UNITED STATES
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): January 12, 2005
DRAGON PHARMACEUTICAL INC.
(Exact name of registrant as specified in its charter)
Florida 0-27937 65-0142474
------- ------- ----------
(State or Other Jurisdiction of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
1055 Hastings Street, Suite 1900
Vancouver, British Columbia V6E 2E9
---------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
(604) 669-8817
--------------
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Section 2 - Financial Information
Item 2.01 Completion of Acquisition or Disposition of Assets
Dragon Pharmaceutical Inc. is filing the financial statements of Oriental
Wave Holding Limited for the year ended December 31, 2004, and pro-forma
financial statements related thereto, in connection with the completion of the
acquisition of Oriental Wave Holding Limited on January 12, 2005.
Section 9 - Financial Statements and Exhibits
Item 9.01 Financial Statements and Exhibits
a. Financial Statements for the year ended December 31, 2004 for Oriental
Wave Holding Limited and Subsidiary.
b. Pro-forma financial information for Dragon Pharmaceutical Inc. and
Oriental Wave Holding Limited.
SIGNATURE
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.
DRAGON PHARMACEUTICAL INC.,
a Florida Corporation
Dated: September 27, 2005 /s/ Maggie Deng
-------------------------------------
Maggie Deng
Chief Operating Officer
ORIENTAL WAVE HOLDING LIMITED
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 (RESTATED) AND 2003
CONTENTS
PAGE 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTI
PAGE 2 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 (RESTATED)
AND 2003
PAGE 3 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 (RESTATED) AND 2003
PAGE 4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 2004 (RESTATED) AND 2003
PAGE 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2004 (RESTATED) AND 2003
PAGES 6 - 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
Oriental Wave Holding Limited and Subsidiary
We have audited the accompanying consolidated balance sheets of Oriental Wave
Holding Limited and subsidiary as of December 31, 2004 and 2003, and the related
statements of operations and comprehensive income, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly in all material respects, the financial position of Oriental Wave Holding
Limited and subsidiary as of December 31, 2004 and 2003 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.
As discussed in Note 2, the Company restated its consolidated financial
statements for the year ended December 31, 2004.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
March 14, 2005, except for Note 2, to
which the date is September 16, 2005
1
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
ASSETS RESTATED
------
(NOTE 2)
Note 2004 2003
---------- ------------------ ---------------
CURRENT ASSETS
Cash and cash equivalents $ 910,425 $ 515,791
Accounts receivable, net of allowances 3 6,675,298 4,267,353
Inventories, net 4 16,623,906 7,488,085
Value added tax receivable 162,443 -
Prepaid expenses 911,228 119,070
------------------ --------------
Total Current Assets 25,283,300 12,390,299
------------------ --------------
PROPERTY AND EQUIPMENT, NET 5 62,396,316 37,996,606
OTHER ASSETS
Intangible assets, net 7 432,769 493,155
Other receivables 2,213,842 890,659
Deposits - 1,355,793
Investments -cost 12,077 -
------------------ --------------
Total Other Assets 2,658,688 2,739,607
------------------ --------------
TOTAL ASSETS $ 90,338,304 $ 53,126,512
------------ ================== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,047,485 $ 7,658,652
Accrued retirement benefits 8 114,432 565,618
Other payables and accrued liabilities 9 17,705,163 13,295,691
Notes payable - short-term 10 12,884,057 806,763
Due to related companies 12 4,660,984 5,509,135
------------------ --------------
Total Current Liabilities 38,412,121 27,835,859
------------------ --------------
LONG-TERM LIABILITIES
Long term accounts payable 11 21,873,147 -
Long term retirement benefits 8 870,321 1,837,182
Notes payable - long-term 10 6,316,426 8,454,106
Due to related companies 12 1,328,502 -
------------------ --------------
Total Long-Term Liabilities 30,388,396 10,291,288
------------------ --------------
TOTAL LIABILITIES 68,800,517 38,127,147
------------------ --------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
$1.00 par value, 50,000 shares authorized, 50,000 shares issued
and outstanding 50,000 50,000
Additional paid-in capital 13,977,504 7,835,865
Retained earnings
Unappropriated - 6,054,864
Appropriated 7,562,432 1,286,784
Due from stockholder (52,149) (228,148)
------------------ --------------
Total Stockholders' Equity 21,537,787 14,999,365
------------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 90,338,304 $ 53,126,512
------------------------------------------ ================== ==============
The accompanying notes are an integral part of these consolidated financial statements.
