-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CAXxpNecwlSC3dm2QudUOkPEsLdPyO0VNf7Kw5DNHuURBY0FJ2oMvXN4imDmoxzY I7asoxefHgs2/aiCM6NQRA== 0000949353-04-000300.txt : 20040527 0000949353-04-000300.hdr.sgml : 20040527 20040527123436 ACCESSION NUMBER: 0000949353-04-000300 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040524 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA PHARMACEUTICALS CORP CENTRAL INDEX KEY: 0001081823 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 980348508 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28879 FILM NUMBER: 04834296 BUSINESS ADDRESS: STREET 1: 3753 HOWARD HUGHES PKWY STREET 2: #200 CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 8185911330 MAIL ADDRESS: STREET 1: 3753 HOWARD HUGHES PKWY STREET 2: #200 CITY: LAS VEGAS STATE: NV ZIP: 89109 FORMER COMPANY: FORMER CONFORMED NAME: WILMINGTON REXFORD INC DATE OF NAME CHANGE: 20020214 FORMER COMPANY: FORMER CONFORMED NAME: E TREND NETWORKS INC /DE DATE OF NAME CHANGE: 20010221 FORMER COMPANY: FORMER CONFORMED NAME: COOL ENTERTAINMENT INC DATE OF NAME CHANGE: 20000112 8-K 1 f8k-052404.txt FORM 8-K 5-24-04 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): MAY 24, 2004 CHINA PHARMACEUTICALS CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 0-28879 98-0348508 (State or other jurisdiction of (Commission (IRS Employer incorporation) File Number) Identification No.) 3753 HOWARD HUGHES PARKWAY, SUITE 200, LAS VEGAS, NEVADA 89109 (Address of principal executive offices) (Zip Code) (818) 591-1330 Registrant's telephone number, including area code NOT APPLICABLE (Former name or former address, if changed since last report) ITEM 1. CHANGES IN CONTROL OF REGISTRANT See the disclosure in Item 2. below. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On May 24, 2004, the registrant closed its acquisition of 87.475% of Zhejiang University Pharmaceutical Co., Ltd., a Sino-foreign equity joint venture ("Zheda Pharmacy"), pursuant to the terms of an agreement dated as of May 24, 2004 with the owners of Sheung Tai Investments Limited. The registrant issued 13,848,220 shares of its common stock to the owners of Sheung Tai Investments Limited for 100% ownership of that entity. Sheung Tai Investments Limited owns 87.475% of Zheda Pharmacy. Of the remaining 12.525%, 7.5% is owned by Zhejiang University Enterprises Group (Holding) Co., Ltd., which is a wholly-owned subsidiary of Zhejiang University, and 5.025% is owned by five different hospitals that are also part of Zhejiang University. Also on May 24, 2004, the registrant issued 31,151,780 shares to China Merchant DiChain Investment Holdings Limited and its designees for approximately $290,000 in debt conversion and assumption of costs of the transaction. There are now 46,160,733 shares of common stock of the registrant issued and outstanding. Except as otherwise noted, the following table sets forth certain information with respect to beneficial ownership of the registrant's shares as of April 22, 2004, adjusted for the consummation of the acquisition of Zheda Pharmacy: (a) each stockholder known to be the beneficial owner of more than five percent, in the aggregate, of the outstanding registrant's shares, (b) each director and executive officer of the registrant as of the date hereof, and (c) all executive officers and directors as a group.
- --------------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES PERCENT OF ALL NAME OWNED OUTSTANDING SHARES(1) - --------------------------------------------------------------------------------------------------------------------- China Merchants DiChain Investment Holdings Limited 20,772,330 45.0% Units 3207-08, West Tower, Shun Tak Centre 168-200 Connaught Road Central, Hong Kong - --------------------------------------------------------------------------------------------------------------------- Anmer Capital Limited 6,407,110 13.9% 172 Kaixuan Road, Jianggan District, Hangzhou Zhejiang Province, The People's Republic of China - --------------------------------------------------------------------------------------------------------------------- Good Achieve Investments Limited 3,005,064 6.5% Room 4905, Office Tower, Convention Plaza 1 Harbour Road, Wanchai, Hong Kong - --------------------------------------------------------------------------------------------------------------------- Aaron ZHU Xiaojun(2) 20,772,330 45.0% - --------------------------------------------------------------------------------------------------------------------- Dr. FAN Di(2) 20,772,330 45.0% - --------------------------------------------------------------------------------------------------------------------- KWOK Yam Sheung 0 -- - --------------------------------------------------------------------------------------------------------------------- Officers and Directors as a group (3 persons) 20,772,330 45.0% - --------------------------------------------------------------------------------------------------------------------- - ------------------ 1 The percentages shown are based on 46,160,733 shares, being the total of the issued and outstanding shares of the registrant as of April 22, 2004 and giving effect to the issuance of 45,400,000 shares upon completion of the acquisition of Zheda Pharmacy. 2 China Merchants DiChain Investment Holdings Limited is the record owner of these 20,772,330 shares of common stock of the registrant. Dr. FAN Di, an officer and director of the registrant, is also a director of China Merchants 2 DiChain Investment Holdings Limited and both Dr. FAN Di and Aaron ZHU Xiaojun, an officer and director of the registrant, are directors of the sole controlling shareholder of China Merchants DiChain Investment Holdings Limited. Accordingly, they are deemed to be beneficial owners of these shares.
Zhejiang University Pharmaceutical Co., Ltd. was founded in 1969 in Hangzhou City, Zhejiang Province, PRC. It was formally incorporated on March 8, 2000 in the People's Republic of China ("PRC") and was later converted into a sino-foreign joint venture enterprise in the PRC. Located in M10-19-2, Xinyaogang, Hangzhou Economic & Technological Development Zone, Zheda Pharmacy is mainly engaged in research and development, production, wholesale and retail of oral liquid, capsules, medical optical instruments and optical spyholes, health food, and biological medicines. On October 17, 2003, Zheda Pharmacy set up a wholly-owned subsidiary, Zhejiang University Pharmaceutical Sales Co., Ltd, a company incorporated in the PRC. As the sole pharmaceutical enterprise of Zhejiang University, Zheda Pharmacy possesses advantages in talents, research and development strength, and hospital resources. It aims to develop into a pharmaceutical conglomerate with a wide range of sectors: pharmaceutical research and development, pharmaceutical production and marketing, and medicare network within 2006. In addition to the headquarters in Xinyaogang, Hangzhou Economic & Technological Development Zone, a 7.4 hectares modern production base for biological and natural medicines in line with GMP standards is under construction and will be completed by the end of June 2004. To build up a better marketing network in China, Zheda Pharmacy has set up two important pharmaceutical marketing corporations since January 2004: (1) Zhejiang University Pharmaceutical Marketing Co., Ltd: this subsidiary company is located in Hangzhou City and has passed GSP standard in 2003. Its main business is marketing over 300 kinds of products, including biological products, prepared Chinese medicines and western medicines. The sales volume for the year of 2004 is expected to reach RMB 220 million (approximately US$26 million). (2) Zhejiang University Pharmaceutical Gushi Medical Co. Ltd: the subsidiary company in Gushi City of Henan province is marketing above 300 kinds of products, covering the areas of North China, Central China and Southwest China. The sales volume for Year 2004 is expected to reach RMB100 million (approximately US$12 million). These two pharmaceutical marketing subsidiaries will be engaged in marketing of products of Zheda Pharmacy and of world-famous medical products as well, mainly in eye drops, and other medicines for immunity-increase, anti-colds, anti-women's menopause, and anti-decrepitude anti-cancer, and medicines for cardiovascular diseases. The total sales volume in China for the year of 2004 is expected to reach RMB 300 million (approximately US$36 million), RMB 600 million (approximately US$72 million) for 2005, and RMB1 billion (approximately US$120 million) for 2006. The marketing network abroad will be set up in late 2004, and, the sales volume abroad is projected to reach RMB 5 million dollars (approximately US$600,000) in 2005. 3 Management of the registrant consists of the following: Dr. FAN Di, Chief Executive Officer and Director since February 2004 Dr. FAN is currently the Chairman and Chief Executive Officer of China Merchants DiChain (Asia) Limited, a company listed on the Stock Exchange of Hong Kong, Limited. Since April 2003, Dr. FAN has been the Chairman, Chief Executive Officer, and an executive director of DF China Technology Inc., a publicly-traded company, where he is responsible for overseeing the strategic development of that company. From December 1999 to July 2002, he worked for China Merchants Group as an Executive Director and Chief Financial Officer and has substantial experience in financial management and business management. He holds a Ph.D. in Business Administration from the University of Southern California, U.S.A. Mr. Aaron ZHU Xiaojun, President and Director since February 2004 Mr. Zhu has extensive experience in the fields of business development, marketing, and finance with companies based in the United States. Mr. Zhu served as a financial analyst for U.S. Media Corporation from 1992 to 1994, and a financial controller and ERP/business consultant for Fourth Shift Corporation in Asia and in the United States from 1996 to 1997. Mr. Zhu also served as a vice president of operations at Harrington Signal Corporation in the United States from January 1997 to February 2000, responsible for strategic planning, corporate finance, information technology and supply chain management. Since April 2003, he has been an executive director of DF China Technology Inc. He is currently in charge of corporate strategic marketing, business development, and investment financing for DF China Technology Inc. and its subsidiaries. Mr. Zhu holds a Bachelor Degree in Business Administration from Shenzhen University, located in the People's Republic of China, and an MBA degree from Regent University, in the United States. Mr. KWOK Yam Sheung, Corporate Secretary Mr. Kwok has been the Company Secretary of China Merchants DiChain (Asia) Limited, a company listed on the Stock Exchange of Hong Kong Limited, since March 2001. He is a fellow member of the Institute of Chartered Secretaries and Administrators in the United Kingdom and a fellow member of the Hong Kong Institute of Company Secretaries. He has worked for a number of public listed companies as company secretaries and also has extensive experience in the property industry. Since April 2003, he has been a director of DF China Technology Inc. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial statements of businesses acquired: See exhibits 99.1 and 99.2 below. (b) Pro forma financial information: See exhibit 99.3 below. 