utilized in preparing its financial statements are reasonable
and prudent. Actual results could differ from these estimates.
Cash and concentration of risk
- ------------------------------
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People's Republic of China. Total cash (including
restricted cash balances) in state-owned banks at December 31, 2005 and 2004
amounted to $556,101 and $663,495, respectively of which no deposits are covered
by insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any risks on its cash in bank accounts.
-8-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Inventories
- -----------
Inventories are stated at the lower of cost or market using the weighted average
basis and consist of the following at December 31:
2005 2004
----------- -----------
Raw materials $ 674,563 $ 348,212
Work-in-progress 222,064 216,776
Finished goods 228,272 161,325
----------- -----------
$ 1,124,899 $ 726,313
=========== ===========
The Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence. As of
December 31, 2005 and 2004, the Company has determined that no reserves are
necessary at year end.
Financial instruments
- ---------------------
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
about Fair Value of Financial Instruments" requires disclosure of the fair value
of financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities and other payables to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest.
Accounts receivable, trade and allowance for doubtful accounts
- --------------------------------------------------------------
The Company's business operations are conducted in the People's Republic of
China. During the normal course of business, the Company extends unsecured
credit to its customers. Accounts receivable, trade outstanding at December 31,
2005 and 2004 amounted to $2,806,496 and $1,884,717, respectively. Management
reviews its accounts receivable on a regular basis to determine if the bad debt
allowance is adequate. An estimate for doubtful accounts is made when collection
of the full amount is no longer probable. The Company records the allowance for
doubtful accounts based upon the following criteria 100% of the accounts
balances over three years old, 50% for accounts balances between two to three
years old, 30% of the account balances between one to two years old and 3% of
the account balances between ten months to one year old. Known bad debts are
written off as incurred. The allowance for doubtful accounts as of December 31,
2005 and 2004 amounted to $136,928 and $157,580, respectively.
Patent and Development Costs
- ----------------------------
The patent and development costs represent patented pharmaceutical formulas,
which have obtained official registration certificate or official approval for
clinical trials. No amortization is provided as it is held for sale.
-9-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Patent and Development Cost, (continued)
- ----------------------------------------
Such costs comprise purchase costs of patented pharmaceutical formulas,
development costs, raw materials and other related expenses of pharmaceutical
formulas. Patent and development costs are accounted for on an individual basis.
The carrying value of patent and development costs is reviewed for impairment
annually, and otherwise when events changes in circumstances indicate that the
carrying value may not be recoverable.
Research and Development Costs
- ------------------------------
Research and development costs of pharmaceutical formulas for contracted
projects are expensed when incurred.
Research costs of pharmaceutical formulas held for sale are capitalized whereas
the development cost are expensed until the project attains technical
feasibility (i.e. obtained official approval for clinical trials), and then such
development costs are capitalized.
Other assets
- ------------
Land use right
All land in the People's Republic of China is owned by the government and cannot
be sold to any individual or company. However, the government grants the user a
"land use right" (the Right) to use the land. The Company obtained the land use
right from a shareholder as part of his registered capital contribution in 2001
for a total amount of $1,936,000. The Company has the right to use this land for
50 years. At December 31, 2005 and 2004, accumulated amortization amounted to
$294,293 and $248,453. The cost of the rights is being amortized over 50 years
using the straight-line method.
Intangible assets of the Company are reviewed annually as to whether their
carrying value has become impaired. The Company considers assets to be impaired
if the carrying value exceeds the future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2005, the Company expects these assets to be
fully recoverable.
Total amortization expense for the years ended December 31, 2005 and 2004
amounted to $39,680 and $38,720 respectively.
-10-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Other assets, (continued)
Other Intangibles
The other intangible assets are comprised of production rights acquired from
third parties in the PRC and medical permits from either local universities or
third parties and consist of the following at December 31:
2005 2004
----------- -----------
Other Intangible $ 1,137,563 $ 910,875
Accumulated amortization (280,017) (172,717)
----------- -----------
$ 857,546 $ 738,158
=========== ===========
The Intangible assets of the Company are reviewed annually as to whether their
carrying value has become impaired. The Company considers assets to be impaired
if the carrying value exceeds the future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2005, the Company expects these assets to be
fully recoverable.
Income taxes
- ------------
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. Since the Company had no operations
within the United States there is no provision for US taxes and there are no
deferred tax amounts at December 31, 2005 and 2004.