2
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
RESTATED (NOTE 2)
Note 2004 2003
---------- ------------------- -------------------
NET SALES 13 $ 29,023,130 $ 26,086,092
COST OF SALES 16,140,305 14,053,421
-------------------- ------------------
GROSS PROFIT 12,882,825 12,032,671
-------------------- ------------------
PERATING EXPENSES
Selling expense 3,666,839 2,674,884
General and administrative expenses 1,911,308 1,481,489
Depreciation 198,154 283,617
Amortization of land use rights 80,295 20,306
-------------------- ------------------
Total Operating Expenses 5,856,596 4,460,296
-------------------- ------------------
INCOME FROM OPERATIONS 7,026,229 7,572,375
OTHER INCOME (EXPENSE)
Interest expense (216,634) (32,404)
Other income 61,881 63,675
Other expense (57,230) (19,694)
-------------------- ------------------
Total Other Income (expense) (211,983) 11,577
-------------------- ------------------
INCOME FROM OPERATIONS BEFORE TAXES 6,814,246 7,583,952
INCOME TAX EXPENSE 1(M) 451,823 -
-------------------- ------------------
NET INCOME 6,362,423 7,583,952
OTHER COMPREHENSIVE INCOME
Foreign currency translation loss - -
-------------------- ------------------
COMPREHENSIVE INCOME $ 6,362,423 $ 7,583,952
==================== ==================
Net income per share - basic and diluted $ 127.25 $ 151.68
==================== ==================
Weighted average number of shares outstanding during the period -
basic and diluted 50,000 50,000
==================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
3
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
RESTATED RESTATED
NOTE 2) (NOTE 2)
Additional Unappropriated Appropriated RESTATED
Common Stock Paid-In Retained Retained Due From (NOTE 2)
Shares Amount Capital Earnings Earnings Stockholder Total
------- --------- ---------- ---------- ------------- -------------- ---------------
Balance, December 31, 2002 50,000 $ 50,000 $1,157,730 $(242,324) $ - $(1,033,418) $ (68,012)
Capital contribution from
stockholders - - 6,678,135 - - - 6,678,135
Notes receivable - stockholders - - - - - 805,270 805,270
Net income for the year ended
December 31, 2003 - - - 7,583,972 - - 7,583,972
Transfer to retained earnings for
appropriated statutory and
staff welfare reserves - - - (1,286,784) 1,286,784 - -
------- -------- ---------- ----------- ----------- ----------- -------------
Balance, December 31, 2003 50,000 50,000 7,835,865 6,054,864 1,286,784 (228,148) 14,999,365
Registered capital appropriation - - 6,141,639 (6,141,639) - - -
Notes receivable - stockholders - - - - - 175,999 175,999
Net income for the year ended
December 31, 2004 - - - 6,362,423 - - 6,362,423
Transfer to retained earnings for
appropriated statutory and staff
welfare reserves - - - (6,275,648) 6,275,648 - -
------- -------- ----------- ----------- ---------- ------------ --------------
BALANCE, DECEMBER 31, 2004 50,000 $ 50,000 $13,977,504 $ - $7,562,432 $ (52,149) $ 21,537,787
-------------------------- ======= ======== =========== =========== ========== ============ ==============
The accompanying notes are an integral part of these consolidated financial statements.
4
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
RESTATED
(NOTE 2)
2004 2003
----------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,362,423 $ 7,583,952
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 2,673,367 540,046
Allowance for doubtful accounts 124,574 -
Provision for excess and obsolete inventories 613,378 213,244
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,532,519) (1,938,499)
Inventories (9,749,199) (2,815,076)
Value added tax receivable (162,443) -
Prepaid expenses (792,158) 61,942
Other assets (1,323,183) (147,520)
Deposits 1,355,793 (1,355,793)
Increase (decrease) in:
Accounts payable (4,611,167) 1,773,132
Other payables and accrued liabilities 25,999,810 12,739,601
Due to related companies 480,351 (873,205)
------------------- -------------
Net Cash Provided By Operating Activities 18,439,027 15,781,844
------------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,147,929) (32,709,127)
Purchase of investments (12,077) -
------------------- -------------
Net Cash Used In Investing Activities (28,160,006) (32,709,127)
------------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 6,678,135
Proceeds from notes payable 9,939,614 9,260,869
Due from stockholder 175,999 805,270
------------------- -------------
Net Cash Provided By Financing Activities 10,115,613 16,744,274
------------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 394,634 (183,009)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 515,791 698,800
------------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 910,425 $ 515,791
=================== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest expense $ 216,634 $ 31,252
=================== =============
Cash paid during the year for income taxes $ 285,328 $ -
=================== =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2004, the Company's subsidiary appropriated $6,141,639 from retained
earnings to registered capital and reduced the Land Use Rights by $1,135,238 to
reflect the extinguishment of Accrued Retirement Benefits (Note 6).
The accompanying notes are an integral part of these consolidated financial statements.
5
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Organization and Basis of Presentation
Oriental Wave Holding Limited ("Oriental Wave") was incorporated in the
British Virgin Islands on January 7, 2003. Shanxi Weiqida Pharmaceutical
Company Limited ("Shanxi Weiqida"), a People's Republic of China limited
liability company was incorporated on January 22, 2002. Shanxi Weiqida is
principally engaged in research and development, manufacturing, and selling
of pharmaceutical products in the People's Republic of China ("PRC").
During 2003, Shanxi Weiqida's shareholders exchanged 100% of their
ownership of Shanxi Weiqida for 50,000 shares of Oriental Wave under a
reorganization plan. The transfer has been accounted for as a
reorganization of entities under common control as the companies were
beneficially owned by identical shareholders and share common management.
The financial statements have been prepared as if the reorganization had
occurred retroactively. Oriental Wave and Shanxi Weiqida are hereafter
referred to as (the "Company").
The accompanying 2004 and 2003 consolidated financial statements include
the accounts of Oriental Wave and its 100% owned subsidiary Shanxi Weiqida.
All significant intercompany balances and transactions have been eliminated
in consolidation.
(B) Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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 revenues and expenses during the reported period.
Actual results could differ from those estimates.
(C) Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the
time of purchase to be cash equivalents.
(D) Accounts Receivable
The Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by performing credit
checks and actively pursuing past due accounts. An allowance for doubtful
accounts is established and recorded based on management's assessment of
the credit history with the customer and current relationships with them.