4 (c) Exhibits: ------------------------------------------------------------------------ REGULATION S-B NUMBER DOCUMENT ------------------------------------------------------------------------ 2.1 Sale and Purchase Agreement in relation to the entire issued share capital of Sheung Tai Investments Limited dated May 24, 2004 ------------------------------------------------------------------------ 99.1 Audited financial statements of Zhejiang University Pharmaceutical Co., Ltd. for the Years ended December 31, 2003 and 2002 ------------------------------------------------------------------------ 99.2 Unaudited financial statements of Zhejiang University Pharmaceutical Co., Ltd. for the three months ended March 31, 2004* ------------------------------------------------------------------------ 99.3 Pro Forma Combined Balance Sheet and Statement of Operations for Zhejiang University Pharmaceutical Co., Ltd. and China Pharmaceuticals Corporation as of March 31, 2004 and for the three months then ended and Statement of Operations for the year ended December 31, 2003* ------------------------------------------------------------------------ ---------------- *to be filed by amendment 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 PHARMACEUTICALS CORPORATION May 26, 2004 By: /s/ AARON ZHU ------------------------------------ Aaron Zhu, President 5 EX-2 2 exh2-1_agmt.txt EXH 2-1 SALE AND PURCHASE AGMT EXHIBIT 2.1 SALE AND PURCHASE AGREEMENT IN RELATION TO THE ENTIRE ISSUED SHARE CAPITAL OF SHEUNG TAI INVESTMENTS LIMITED DATED MAY 24, 2004 DATED MAY 24, 2004 (1) GOOD ACHIEVE INVESTMENTS LIMITED (2) PROFIT SPRING INTERNATIONAL LIMITED (3) ANMER CAPITAL LIMITED (4) DUNKLEY INTERNATIONAL LIMITED (5) NATION EXPRESS LIMITED (6) HAN HONG LU (7) MA LEUNG (8) ALAN LI (9) CHEN MING YOU (10) GUO JIANJUN AND (11) CHINA PHARMACEUTICALS CORPORATION ------------------------------------------------------ SALE AND PURCHASE AGREEMENT IN RELATION TO THE ENTIRE ISSUED SHARE CAPITAL OF SHEUNG TAI INVESTMENTS LIMITED ------------------------------------------------------ STEPHENSON HARWOOD & LO 18TH FLOOR, EDINBURGH TOWER THE LANDMARK 15 QUEEN'S ROAD CENTRAL HONG KONG TEL: (852) 2868 0789 FAX: (852) 2868 1504 REF: JKC/XXD/BA2092H/OO012G05.DOC INDEX 1. INTERPRETATION........................................................... 2 2. SALE AND PURCHASE OF THE SALE SHARES......................................4 3. CONSIDERATION.............................................................5 4. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE VENDORS AND THE WARRANTORS................................................5 5. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE PURCHASER.................................................................7 6. COMPLETION................................................................9 7. POST COMPLETION EFFECT...................................................10 8. RESTRICTIVE COVENANTS....................................................10 9. FURTHER ASSURANCE AND ASSISTANCE.........................................12 10. DOCUMENTS CONSTITUTING AGREEMENT.........................................12 11. CONFIDENTIALITY..........................................................12 12. NOTICES AND OTHER COMMUNICATIONS ........................................12 13. COSTS AND EXPENSES ......................................................13 14. GOVERNING LAW AND JURISDICTION...........................................13 SCHEDULE 1 - PART A - SUBSIDIARIES.........................................................14 PART B - PARTICULARS OF THE SUBSIDIARIES......................................15 SCHEDULE 2 - PART A - PARTICULARS OF THE BVI COMPANY.......................................18 PART B - CERTIFICATE OF INCUMBENCY OF THE BVI COMPANY.........................19 SCHEDULE 3 - DEFINITION OF "TAXATION".........................................20 SCHEDULE 4 - THE WARRANTIES...................................................21 SCHEDULE 5 - PART A - THE PURCHASER'S WARRANTIES...........................................27 PART B - THE PERCENTAGES OF SHAREHOLDING REFRESENTED BY THE CONSIDERATION SHARES..........................................................28 SCHEDULE 6 - THE ACCOUNTS.....................................................29 SCHEDULE 7 - FORM OF BOARD RESOLUTIONS........................................30 SCHEDULE 8 - MEDICINES AND OTHER PRODUCTS FOR WHICH AN APPROVAL NUMBER HAS BEEN OBTAINED.............................................................33 SCHEDULE 9 - PROJECTS WHICH ARE UNDER RESEARCH AND DEVELOPMENT................34 SCHEDULE 10 - PART A - TRADEMARKS...........................................................35 PART B - PATENT APPLICATIONS..................................................35 SCHEDULE 11 - CORRESPONDENCE DETAILS..........................................36 THIS AGREEMENT IS MADE THIS 24TH DAY OF MAY, 2004 BETWEEN (1) GOOD ACHIEVE INVESTMENTS LIMITED, a company incorporated in the British Virgin Islands whose registered office is situate at the offices of Offshore Incorporations Limited, P.O.Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands ("GOOD ACHIEVE"); (2) PROFIT SPRING INTERNATIONAL LIMITED, a company incorporated in the British Virgin Islands whose registered office is situate at the offices of Offshore Incorporations Limited, P.O.Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands ("PROFIT SPRING"); (3) ANMER CAPITAL LIMITED, a company incorporated in the British Virgin Islands whose registered office is situate at the offices of Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O.Box 146, Road Town, Tortola, British Virgin Islands ("ANMER"); (4) DUNKLEY INTERNATIONAL LIMITED, a company incorporated in the British Virgin Islands whose registered office is situate at the offices of Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O.Box 146, Road Town, Tortola, British Virgin Islands ("DUNKLEY"); (5) NATION EXPRESS LIMITED, a company incorporated in the British Virgin Islands who registered office is situate at the offices of Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O.Box 146, Road Town, Tortola, British Virgin Islands ("NATION EXPRESS"); (Good Achieve, Profit Spring, Anmer, Dunkley and Nation Express together known as the "VENDORS" or individually the "VENDOR") (6) HAN HONG LU (PRC identity card number: 330104580914161) of 172 Kaixuan Lu, Jianggan District, Hangzhou City, Zhejiang Province, the PRC ("MR. HAN"); (7) MA LEUNG (Hong Kong identity card number: K968915(A)) of Room 4905, Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong ("MR. MA"); (8) ALAN LI (Hong Kong identity card number: P544292(1)) of 6D Borita, 135-143 Third Street, Sai Ying Pun, Hong Kong ("MR. LI"); (9) CHEN MING YOU (PRC identity card number: 420106581220083) of Room 801, Block 2, Defu Yuan (Zone A), Dexing Garden, Shenzhen, Guangdong Province, the PRC ("MR. CHEN"); (10) GUO JIANJUN (Hong Kong identity card number: P918183(4)) of 5/F Yee Kan Court, 12 Swatow Street, Wanchai, Hong Kong ("MR. Guo"); (Mr. Han, Mr. Ma, Mr. Li, Mr. Chen and Mr. Guo together known as the "WARRANTORS" or individually the "WARRANTOR"); and 1 (11) CHINA PHARMACEUTICALS CORPORATION, a company incorporated in Delaware whose registered office is situate at 615, South Dupont Highway, City of Dover, Zip Code 19901, County of Kent, Delaware, the United States of America and which has a correspondence address in Hong Kong at Units 3207 - 08, 32/F, West Tower, Shun Tak Centre, 168-200 Connaught Road Central, Hong Kong (the "PURCHASER"). PRELIMINARY (A) Mr. Han is the registered and beneficial owner of the entire issued share capital of Anmer. Mr. Ma is the registered and beneficial owner of the entire issued share capital of Good Achieve. Mr. Li is the registered and beneficial owner of the entire issued share capital of Dunkley. Mr. Chen is the registered and beneficial owner of the entire issued share capital of Profit Spring. Mr. Guo is the registered and beneficial owner of the entire issued share capital of Nation Express. The Vendors together are the registered and beneficial owners of the entire issued share capital of the BVI Company. (B) The Vendors and the Purchaser have agreed to a sale and purchase of the Sale Shares on the following terms and conditions. IT IS AGREED AS FOLLOWS :- 1. INTERPRETATION 1.1 In this Agreement, unless the context otherwise requires, the following expressions shall have the respective meanings set opposite thereto:- "ACCOUNTS" means the audited consolidated accounts of Zhejiang University Pharmaceutical Company Limited and its subsidiary which comprise consolidated balance sheets, statements of operations, statements of stockholders' equity, statements of cashflows and all the notes thereto for each of the two years ended 31st December, 2002 and 31st December, 2003, a copy of which is set out in Schedule 6; "ASSOCIATES" in relation to each Warrantor, means his spouse and children under 18 and any company in which he and/or his family interests taken together are directly or indirectly interested so as to exercise or control the exercise of 30 per cent. or more of the voting power at general meetings or to control the composition of a majority of the board of directors; and in relation to each Vendor, means any company in which it is directly or indirectly interested so as to exercise or control the exercise of 30 per cent. or more of the voting power at general meetings or to control the composition of a majority of the board of directors; "BVI COMPANY" means Sheung Tai Investments Limited, brief particulars of which are set out in Part A of Schedule 2; "COMPLETION" means the completion of the sale and purchase of the Sale Shares in accordance with the provisions of this Agreement; "COMPLETION DATE" means the date on which Completion takes place; 2 "CONSIDERATION SHARES" means a total of 13,848,220 shares of US$0.0001 each in the capital of the Purchaser or (where the context otherwise indicates) any of such share; "DOLLARS" or "HK$" means Hong Kong dollars; "GROUP" means the BVI Company and the Subsidiaries and "GROUP COMPANY" and "MEMBER OF THE GROUP" shall be construed accordingly; "HONG KONG" means the Hong Kong Special Administrative Region of the PRC; "INTELLECTUAL PROPERTY" means patents, trade marks and service marks, rights in designs, trade or business names and copyrights (whether or not any of these is registered and including applications for registration of any such thing) and rights under licences and consents in relation to any such thing and all rights or forms of protection of a similar nature or having equivalent or similar effect to any of these which may subsist anywhere in the world; "LAST ACCOUNTING DATE" means 31st December, 2003; "LISTING RULES" means the OTC Bulletin Board Rules; "PRC" means the People's Republic of China; "RELEVANT CAPACITY" means for his own account or for that of any person, firm or company other than the Purchaser or the Group and whether through the medium of any company which is his Associate (for which purpose there shall be aggregated with his shareholding or ability to exercise control the shares held or controlled by any of his Associates) or as principal, partner, director, employee, consultant or agent; "RESTRICTED PERIOD" means after Completion, the 12-month period commencing on the date on which any Vendor ceases to be a shareholder of the Purchaser; "SALE SHARES" means 1,000 shares of US$1.00 in the capital of the BVI Company representing the entire issued share capital of the BVI Company, of which 477 shares are held by Anmer, 206 shares are held by Good Achieve, 154 shares are held by Profit Spring, 100 shares are held by Dunkley and 63 shares held by Nation Express; "STOCK EXCHANGE" means the OTC Bulletin Board; "SUBSIDIARIES" means the companies whose name and registered office addresses are set out in Schedule 1; "US$" means the United States dollars; and "WARRANTIES" means the warranties representations and undertakings set out in Schedule 4 and referred to in Clause 4.1. 