Attached files
| file | filename |
|---|---|
| 8-K - Oriental Dragon Corp | v163424_8k.htm |
| EX-4.1 - Oriental Dragon Corp | v163424_ex4-1.htm |
| EX-2.1 - Oriental Dragon Corp | v163424_ex2-1.htm |
| EX-10.4 - Oriental Dragon Corp | v163424_ex10-4.htm |
| EX-10.9 - Oriental Dragon Corp | v163424_ex10-9.htm |
| EX-16.1 - Oriental Dragon Corp | v163424_ex16-1.htm |
| EX-10.3 - Oriental Dragon Corp | v163424_ex10-3.htm |
| EX-10.7 - Oriental Dragon Corp | v163424_ex10-7.htm |
| EX-10.2 - Oriental Dragon Corp | v163424_ex10-2.htm |
| EX-10.5 - Oriental Dragon Corp | v163424_ex10-5.htm |
| EX-10.1 - Oriental Dragon Corp | v163424_ex10-1.htm |
| EX-10.8 - Oriental Dragon Corp | v163424_ex10-8.htm |
| EX-99.2 - Oriental Dragon Corp | v163424_ex99-2.htm |
| EX-10.6 - Oriental Dragon Corp | v163424_ex10-6.htm |
| EX-10.12 - Oriental Dragon Corp | v163424_ex10-12.htm |
| EX-10.11 - Oriental Dragon Corp | v163424_ex10-11.htm |
| EX-10.10 - Oriental Dragon Corp | v163424_ex10-10.htm |
MERIT
TIMES INTERNATIONAL LIMITED AND SUBIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
For
the Years Ended December 31, 2008 and 2007
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
INDEX TO
CONSOLIATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
CONTENTS
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets - As of December 31, 2008 and 2007
|
F-3
|
|
Consolidated
Statements of Income -
|
|
|
For
the Years ended December 31, 2008 and 2007
|
F-4
|
|
Consolidated
Statements of Stockholder’s Equity -
|
|
|
For
the Years ended December 31, 2008 and 2007
|
F-5
|
|
Consolidated
Statements of Cash Flows –
|
|
|
For
the Years ended December 31, 2008 and 2007
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7 to F-17
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Merit
Times International Limited and Subsidiaries
British
Virgin Islands
We have audited the accompanying
consolidated balance sheets of Merit Times International Limited and
Subsidiaries as of December 31, 2008 and 2007 and the related consolidated
statements of income, changes in stockholder’s equity, and cash flows for the
years ended December 31, 2008 and 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining on a test basis, evidence
supporting the amount and disclosures in the consolidated 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 Shandong Merit Times
International Limited and Subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for the years ended December
31, 2008 and 2007, in conformity with accounting principles generally accepted
in the United States of America.
|
/s/
Sherb & Co., LLP
|
|
Certified
Public
Accountants
|
New York,
New York
June 22,
2009
F-2
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,028,858 | $ | 9,171,445 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts
|
5,102,763 | 1,548,235 | ||||||
|
Inventories,
net of reserve for obsolete inventory
|
15,589,977 | 19,939,236 | ||||||
|
Prepaid
value-added taxes on purchases
|
433,109 | 360,051 | ||||||
|
Prepaid
expenses and other
|
994,199 | 945,357 | ||||||
|
Total
Current Assets
|
24,148,906 | 31,964,324 | ||||||
|
PROPERTY
AND EQUIPMENT - net
|
7,464,680 | 7,878,177 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Land
use rights, net
|
16,287,091 | 5,035,762 | ||||||
|
Total
Assets
|
$ | 47,900,677 | $ | 44,878,263 | ||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
portion of loan payable
|
$ | 10,212,716 | $ | 5,468,889 | ||||
|
Accounts
payable
|
1,050,806 | 987,925 | ||||||
|
Accrued
expenses
|
270,474 | 212,094 | ||||||
|
Acquisition
payables
|
850,501 | 4,908,809 | ||||||
|
Income
taxes payable
|
2,366,211 | 4,596,016 | ||||||
|
Total
Current Liabilities
|
14,750,708 | 16,173,733 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Loan
payable, net of current portion
|
3,568,628 | 11,985,596 | ||||||
|
Total
Liabilities
|
18,319,336 | 28,159,329 | ||||||
|
COMMITMENTS
|
||||||||
|
STOCKHOLDER'S
EQUITY:
|
||||||||
|
Common
stock ($1.00 par value; 50,000 shares authorized, 50,000 shares issued and