6
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(E) Investments
During the twelve months ended December 31, 2004, the Company made a
strategic investment in a private company of $12,077. The investment
represents less than 1% of the total equity outstanding of the private
company outstanding as of December 31, 2004. The private company investment
is carried at cost and written down to fair market value when indications
exist that this investment has other than temporarily declined in value. As
of December 31, 2004, no impairment in the value of the investment has been
recorded.
(F) Inventories
Inventories are stated at the lower of cost or market value, cost being
determined on a first-in, first-out method. The Company provides inventory
allowances based on excess and obsolete inventories determined principally
by customer demand and product expiration dates.
(G) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures for additions, major renewals and betterments are capitalized
and expenditures for maintenance and repairs are charged to expense as
incurred.
Depreciation is provided on a straight-line basis, less estimated residual
value over the assets estimated useful lives. The estimated useful lives
are as follows:
Buildings 50 Years
Plant and machinery 10 Years
Motor vehicles 8 Years
Furniture, fixtures and equipment 5 Years
Land use rights are stated at cost, less accumulated amortization, and are
further reduced by the amount of the Accrued Retirement Benefit obligation
extinguished through the Company's rehiring of employees (Note6). The land
use rights are amortized over the term of the relevant rights of 50 years
from date of acquisition.
(H) Fair Value of Financial Instruments
Depreciable assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable
based on projected undiscounted cash flows associated with the assets. A
loss is recognized for the difference between the fair value and the
carrying amount of the assets. Fair value is determined based upon market
quote, if available, or is based on valuation techniques.
7
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
The carrying amount of the Company's cash, receivables and payables and
short-term bank loan approximates their fair value due to the short
maturity of those instruments.
(I) Intangible Assets
Under the Statement of Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets", all goodwill and certain intangible assets
determined to have indefinite lives will not be amortized but will be
tested for impairment at least annually. Intangible assets other than
goodwill will be amortized over their useful lives of 10 years and reviewed
for impairment in accordance with SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets".
(J) Revenue Recognition
The Company recognizes revenue from the sale of pharmaceutical products at
the time when title to the products transfers, the amount is fixed and
determinable, evidence of an agreement exists, and the customer bears the
risk of loss, net of estimated provisions for returns, rebates and sales
allowances.
(K) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense totaled
$63,692 and $26,145 for the years ended December 31, 2004 and 2003,
respectively.
(L) Research and Development
Research and development costs related to both present and future products
are expensed as incurred. Total expenditures on research and development
charged to selling, general and administrative expenses for the years ended
December 31, 2004 and 2003 were $193,188 and $19,555, respectively.
(M) Income Taxes
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). Under Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company
8
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
is organized in the British Virgin Islands and the People's Republic of
China and no tax benefit is expected from the tax credits in the future.
The Company located its factories in a special economic region in China.
This economic region allows foreign enterprises a two-year income tax
exemption from central government tax beginning in the first year after
they become profitable and a 50% income tax reduction for the following
three years. The Company was approved as a wholly owned foreign enterprise
in October 2002. Pursuant to a new regulation, "No. 142 enacted during 2004
by the Shanxi Province National Taxation Administration", foreign
investment enterprises established after January 31, 2002 will not be
exempted from the Provincial income tax, which is 3% of the taxable income
(derived under Chinese GAAP). The Company will continue to be exempt from
central government tax as a foreign enterprise. The Company was established
as a wholly foreign owned enterprise on September 30, 2002. The income tax
expense for the years ended December 31, 2004 and 2003 was $451,823 and $0,
respectively.
(N) Foreign Currency Translation
The functional currency of the Company is the Chinese Renminbi ("RMB").
Transactions denominated in currencies other than RMB are translated into
United States dollars using period end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. Net gains and losses resulting from foreign exchange
translations are included in the statements of operations and stockholder's
equity as other comprehensive gain (loss).
(O) Comprehensive Income
The foreign currency translation gain or loss resulting from translation of
the financial statements expressed in RMB to United States Dollar is
reported as other comprehensive income in the statements of operations and
stockholders' equity.
(P) Segments
The Company operates in two reportable segments, Chemical Division and
Pharma Division.
(Q) Reclassifications
Certain 2003 balances have been reclassified to conform with the 2004
presentation.
9
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(R) Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4 SFAS No. 152, "Accounting for
Real Estate Time-Sharing Transactions - an amendment of FASB Statements No.
66 and 67," SFAS No. 153, "Exchanges of Non-monetary Assets - an amendment
of APB Opinion No. 29," and SFAS No. 123 (revised 2004), "Share-Based
Payment," were recently issued. SFAS No. 151, 152, 153 and 123 (revised
2004) have no current applicability to the Company and have no effect on
the financial statements.
NOTE 2 RESTATEMENT
The Company had originally determined under SFAS 141 that it had identified
and measured the fair value of the assets acquired and the liabilities
assumed in the acquisition of the Land Use Rights. During September 2005,
the Company has determined that $1,135,238 of the extinguishment of Accrued
Retirement Benefit should have been accounted for as a reduction of the
Land Use Rights acquired rather than as a gain as previously recorded. As a
result of the change in asset value, the Company has reduced depreciation
expense by $11,352. The Company has restated the financial statements to
account for this non-cash adjustment in accordance with SFAS 141 and
changed its policy to record the extinguishment of Accrued Retirement
Benefits as a reduction of the carrying value of the Land Use Rights.