3 1.2 Any reference to a Clause, sub-clause or Schedule (other than to a Schedule to a statutory provision) is a reference to a Clause or a sub-clause or Schedule to this Agreement and the Schedules form part of and are deemed to be incorporated into this Agreement. 1.3 Words denoting the singular number or the masculine shall include the plural or the feminine or neuter and vice versa. 1.4 Any reference to "SUBSIDIARIES" has the meaning ascribed to it in the Companies Ordinance (Cap 32) of the Laws of Hong Kong. Any reference to an ordinance, statute, legislation or enactment shall be construed as a reference to such ordinance, statute, legislation or enactment as may be amended or re-enacted from time to time and for the time being in force. 1.5 The headings to the Clauses of this Agreement are for ease of reference only and shall be ignored in interpreting this Agreement. 2. SALE AND PURCHASE OF THE SALE SHARES 2.1 Good Achieve shall, as registered and beneficial owner sell to the Purchaser and the Purchaser, relying on the representations, warranties, undertakings and indemnities made or given by the Vendors and the Warrantors and subject to the terms and conditions contained in this Agreement, shall purchase from Good Achieve 206 Sale Shares free from all claims, charges, liens, encumbrances, equities and third party rights and together with all rights attached thereto and all dividends and distributions declared, paid or made in respect thereof after the Completion Date. 2.2 Profit Spring shall, as beneficial owner sell to the Purchaser and the Purchaser, relying on the representations, warranties, undertakings and indemnities made or given by the Vendors and the Warrantors and subject to the terms and conditions contained in this Agreement, shall purchase from Profit Spring 154 Sale Shares free from all claims, charges, liens, encumbrances, equities and third party rights and together with all rights attached thereto and all dividends and distributions declared, paid or made in respect thereof after the Completion Date. 2.3 Anmer shall, as beneficial owner sell to the Purchaser and the Purchaser, relying on the representations, warranties, undertakings and indemnities made or given by the Vendors and the Warrantors and subject to the terms and conditions contained in this Agreement, shall purchase from Anmer 477 Sale Shares free from all claims, charges, liens, encumbrances, equities and third party rights and together with all rights attached thereto and all dividends and distributions declared, paid or made in respect thereof after the Completion Date. 2.4 Dunkley shall, as beneficial owner sell to the Purchaser and the Purchaser, relying on the representations, warranties, undertakings and indemnities made or given by the Vendors and the Warrantors and subject to the terms and conditions contained in this Agreement, shall purchase from Dunkley 100 Sale Shares free from all claims, charges, liens, encumbrances, equities and third party rights and together with all rights attached thereto and all dividends and distributions declared, paid or made in respect thereof after the Completion Date. 2.5 Nation Express shall, as beneficial owner sell to the Purchaser and the Purchaser, relying on the representations, warranties, undertakings and indemnities made or given by the Vendors and the Warrantors and subject to the terms and conditions contained in this Agreement, shall purchase from Nation Express 63 Sale Shares free from all claims, charges, liens, encumbrances, equities 4 and third party rights and together with all rights attached thereto and all dividends and distributions declared, paid or made in respect thereof after the Completion Date. 2.6 Each of the Vendors hereby unconditionally and irrevocably waive any pre-emption rights which it may have in respect of the Sale Shares. 3. CONSIDERATION 3.1 The consideration for the sale by Good Achieve of the 206 Sale Shares shall be the allotment and issue by the Purchaser on the terms of Clause 3.6 to Good Achieve (or as Good Achieve may otherwise direct) of 3,005,064 Consideration Shares. 3.2 The consideration for the sale by Profit Spring of the 154 Sale Shares shall be the allotment and issue by the Purchaser on the terms of Clause 3.6 to Profit Spring (or as Profit Spring may otherwise direct) of 2,248,028 Consideration Shares. 3.3 The consideration for the sale by Anmer of the 477 Sale Shares shall be the allotment and issue by the Purchaser on the terms of Clause 3.6 to Anmer (or as Anmer may otherwise direct) of 6,407,110 Consideration Shares. 3.4 The consideration for the sale by Dunkley of the 100 Sale Shares shall be the allotment and issue by the Purchaser on the terms of Clause 3.6 to Dunkley (or as Dunkley may otherwise direct) of 1,357,125 Consideration Shares. 3.5 The consideration for the sale by Nation Express of the 63 Sale Shares shall be the allotment and issue by the Purchaser on the terms of Clause 3.6 to Nation Express (or as Nation Express may otherwise direct) of 830,893 Consideration Shares. 3.6 The Consideration Shares shall be allotted and issued as fully paid and shall rank pari passu in all respects with the existing issued ordinary shares in the capital of the Purchaser. Immediately after the allotment and issuance of the Consideration Shares, the Purchaser will have in total 46,160,733 shares of US$0.0001 in issue and the percentages of shares in the Purchaser represented by the Consideration Shares are set out in Part B of Schedule 5. 3.7 After this Agreement has been executed by the parties, the Vendors and the Purchaser shall sign any documents (undated) or procure the production of such documents as are required for Completion and deliver the same to Stephenson Harwood & Lo to arrange for Completion. 4. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE VENDORS AND THE WARRANTORS 4.1 Each of the Vendors and the Warrantors hereby represents, warrants and undertakes to the Purchaser (for himself and as trustee for each Group Company) in the terms of Schedule 4 (each of the Warranties being hereinafter referred to as a "WARRANTY" and together as the "WARRANTIES") and acknowledges that the Purchaser is entering into this Agreement in reliance upon the Warranties and that the Purchaser shall be entitled to treat the Warranties as conditions of this Agreement. 5 4.2 Each of the Warranties set out in each sub-paragraph of Schedule 4 hereto shall be separate and independent and save as expressly provided shall not be limited by reference to any other sub-paragraph or anything in this Agreement or the Schedules hereto. 4.3 The benefit of the Warranties may be assigned in whole or in part and without restriction by the person for the time being entitled thereto. 4.4 The Vendors and the Warrantors shall not (save only as may be necessary to give effect to this Agreement) do or allow and shall procure that no act or omission shall occur before Completion which would constitute a breach of any of the Warranties if they were given at the time of such act or omission and/or at Completion or which would make any of the Warranties inaccurate or misleading if they were so given and the Vendors and the Warrantors jointly and severally undertake to disclose to the Purchaser in writing any matter occurring prior to Completion which constitutes a breach of or is inconsistent with any of the Warranties forthwith upon becoming aware of the same. 4.5 In the event of it being found prior to Completion that any of the Warranties is incorrect or misleading or has not been fully carried out in any material respect, or in the event of any matter or thing arising or becoming known or being notified to the Purchaser which is inconsistent with any of the Warranties or any other provision of this Agreement or in the event of any of the Vendors or any of the Warrantors becoming unable or failing to do anything required to be done by him at or before Completion the Purchaser shall not be bound to complete this Agreement and the Purchaser may by notice rescind this Agreement without liability on its part. The right conferred on the Purchaser by this Clause is for the exclusive benefit of the Purchaser and in addition to and without prejudice to any other rights or remedies of the Purchaser (including any rights under the Misrepresentation Ordinance or any rights to claim damages or compensation from the Vendors and the Warrantors by reason of any such breach or non-fulfilment) and failure to exercise it shall not constitute a waiver of any such rights or remedies. 4.6 If in respect of or in connection with any breach of any of the Warranties any sum payable to the Purchaser by the Vendors and/or the Warrantors pursuant to this Agreement by way of compensation is subject to Taxation (as defined in Schedule 3), then such further amount shall be paid to the Purchaser by the Vendors so as to secure that the net amount received by the Purchaser is equal to the amount of the compensation due to it as aforesaid. 4.7 Each of the Vendors and the Warrantors undertake to compensate the Purchaser against all costs (including reasonable legal costs), expenses or other liabilities which the Purchaser may properly incur either before or after the commencement of any action in connection with:- 4.7.1 the settlement of any claim that any of the Warranties is untrue or misleading or has been breached; 4.7.2 any legal proceedings in which the Purchaser claims that any of the Warranties is untrue or misleading or has been breached and in which judgment is given for the Purchaser; or 4.7.3 the enforcement of any such settlement or judgment. 6 4.8 If any of the Vendors and the Warrantors defaults in the payment when due of any sum payable under this Agreement (whether determined by agreement or pursuant to an order of a court or otherwise), the liability of the Vendors and the Warrantors shall be increased to include interest on such sum from the date when such payment is due until the date of actual payment (as well after as before judgment) at a rate per annum of 2 per cent. above the prime rate from time to time of The Hongkong and Shanghai Banking Corporation Limited. Such interest shall accrue from day to day and shall be compounded annually. 4.9 Each of the Vendors and the Warrantors represents and warrants to the Purchaser that each of the Warranties is accurate in all respects and not misleading at the date of this Agreement and that if for any reason there is any interval of time between the time of this Agreement and Completion, the Warranties will continue to be accurate in all respects and not misleading at all times subsequent to the date of this Agreement up to and including the Completion Date as if repeated on each such day immediately before Completion. 4.10 Each of the Warranties shall, save where the context otherwise requires, be given in respect of each of the member of the Group. 4.11 In the absence of fraud, dishonesty or wilful concealment on the part of the Vendors and/or the Warrantors in respect of any potential liabilities under this Clause 4, no claim shall be brought by the Purchaser against the Vendors and/or the Warrantors unless notice of any such claim (specifying in reasonable detail the nature of the breach) has been given to the Vendors and the Warrantors on or prior to the of the expiry of the first 18-month period commencing on the Completion Date. 5. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF THE PURCHASER 5.1 The Purchaser hereby represents, warrants and undertakes to the Vendors in the terms of Schedule 5 (each of the Warranties being hereinafter referred to as a "PURCHASER'S WARRANTY" and together as the "PURCHASER'S WARRANTIES") and acknowledges that each of the Vendors is entering into this Agreement in reliance upon the Purchaser's Warranties and that each of the Vendors shall be entitled to treat the Purchaser's Warranties as conditions of this Agreement. 5.2 Each of the Purchaser's Warranties set out in each sub-paragraph of Schedule 5 hereto shall be separate and independent and save as expressly provided shall not be limited by reference to any other sub-paragraph or anything in this Agreement or the Schedules hereto. 5.3 The benefit of the Purchaser's Warranties may be assigned in whole or in part and without restriction by the person for the time being entitled thereto. 5.4 The Purchaser shall not (save only as may be necessary to give effect to this Agreement) do or allow and shall procure that no act or omission shall occur before Completion which would constitute a breach of any of the Purchaser's Warranties if they were given at the time of such act or omission and/or at Completion or which would make any of the Purchaser's Warranties inaccurate or misleading if they were so given and the Purchaser undertakes to disclose to the Vendors in writing any matter occurring prior to Completion which constitutes a breach of or is inconsistent with any of the Purchaser's Warranties forthwith upon becoming aware of the same. 7 5.5 In the event of it being found prior to Completion that any of the Purchaser's Warranties is incorrect or misleading or has not been fully carried out in any material respect, or in the event of any matter or thing arising or becoming known or being notified to the Vendors which is inconsistent with any of the Purchaser's Warranties or any other provision of this Agreement or in the event of Purchaser becoming unable or failing to do anything required to be done by it at or before Completion the Vendors shall not be bound to complete this Agreement and the Vendors may by notice rescind this Agreement without liability on their part. The right conferred on the Vendors by this Clause is for the exclusive benefit of the Vendors and in addition to and without prejudice to any other rights or remedies of the Vendos (including any rights under the Misrepresentation Ordinance or any rights to claim damages or compensation from the Purchaser by reason of any such breach or non-fulfilment) and failure to exercise it shall not constitute a waiver of any such rights or remedies. 5.6 If in respect of or in connection with any breach of any of the Purchaser's Warranties any sum payable to the Vendors by the Purchaser pursuant to this Agreement by way of compensation is subject to Taxation (as defined in Schedule 3), then such further amount shall be paid to the Vendors by the Purchaser so as to secure that the net amount received by the Vendors is equal to the amount of the compensation due to it as aforesaid. 5.7 The Purchaser undertakes to compensate the Vendors against all costs (including reasonable legal costs), expenses or other liabilities which the Vendors may properly incur either before or after the commencement of any action in connection with:- 5.7.1 the settlement of any claim that any of the Purchaser's Warranties is untrue or misleading or has been breached; 5.7.2 any legal proceedings in which any Vendor claims that any of the Purchaser's Warranties is untrue or misleading or has been breached and in which judgment is given for the Vendor; or 5.7.3 the enforcement of any such settlement or judgment. 5.8 If the Purchaser defaults in the payment when due of any sum payable under this Agreement (whether determined by agreement or pursuant to an order of a court or otherwise), the liability of the Purchaser shall be increased to include interest on such sum from the date when such payment is due until the date of actual payment (as well after as before judgment) at a rate per annum of 2 per cent. above the prime rate from time to time of The Hongkong and Shanghai Banking Corporation Limited. Such interest shall accrue from day to day and shall be compounded annually. 5.9 The Purchaser represents and warrants to the Vendors that each of the Purchaser's Warranties is accurate in all respects and not misleading at the date of this Agreement and that if for any reason there is any interval of time between the time of this Agreement and Completion, the Purchaser's Warranties will continue to be accurate in all respects and not misleading at all times subsequent to the date of this Agreement up to and including the Completion Date as if repeated on each such day immediately before Completion. 8 6. COMPLETION 6.1 Completion shall take place at the offices of Stephenson Harwood & Lo at 18/F., Edinburgh Tower, The Landmark, 15 Queen's Road Central, Hong Kong or such other place as the parties may agree forthwith upon the execution of this Agreement, on the date on which the conditions precedent are satisfied (or such later date as agreed by the parties hereto), such conditions precedents being (1) the release of all charges and encumbrances to which the Sale Shares are subject and (2) all the following business being able to be simultaneously transacted :- 6.1.1 each of the Vendors shall deliver to the Purchaser or as it may direct the following:- (a) instruments of transfer in favour of the Purchaser and/or its nominee(s) in respect of the Sale Shares duly executed by the registered holders thereof; (b) original share certificates in respect of the Sale Shares (if any); (c) such other documents as may be required to give a good and effective transfer of title of the Sale Shares to the Purchaser and/or its nominee(s) and to enable it/them to become the registered holders thereof; (d) signed resignation letters from Ma Leung, Yu Sin, Chen Ming You, Liu Yan Xin, Han Hong Lu, Cheng Jia An, and Alan Li as directors of the BVI Company; 6.1.2 each of the Vendors and the Warrantors shall cause a meeting of the board of directors of the BVI Company to be held at which resolutions shall be passed to approve the transfer of the Sale Shares referred to above and the issue of new share certificate for the Sale Shares in the name of the Purchaser and/or its nominee(s), if so required, the acceptance of the resignation of the directors as stated in Clause 6.1.1(d) and the appointments of the persons stated in Clause 6.1.3(e) as directors of the BVI Company; and 6.1.3 the Purchaser shall:- (a) procure the passing of the board resolutions in Schedule 7 and allot and issue the Consideration Shares, credited as fully paid, to the Vendors (or as the Vendors may otherwise direct) on the terms of Clause 3.6; (b) deliver to the Vendors (or his nominee(s)) share certificates for the Consideration Shares or as the Vendors may otherwise direct; (c) produce for inspection by the Vendors the instruments of transfer in respect of the Sale Shares duly executed by the Purchaser and/or its nominee(s); (d) arrange to present the instruments of transfer together with the share certificates in respect of the Sale Shares to the BVI Company for registration of such transfer; and (e) deliver to the Company the signed consent to act as directors of the BVI Company from Aaron Zhu Xiaojun. 9 6.2 The transactions described in Clause 6.1 shall take place at the same time, so that in default of the performance of any such transactions by either party, the other party shall not be obliged to complete this Agreement or perform any obligations hereunder (without prejudice to any further legal remedies). 7. POST COMPLETION EFFECT This Agreement shall remain in full force and effect after and notwithstanding Completion in respect of all obligations, agreements, covenants, undertakings, conditions, representations, warranties or indemnities which have not been done, observed or performed at or prior to Completion and that the parties may take action for any breach or non-fulfilment of any of such obligations, agreement, covenants, undertakings, conditions, representations, warranties or indemnities either before or after Completion (whether or not such breach or non-fulfilment may have been known to or discoverable by the Purchaser prior to Completion) it being agreed that Completion shall not be deemed to constitute a waiver of or operate as an estoppel against any right to take any such action. 8. RESTRICTIVE COVENANTS 8.1 For the purpose of assuring to the Purchaser the full benefit of the business and goodwill of the Group, each of the Vendors and the Warrantors undertakes by way of further consideration for the obligations of the Purchaser under this Agreement, as separate and independent agreements that he will not and shall procure his Associates will not: 8.1.1 at any time after Completion disclose to any person, or himself use for any purpose, and shall use his best endeavours to prevent the publication or disclosure of, any information concerning the business, accounts or finances of any Group Company, or any of its clients', suppliers' or customers' transactions or affairs, which may, or may have, come to his knowledge except with the consent of the Purchaser; 8.1.2 in any Relevant Capacity at any time during the Restricted Period directly or indirectly solicit, interfere with, employ or endeavour to entice away from any Group Company with a view to competing with the Group any person who, to his knowledge, has during the 12 months preceding the date of the commencement of the Restricted Period been, a client, customer, supplier or employee of, or has been in the habit of dealing with, any Group Company; and/or 8.1.3 at any time after Completion use the name or trading style of any Group Company, or any trade marks or logos or device similar in appearance to any trade marks, in Hong Kong or any other part of the world, or represent himself as carrying on or continuing or being connected with any Group Company or its business for any purposes whatsoever unless he is so authorised by the Group Company. 