The charge for taxation is based on the results for the year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settles. Deferred tax is
charges or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity.
-11-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Income taxes, (continued)
- -------------------------
Deferred tax assets and liabilities are offset when they related to income taxes
levied by the same taxation authority and the Company intends to settle its
current ax assets and liabilities on a net basis.
The Company is governed by the Income Tax Law of the People's Republic of China
(PRC) concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws (the Income Tax Laws). Under the Income Tax Laws,
foreign investment enterprises (FIE) generally are subject to an income tax at
an effective rate of 33% (30% state income taxes plus 3% local income taxes) on
income as reported in their statutory financial statements after appropriate tax
adjustments unless the enterprise is located in specially designated regions of
cities for which more favorable effective tax rates apply. Upon approval by the
PRC tax authorities, FIE's scheduled to operate for a period of 10 years or more
and engaged in manufacturing and production may by exempt from income taxes for
two years, commencing with their first profitable year of operations, after
taking into account any losses brought forward from prior years, and thereafter
with a 50% exemption for the next three years.
From the Company's inception in the year 1998 through the year 2004, the Company
adopted the Tax Package Policy granted by the local Government, which required
the Company to pay its tax to the appropriate taxing authority based upon the
annual fixed amount set forth by the local County Government. The Company did
not obtain any written approval of the Tax Package Policy from the local County
Government. However as of the date of this audit report, the Company has not
been notified for any additional tax payment.
In September 2004, the Company became a wholly owned foreign company and was
granted by the local government for benefit of state income tax exemption for
year 2004 and 2005 and 50% exemption for 2006, 2007 and 2008. In addition, the
Company is located in a Special Economic Zone and the PRC tax authority has
offered a special income tax rate of 7.5% for the companies being awarded the
"High Technology Enterprise" status. As of the date of this audit report, the
Company has not applied for the tax benefit offered for the "High Technology
Enterprise". With the approval of the local government, the Company would became
subject to income tax at a reduced rate of 7.5 % for 2006, 2007 and 2008 after
the two-year 100% exemption for income taxes had expired . The Company is not
subject to any local income tax of 3% until its exemption and reduction periods
expire in 2009.
-12-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Income taxes, (continued)
- -------------------------
During years ending December 31, 2005 and 2004 there was no provision for income
taxes due to the income tax exemption.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate for the years ended December 31:
2005 2004
---------- ----------
U.S. Statutory rates 34.0 % 34.0 %
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 33.0 33.0
China income tax exemption (33.0) (33.0)
---------- ----------
Effective income tax rates -- % -- %
========== ==========
The estimated tax savings due to the tax exemption for the years ending December
31, 2005 and 2004 amounted to $1,696,878 and $1,341,971, respectively.
Value Added Tax
- ---------------
Enterprises or individuals who sell commodities, engage in repair and
maintenance or import and export goods in the PRC are subject to a value added
tax in accordance with Chinese laws. The value added tax standard rate is 17% of
the gross sales price. A credit is available whereby VAT paid on the purchases
of semi-finished products or raw materials used in the production of the
Company's finished products can be used to offset the VAT due on sales of the
finished product.
From the Company's inception in the year 1998 through the year 2004, the Company
adopted the Tax Package Policy granted by the local Government, which requires
the Company to pay its tax to the appropriate taxing authority based upon the
annual fixed amount set forth by the local County Government. The Company did
not obtain any written approval of the Tax Package Policy from the local County
Government. However As of the date of this audit report, the Company has not
been notified for any additional tax payment. The Tax Package Policy was
terminated starting January 1, 2005. The Company is subject to the value added
tax at the standard rate of 17% on the gross sales price of all products sold
within the PRC.
-13-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, (continued)
Recently issued accounting pronouncements
- -----------------------------------------
In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 includes new guidance for evaluating and recording impairment losses on
debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB issued Staff Position EITF 03-1-1, which delays the effective date until
additional guidance is issued for the application of the recognition and
measurement provisions of EITF 03-1 to investments in securities that are
impaired; however, the disclosure requirements are effective for annual periods
ending after June 15, 2004. The adoption of the pronouncement did not have a
material impact on the Company's financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandle costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities.