This reduction in Land Use Rights will also result in a reduction of the
depreciation expense in subsequent periods. The restatement did not have an
effect on the cash flow or liabilities of the Company. The changes to the
financial statements are as follows:
As of December 31, 2004
------------------------------------------------------------------
Previously
Reported Adjustment Restated
---------------------------- -------------------- ----------------
Current assets 25,283,300 25,283,300
Property and equipment 63,520,202 (1,123,886) 62,396,316
Other assets 2,658,688 2,658,688
-------------------------- ---------------
Total assets 91,462,190 90,338,304
========================== ===============
Liabilities 68,800,517 68,800,517
-------------------------- ---------------
Share capital 14,027,504 14,027,504
Retained earnings 8,686,318 (1,123,886) 7,562,432
Due from shareholder (52,149) (52,149)
-------------------------- ---------------
Total equity 22,661,673 21,537,787
-------------------------- ---------------
Total liabilities and equity 91,462,190 90,338,304
========================== ===============
10
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Year ended December 31, 2004
-----------------------------------------------------------------
Previously
Reported Adjustment Restated
-------------------------- ------------------ -------------------
Net Sales $29,023,130 $29,023,130
Cost of sales 16,140,305 16,140,305
-------------------------- ---------------
Gross profit 12,882,825 12,882,825
Operating expenses 5,867,948 (11,352) 5,856,596
-------------------------- ---------------
Income from operations 7,014,877 7,026,229
Other income (expenses) 923,255 (1,135,238) (211,983)
-------------------------- ---------------
Income before taxes 7,938,132 6,814,246
Income tax expense 451,823 451,823
-------------------------- ---------------
Net income $ 7,486,309 $6,362,423
========================= ===============
Net income per share $ 149.73 $ 127.25
========================= ===============
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 3 ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2004 and 2003 consisted of the
following:
2004 2003
---------------- ----------------
Trade and other receivables $ 6,799,872 $ 4,267,353
Less: allowance for doubtful accounts 124,574 -
---------------- ----------------
Accounts receivable, net $ 6,675,298 $ 4,267,353
================ ================
For the years ended December 31, 2004 and 2003, the Company recorded an
allowance for doubtful accounts of $124,574 and nil, respectively.
NOTE 4 INVENTORIES
Inventories at December 31, 2004 and 2003 consisted of the following:
2004 2003
---------------- ---------------
Raw materials $ 4,287,604 $ 2,729,091
Work-in-progress 10,994,088 1,423,182
Finished goods 2,302,073 3,682,293
---------------- ---------------
17,583,765 7,834,566
Less: provision for obsolescence and
impairment 959,859 46,481
---------------- ---------------
$ 16,623,906 $ 7,488,085
================ ===============
11
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
For the years ended December 31, 2004 and 2003, the Company recorded a
provision for obsolete inventories of $613,378 and $346,481, respectively.
NOTE 5 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2004
and 2003:
RESTATED
(NOTE 2)
2004 2003
------------------ -----------------
Plant and machinery $ 41,154,014 $ 22,997,197
Land and Buildings 18,552,438 5,161,270
Motor vehicles 611,261 355,616
Furniture and office equipment 2,499,188 729,165
Construction in progress 2,691,179 9,252,141
------------------ -----------------
65,508,080 38,495,389
Less: accumulated depreciation 3,111,764 498,783
------------------ -----------------
Property and equipment, net $ 62,396,316 $ 37,996,606
================== =================
Depreciation expense for the years ended December 31, 2004 and 2003 was
$2,612,981 and $479,659 respectively.
NOTE 6 ACQUISITIONS
During July 2003, the Company acquired land use rights and buildings from a
government liquidator in exchange for assuming certain future employment,
healthcare and land acquisition costs of the factory and its former
employees. The agreement requires the Company to pay certain minimum wages
and health care costs until the date of their employment, retirement or
death, whichever occurs first. The total amount of the liabilities assumed
on the closing date was $8,897,685. The Company has calculated the related
asset value by computing the net present value of the future expected
payments to the remaining employees assuming an interest rate of 3% and has
recorded the land at a net present value of $3,332,907 (See Notes 8 and
14). As of December 31, 2004, the Company had employed 651 former employees
and 207 former employees have retired. Subsequent to the acquisition the
Company rehired a number of the former employees, reducing the expected
future payments required. The Company has accounted for the reduction of
the obligation by reducing the amount of Land Use Rights recorded.
12
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
The cost of Land Use Rights is as follows:
RESTATED
(NOTE 2)
2004 2003
------------ --------------
Original cost recorded $ 3,332,907 $ 3,332,907
Less: reduction of accrued retirement benefit 1,135,238 -
------------- --------------
Cost of Land Use Rights $ 2,197,669 $ 3,332,907
============= ==============
The Company intends to reduce the Land Use Rights should the future
payments be further reduced due to additional former employees being
rehired.
NOTE 7 INTANGIBLE ASSETS
During May 2002, the Company acquired licenses from a company related to a
director.
Intangible assets consist of the following as of December 31, 2004 and
2003:
2004 2003
------------ -------------
Licenses $ 603,865 $ 603,865
Less: accumulated amortization 171,096 110,710
------------ -------------
$ 432,769 $ 493,155
============ =============
Amortization expense for the years ended December 31, 2004 and 2003 was
$60,386, and $60,387, respectively.