outstanding at December 31, 2008 and 2007, respectively)
|
50,000 | 50,000 | ||||||
|
Additional
paid-in capital
|
1,207,729 | 1,207,729 | ||||||
|
Subscription
receivable
|
(50,000 | ) | (50,000 | ) | ||||
|
Retained
earnings
|
23,009,955 | 12,710,564 | ||||||
|
Statutory
and non-statutory reserves
|
2,949,814 | 1,690,804 | ||||||
|
Other
comprehensive gain - cumulative foreign currency translation
adjustment
|
2,413,843 | 1,109,837 | ||||||
|
Total
Stockholder's Equity
|
29,581,341 | 16,718,934 | ||||||
|
Total
Liabilities and Stockholder's Equity
|
$ | 47,900,677 | $ | 44,878,263 | ||||
See notes
to audited consolidated financial statements
F-3
CONSOLIDATED
STATEMENTS OF INCOME
|
For the Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
NET
REVENUES
|
$ | 74,232,226 | $ | 65,038,233 | ||||
|
COST
OF SALES
|
54,897,949 | 49,857,042 | ||||||
|
GROSS
PROFIT
|
19,334,277 | 15,181,191 | ||||||
|
OPERATING
EXPENSES:
|
||||||||
|
Selling
|
686,724 | 537,704 | ||||||
|
Research
and development
|
256,283 | 477,365 | ||||||
|
General
and administrative
|
1,710,215 | 815,249 | ||||||
|
Total
Operating Expenses
|
2,653,222 | 1,830,318 | ||||||
|
INCOME
FROM OPERATIONS
|
16,681,055 | 13,350,873 | ||||||
|
OTHER
INCOME (EXPENSE):
|
||||||||
|
Interest
income
|
50,251 | 37,652 | ||||||
|
Interest
expense
|
(976,204 | ) | (1,001,704 | ) | ||||
|
Other
income
|
- | 6,064 | ||||||
|
Total
Other Income (Expense)
|
(925,953 | ) | (957,988 | ) | ||||
|
INCOME
BEFORE INCOME TAXES
|
15,755,102 | 12,392,885 | ||||||
|
INCOME
TAXES
|
4,196,701 | 4,413,134 | ||||||
|
NET
INCOME
|
$ | 11,558,401 | $ | 7,979,751 | ||||
|
COMPREHENSIVE
INCOME:
|
||||||||
|
NET
INCOME
|
$ | 11,558,401 | $ | 7,979,751 | ||||
|
OTHER
COMPREHENSIVE INCOME:
|
||||||||
|
Unrealized
foreign currency translation gain
|
1,304,006 | 872,141 | ||||||
|
COMPREHENSIVE
INCOME
|
$ | 12,862,407 | $ | 8,851,892 | ||||
See notes
to audited consolidated financial statements
F-4
CONSOLIDATED
STATEMENTS OF STOCKHOLDER'S EQUITY
For the
Years Ended December 31, 2008 and 2007
|
Common Stock
|
Additional
|
Statutory and
|
Other
|
Total
|
|||||||||||||||||||||||||||
|
Number of
|
Paid-in
|
Subscription
|
Retained
|
Non-Statutory
|
Comprehensive
|
Stockholder's
|
|||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Receivable
|
Earnings
|
Reserves
|
Income
|
Equity
|
||||||||||||||||||||||||
|
Balance,
December 31, 2006
|
50,000 | $ | 50,000 | $ | 1,207,729 | $ | (50,000 | ) | $ | 5,626,813 | $ | 794,804 | $ | 237,696 | $ | 7,867,042 | |||||||||||||||
|
Adjustment
to non-statutory reserves
|
- | - | - | - | (896,000 | ) | 896,000 | - | - | ||||||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | 7,979,751 | - | - | 7,979,751 | |||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | - | - | 872,141 | 872,141 | |||||||||||||||||||||||
|
Total
comprehensive income
|
- | - | - | - | - | - | - | 8,851,892 | |||||||||||||||||||||||
|
Balance,
December 31, 2007
|
50,000 | 50,000 | 1,207,729 | (50,000 | ) | 12,710,564 | 1,690,804 | 1,109,837 | 16,718,934 | ||||||||||||||||||||||
|
Adjustment
to non-statutory reserves
|
- | - | - | - | (1,259,010 | ) | 1,259,010 | - | - | ||||||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||||||
|
Net
income for the year
|
- | - | - | - | 11,558,401 | - | - | 11,558,401 | |||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | - | - | 1,304,006 | 1,304,006 | |||||||||||||||||||||||
|
Total
comprehensive income
|
- | - | - | - | - | - | - | 12,862,407 | |||||||||||||||||||||||
|
Balance,
December 31, 2008
|
50,000 | $ | 50,000 | $ | 1,207,729 | $ | (50,000 | ) | $ | 23,009,955 | $ | 2,949,814 | $ | 2,413,843 | $ | 29,581,341 | |||||||||||||||
See notes
to audited consolidated financial statements
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Years Ended
|
||||||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 11,558,401 | $ | 7,979,751 | ||||
|
Adjustments
to reconcile net income from operations to net cash provided by operating
activities:
|
||||||||
|
Depreciation
|
930,720 | 843,113 | ||||||
|
Amortization
of land use rights