8.2 Each of the Vendors and the Warrantors who individually will be holding 5% or more of the issued share capital of the Purchaser hereby: 8.2.1 undertakes with the Purchaser, to supply to it on Completion with full and accurate details of any business or interest which each of the Vendors and/or each of the Warrantors and/or his or its Associates has or may have which competes or may compete 10 with the business from time to time carried on by the Group and any other conflicts of interests which each of the Vendors and/or each of the Warrantors has or may have with the Group and whether each of the Vendors and/or each of the Warrantors and/or his or its Associates intends or does not intend to inject such business or interest into the Group; 8.2.2 undertakes with the Purchaser, at any time during which the Purchaser is listed on the Stock Exchange and for so long as each of the Vendors and/or each of the Warrantors his or its Associates is individually interested in 5% or more of the issued share capital of the Purchaser, notify the Purchaser forthwith of any changes of the details and information referred to in Sub-clause 8.2.1 above so as to enable the Purchaser to disclose such information by way of a press announcement and, if so required by the Stock Exchange, include such information in all circulars, annual reports and half-year reports required to be issued by the Purchaser pursuant to the Listing Rules; 8.2.3 Undertakes with the Purchaser to procure any director of the Purchaser from time to time nominated by the Vendors and/or the Warrantors: (i) to disclose to the Purchaser after Completion and at any time during which the Purchaser is listed on the Stock Exchange full and accurate details of any business or interest which such Director and/or his Associates has or may have which competes or may compete with the business from time to time carried on by the Group and any other conflicts of interest which such Director has or may have with the Group; (ii) to notify the Purchaser forthwith of any changes of the details and information referred to in Sub-clause 8.2.3 above, including any such business or interest acquired by such Director and/or his Associates after the listing of the Purchaser so as to enable the Purchaser to include such information in its annual reports and, if so required by the Stock Exchange, its quarter-year reports and circulars; and 8.2.4 acknowledges that and, if so required by the Purchaser, procure such director referred to in Sub-clause 8.2.3 to acknowledge that the information supplied to the Purchaser pursuant to this Clause 8.2 will or may be disclosed by the Purchaser in the prospectus, circulars, reports, announcements and other statements to the Stock Exchange and/or any regulatory authorities and their respective officers and employees from time to time issued by the Purchaser and that such disclosure is required by the Purchaser in order to comply with the requirements of the Stock Exchange and/or other regulatory bodies. 8.3 While the restrictions contained in this Clause 8 are considered by the parties to be reasonable in all the circumstances, it is agreed that if any one or more of such restrictions shall either taken by itself or themselves together be adjudged to go beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Purchaser but would be adjudged reasonable if any particular restriction or restrictions were deleted or if any part or parts of the wording thereof were deleted, restricted or limited in a particular manner or if the period thereof were reduced or if the range of activities reduced in scope, then the remaining restrictions shall be valid to the extent that they are not held to be invalid and the affected restriction 11 contained in this Clause 8 shall apply with such deletion, restriction or limitation, as the case may be. 9. FURTHER ASSURANCE AND ASSISTANCE The Vendors shall, and the Warrantors shall procure that the Vendors shall, do, execute and perform and shall procure to be done, executed and performed all such further acts, deeds, documents and things as the Purchaser may require from time to time effectively to vest the beneficial ownership of the Sale Shares in the Purchaser or as it directs free from all liens, charges, options, encumbrances or adverse rights or interest of any kind and otherwise to give to the Purchaser the full benefit of this Agreement. 10. DOCUMENTS CONSTITUTING AGREEMENT This Agreement and all agreements entered or to be entered into pursuant to the terms of this Agreement together constitute the entire agreement and understanding between the parties in connection with the subject-matter of this Agreement and supersedes all previous proposals, representations, warranties, agreements or undertakings relating thereto whether oral, written or otherwise and neither party has relied on any such proposals, representations, warranties, agreements or undertakings. 11. CONFIDENTIALITY Other than such disclosure as may be required by the Stock Exchange, none of the parties hereto shall make any announcement or release or disclose any information concerning this Agreement or the transactions herein referred to or disclose the identity of any of the other parties (save disclosure to their respective professional advisers who are under a duty of confidentiality) without the prior written consent of the other parties. 12. NOTICES AND OTHER COMMUNICATIONS Each of the Vendors and the Warrantors hereby appoint Mr. Ma at the address stated in Schedule 11 as its agent to receive on its or his behalf service of process any proceedings in Hong Kong. The Purchaser hereby appoints Mr. Aaron Zhu Xiaojun at the address stated in Schedule 11 as its agent to receive on its behalf service of process any proceedings in Hong Kong. Any notice or other communications to be given under this Agreement shall be in writing and may be delivered by hand or given by facsimile, telex, telegram or cable to the respective addresses of the parties set out in Schedule 11. Any such notice or communication shall be sent to the party to whom it is addressed and must contain sufficient reference and/or particulars to render it readily identifiable with the subject matter of this Agreement. If so delivered by hand or given by facsimile, telex, telegram or cable such notice or communication shall be deemed received on the date of despatch and if so sent by post (or, if sent to an address outside of Hong Kong, so sent by first class air-mail) shall be deemed received 2 business days after the date of despatch. 13. COSTS AND EXPENSES The parties hereto bear their respective legal and professional fees, costs and expenses incurred in the negotiation, preparation and execution of this Agreement and all documents contemplated hereby. 12 14. GOVERNING LAW AND JURISDICTION This Agreement shall be governed by and construed and take effect in all respects in accordance with the laws of Hong Kong and the parties hereto agree to submit to the non-exclusive jurisdiction of the courts of Hong Kong. 13 19 IN WITNESS whereof the parties hereto have executed this Agreement the day and year first above written. SIGNED by Ma Leung ) ) for and on behalf of GOOD ACHIEVE ) ) INVESTMENTS LIMITED ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR SIGNED by ) ) MA LEUNG ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR 14 SIGNED by Chen Ming You ) ) for and on behalf of PROFIT SPRING ) ) INTERNATIONAL LIMITED ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR SIGNED by ) ) CHEN MING YOU ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR 15 SIGNED by Han Hong Lu ) ) for and on behalf of ) ) ANMER CAPITAL LIMITED ) ) in the presence of:- ) SIGNED by ) ) HAN HONG LU ) ) in the presence of:- ) 16 SIGNED by Alan Li ) ) for and on behalf of DUNKLEY ) ) INTERNATIONAL LIMITED ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR SIGNED by ) ) ALAN LI ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR 17 SIGNED by Guo Jianjun ) ) for and on behalf of NATION ) ) EXPRESS LIMITED ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR SIGNED by ) ) GUO JIANJUN ) ) in the presence of:- ) Josephine C. K. Chan 18th Floor Edinburgh Tower The Landmark, Central Hong Kong Solicitor, HKSAR 18 SIGNED by Aaron Zhu Xiaojun ) ) for and on behalf of ) ) CHINA PHARMACEUTICALS ) ) CORPORATION ) ) in the presence of:- ) 19 EX-99 3 exh99-1_financials.txt EXH 99-1 AUDITED FINANCIALS EXHIBIT 99.1 AUDITED FINANCIAL STATEMENTS OF ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AUDITED FINANCIAL STATEMENTS ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. YEARS ENDED DECEMBER 31, 2003 AND 2002 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. (INCORPORATED IN THE PEOPLE'S REPUBLIC OF CHINA WITH LIMITED LIABILITY) We have audited the accompanying consolidated balance sheets of Zhejiang University Pharmaceutical Co., Ltd. and its subsidiary (the "Company") as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity and cash flows of the Company for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ MOORES ROWLAND MAZARS MOORES ROWLAND MAZARS CHARTERED ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS Hong Kong Date: April 30, 2004 Page 1 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. CONSOLIDATED BALANCE SHEETS =========================================================================================================================
AS OF DECEMBER 31, ----------------------------------------------------------- 2003 2003 2002 ASSETS NOTE US$ RMB RMB CURRENT ASSETS Cash and cash equivalents 1,909,602 15,824,297 11,852,058 Marketable equity securities - - 13,500 Trade receivables 62,232 515,695 219,263 Deposits, prepayments and other receivables 360,040 2,983,548 6,270,122 Interest receivable 36,203 300,000 3,913,541 Loans receivable maturing within one year 3 4,947,687 41,000,000 97,800,000 Inventories 4 103,692 859,269 716,471 ----------------- ---------------- ---------------- TOTAL CURRENT ASSETS 7,419,456 61,482,809 120,784,955 Property, plant and equipment, net 5 1,112,140 9,215,975 7,697,276 Construction in progress 6 5,072,709 42,036,017 3,401,051 Intangible assets, net 7 919,747 7,621,666 8,579,333 Loans receivable maturing in more than one year 3 - - 21,000,000 Long-term investment 8 1,086,078 9,000,000 - ----------------- ---------------- ---------------- TOTAL ASSETS 15,610,130 129,356,467 161,462,615 ================= ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt 9 - - 20,000,000 Current portion of long-term debt 10 47,114 390,419 - Trade payables 129,040 1,069,319 1,121,257 Accrued charges and other payables 230,981 1,914,073 1,834,199 Due to related parties 11 1,529,197 12,672,000 18,600,000 Income tax payable - - 497,376 ----------------- ---------------- ---------------- TOTAL CURRENT LIABILITIES 1,936,332 16,045,811 42,052,832 Long-term debt 10 6,086,845 50,439,856 50,000,000 ----------------- ---------------- ---------------- TOTAL LIABILITIES 8,023,177 66,485,667 92,052,832 ----------------- ---------------- ---------------- COMMITMENTS AND CONTINGENCIES 15 STOCKHOLDERS' EQUITY Registered capital 9,654,024 80,000,000 80,000,000 Accumulated losses (2,067,071) (17,129,200) (10,590,217) ----------------- ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 7,586,953 62,870,800 69,409,783 ----------------- ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 15,610,130 129,356,467 161,462,615 ================= ================ ================
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 2 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. CONSOLIDATED STATEMENTS OF OPERATIONS ========================================================================================================================
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2003 2003 2002 NOTE US$ RMB RMB OPERATING REVENUE Net sales 119,714 992,038 675,717 Cost of sales (217,597) (1,803,163) (1,578,717) --------------- --------------- --------------- GROSS LOSS (97,883) (811,125) (903,000) --------------- --------------- --------------- OPERATING EXPENSES Selling, general and administrative expenses 689,886 5,716,883 4,618,434 Research and development expenses 259,099 2,147,077 2,002,489 --------------- --------------- --------------- Total operating expenses 948,985 7,863,960 6,620,923 --------------- --------------- --------------- LOSS FROM OPERATIONS (1,046,868) (8,675,085) (7,523,923) NON-OPERATING INCOME (EXPENSES) Interest income from loans receivable 497,789 4,125,028 8,469,577 Bank interest income 15,721 130,280 83,774 Interest expense, net (236,152) (1,956,919) (2,271,031) Other (expense) income, net (19,584) (162,287) 51,166 --------------- --------------- --------------- LOSS BEFORE INCOME TAX (789,094) (6,538,983) (1,190,437) Provision for income tax 12 - - (606,755) --------------- --------------- --------------- NET LOSS (789,094) (6,538,983) (1,797,192) =============== =============== ===============