The provisions of SFAS 151 shall be applied prospectively and are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005, with
earlier application permitted for inventory costs incurred during fiscal years
beginning after the date this Statement was issued. The Company's adoption of
SFAS No. 151 is not currently expected to have a material impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods beginning after June 15, 2005. The
revised standard requires, among other things that compensation cost for
employee stock options be measured at fair value on the grant date and charged
to expense over the employee's requisite service period for the option. Due to
the absence of observable market prices for employee stock options, the standard
indicates that the fair value of most stock options will be determined using an
option-pricing model. The Company's adoption of SFAS No. 123(R) is not currently
expected to have a material impact on the Company's financial position or
results of operations.
-14-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, continued
Recently issued accounting pronouncements, continued
- ----------------------------------------------------
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company's adoption of SFAS No. 153 is not
expected to have a material impact on the Company's financial position or
results of operations.
In March 2005, the FASB published FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that the term,
conditional asset retirement obligations, as used in SFAS No. 143, "Accounting
for Asset Retirement Obligations," refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. The interpretation also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. This interpretation
is effective no later than the end of the Company's fiscal 2006. The adoption of
this Interpretation is not expected to have a material effect on the Company's
financial position or results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable. SFAS No.
154 enhances the consistency of financial information between periods. SFAS No.
154 will be effective beginning with the Company's first quarter of fiscal year
2006. The Company does not expect that the adoption of SFAS No. 154 will have a
material impact on its results of operations, financial position or cash flows.
-15-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies, continued
Recently issued accounting pronouncements, continued
- ----------------------------------------------------
In June 2005, the EITF reached a consensus on Issue No. 05-06, "Determining the
Amortization Period for Leasehold Improvements" (EITF 05-06). EITF 05-06
provides guidance for determining the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception
of a lease, collectively referred to as subsequently acquired leasehold
improvements). EITF 05-06 provides that the amortization period used for the
subsequently acquired leasehold improvements to be the lesser of (a) the
subsequently acquired leasehold improvements' useful lives, or (b) a period that
reflects renewals that are reasonably assured upon the acquisition or the
purchase. EITF 05-06 is effective on a prospective basis for subsequently
acquired leasehold improvements purchased or acquired in periods beginning after
the date of the FASB's ratification, which was on June 29, 2005. The Company
does not anticipate that EITF 05-06 will have a material impact on its results
of operations.
In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed Interpretation "Accounting for Uncertain Tax Positions--an
interpretation of FASB Statement No. 109." Under the proposed Interpretation, a
company would recognize in its financial statements its best estimate of the
benefit of a tax position, only if the tax position is considered probable of
being sustained on audit based solely on the technical merits of the tax
position. In evaluating whether the probable recognition threshold has been met,
the proposed Interpretation would require the presumption that the tax position
will be evaluated during an audit by taxing authorities. The proposed
Interpretation would be effective as of the end of the first fiscal year ending
after December 15, 2005, with a cumulative effect of a change in accounting
principle to be recorded upon the initial adoption. The proposed Interpretation
would apply to all tax positions and only benefits from tax positions that meet
the probable recognition threshold at or after the effective date would be
recognized. The Company is currently analyzing the proposed Interpretation and
has not determined its potential impact on our Consolidated Financial
Statements. While we cannot predict with certainty the rules in the final
Interpretation, there is risk that the final Interpretation could result in a
cumulative effect charge to earnings upon adoption, increases in future
effective tax rates, and/or increases in future interperiod effective tax rate
volatility.
In October 2005, FASB Staff Position (FSB) FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" was issued. This FSP concluded that
rental costs associated with ground or building operating leases that are
incurred during a construction period be expensed. The guidance in the FSP is
required to be applied to the first reporting period beginning after December
15, 2005. The adoption of this pronouncement is not expected to have a material
impact on the Company's financial position or results of operations.
Note 3 - Supplemental disclosure of cash flow information
No Income taxes were paid for the years ended December 31, 2005 and 2004,
respectively. Interest paid for the years ended December 31, 2005 and 2004
amounted to $76,797 and $40,048 respectively
-16-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 4 - Accounts receivable and sales -related party
The Company sold its products to its related company, Liaoning Xiehe Industry
Ltd which was 100% directly and indirectly owned by the shareholders of the
Company. The total sales for the years ended December 31, 2005 and 2004 amounted
to $83,033 and $851,870, respectively. Accounts receivable from this related
company amounted to $23,800 and $17,430 as of December 31, 2005 and 2004
respectively.