|
538,202 | 148,186 | ||||||
|
Increase
in allowance for doubtful accounts
|
- | 37,431 | ||||||
|
Increase
in reserve for inventory obsolescence
|
30,055 | 23,543 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(3,397,094 | ) | (1,121,352 | ) | ||||
|
Inventories
|
5,568,816 | (196,060 | ) | |||||
|
Prepaid
and other current assets
|
(33,778 | ) | 503,061 | |||||
|
Accounts
payable
|
(3,353 | ) | 346,610 | |||||
|
Accrued
expenses
|
880,768 | 614,076 | ||||||
|
Income
taxes payable
|
(2,498,796 | ) | 1,929,684 | |||||
|
Advances
from customers
|
- | (93,048 | ) | |||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
13,573,941 | 11,014,995 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of land use rights
|
(11,282,274 | ) | (3,548,910 | ) | ||||
|
Purchase
of property and equipment
|
(3,238 | ) | (4,451 | ) | ||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(11,285,512 | ) | (3,553,361 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Payment
on loan payable
|
(4,769,114 | ) | - | |||||
|
Payments
on acquisition payables
|
(5,156,884 | ) | (3,947,949 | ) | ||||
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(9,925,998 | ) | (3,947,949 | ) | ||||
|
EFFECT
OF EXCHANGE RATE ON CASH
|
494,982 | 500,558 | ||||||
|
NET
(DECREASE) INCREASE IN CASH
|
(7,142,587 | ) | 4,014,243 | |||||
|
CASH -
beginning of year
|
9,171,445 | 5,157,202 | ||||||
|
CASH
- end of year
|
$ | 2,028,858 | $ | 9,171,445 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for:
|
||||||||
|
Interest
|
$ | 976,204 | $ | 1,001,704 | ||||
|
Income
taxes
|
$ | 6,695,497 | $ | 2,483,449 | ||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Unappropriated
retained earnings allocated to statutory reserve
|
$ | 1,259,010 | $ | 896,000 | ||||
See notes
to audited consolidated financial statements.
F-6
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Merit Times International Limited
(“Merit” or the “Company”) was established on February 8, 2008, under the laws of British Virgin Islands. The shareholder of Merit is a Chinese citizen who owns a majority of Shandong Longkang Fruit Juice
Co., Ltd. (“Longkang”) which is a limited liability company and was formed under laws of the
People’s Republic of China (“PRC”). Merit was established as a “special purpose vehicle” for foreign fund raising for
Longkang.
On June 9, 2009, Merit established a 100% owned subsidiary,
Shandong MeKeFuBang Food
Co. Ltd. (“MeKeFuBang”), in PRC as a wholly owned foreign
limited liability company. MeKeFuBang intends to be engaged in the production and
distribution of highly specialized pear and other fruit juice concentrates in
the People Republic of China (PRC).
On June 10, 2009, MeKeFuBang entered a series of contractual
arrangements (the “Contractual Arrangements”) with Longkang and its shareholders in which
MeKeFuBang takes over management of business
activities of Longkang and holds a 100% variable interest in
Longkang. The Contractual
Arrangements are comprised of a series of agreements, including a Consulting Services Agreement and an
Operating Agreement, through which MeKeFuBang has the right to advise, consult, manage
and operate Longkang, and
collect and own all of their respective net profits. Additionally,
Longkang Shareholders have granted
their voting rights over
Longkang to MeKeFuBang. In order to further reinforce
MeKeFuBang’s rights to control and operate
Longkang,
Longkang and its shareholders have granted
MeKeFuBang, the exclusive right and option to
acquire all of their equity interests in Longkang or, alternatively, all of the assets of
Longkang. Further
Longkang Shareholders have pledged all of their
rights, titles and interests in Longkang to MeKeFuBang. This has been accounted for as a
reorganization of entities and the financial statements have been prepared as if the
reorganization had occurred retroactively. The Company consolidates
Longkang results, assets and liabilities in its
financial statements.
Through MeKeFuBang, MeKeFuBang operates and controls
Longkang through the
Contractual Arrangements.