13
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 8 ACCRUED RETIREMENT BENEFITS
During July 2003, the Company acquired land use rights and buildings from a
government liquidator. The present value of accrued expected land costs is
recorded at December 31, 2004 and 2003 as follows:
2004 2003
----------------- ------------------
Total liabilities assumed at closing date $ 8,897,685 $ 8,897,685
Less: net present value of liabilities not expected
to be paid 5,564,778 5,564,778
----------------- ------------------
Present value of expected liabilities 3,332,907 3,332,907
Less: amounts paid and liabilities not expected
to be paid 2,348,154 930,107
----------------- ------------------
984,753 2,402,800
Less: current portion 114,432 565,618
----------------- ------------------
$ 870,321 $ 1,837,182
================= ==================
Under the terms of the contract with the liquidator, the Company will
remain contingently liable for these liabilities until the date of
retirement or re-employment for each employee (See Notes 6 and 14).
NOTE 9 OTHER PAYABLES AND ACCRUED LIABILITIES
Other payables and accrued liabilities at December 31, 2004 and 2003
consist of the following:
2004 2003
----------------- ------------------
Machinery and equipment payable $ 7,050,243 $ 8,510,372
Accrued expenses 6,360,198 2,905,155
Value added tax payables - 187,083
Income taxes payable 166,495 -
Other taxes payable 121,054 1,429
Deposits received from customers 4,007,173 1,691,652
----------------- ------------------
$ 17,705,163 $ 13,295,691
================= ==================
14
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 10 NOTES PAYABLE
Balance at December 31, 2004 and 2003:
2004 2003
----------------- -----------------
Note payable to a bank, interest rate of 6.372% per $ 420,290 $ 420,290
annum, guaranteed by a third party, due June 2005
Note payable to a bank, interest rate of 6.372% per
annum, guaranteed by a third party, due June 2005 386,473 386,473
Note payable to a bank, interest rate of 6.138% per
annum, guaranteed by a third party, due June 2005 3,623,188 -
Note payable to a bank, interest rate of 6.039% per annum, secured by
leasehold land and fixed assets, due
April 2005 8,454,106 8,454,106
Note payable to a bank, interest rate of 5.76% per annum,
guaranteed by a third party, due November 2006 6,316,426 -
----------------- ------------------
19,200,483 9,260,869
Less current maturities 12,884,057 806,763
----------------- ------------------
$ 6,316,426 $ 8,454,106
================= ==================
Maturities are as follows:
For the Year Ending December 31,
2005 $ 12,884,057
2006 6,316,426
-------------------
$ 19,200,483
===================
NOTE 11 LONG TERM ACCOUNTS PAYABLE
Long term accounts payable balance at December 31, 2004 is the final
payment of construction contracts which had been finished through December
31, 2004. According to the contract terms, the final payments on the
contracts will be settled as follows:
Settlement Arrangement
Accounts payable due 2006 $ 21,873,147
=============
15
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 12 DUE TO RELATED PARTIES
Accounts payable - related party balances at December 31, 2004 and 2003:
2004 2003
----------------- -------------------
Due to a company owned by a stockholder and director due
March 2006 $ 1,328,502 $ -
Due to a company owned by a stockholder and director - 5,239,360
Due to a company owned by a stockholder and director 4,660,984 269,775
----------------- -------------------
5,989,486 5,509,135
Less: current maturities 4,660,984 5,509,135
----------------- -------------------
$ 1,328,502 $ -
================= ===================
NOTE 13 SEGMENTS
The Company operates in two reportable segments, Pharma Division and
Chemical Division. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. The Company
evaluates segment performance based on income from operations. All
intercompany transactions between segments have been eliminated. As a
result, the components of operating income for one segment may not be
comparable to another segment. The following is a summary of the Company's
segment information for the years ended December 31, 2004 and 2003.
Chemical Pharma
Division Division Total
------------------- ----------------- -----------------
2004
Sales $ 4,248,906 24,774,224 29,023,130
Gross profit 216,380 12,666,445 12,882,825
Total assets (RESTATED-NOTE 2) 66,726,390 23,611,914 90,338,304
Additions to long-lived assets 27,295,156 852,773 28,147,929
Intangible assets - 432,769 432,769
Depreciation and 2,033,933 639,434 2,673,367
amortization(RESTATED-NOTE 2)
16
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2003
Sales $ - $ 26,086,092 26,086,092
Gross profit - 12,032,671 12,032,671
Total assets 29,553,673 23,572,839 53,126,512
Additions to long-lived assets 29,553,673 3,155,454 32,709,127
Intangible assets - 493,155 493,155
Depreciation and amortization - 540,046 540,046
NOTE 14 COMMITMENTS AND CONTINGENCIES
(A) Employee Benefits
The full time employees of the Company are entitled to employee benefits
including medical care, welfare subsidies, unemployment insurance and
pension benefits through a Chinese government mandated multi-employer
defined contribution plan. The Company is required to accrue for those
benefits based on certain percentages of the employees' salaries. The total
provision for such employee benefits was $642,856 and $294,136 for the
years ended December 31, 2004 and 2003, respectively. The Company is
required to make contributions to the plans out of the amounts accrued for
medical and pension benefits. The Chinese government is responsible for the
medical benefits and the pension liability to be paid to these employees.