Note 5 - Advances to suppliers
Advances to suppliers - short term represent partial payments for deposits on
inventory purchases, plant and equipment purchases amounted to $1,046,095 and
$232,859 fro the years ended December 31, 2005 and 2004, respectively.
Advances to suppliers - long term represent the payments for acquiring
production rights and medical permits which the management believes will be
completed beyond one financial year. The long - term advances to suppliers
amounted to $434,000 and $423,500 as of December 31, 2005 and 2004,
respectively.
Note 6 - Short loans - bank
Short term loans - bank represent amounts due to various banks which are due on
demand or normally within one year. These loans can be renewed with the banks.
The Company had a total of $2,480,000 and $1,815,000 short term bank loans as of
December 31, 2005 and 2004, respectively and consisted of the following:
2005 2004
---------- ----------
Loan from China Citic Bank, Shenyang branch due
March 28, 2006. Monthly interest only payment at
5.58% per annum, secured by a buliding
valued at RMB 15,327,968 $1,240,000 $ 605,000
Loans from Agriculture Bank, Zhongshan Branch, due
July 30, 2006. Monthly interest only payment at
5.580% per annum, secured by buildings and
and land use rights 620,000 605,000
Loans from Agriculture Bank, Zhongshan Branch, due
July 30, 2006. Monthly interest only payment at
5.580% per annum, secured by buildings and 620,000 605,000
and land use rights
---------- ----------
Totals $2,480,000 $1,815,000
========== ==========
The two loans in the amount of $1,240,000 from China Agriculture Bank expired in
July 2005 and were verbally renewed to July 28, 2006.
-17-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 6 - Short loans - bank, continued
In 2004 China Citic Bank made a loan to the Company to fund operations and to
fund the cost of the Company's attempt to be listed on the Singapore stock
exchange. In 2005 the Company has changed its target market to be listed on a US
stock exchange. China Citic Bank loaned the Company additional funds and the
loan is due by March 2006. In 2006 the Bank has verbally renewed this loan for
an additional year and the Company is in the process of obtaining a new loan
agreement.
Note 7 - Reserves and dividends
The laws and regulations of the People's Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserve. The statutory
reserves include the surplus reserve fund, the common welfare fund, and the
enterprise fund.
Statutory reserve fund
- ----------------------
The Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company's registered
capital.
The transfer to this reserve must be made before distribution of any dividends
to shareholders. For the year ended December 31, 2005, the Company transferred
$514,206 to this reserve which represents 10% of the current year's net income
determined in accordance with PRC accounting rules and regulations. The surplus
reserve fund is non-distributable other than during liquidation and can be used
to fund previous years' losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered capital.
Common welfare fund
- -------------------
The Company is required to transfer 5% to 10% of its net income, as determined
in accordance with the PRC accounting rules and regulations, to the statutory
common welfare fund. This fund can only be utilized on capital items for the
collective benefit of the Company's employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities. This fund
is non-distributable other than upon liquidation. The transfer to this fund must
be made before distribution of any dividend to shareholders. For the year ended
December 31, 2005, the directors authorized, subject to shareholders' approval,
the transfer of $257,103, which amounted to 5% of current year's net income, to
the statutory reserve fund.
The Chinese government restricts distributions of registered capital and the
additional investment amounts required by the Chinese joint ventures. Approval
by the Chinese government must be obtained before distributions of these amounts
can be returned to the shareholders.
-18-
SHENYANG ENSHI PHARMACEUTICAL CO., LTD
NOTES TO THE FINANCIAL STATEMENTS
Note 7 - Reserves and dividends, continued
Dividends
- ---------
Pursuant to the board of director's resolution dated August 12, 2005 and
September 1, 2004 , total dividends of RMB 22,521,193 and RMB 22,157,771 were
declared to the shareholder. $831,036 and 2,096,097 dividend payable were
outstanding as of December 31, 2005 and 2004 respectively.
Note 8 - Retirement benefit plans
Regulations in the People's Republic of China require the Company to contribute
to a defined contribution retirement plan for all permanent employees. All
permanent employees are entitled to an annual pension equal to their basic
salary at retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at range from 15% to 20% of the
monthly basic salaries of the current employees. For the years ended December
31, 2005 and 2004, the Company made pension contributions in the amount of
$34,872 and $47,670, respectively.
-19-
(b) Pro Forma Financial Information as required by Article 11 of Regulation S-X
(UNAUDITED).