The reasons that MeKeFuBang
used the contractual
arrangements to acquire control of Longkang, instead of using a complete
acquisition of Longkang’s
assets or equity to make Longkang a wholly-owned subsidiary of
MeKeFuBang, are that (i) new PRC laws governing share exchanges
with foreign entities, which became effective on September 8, 2006, make the
consequences of such acquisitions uncertain and (ii) other than by share
exchange, PRC law requires Longkang be acquired for cash and MeKeFuBang was not able to raise sufficient funds
to pay the full appraised value for Longkang ‘s assets or shares as required under PRC
law.
Longkang
is a Chinese limited liability company and was formed under laws of the People’s
Republic of China on November 22, 2004 under the name of Liayang Tianfu Fruit
Juice Company, Ltd. The Company changed its name on January 7, 2008
to Shandong Longkang Fruit Juice Co., Ltd. Longkang processes,
produces and distributes highly specialized pear and other fruit juice
concentrates in the PRC.
Basis of
presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America (“U.S.
GAAP”). This basis differs
from that used in the
statutory accounts of our subsidiaries in China, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises in the PRC. All necessary adjustments have been made
to present the consolidated financial statements in accordance with
U.S. GAAP.
The
Company’s consolidated financial statements include the financial statements of
its wholly-owned subsidiary, MeKeFuBang, as well as the financial statements of
Longkang. All significant intercompany accounts and transactions have
been eliminated in consolidation.
F-7
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Longkang
is considered a variable interest entity (“VIE”), and the Company is the primary
beneficiary. The Company’s relationships with Longkang and its
shareholders are governed by a series of contractual arrangements between
MeKeFuBang, the Company’s wholly foreign-owned enterprise in the PRC, and
Longkang, which is the operating company of the Company in the PRC. Under PRC
laws, each of MeKeFuBang and Longkang is an independent legal entity and none of
them are exposed to liabilities incurred by the other party. The contractual
arrangements constitute valid and binding obligations of the parties of such
agreements. Each of the contractual arrangements and the rights and obligations
of the parties thereto are enforceable and valid in accordance with the laws of
the PRC. On June 10, 2009, the Company entered into the following contractual
arrangements with Longkang:
Consulting Services
Agreement. Pursuant to the exclusive consulting services agreement
between MeKeFuBang and Longkang, MeKeFuBang has the exclusive right to provide
to Longkang general business operation services, including advice and strategic
planning, as well as consulting services related to the technological research
and development of the Longkang’s products (the “Services”). Under
this agreement, MeKeFuBang owns the intellectual property rights developed or
discovered through research and development, in the course of providing the
Services, or derived from the provision of the Services. Longkang shall pay a
quarterly consulting service fees in Renminbi (“RMB”) to MeKeFuBang that is
equal to all of Longkang’s profits for such quarter.
Operating Agreement.
Pursuant to the operating agreement among MeKeFuBang, Longkang and all
shareholders of Longkang (the “Longkang Shareholders”),
MeKeFuBang provides guidance and instructions on Longkang’s daily operations,
financial management and employment issues. Longkang Shareholders must designate
the candidates recommended by MeKeFuBang as their representatives on the boards
of directors of Longkang. MeKeFuBang has the right to appoint senior executives
of Longkang. In addition, MeKeFuBang agrees to guarantee Longkang’s performance
under any agreements or arrangements relating to Longkang’s business
arrangements with any third party. Longkang, in return, agrees to pledge their
accounts receivable and all of their assets to MeKeFuBang. Moreover, Longkang
agrees that without the prior consent of MeKeFuBang, Longkang will not engage in
any transactions that could materially affect its assets, liabilities, rights or
operations, including, without limitation, incurrence or assumption of any
indebtedness, sale or purchase of any assets or rights, incurrence of any
encumbrance on any of its assets or intellectual property rights in favor of a
third party or transfer of any agreements relating to its business operation to
any third party. The term of this agreement shall commence from the effective
and shall last for the maximum period of time permitted by law unless terminated
early in accordance with certain provision or by any other agreements reached by
all parties, with any extended term to be mutually agreed upon by the parties.
Longkang shall not terminate this agreement.
Equity Pledge
Agreement. Under
the equity pledge agreement between Longkang’s shareholders and MeKeFuBang,
Longkang’s Shareholders pledged all of their equity interests in Longkang to
MeKeFuBang to guarantee Longkang’s performance of its obligations under the
consulting services agreement. If Longkang or Longkang’s Shareholders breaches
their respective contractual obligations, MeKeFuBang, as pledgee, will be
entitled to certain rights, including the right to sell the pledged equity
interests. Longkang’s Shareholders also agreed that upon occurrence of any event
of default, MeKeFuBang shall be granted an exclusive, irrevocable power of
attorney to take actions in the place and stead of the Longkang’s Shareholders
to carry out the security provisions of the equity pledge agreement and take any
action and execute any instrument that MeKeFuBang may deem necessary or
advisable to accomplish the purposes of the equity pledge agreement. Longkang’s
Shareholders agreed not to dispose of the pledged equity interests or take any
actions that would prejudice MeKeFuBang’s interest. The equity pledge agreement
will expire two (2) years after Longkang’s obligations under the consulting
services agreements have been fulfilled.