(B) Loan Guarantee
The Company has issued a guarantee to a bank as security for a loan to a
third party vendor. The total loan guarantee as of December 31, 2004 was
$2,596,618.
The Company has also issued a guarantee to a bank as security for a loan to
a third party vendor. The total loan guarantee as of December 31, 2004 was
$6,036,647. The vendor pledged its assets totaling $8,484,101 to the
Company for this guarantee.
(C) Capital Commitments
According to the Articles of Association of Shanxi Weiqida, Oriental Wave
has to fulfill registered capital of $19,205,116 (RMB 159,018,360) within
five years from December 16, 2003. As of December 31, 2004, the Company has
fulfilled $13,977,504 (RMB 115,733,733) of registered capital requirement
and has registered capital commitments of $5,227,612 (See Notes 15(A) and
18 (A) & (B)).
17
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(D) Contingent Employment Benefits
During July 2003, the Company acquired land and buildings from a government
liquidator in exchange for assuming certain future employment, healthcare
and land acquisition costs of the factory and its former employees. Under
the terms of the contract with the liquidator, the Company will remain
contingently liable for these liabilities until the date of retirement,
re-employment or death for each employee. As of December 31, 2004, the
Company has rehired 651 former employees and 207 employees have retired. If
the Company is unable to provide continued employment to these individuals,
it will be liable to pay each former employee approximately $49 per month
until his or her date of retirement or death, whichever comes first (See
Notes 6 & 8).
NOTE 15 STOCKHOLDERS' EQUITY
(A) Capital Contribution
On January 5, 2004, Shanxi Weiqida declared a one-time dividend of
$6,141,639 to be used to satisfy its registered capital requirement (See
Note 14(C)).
(B) Appropriated Retained Earnings
Shanxi Weiqida is required to make appropriations to reserves funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on after-tax net income determined in
accordance with generally accepted accounting principles of the People's
Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus
reserve should be at least 10% of the after tax net income determined in
accordance with the PRC GAAP until the reserve is equal to 50% of the
entities' registered capital. Appropriations to the statutory public
welfare fund are at 5% to 10% of the after tax net income determined in
accordance with the PRC GAAP. The statutory public welfare fund is
established for the purpose of providing employee facilities and other
collective benefits to the employees and is non-distributable other than in
liquidation. Appropriations to the discretionary surplus reserve are made
at the discretion of the Board of Directors.
The Company appropriated $6,275,648 to the reserves funds based on its net
income under PRC GAAP.
NOTE 16 RELATED PARTY TRANSACTIONS
See Notes 7 and 12.
18
ORIENTAL WAVE HOLDING LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 17 CONCENTRATIONS AND RISKS
During the years ended December 31, 2004 and 2003, 95% and 100%,
respectively, of the Company's revenues were derived from companies located
in China and 100% its assets are located in China.
NOTE 18 SUBSEQUENT EVENTS
(A) Acquisition
On June 11, 2004, the Company entered into a share purchase agreement with
a pharmaceutical company. The transaction will result in the shareholders
of the Company owning the majority of the issued and outstanding shares of
the new combined entity. The transaction will be accounted for as a
purchase by the Company. On January 12, 2005, the Company completed the
acquisition with Dragon Pharmaceutical, Inc. The Company's stockholders
received 44,502,004 shares or 68.35 % of the outstanding shares of common
stock.
Concurrent with the acquisition agreement, the principal stockholder of the
Company agreed to convert approximately $2,415,500 of loans payable to a
related entity into equity of the Company.
(B) Contribution of Capital
On January 31, 2005 Oriental Wave paid Shanxi Weiqida $479,988 towards its
registered capital requirement under Chinese law.
19
PRO-FORMA FINANCIAL INFORMATION
1
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
PRO-FORMA CONSOLIDATED BALANCE SHEET
As of December 31, 2004
(Expressed in US Dollars)
ORIENTAL PRO-FORMA PRO-FORMA
WAVE DRAGON ADJUSTMENT CONSOLIDATED
----------------- -------------- ------------------ --------------------
ASSETS
Current
Cash and short term securities $ 910,425 $2,161,781 $ 3,072,206
Accounts and other receivable 6,837,741 1,382,019 8,219,760
Inventories 16,623,906 585,565 17,209,471
Due from director 100 100
Prepaid and deposits 911,228 401,727 (a) (301,306) 1,011,649
----------------- -------------- --------------------
Total Current Assets 25,283,300 4,531,192 29,513,186
----------------- -------------- --------------------
Fixed Assets 62,396,316 873,036 63,269,352
Other Tangible Assets 2,225,919 2,225,919
Other Assets
Patent rights and Hep B Vaccine -
Intangible and other assets, net 432,769 2,372,207 2,804,976
----------------- -------------- --------------------
Total Other Assets 432,769 2,372,207 2,804,976
----------------- -------------- --------------------
Total Assets $90,338,304 $7,776,435 $97,813,433
================= ============== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DIFFICIENCY)
Current Liabilities
Accounts payables and accrued liabilities $ 20,867,080 $ 1,548,144 $22,415,224
Notes payable - short-term 12,884,058 12,884,058
Due to related companies 4,660,984 (b) (2,420,000) 2,240,984
----------------- -------------- --------------------
Total Current Liabilities 38,412,122 1,548,144 37,540,266