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 3 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ========================================================================================================================
REGISTERED ACCUMULATED TOTAL CAPITAL LOSSES ---------------- --------------- --------------- mb mb mb Balance as of January 1, 2002 80,000,000 (8,793,025) 71,206,975 Net loss - (1,797,192) (1,797,192) ---------------- --------------- -------------- Balance as of January 1, 2003 80,000,000 (10,590,217) 69,409,783 Net loss - (6,538,983) (6,538,983) ---------------- --------------- -------------- Balance as of December 31, 2003 80,000,000 (17,129,200) 62,870,800 ================ =============== ============== US$ US$ US$ 9,654,024 (2,067,071) 7,586,953 ================ =============== ==============
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 4 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS =========================================================================================================================
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2003 2002 US$ RMB RMB CASH FLOWS FROM OPERATING ACTIVITIES Net loss (789,094) (6,538,983) (1,797,192) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property, plant and equipment 116,760 967,552 762,859 Amortization of intangible assets 115,567 957,667 957,667 Loss on disposal of property, plant and equipment 12,500 103,586 - Gain on disposal of marketable securities (235) (1,949) (57,023) Changes in operating assets and liabilities: Trade receivables (35,772) (296,432) (217,451) Deposits, prepayments and other receivables 71,871 595,574 (897,920) Interest receivable 436,065 3,613,541 (3,548,208) Inventories (17,232) (142,798) 147,211 Trade payables (6,267) (51,938) (49,436) Accrued charges and other payables 9,638 79,874 1,673,406 Income tax payable (60,021) (497,376) 446,929 -------------- -------------- -------------- NET CASH USED IN OPERATING ACTIVITIES (146,220) (1,211,682) (2,579,158) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Increase in loans receivable (2,413,506) (20,000,000) (168,800,000) Repayment of loans receivable 11,802,044 97,800,000 109,000,000 Purchase of marketable equity securities - - (108,920) Purchase of property, plant and equipment (173,542) (1,438,088) (468,744) Addition of construction in progress (4,337,549) (35,943,966) (2,863,287) Acquisition of long-term investment (1,086,078) (9,000,000) - Proceeds on sale of marketable equity securities 1,865 15,449 152,443 Proceeds on disposal of property, plant and equipment 3,771 31,251 - -------------- -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,797,005 31,464,646 (63,088,508) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES Inception of short-term debt - - 20,000,000 Repayment of short-term debt (2,413,506) (20,000,000) - Inception of long-term debt - - 50,000,000 Repayment of long-term debt (42,565) (352,725) - Advances from related parties 1,206,753 10,000,000 18,600,000 Repayments to related parties (1,922,116) (15,928,000) (14,600,000) -------------- -------------- -------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,171,434) (26,280,725) 74,000,000 -------------- -------------- -------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 479,351 3,972,239 8,332,334 CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 1,430,251 11,852,058 3,519,724 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF THE YEAR 1,909,602 15,824,297 11,852,058 ============== ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Income tax paid 60,021 497,376 159,826 Interest paid, net 236,152 1,956,919 2,271,031 ============== ============== ============== NON-CASH TRANSACTION Purchase of property, plant and equipment financed by long-term debt 142,759 1,183,000 - ============== ============== ==============
The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 5 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Zhejiang University Pharmaceutical Co., Ltd. (the "Company") was incorporated in the People's Republic of China (the "PRC") on March 8, 2000 with registered capital of Rmb16,000,000 (US$1,930,805). On April 24, 2001, the capital of the Company was increased by Rmb64,000,000 (US$7,723,219) to Rmb80,000,000 (US$9,654,024) in the form of cash of Rmb56,000,000 (US$6,757,816) and a patent of Rmb8,000,000 (US$965,403). Details of the patent are described in note 7 to the financial statements. On August 7, 2003, the Company converted into a sino-foreign joint venture enterprise in the PRC. The principal stockholder is Sheung Tai Investments Limited, a company incorporated in the British Virgin Islands, which holds 87.475% of the registered capital of the Company. The remaining registered capital is held by Zhejiang University Enterprises Group (Holding) Co., Ltd., The First Affiliated Hospital of School of Medicine of Zhejiang University, The Second Affiliated Hospital of School of Medicine of Zhejiang University, Sir Run Run Shaw Hospital of School of Medicine of Zhejiang University, The Hospital for Genecology and Obstetrics of School of Medicine of Zhejiang University, The Children's Hospital of School of Medicine of Zhejiang University. Their stockholdings are 7.5%, 1.65%, 1.65%, 0.5%, 0.625% and 0.6% respectively. On October 17, 2003, the Company set up a wholly-owned subsidiary, Zhejiang University Pharmaceutical Sales Co., Ltd., a company incorporated in the PRC to be operated for a period of 20 years with registered capital of Rmb5,000,000. On February 2, 2004, the registered capital of the subsidiary was increased to Rmb20,000,000. The additional capital of Rmb15,000,000 was made by the Company in the form of cash. The subsidiary has not commenced operations as of December 31, 2003. On February 2, 2004, the subsidiary acquired the 100% equity interest in a PRC company engaged in sale of medicine at a consideration of Rmb7,000,000. The Company is principally engaged in the development and manufacturing of medicine and health products for customers in the PRC. Pursuant to a notice issued by Zhejiang Food and Drug Administration Authority, a Good Manufacturing Practice ("GMP") certificate has to be obtained in order to continue the production of medicine. In order to fulfill the requirements for application of the GMP certificate, the Company is undergoing the construction of a new factory which is expected to be completed in 2004. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("USGAAP"). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial information of the Company and its subsidiary. All material intercompany balances and transactions have been eliminated on consolidation. - -------------------------------------------------------------------------------- Page 6 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUBSIDIARY A subsidiary is an affiliate controlled by the Company directly, or indirectly through one or more intermediaries. The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. CASH EQUIVALENTS Cash equivalents include all highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and are so near maturity that they represent insignificant risk of changes in value because of changes in interest rates. MARKETABLE EQUITY SECURITIES Equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of other comprehensive income. Equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in the consolidated statements of operations. Realized gains and losses are determined on the average cost method and reflected in consolidated statements of operations. The balance as of December 31, 2002 represents available-for-sale listed equity securities. As the cost approximated to the estimated fair value as of December 31, 2002, no unrealized gain or loss was recognized. TRADE RECEIVABLES Trade receivables are recorded at original invoice amount, less an estimated allowance for uncollectible accounts. Trade credit is generally granted on a short-term basis, thus trade receivables do not bear interest. Trade receivables are periodically evaluated for collectibility based on past credit history with customers and their current financial condition. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables. Provision for uncollectibility of trade receivables included in "Selling, general and administrative expenses" amounting to Rmb49,648 and Rmb487,387 for the years ended December 31, 2003 and 2002 respectively. INVENTORIES All inventories are stated at the lower of weighted average cost or market. Potential losses from obsolete and slow-moving inventories are provided for when identified. Costs of work-in-progress and finished goods are composed of direct materials and an attributable portion of manufacturing overhead. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment are recorded at cost less accumulated depreciation. Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property, plant and equipment, are expensed as incurred. The cost and related accumulated depreciation applicable to property, plant and equipment sold or no longer in service are eliminated from the accounts and any gain or loss is included in the consolidated statements of operations. - -------------------------------------------------------------------------------- Page 7 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION (CONTINUED) Depreciation is calculated to write off the cost of property, plant and equipment over their estimated useful lives as set out below, from the date on which they become fully operational and after taking into account of their estimated residual values, using the straight-line method: Leasehold land Over the unexpired term of lease Buildings 20 years Plant and machinery 5 - 10 years Furniture and equipment 5 - 10 years Motor vehicles 8 years CONSTRUCTION IN PROGRESS Construction in progress is stated at cost. Cost includes all construction expenditures and other direct costs, including borrowing costs, attributable to such projects. Borrowing costs incurred, net of any investment income on the temporary investment of the specific borrowings, are capitalized as part of the cost of the construction in progress. Capitalization of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Costs on completed construction works are transferred to the appropriate asset category. No depreciation is provided in respect of construction in progress until it is completed and put into commercial operation. INTANGIBLE ASSETS Statement of Financial Accounting Standard ("SFAS") No. 142 "Goodwill and Other Intangible Assets" requires that intangible asset with estimated useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". Intangible assets of the Company are comprised of a trademark and a patent, which are stated at cost and are amortized over their respective unexpired registration periods. The trademark was originally registered for a period of 10 years and will expire in 2008 while the patent was originally registered for a period of 20 years and will expire in 2013. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". An asset is considered impaired if its carrying amount exceeds the future net cash flows the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The recoverability of long-lived assets is assessed by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows using a discount rate reflecting the Company's average cost of capital. REVENUE RECOGNITION Net sales represent the invoiced value of goods, net of value-added tax and returns. The Company recognizes revenue when there is persuasive evidence of an agreement with customers, with a fixed fee that is collectible and when delivery has occurred. - -------------------------------------------------------------------------------- Page 8 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COST OF SALES Cost of sales includes materials, direct labor and factory overhead which included mainly depreciation, utilities and indirect wages. RESEARCH AND DEVELOPMENT All cost of research and development activities are expensed as incurred, which included mainly external costs related to services contracted by the Company. ADVERTISING AND PROMOTION Advertising and promotion expenses are expensed when incurred. Advertising costs included in "Selling, general and administrative expenses" amounted to Rmb689,300 (US$83,181) and Rmb567,374 (US$68,465) for the years ended December 31, 2003 and 2002 respectively. GOVERNMENT GRANTS Government grants, including non-monetary grants at fair value, are recognized as income or set off to the respective items of the grants, as appropriate. In 2002, the Company received a grant amounting to Rmb450,000 (US$54,301) from the PRC government to subsidize interest expense related to the construction in progress. The Company recognized the grant as a reduction of interest expense incurred for the construction in progress as detailed in note 6 to the financial statements. INCOME TAXES Income taxes have been provided in accordance with the tax rates and laws in effect in the PRC. Deferred taxes are provided under the provisions of SFAS No. 109 "Accounting for Income Taxes", which requires recognition of the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards under the liability method. Deferred tax assets and liabilities are measured using expected tax rates in effect for the period in which those temporary differences are expected to be recovered or settled. FOREIGN CURRENCY TRANSLATION The Company considers Rmb as its functional currency as the Company's business activities are based in Rmb. Transactions in currencies other than functional currencies during the period are translated into the respective functional currencies at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in currencies other than functional currencies are translated into respective functional currencies at the applicable rates of exchange in effect at the balance sheet date. Exchange gains and losses are recorded in the consolidated statements of operations. For the convenience of the readers of these financial statements, translation of amounts from Rmb into US$ has been made at the exchange rate of US$1.00 = Rmb8.2867 as of December 31, 2003 and US$1.00 = Rmb8.2871 as of December 31, 2002. No representation is made that the Rmb amounts could have been or could be converted into the US$ amounts at these rates or at any other rates on December 31, 2003 and 2002. - -------------------------------------------------------------------------------- Page 9 of 19 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with USGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include provisions for doubtful accounts, sales returns and allowances, long-lived assets and income tax. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values for financial instruments under SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of the Company's financial instruments, which includes cash, loans receivable, accounts receivable, accounts payable and debts, approximate their carrying values in the financial statements. RELATED PARTIES Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. RECENT ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued Interpretation No. 45 ("FIN 45") "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees. It also clarifies that at the time a company issues a guarantee, it must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. However, the provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor's obligations does not apply to product warranties or to guarantees accounted for as derivatives. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company does not expect the adoption of FIN 45 will have a material impact on the Company's results of operations or financial position. In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21 ("EITF 00-21") "Revenue Arrangements with Multiple Deliverables". EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect the adoption of EITF 00-21 will have a material impact on its results of operations or financial position. - -------------------------------------------------------------------------------- Page 10 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities". Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns. In December 2003, the FASB issued a revised FIN 46. The revised standard, FIN 46-R, modifies or clarifies various provisions of FIN 46 and incorporates many FASB Staff Positions previously issued by the FASB. This standard replaces the original FIN 46 that was issued in January 2003. The Company does not expect the adoption of FIN 45 will have a material impact on its results of operations or financial position. In May 2003, the FASB issued SFAS 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 establishes standards for how certain financial instruments with characteristics of both liabilities and equity shall be classified and measured. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS 150 will have a material impact on its results of operations or financial position. 3. LOANS RECEIVABLE The loans receivable represent cash placed with two trust companies in the PRC, namely Kinghing Trust & Investment Co., Ltd. ("Kinghing Trust") and Shenzhen International Trust & Investment Co., Ltd. ("Shenzhen Trust").
AS OF DECEMBER 31, ----------------------------------------------------- 2003 2003 2002 US$ RMB RMB Kinghing Trust (NOTE (A)) 2,534,181 21,000,000 118,800,000 Shenzhen Trust (NOTE (B)) 2,413,506 20,000,000 - -------------- --------------- --------------- 4,947,687 41,000,000 118,800,000 Less: Current portion (4,947,687) (41,000,000) (97,800,000) -------------- --------------- --------------- Non-current portion - - 21,000,000 ============== =============== ===============
- -------------------------------------------------------------------------------- Page 11 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 3. LOANS RECEIVABLE (CONTINUED) (a) Kinghing Trust is a related party of Tonhe Investment Holding Co., Ltd. ("Tonhe"), a former major stockholder of the Company. Pursuant to the original agreements entered into between the Company and Kinghing Trust, the amounts placed with Kinghing Trust bear interests ranging from 5.31% to 6.903% per annum. However, the actual interest rate was agreed orally at 10% per annum and all related interest income (calculated at 10% per annum) was received by December 31, 2003. In addition, pursuant to the original agreements, Kinghing Trust will not bear the risk of non-recovery of the amounts due. However, pursuant to a supplemental agreement on December 26, 2003, Kinghing Trust has agreed to provide a guarantee to the Company for the recovery of the balance as of December 31, 2003. According to the original agreements, Rmb16,000,000 of the amount was repayable on September 4, 2003 while Rmb5,000,000 was repayable on July 5, 2003. Pursuant to the supplemental agreement dated December 26, 2003, the due dates of repayment of the amounts of Rmb16,000,000 and Rmb5,000,000 were extended to March 5, 2004 and July 5, 2004 respectively. Pursuant to another supplemental agreement on April 5, 2004, the due date of repayment of the Rmb16,000,000 was further extended to July 5, 2004. (b) The amount placed with Shenzhen Trust bears interests at 7.5% per annum. Pursuant to the original agreement, Shenzhen Trust will not bear the risk of non-recovery of the amount due and the period of the loan is 5 years. However, a supplemental agreement was entered into between the Company and Shenzhen Trust on December 26, 2003 pursuant to which Shenzhen Trust has agreed to provide a guarantee to the Company for the recovery of the balance as of December 31, 2003. In addition, the period of the loan was revised from 5 years to 4 months, i.e. the amount was repayable on February 20, 2004. Pursuant to another supplemental agreement on February 27, 2004, the due date of repayment was extended to March 31, 2004 and the supplemental agreement dated December 26, 2003 was terminated. The amount was received on March 31, 2004. 4. INVENTORIES INVENTORIES CONSISTED OF:
AS OF DECEMBER 31, -------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Raw materials 63,056 522,532 275,840 Work-in-progress 4,965 41,142 189,448 Finished goods 35,671 295,595 251,183 -------------- -------------- -------------- 103,692 859,269 716,471 ============== ============== ==============
- -------------------------------------------------------------------------------- Page 12 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consisted of:
AS OF DECEMBER 31, -------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Leasehold land 170,816 1,415,499 1,415,499 Buildings 461,293 3,822,601 3,822,601 Plant and machinery 670,059 5,552,581 4,901,493 Furniture and equipment 45,672 378,470 253,768 Motor vehicles 263,518 2,183,694 605,175 -------------- --------------- --------------- Cost 1,611,358 13,352,845 10,998,536 Less: Accumulated depreciation (499,218) (4,136,870) (3,301,260) -------------- --------------- --------------- Property, plant and equipment, net 1,112,140 9,215,975 7,697,276 ============== =============== ===============
The leasehold land is situated in the PRC and is held under medium term lease for a period of fifty years. As of December 31, 2003 and 2002, the cost of property, plant and equipment pledged to secure bank loans of the Company amounted to approximately Rmb1,547,299 (US$186,721) and Rmb- (US$-) and the related accumulated depreciation amounted to Rmb121,508 (US$14,662) and Rmb- (US$-) respectively. Depreciation expense amounted to Rmb967,552 (US$116,760) and Rmb762,859 (US$92,054) for the years ended December 31, 2003 and 2002 respectively. 6. CONSTRUCTION IN PROGRESS Construction in progress consisted of:
AS OF DECEMBER 31, --------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Leasehold land 1,093,214 9,059,138 - Construction costs 1,639,011 13,581,991 3,401,051 Machinery 2,229,430 18,474,619 - --------------- --------------- -------------- 4,961,655 41,115,748 3,401,051 --------------- --------------- -------------- Interest expense capitalized 157,119 1,302,001 68,268 Less: Government grants (NOTE 2) (46,065) (381,732) (68,268) --------------- --------------- -------------- 111,054 920,269 - --------------- --------------- -------------- 5,072,709 42,036,017 3,401,051 =============== =============== ==============
The leasehold land is situated in the PRC and is held under medium term lease for a period of fifty years. - -------------------------------------------------------------------------------- Page 13 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. INTANGIBLE ASSETS, NET Intangible assets consisted of:
AS OF DECEMBER 31, --------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Trademark 351,165 2,910,000 2,910,000 Patent 965,403 8,000,000 8,000,000 --------------- --------------- --------------- Cost 1,316,568 10,910,000 10,910,000 Less: Accumulated amortization (396,821) (3,288,334) (2,330,667) --------------- --------------- --------------- Intangible assets, net 919,747 7,621,666 8,579,333 =============== =============== ===============