F-8
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Option Agreement. Under the option
agreement between Longkang’s Shareholders and MeKeFuBang, Longkang’s
Shareholders irrevocably granted MeKeFuBang or its designated person an
exclusive option to purchase, to the extent permitted under PRC law, all or part
of the equity interests in Longkang for the cost of the initial contributions to
the registered capital or the minimum amount of consideration permitted by
applicable PRC law. MeKeFuBang or its designated person has sole discretion to
decide when to exercise the option, whether in part or in full. The term of this
agreement shall last for the maximum period of time permitted by law unless
terminated in accordance with this agreement.
The
accounts of Longkang are consolidated in the accompanying consolidated financial
statements pursuant to Financial Accounting Standards Board Interpretation No.
46 (Revised), “Consolidation of Variable Interest Entities - an Interpretation
of ARB No. 51.” As a VIE, Longkang’s sales are included in the Company’s total
sales, its income from operations is consolidated with the Company’s, and the
Company’s net income includes all of Longkang’s net income. The Company does not
have any non-controlling interest and accordingly, did not subtract any net
income in calculating the net income attributable to the Company. Because of the
contractual arrangements, the Company had a pecuniary interest in Longkang that
require consolidation of the Company’s and Longkang financial
statements.
Use of
estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses, and the related disclosures at the date of the
consolidated financial statements and during the reporting period. Actual
results could materially differ from these estimates. Significant estimates in
2008 and 2007 include the allowance for doubtful accounts, the allowance for
obsolete inventory, the useful life of property and equipment and intangible
assets, and assumptions used in assessing impairment of long-term
assets.
Fair value of financial
instruments
The Company adopted SFAS 157, Fair Value
Measurements (SFAS 157). SFAS 157 clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value
hierarchy to classify the
inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted
prices in active markets for identical assets or liabilities available at the
measurement date.
Level 2-Inputs are unadjusted quoted
prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets and liabilities in markets that are not
active, inputs other then quoted prices that are observable, and inputs derived
from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which
reflect the reporting entity’s own assumptions on what assumptions
the market participants would use in pricing the asset or liability based on the
best available information.
The
carrying amounts reported in the consolidated balance sheets for cash, accounts
receivable, loans payable, accounts payable and accrued expenses, customer
advances, and amounts due from related parties approximate their fair market
value based on the short-term maturity of these instruments. The Company did not
identify any assets or liabilities that are required to be presented on the
consolidated balance sheets at fair value in accordance with SFAS
157.
Cash and cash
equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions in the PRC. Balances in
banks in the PRC are uninsured.
F-9
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit
risk
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America. The Company's results may be adversely affected 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.
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. All of the
Company’s cash is maintained with state-owned banks within the People’s Republic
of China of which no deposits are
covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts. A significant portion of the Company's sales are credit sales
which are primarily to customers whose ability to pay is dependent upon the
industry economics prevailing in these areas; however, concentrations of credit
risk with respect to trade accounts receivables is limited due to generally
short payment terms. The Company also performs ongoing credit
evaluations of its customers to help further reduce credit risk.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains allowances for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. At
December 31, 2008 and 2007, the Company has established, based on a review of
its outstanding balances, an allowance for doubtful accounts in the amount of
$41,598 and $38,982, respectively.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the
Company’s products are stated at the lower of cost or market utilizing the
weighted average method. An
allowance is established when management determines that certain inventories may
not be saleable. If
inventory costs exceed expected market value due to obsolescence or quantities
in excess of expected demand, the Company will record reserves for the
difference between the cost and the market value. These reserves are recorded
based on estimates. The Company recorded an
inventory reserve of $92,390 and $57,971 at December 31,
2008 and 2007, respectively.
Property and
equipment
Property
and equipment are carried at cost
and are depreciated on a straight-line basis over the estimated useful
lives of the assets.
The cost of repairs and maintenance is expensed as incurred; major replacements
and improvements are capitalized. When assets are retired or disposed
of, the cost and accumulated depreciation are removed from the accounts, and any
resulting gains or losses are included in income in the year of disposition. The
Company examines the possibility of decreases in the value of fixed assets when
events or changes in circumstances reflect the fact that their recorded value
may not be recoverable.