----------------- -------------- --------------------
Long-term Liabilities
Long-term account payable 22,743,468 22,743,468
Notes payable - long-term 6,316,425 6,316,425
Due to related companies 1,328,502 1,328,502
----------------- -------------- --------------------
Total Liabilities 68,800,517 1,548,144 67,928,661
----------------- -------------- --------------------
Minority Interest
----------------- -------------- --------------------
Stockholders' Equity (Deficiency)
Share Capital 50,000 18,376 (a) (5,498) 62,878
Additional paid in capital 13,977,504 24,176,970 (a) (18,262,863) 22,311,611
(b) 2,420,000
Due from a stockholder (52,149) (52,149)
Accumulated other comprehensive (loss) (34,807) (a) 34,807 -
Retained earnings (deficit) 7,562,432 (17,932,248) (a) 17,932,248 7,562,432
----------------- -------------- --------------------
Total stockholders' equity 21,537,787 6,228,291 29,884,772
----------------- -------------- --------------------
Total liabilities and equity $90,338,304 $7,776,435 $97,813,433
================= ============== ====================
2
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2004
(Expressed in US Dollars)
ORIENTAL PRO-FORMA PRO-FORMA
ADJUST- CONSOLI-
WAVE DRAGON MENT DATED
--------------- ------------- ---------------- ------------------
Sales $ 29,023,130 $3,705,261 $ 32,728,391
Cost of Sales 16,140,305 1,546,028 17,686,333
--------------- ------------- ------------------
Gross Profit 12,882,825 2,159,233 15,042,058
Operating Expenses
Selling, general and
administrative expenses 5,578,147 3,354,522 8,932,669
Depreciation and amortization of fixed assets 278,449 706,941 985,390
--------------- ------------- ------------------
Total operating expenses 5,856,596 4,061,463 9,918,059
--------------- ------------- ------------------
7,026,229 (1,902,230) 5,123,999
Net write off of land-use right and fixed assets (937,777) (937,777)
New market and EPO development expenses (246,080) (246,080)
Provision for doubtful debts -
Loan interest expense (216,634) (4,223) (220,857)
--------------- ------------- ------------------
Income (Loss) from Operations 6,809,595 (3,090,310) 3,719,285
Other Income (Expenses)
Interest Income (expense) 41,106 41,106
Other income 61,881 2,106,486 2,168,367
Other expense (57,230) (57,230)
--------------- ------------- ------------------
Income (Loss) before income taxes and minority interest 6,814,246 (942,718) 5,871,528
Minority interest
Income Tax Expense (451,823) - (451,823)
--------------- ------------- ------------------
Net Income (Loss) for the year 6,362,423 (942,718) 5,419,705
=============== ============= ==================
$
Net Income (Loss) per share - basic $ 127.25 $ (0.05) 0.08
=============== ============= ==================
Weighted average number of common shares
outstanding - basic 50,000 20,551,440 65,053,444
=============== ============= ==================
3
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
PRO-FORMA CONSOLIDATED BALANCE SHEET
As of December 31, 2003
(Expressed in US Dollars)
ORIENTAL PRO-FORMA PRO-FORMA
WAVE DRAGON ADJUSTMENT CONSOLIDATED
----------------- -------------- --------------- ------------------
ASSETS
Current
Cash and short term securities $ 515,791 $ 3,126,667 $ 3,642,458
Accounts receivable 4,267,353 1,265,676 5,533,029
Inventories 7,488,085 1,090,464 8,578,549
Due from director (a) 500,100 500,100
Prepaid and deposits 119,070 139,595 258,665
----------------- --------------
------------------
Total Current Assets 12,390,299 5,622,402 18,512,801
----------------- -------------- ------------------
Fixed Assets 37,996,606 2,089,352 40,085,958
Other Tangible Assets 2,246,452 2,246,452
Other Assets
Patent rights and Hep B Vaccine 500,100 (a) (500,100) -
Intangible and other assets, net 493,155 2,924,198 (a) - 3,417,353
----------------- -------------- ------------------
Total Other Assets 493,155 3,424,298 3,417,353
----------------- -------------- ------------------
Total Assets $53,126,512 $11,136,052 $64,262,564
================= ============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DIFFICIENCY)
Current Liabilities
Accounts payables and accrued liabilities $ 21,519,961 $1,428,257 $ 22,948,218
Notes payable - short-term 806,763 806,763
Due to a stockholder and related companies 5,509,135 (b) (5,100,000) 409,135
----------------- --------------
------------------
Total Current Liabilities 27,835,859 1,428,257 24,164,116
----------------- -------------- ------------------
Long-term Liabilities
Long-term account payable 1,837,182 1,837,182
Notes payable - long-term 8,454,106 8,454,106
Due to related companies (b) 2,680,000 2,680,000
----------------- -------------- ------------------
Total Liabilities 38,127,147 1,428,257 37,135,404
----------------- -------------- ------------------
Minority Interest
----------------- -------------- ------------------
Stockholders' Equity (Deficiency)
Share Capital 50,000 20,462 (a) (5,509) 64,953
Additional paid in capital 7,835,865 26,708,870 (a) (17,016,028) 19,948,707
(b) 2,420,000
Due from a stockholder (228,148) (228,148)
Accumulated other comprehensive (loss) (32,007) (a) 32,007 -
Retained earnings (deficit) 7,341,648 (16,989,530) (a) 16,989,530 7,341,648
----------------- -------------- ------------------
Total stockholders' equity 14,999,365 9,707,795 27,127,160
----------------- -------------- ------------------
Total liabilities and equity $53,126,512 $11,136,052 $64,262,564
================= ============== ==================
4
DRAGON PHARMACEUTICAL INC. & SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
(Expressed in US Dollars)
ORIENTAL PRO-FORMA PRO-FORMA
WAVE DRAGON ADJUSTMENT CONSOLIDATED
------------ ------- ---------- ------------