The patent was acquired from a director and former stockholder, Mr. Han Honglu ("Mr. Han"), at a consideration of Rmb8,000,000 (US$965,403) which was settled by the capital of the Company as discussed in note 1 to the financial statements. The consideration was determined based on a valuation provided by professional appraisers in the PRC based on a discounted estimated future cash flows basis. The formal transfer of ownership of the patent is still in progress and an agreement has been entered into between the Company and Mr. Han that Mr. Han is holding the patent on behalf of the Company until the completion of the formal transfer. The patent has not been used for commercial production up to December 31, 2003. However, the Company has already developed a new medicine based on the patent, which is expected to be put into commercial production in 2004. Amortization expense amounted to Rmb957,667 (US$115,567) and Rmb957,667 (US$115,561) for the years ended December 31, 2003 and 2002 respectively. The estimated amortization expense of the intangible assets in the following periods is as follows:
AS OF DECEMBER 31, --------------------------------------------------- 2003 2003 2002 US$ RMB RMB Amortization expense: Within one year 115,567 957,667 957,667 Over 1 year but not exceeding 2 years 115,567 957,667 957,667 Over 2 years but not exceeding 3 years 115,567 957,667 957,667 Over 3 years but not exceeding 4 years 115,567 957,667 957,667 Over 4 years but not exceeding 5 years 115,567 957,667 957,667 ============== ============== =============
- -------------------------------------------------------------------------------- Page 14 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. LONG-TERM INVESTMENT
AS OF DECEMBER 31, ----------------------------------------------- 2003 2003 2002 US$ RMB RMB Unlisted equity investment, at cost 1,086,078 9,000,000 - ============= ============= ============
On January 6, 2003, the Company acquired an 18% equity interest in a company incorporated in the PRC. The Company has no significant control and influence over its operating and financial policies. Mr. Han has indemnified the Company against any loss that may result from the investment by an amount due to him of Rmb10,000,000 (US$1,206,753) (see note 11 to the financial statements). 9. SHORT-TERM DEBT The short-term debt represents a bank loan which is repayable within one year, bears interest at 5.841% per annum and is secured by a guarantee provided by Tonhe. The debt was fully repaid in 2003. 10. LONG-TERM DEBT
AS OF DECEMBER 31, --------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Current portion 47,114 390,419 - Non-current portion 6,086,845 50,439,856 50,000,000 --------------- --------------- --------------- 6,133,959 50,830,275 50,000,000 =============== =============== ===============
The Company has various long-term bank loans to finance the purchase of property, plant and equipment and the construction in progress. Rmb50,000,000 of the balances as of December 31, 2003 and 2002 is wholly repayable in 2006, bears interest at 5.58% per annum and is secured by a guarantee provided by Tonhe. Rmb830,275 of the balance as of December 31, 2003 is repayable in fixed monthly installments, bears interest at 5.49% per annum and is secured by certain property, plant and equipment of the Company (see note 5 to the financial statements). - -------------------------------------------------------------------------------- Page 15 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 10. LONG-TERM DEBT (CONTINUED) Aggregate maturities of the long-term debt as of December 31, 2003 are as follows: PRINCIPAL PAYABLE IN THE FOLLOWING PERIODS ---------------------------- ------------------------------------ US$ RMB ------------ -------------- 47,114 390,419 Within 1 year ------------ -------------- 50,265 416,534 Over 1 year but not exceeding 2 years 6,036,580 50,023,322 Over 2 years but not exceeding 3 years ------------ -------------- 6,086,845 50,439,856 ------------ -------------- 6,133,959 50,830,275 ============ ============== 11. RELATED PARTY TRANSACTIONS In addition to the transactions / information disclosed elsewhere in the financial statements, during the years, the Company had the following transactions with related parties. Balances with related parties are as follows:
AS OF DECEMBER 31, ------------------------------------------------------- 2003 2003 2002 US$ RMB RMB Due to Mr. Han * 1,206,753 10,000,000 - Due to related parties with a common director 322,444 2,672,000 18,600,000 --------------- ---------------- ---------------- 1,529,197 12,672,000 18,600,000 =============== ================ ================
* Mr. Han has used the amount due to him to indemnify the Company against any loss that may result from the long-term investment of Rmb9,000,000 (US$1,086,078) (see note 8 to the financial statements). The amounts due are unsecured, interest-free and have no fixed repayment terms. 12. INCOME TAX The Company is subject to the PRC Enterprise Income Tax at a rate of 33%. Income tax expense consisted of:
AS OF DECEMBER 31, ----------------------------------------------------- 2003 2003 2002 US$ RMB RMB CURRENT TAX: Charge for the year - - 606,755 ============== ============== ================
- -------------------------------------------------------------------------------- Page 16 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 12. INCOME TAX (CONTINUED) The reconciliation of the statutory tax rate to the effective tax rate based on the loss before income tax is as follows: YEAR ENDED DECEMBER 31, ------------------------ 2003 2002 Statutory tax rate 33% 33% Non-deductible expenses (9%) (84%) Valuation allowance for deferred tax asset (24%) - ---------- ---------- Effective tax rate - (51%) ========== ========== As of December 31, 2003 and 2002, the Company has operating losses carried forward for tax purposes amounted to Rmb4,642,662 (US$560,254) and Rmb- (US$-) respectively. Under current PRC tax laws, the Company's losses will expire after five years from the year of the losses were incurred. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets are as follows:
AS OF DECEMBER 31, ---------------------------------------------------- 2003 2003 2002 US$ RMB RMB Deferred tax asset - Tax effect of net 184,884 1,532,078 - operating losses carried forward Valuation allowance for deferred tax asset (184,884) (1,532,078) - -------------- --------------- ------------- Net deferred taxes - - - ============== =============== =============
13. RETIREMENT PLAN AND POST-EMPLOYMENT BENEFITS As stipulated by the rules and regulations in the PRC, the Company is required to contribute to a state-sponsored social insurance plan for all of its employees who are residents of PRC at a rate of 22% on an amount based on the remuneration of employees. The Company has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plan is responsible for the entire pension obligations payable to all employees. Pension expense for the years ended December 31, 2003 and 2002 amounted to Rmb358,292 (US$43,237) and Rmb120,170 (US$14,501) respectively. - -------------------------------------------------------------------------------- Page 17 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 14. REPORT ON SEGMENT INFORMATION The Company adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information" in respect to its operating segments. The Company's income is derived from its operations in a single business segment which is the development and manufacturing of medicine and health products. In addition, the Company's products are only sold to customers in the PRC. Therefore, no geographical segment information is presented. 15. COMMITMENTS AND CONTINGENCIES CAPITAL EXPENDITURE COMMITMENTS As of December 31, 2003 and 2002, the Company had capital expenditure commitments contracted but not provided for net of deposit paid amounting to Rmb9,499,993 (US$1,146,415) and Rmb17,331,264 (US$2,091,355) respectively. OPERATING LEASE COMMITMENTS The Company leases certain staff quarters and office premises under non-cancellable operating leases. Rental expense under operating leases amounted to Rmb140,201 (US$16,919) and Rmb55,000 (US$6,637) for the years ended December 31, 2003 and 2002 respectively. Future minimum rental payments under non-cancellable operating leases which are payable within one year amounted to Rmb17,367 (US$2,096) and Rmb- (US$-) as of December 31, 2003 and 2002 respectively. 16. OPERATING RISKS COUNTRY RISKS The Company may be exposed to the risks as a result of its sales operations being carried out in the PRC. These include risks associated with, among others, the political, economic and legal environmental and foreign currency exchange. The Company's results may be adversely affected by change in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company's management does not believe these risks to be significant. There can be no assurance, however, those changes in political and other conditions will not result in any adverse impact. CASH, TIME DEPOSITS AND LOAN RECEIVABLES The Company maintains its cash balances and investments in time deposits and loans receivable with various banks and trust companies located in the PRC. In common with local practice, such amounts are not insured or otherwise protected should the amounts placed with the banks and trust companies be non-recoverable. There has been no history of credit losses in these regards and there are neither material commitment fees nor compensating balance requirements for all outstanding loans of the Company. - -------------------------------------------------------------------------------- Page 18 of 19 ZHEJIANG UNIVERSITY PHARMACEUTICAL CO., LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 16. OPERATING RISKS (CONTINUED) CONCENTRATION OF CREDIT RISK As of December 31, 2003, two customers had trade receivable balances representing 26% and 11% of the total trade receivables respectively. As of December 31, 2002, three customers had trade receivable balances representing 40%, 30% and 27% of the total trade receivables respectively. No other customer had trade receivable balance that exceeded 10% of the total trade receivables as of December 31, 2003 and 2002. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when there are similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The major concentration of credit risk arises from the Company's receivables. Even though the Company does have major customers and the provision for doubtful accounts as a percentage of sales are relatively high in 2002, it does not consider itself be exposed to significant credit risk with regards to collection of the related receivables. It is because the high level of provision in 2002 was arisen from a customer who accounted for Rmb396,741 of the provision. The Company has already ceased trading with that customer. In addition, the management has tightened controls over the recovery of trade receivables and the level of provision has been significantly improved in 2003. 17. SUBSEQUENT EVENTS On January 17, 2004, a new bank loan amounted to Rmb20,000,000 (US$2,413,506) was arranged to finance the acquisition of the 100% interest in a PRC company as stated in note 1 to the financial statements and to provide for additional working capital of the Company. The bank loan is repayable in one year and is secured by the Company's construction in progress and land and buildings included in the property, plant and equipment. - -------------------------------------------------------------------------------- Page 19 of 19 -----END PRIVACY-ENHANCED MESSAGE-----