F-10
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived
assets
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
reviews, long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable, or at least annually. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the
carrying amount of the asset. The amount of impairment is measured as the
difference between the asset’s estimated fair value and its book value. The
Company did not record any impairment charges during the year ended December 31,
2008 and 2007.
Income
taxes
The
Company is governed by the Income Tax Law of the People’s Republic of
China. Income taxes are accounted for under Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”, which is an asset
and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.
The
Company adopted FIN 48, “Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statements No. 109,” as of January 1,
2007. Under FIN 48, the evaluation of a tax position is a two-step
process. The first step is to determine whether it is more likely than not that
a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the
more-likely-than-not threshold to determine the amount of benefit to be
recognized in the financial statements. A tax position is measured at the
largest amount of benefit that is greater than 50% likelihood of being realized
upon ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in the first
subsequent period in which the threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not criteria should be
de-recognized in the first subsequent financial reporting period in which the
threshold is no longer met. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition. The adoption had no effect on the
Company’s financial statements.
Advances from
customers
Advances
from customers consist of prepayments from customers for merchandise that had
not yet been shipped. The Company recognizes the deposits as revenue as
customers take delivery of the goods, in accordance with its revenue recognition
policy. At December 31, 2008 and 2007, advances from customers
were not material.
Revenue
recognition
The Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the purchase price is fixed or determinable and
collectability is reasonably assured. The Company recognizes revenues from the sale of juice concentrate upon shipment and transfer of
title.
F-11
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping
costs
Shipping
costs are included in selling expenses and totaled $337,333 and $319,825 for the
year ended December 31, 2008 and 2007, respectively.
Employee
benefits
The
Company’s operations and employees are all located in the PRC. The
Company makes mandatory contributions to the PRC government’s health, retirement
benefit and unemployment funds in accordance with the relevant Chinese social
security laws, which is approximately 25% of salaries. For the years ended
December 31, 2008 and 2007, the costs of these payments are charged to general
and administrative expenses in the same period as the related salary costs and
amounted to $56,505 and $31,439, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling expenses on the accompanying
statement of operations. For the years ended December 31, 2008 and 2007,
advertising expense amounted to $209,701 and $119,402,
respectively.
Research and
development
Research
and development costs are expensed as incurred. For the years ended December 31,
2008 and 2007, research and development costs amounted to $256,283 and $477,365,
respectively.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
operations and cash flows are translated at average exchange rates during the
period, assets and liabilities are translated at the unified exchange rate at
the end of the period, and equity is translated at historical exchange rates.
Translation adjustments resulting from the process of translating the local
currency financial statements into U.S. dollars are included in determining
comprehensive income. The cumulative translation adjustment and
effect of exchange rate changes on cash for the year ended December 31, 2008 and
2007 was $494,982 and $500,558, respectively. Transactions denominated in
foreign currencies are translated into the functional currency at the exchange
rates prevailing on the transaction dates. Assets and liabilities denominated in
foreign currencies are translated into the functional currency at the exchange
rates prevailing at the balance sheet date with any transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred. All of the Company’s revenue transactions are transacted
in the functional currency. The Company does not enter any material transaction
in foreign currencies and accordingly, transaction gains or losses have not had,
and are not expected to have, a material effect on the results of operations of
the Company.
Asset and
liability accounts at December 31, 2008 and 2007 were translated at 6.8542 RMB
to $1.00 and at 7.3141 RMB to $1.00, respectively. Equity accounts were stated
at their historical rate. The average translation rates applied to the
statements of income for the year ended December 31, 2008 and 2007 were 6.96225
RMB and 7.6172 RMB to $1.00, respectively. In accordance with
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
cash flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.
F-12
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accumulated
other comprehensive income
The
Company follows Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive
Income" to recognize the elements of comprehensive income. Comprehensive
income is comprised of net income and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the years ended
December 31, 2008 and 2007, comprehensive income includes net income and
unrealized gains from foreign currency translation adjustments.
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. The Company shall disclose all related party transactions.
All transactions shall be recorded at fair value of the goods or services
exchanged. Property purchased from a related party is recorded at the cost to
the related party and any payment to or on behalf of the related party in excess
of the cost is reflected as a distribution to related party.
Recent
accounting pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008, and
applies to any business combinations which occur after December 31, 2008. The
adoption of SFAS 141(R), effective January 1, 2009, may have an impact on
accounting for future business combinations.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the non-controlling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company does not expect SFAS No. 160 to have a material impact on the preparation of its
consolidated financial
statements.
In
March 2008, the FASB issued SFAS 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The
Company does not expect SFAS No. 161 to have a material impact on the preparation of its
consolidated financial
statements.