Sales $ 26,086,092 $ 3,648,149 $ 29,734,241
Cost of Sales 13,817,298 1,184,896 15,002,194
--------------- --------------- ---------------
Gross Profit 12,268,794 2,463,253 14,732,047
Operating Expenses
Selling, general and
administrative expenses 4,156,373 3,391,430 7,547,803
Depreciation and amortization of fixed assets 540,046 743,080 1,283,126
---------------- --------------- -------------------
Total operating expenses 4,696,419 4,134,510 8,830,929
---------------- --------------- -------------------
7,572,375 (1,671,257) 5,901,118
Net write off of land-use right and fixed assets (165,912) (165,912)
New market and EPO development expenses (216,560) (216,560)
Provision for doubtful debts (29,450) (29,450)
Loan interest expense (6,357) (6,357)
---------------- --------------- -------------------
Income (Loss) from Operations 7,572,375 (2,089,536) 5,482,839
Other Income (Expenses)
Interest Income (expense) (32,384) 138,802 106,418
Other income 63,675 63,675
Other expense (19,694) (19,694)
---------------- --------------- -------------------
Income (Loss) before income taxes and minority
interest 7,583,972 (1,950,734) 5,633,238
Minority interest
Income Tax Expense (44,000) (44,000)
------------------ ---------------- -------------------
Net Income (Loss) for the year 7,583,972 (1,994,734) 5,589,238
================= =============== ===================
Net Income (Loss) per share - basic $ 151.68 $ (0.10) 0.09
================= =============== ===================
Weighted average number of common shares
outstanding - basic 50,000 20,348,195 64,839,402
================= =============== ===================
5
Dragon Pharmaceutical Inc. & Subsidiaries
Notes to Unaudited Pro Forma Combined Consolidated Financial Statements
As of December 31, 2004 and December 31, 2003
(Expressed in US Dollars)
1. Basis of Presentation
The accompanying unaudited pro-forma consolidated financial statements have
been prepared by management of Dragon in accordance with generally accepted
accounting principles of the United States. In the opinion of the management,
the pro-forma consolidated financial statements include all material adjustments
necessary for fair presentation in accordance with generally accepted accounting
principles of the United States.
These pro forma consolidated financial statements have been prepared to
give effect to Dragon Pharmaceutical, Inc.'s acquisition of Oriental Wave
Holding Limited which occurred on January 12, 2005. These pro forma consolidated
financial statements are not necessarily indicative of the actual results which
would have been attained had the combination been in effect on the date
indicated or may be attained in the future.
These pro forma consolidated financial statements have been prepared from
information derived from information derived from the audited consolidated
financial statements of Dragon and Oriental Wave as at December 31, 2004 and
2003. These pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and notes thereto of both
Dragon and Oriental Wave for the year, ended December 31, 2004 and 2003.
2. Share Purchase Agreement and Assumptions
Pursuant to a Share Purchase Agreement dated June 11, 2004, Dragon agreed
to issue 44,502,004 shares of common stock in exchange for 100% of the
outstanding shares of Oriental Wave. The acquisition was completed on January
12, 2005. The exchange resulted in the former shareholders of Oriental Wave
owning a majority of Dragon's shares and, consequently, accounting principles
applicable to a reverse take-over have been applied to record the transaction.
Under this basis of accounting, Oriental Wave has been identified as the
acquirer and, accordingly, the combined company is considered to be a
continuation of the operations of Oriental Wave and include Dragon's accounts
from the acquisition date. The pro forma consolidated balance sheets as of
December 31, 2004 and 2003 have been prepared as though the acquisition had
occurred on December 31, 2004 and the pro forma consolidated statement of
operations for the years ended December 31, 2004 and 2003 have been prepared as
though the acquisition had occurred on January 1, 2003.
3. Pro Forma Adjustments
These unaudited pro forma consolidated financial statements reflect the
following pro forma adjustments:
(a) Adjustment to record acquisition of the net assets of Dragon by
Oriental Wave as though the acquisition occurred December 31, 2004. The net
assets acquired are:
6
Dragon Pharmaceutical Inc. & Subsidiaries
Notes to Unaudited Pro Forma Combined Consolidated Financial Statements
As of December 31, 2004 and 2003
(Expressed in US Dollars)
Cash and short term securities......................... $ 2,161,781
Accounts receivable.................................... 1382,019
Inventories............................................ 585,565
Due from director...................................... 100
Prepaid and deposits................................... 100,421
------------
Total Current Assets................................ 4,531,192
Fixed Assets........................................... 873,036
Other Assets...........................................
Intangible and other assets, net....................... 2372,207
-------------
Total Assets........................................ 7,475,129
Less accounts payables and accrued liabilities......... (1,548,144)
--------------
Net assets acquired................................ $ 5,926,985
==============
.
(b) Oriental Wave's stockholders agreed to the conversion of 20 million RMB
(US$2,420,000) of the debt to equity upon the completion of the
acquisition. These pro forma consolidated financial statements reflect this
transaction having occurred on December 31, 2004.
7