Pro Forma Financial Information as required by
Article 11 of Regulation S-X (UNAUDITED)
On May 16, 2006 we entered into a purchase agreement which became effective on
June 5, 2006, under which we acquired 100% of the controlling ownership interest
of RACP Pharmaceutical Holdings LTD. ("RACP") which owns a 100% equity interest
in Shengyang Enshi Pharmaceutical Limited Company ("Enshi").
The Company paid approximately $14.7 million to acquire 100% interest in both
RACP and Enshi. Consideration included $12 million cash and $2.7 million in
warrants. We applied the Black-Scholes model method to determine the value of
the warrants. However, in October 2006, the Company determined certain
contingencies were not met, therefore, $625,000 of the purchase price in escrow
is being returned to the Company. As a result, the purchase price was reduced
to $14,065,000, pursuant to FAS 141, Business Combinations, paragraph 27.
Due to this purchase of a wholly-owned interest in Enshi, the pro forma effects
on the Company's consolidated balance sheet and consolidated statement of income
from continuing operation contemplated by the Purchase Agreement as if it had
occurred on January 1, 2005 are shown below:
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
Pro forma
Historical Adjustments (1) Pro forma
----------- ------------ -----------
Current Assets $12,744,880 $ 4,220,081 $16,964,961
Plant and Equipment, net 5,699,211 8,340,664 14,039,875
Other Assets 8,176,983 6,098,021 14,275,004
----------- ----------- -----------
Total Assets $26,621,074 $18,658,766 $45,279,840
=========== =========== ===========
Total Current Liabilities $15,876,834 $ 4,593,766 $20,470,600
Total Long Term Liabilities 1,017,102 -- 1,017,102
----------- ----------- -----------
Total Liabilities 16,893,936 4,593,766 21,487,702
Minority Interest 4,458,414 -- 4,458,414
Total Shareholders' equity 5,268,724 14,065,000 19,333,724
----------- ----------- -----------
Total Liabilities and Shareholders' Equity $26,621,074 $18,658,766 $45,279,840
=========== =========== ===========
(1) This column represents the net assets acquired from Enshi on June 5, 2006,
the closing date of the acquisition.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
Pro forma
Historical Adjustments(2) Pro forma
----------- ----------- -----------
Revenue $23,705,430 $11,351,050 $35,056,480
Cost of Goods Sold 18,527,841 4,783,389 23,311,230
----------- ----------- -----------
Gross Profit 5,177,589 6,567,661 11,745,250
Operating Expenses 3,414,366 1,425,605 4,839,971
Income Taxes 502,139 -- 502,139
Minority Interest 597,838 -- 597,838
----------- ----------- -----------
Income (Loss) from Continuing Operation $ 663,246 $ 5,142,056 $ 5,805,302
=========== =========== ===========
Income (Loss) per share of Common Stock from
Continuing Operation:
Basic $ 0.03 $ 0.19 $ 0.22
=========== =========== ===========
Diluted $ 0.02 $ 0.19 $ 0.21
=========== =========== ===========
Weighted Averaged Number of Shares Outstanding:
Basic 26,483,640 26,483,640 26,483,640
=========== =========== ===========
Diluted 27,096,558 27,096,558 27,096,558
=========== =========== ===========
(2) This column represents the operating result of Enshi for the year ended
December 31, 2005.
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006
Pro forma
Historical Adjustments (3) Pro forma
------------ ------------ ------------
Revenue $ 25,980,820 $ 1,808,486 $ 27,789,306
Cost of Goods Sold 18,834,077 1,789,987 20,624,064
------------ ------------ ------------
Gross Profit 7,146,743 18,499 7,165,242
Operating Expenses 7,693,493 505,244 8,198,737
Income Taxes 122,967 322,534 445,501
Minority Interest 1,145,157 -- 1,145,157
------------ ------------ ------------
Income (Loss) from Continuing Operation $ (1,814,874) $ (809,279) $ (2,624,153)
============ ============ ============
Income (Loss) per share of Common Stock from
Continuing Operation:
Basic $ (0.05) $ (0.02) $ (0.08)
============ ============ ============
Diluted $ (0.05) $ (0.02) $ (0.07)
============ ============ ============
Weighted Averaged Number of Shares Outstanding:
Basic 34,973,084 34,973,084 34,973,084
============ ============ ============
Diluted 35,903,084 35,903,084 35,903,084
============ ============ ============
(3) This column represents the operating result of Enshi for the period ended
June 5, 2006, the closing date of the acquisition.