F-13
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2008, the Financial Accounting
Standards Board
(“FASB”) issued FASB Staff Position
(“FSP”) APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement). FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s non-convertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The Company has adopted FSP APB 14-1 beginning January 1, 2009, and this standard must be applied on
a retroactive basis. The Company is evaluating the impact the adoption of
FSP APB 14-1 will have on its financial position and results of
operations.
In May 2008, the FASB issued Statement
of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy
of
Generally Accepted Accounting Principles. This standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting
Oversight Board’s amendments to AU Section 411,
The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The Company does not expect SFAS No. 162 to have a
material impact on the
preparation of its consolidated financial statements.
On June 16, 2008, the FASB issued final
Staff Position (FSP) No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities,” to address the question of whether
instruments granted in share-based payment transactions are
participating securities prior to vesting. The FSP determines that unvested
share-based payment awards that contain rights to dividend payments should be
included in earnings per share calculations. The guidance will be
effective for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the requirements of (FSP)
No. EITF 03-6-1 as well as the impact of the adoption on its consolidated financial
statements.
In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock. Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company is currently evaluating the impact the adoption of EITF 07-5 will have
on its consolidated financial statement presentation and
disclosures.
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP FAS 140-4 and FIN 46(R)-8”). FSP FAS 140-4
and FIN 46(R)-8 amends FAS 140 and FIN 46(R) to require additional disclosures
regarding transfers of financial assets and interest in variable interest
entities. FSP FAS 140-4 and FIN 46(R)-8 is effective for interim or annual
reporting periods ending after December 15, 2008. The adoption of FSP FAS 140-4
and FIN 46(R)-8 did not have
an impact on its financial position and results of
operations.
F-14
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 2 –
ACCOUNTS
RECEIVABLE
At
December 31, 2008 and 2007, accounts receivable consisted of the
following:
|
2008
|
2007
|
|||||||
|
Accounts
receivable
|
$ | 5,144,361 | $ | 1,587,217 | ||||
|
Less:
allowance for doubtful accounts
|
(41,598 | ) | (38,982 | ) | ||||
| $ | 5,102,763 | $ | 1,548,235 | |||||
NOTE 3 -
INVENTORIES
At
December 31, 2008 and 2007, inventories consisted of the following:
|
2008
|
2007
|
|||||||
|
Raw
materials
|
$ | 266,581 | $ | 649,706 | ||||
|
Work
in process
|
690 | 72,291 | ||||||
|
Finished
goods
|
15,415,096 | 19,275,210 | ||||||
| 15,682,367 | 19,997,207 | |||||||
|
Less:
Reserve for obsolete inventory
|
(92,390 | ) | (57,971 | ) | ||||
| $ | 15,589,977 | $ | 19,939,236 | |||||
NOTE 4 -
PROPERTY AND
EQUIPMENT
At
December 31, 2008 and 2007, property and equipment consist of the
following:
|
Useful Life
|
2008
|
2007
|
||||||||
|
Office
equipment and furniture
|
10
Years
|
$ | 113,136 | $ | 106,023 | |||||
|
Manufacturing
equipment
|
10
Years
|
7,950,552 | 7,450,045 | |||||||
|
Vehicles
|
10
Years
|
76,300 | 71,503 | |||||||
|
Building
and building improvements
|
10-20
Years
|
3,087,605 | 2,890,965 | |||||||
| 11,227,593 | 10,518,536 | |||||||||
|
Less:
accumulated depreciation
|
(3,762,913 | ) | (2,640,359 | ) | ||||||
| $ | 7,464,680 | $ | 7,878,177 | |||||||
For the year ended December 31, 2008 and 2007, depreciation expense amounted
to $930,720 and $843,113, of which $676,540 and $653,617 is
included in cost of sales,
and $254,180 and $189,496
is included in general and administrative expenses, respectively.
NOTE 5 –
LAND USE
RIGHTS
There is
no private ownership of land in China. Land is owned by the government and the
government grants land use rights for specified terms. The Company’s land use
rights are valued at a fixed amount, which is RMB 116,966,170 and RMB 38,416,160
at December 31, 2008 and 2007, respectively, and the dollar value of the land
use right fluctuates based on the exchange rate. The Company’s land
use rights have terms that expire in December 2037 through December
2054. The Company amortizes these land use rights over the term of
the respective land use right. For the year ended December 31, 2008 and 2007,
amortization of land use rights amounted to $538,202 and $148,186, respectively,
and has been included in general and administrative expenses.
F-15
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 5 –
LAND USE
RIGHTS
At
December 31, 2008 and 2007, land use rights consist of the
following:
|
Useful
Life
|
2008
|
2007
|
||||||||
|
Land
Use Rights
|
30
- 50 years
|
$ | 17,064,890 | $ | 5,252,343 | |||||
|
Less:
Accumulated Amortization
|
(777,799 | ) | (216,581 | ) | ||||||
| $ | 16,287,091 | $ | 5,035,762 | |||||||
Amortization
of land use rights attributable to future periods is as follows:
|
Period
ending December 31:
|
||||
|
2009
|
$ | 546,686 | ||
|
2010
|
546,686 | |||
|
2011
|
546,686 | |||
|
2012
|
546,686 | |||
|
Thereafter
|
14,100,347 | |||
| $ | 16,287,091 | |||
NOTE 6 –
LOAN
PAYABLE
In
connection with the acquisition of the net assets of the Company, which occurred
in 2004, the Company assumed a loan payable to a third party related to the
original construction of the its factory. The loan is due in annual installments
through December 2010 and is non-interest bearing. Since the agreement did not
have a stated interest rate, the Company used an imputed interest rate of
interest of 6.12% based on PRC central bank five year and up loan rate effective
October 2004. At December 31, 2008, future maturities of loan payable are as
follows:
|
Period
ending December 31:
|
||||
|
2009
|
$ | 10,212,716 | ||
|
2010
|
3,568,628 | |||
| $ | 13,780,344 | |||
During
the three months ended March 31, 2009, the Company repaid $10,212,716 of this
loan.
NOTE 7 –
ACQUISITION
PAYABLES
In
connection with the acquisition of the net assets of the Company, which occurred
in 2004, the Company assumed certain accounts payable to third parties. These
payables are payable on demand and amounted to $850,501 and $4,908,809 and
December 31, 2008 and 2007, respectively.
NOTE 8 –
INCOME
TAXES
The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS 109’’). SFAS 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and the tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax losses and tax credit carryforwards. SFAS 109
additionally requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Realization of deferred tax
assets are dependent upon future earnings, if any, of which the timing and
amount are uncertain. The Company is governed by the Income Tax Law of the
People’s Republic of China.
F-16
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008 and 2007
NOTE 8 –
INCOME TAXES
(continued)
In 2008
and 2007, under the Income Tax Laws of PRC, Chinese companies are generally
subject to an income tax at an effective rate of 25% and 33%, respectively, on
income reported in the statutory financial statements after appropriate tax
adjustments.
The table
below summarizes the differences between the PRC statutory federal rate and the
Company’s effective tax rate and are as follows for the year ended December 31,
2008 and 2007:
|
2008
|
2007
|
|||||||
|
China statutory
rates
|
25.0 | % | 33.0 | % | ||||
|
Non-deductible
items
|
1.7 | % | 2.7 | % | ||||
|
Total
provision for income taxes
|
26.7 | % | 35.7 | % | ||||
Income
tax expense for the year ended December 31, 2008 and 2007 was $4,196,701 and
$4,413,134, respectively.
NOTE
9 – STATUTORY AND NON-STATUTORY
RESERVES
The
Company is required to make appropriations to reserve 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 PRC (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 or members’ equity.
Appropriations to the statutory public welfare fund are at a minimum of 5% of
the after tax net income determined in accordance with PRC GAAP. Commencing on
January 1, 2006, the new PRC regulations waived the requirement for
appropriating retained earnings to a welfare fund. During the years ended
December 31, 2008 and 2007, the Company made voluntary appropriations to a
non-statutory reserve. For the years ended December 31, 2008 and 2007, statutory
and non-statutory reserve activities are as follows:
|
Statutory
|
Non-Statutory
|
Total
|
|||||||||||
|
Balance
– December 31, 2006
|
$ | 622,823 | $ | 171,981 | $ | 794,804 | |||||||
|
Addition
to reserves
|
- | 896,000 | 896,000 | ||||||||||
|
Balance
– December 31, 2007
|
622,823 | 1,067,981 | 1,690,804 | ||||||||||
|
Addition
to reserves
|
- | 1,259,010 | 1,259,010 | ||||||||||
|
Balance
– December 31, 2008
|
$ | 622,823 | $ | 2,326,991 | $ | 2,949,814 | |||||||
NOTE 10 –
SUBSEQUENT
EVENTS
During
the three months ended March 31, 2009, the Company repaid $10,212,716 of its
loan payable.
On June
21, 2009, the Company signed a binding letter of intent with League Now
Holdings, Inc., a Florida corporation (“League Now”), to negotiate and enter
into a Share Exchange Agreement by and among Merit and the stockholders of 100%
of Merit’s common stock, on the one hand, and League Now and the holder of a
majority of League Now’s issued and outstanding common stock, on the other
hand.
F-17