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-10.6 - Oriental Dragon Corp | v163424_ex10-6.htm |
| EX-99.1 - Oriental Dragon Corp | v163424_ex99-1.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 Six Months Ended June 30, 2009 and 2008
(Unaudited)
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
INDEX TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
CONTENTS
|
Consolidated
Financial Statements:
|
||
|
Consolidated
Balance Sheets –
|
||
|
As
of June 30, 2009 (Unaudited) and December 31, 2008
|
F-2
|
|
|
Consolidated
Statements of Income – (Unaudited)
|
||
|
For
the Three and Six Months ended June 30, 2009 and 2008
|
F-3
|
|
|
Consolidated
Statements of Cash Flows – (Unaudited)
|
||
|
For
the Six Months ended June 30, 2009 and 2008
|
F-4
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
F-5 to F-15
|
F-1
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
June 30,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Audited)
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 21,048,226 | $ | 2,028,858 | ||||
|
Accounts
receivable, net of allowance for doubtful accounts and sales
discount
|
- | 5,102,763 | ||||||
|
Inventories,
net of reserve for obsolete inventory
|
2,010,186 | 15,589,977 | ||||||
|
Prepaid
value-added taxes on purchases
|
212,493 | 433,109 | ||||||
|
Prepaid
expenses and other
|
16 | 994,199 | ||||||
|
Total
Current Assets
|
23,270,921 | 24,148,906 | ||||||
|
PROPERTY
AND EQUIPMENT - net
|
7,026,117 | 7,464,680 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Land
use rights, net
|
16,035,740 | 16,287,091 | ||||||
|
Total
Assets
|
$ | 46,332,778 | $ | 47,900,677 | ||||
|
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
portion of loan payable
|
$ | - | $ | 10,212,716 | ||||
|
Accounts
payable
|
437,339 | 1,050,806 | ||||||
|
Accrued
expenses
|
116,890 | 270,474 | ||||||
|
Acquisition
payables
|
- | 850,501 | ||||||
|
Income
taxes payable
|
3,055,920 | 2,366,211 | ||||||
|
VAT
and other taxes payable
|
98,280 | - | ||||||
|
Total
Current Liabilities
|
3,708,429 | 14,750,708 | ||||||
|
LONG-TERM
LIABILITIES:
|
||||||||
|
Loan
payable, net of current portion
|
3,762,603 | 3,568,628 | ||||||
|
Total
Liabilities
|
7,471,032 | 18,319,336 | ||||||
|
STOCKHOLDER'S
EQUITY:
|
||||||||
|
Common
stock ($1.00 par value; 50,000 shares authorized, 50,000 shares issued and
outstanding at June 30, 2009 and December 31, 2008,
respectively)
|
50,000 | 50,000 | ||||||
|
Additional
paid-in capital
|
1,207,729 | 1,207,729 | ||||||
|
Subscription
receivable
|
(50,000 | ) | (50,000 | ) | ||||
|
Retained
earnings
|
32,251,856 | 23,009,955 | ||||||
|
Statutory
and non-statutory reserves
|
2,949,814 | 2,949,814 | ||||||
|
Other
comprehensive gain - cumulative foreign currency translation
adjustment
|
2,452,347 | 2,413,843 | ||||||
|
Total
Stockholder's Equity
|
38,861,746 | 29,581,341 | ||||||
|
Total
Liabilities and Stockholder's Equity
|
$ | 46,332,778 | $ | 47,900,677 | ||||
See notes
to unaudited consolidated financial statements
F-2
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
For the Three Months Ended
|
For the Six Months Ended
|
|||||||||||||||
|
June 30,
|
June 30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
|
NET
REVENUES
|
$ | 2,227,201 | $ | 18,604,923 | $ | 46,371,201 | $ | 35,088,503 | ||||||||
|
COST
OF SALES
|
1,138,261 | 14,374,158 | 32,700,082 | 26,383,646 | ||||||||||||
|
GROSS
PROFIT
|
1,088,940 | 4,230,765 | 13,671,119 | 8,704,857 | ||||||||||||
| 0.295 | 0.248 | |||||||||||||||
|
OPERATING
EXPENSES:
|
||||||||||||||||
|
Selling
|
115,969 | 122,986 | 343,238 | 259,408 | ||||||||||||
|
Research
and development
|
29,977 | 66,260 | 71,019 | 99,465 | ||||||||||||
|
General
and administrative
|
364,904 | 358,985 | 794,380 | 790,653 | ||||||||||||
|
Total
Operating Expenses
|
510,850 | 548,231 | 1,208,637 | 1,149,526 | ||||||||||||
|
INCOME
FROM OPERATIONS
|
578,090 | 3,682,534 | 12,462,482 | 7,555,331 | ||||||||||||
|
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
|
Interest
income
|
12,888 | 8,419 | 25,157 | 12,860 | ||||||||||||
|
Interest
expense
|
(57,063 | ) | (285,845 | ) | (189,117 | ) | (559,461 | ) | ||||||||
|
Total
Other Income (Expense)
|
(44,175 | ) | (277,426 | ) | (163,960 | ) | (546,601 | ) | ||||||||
|
INCOME
BEFORE INCOME TAXES
|
533,915 | 3,405,108 | 12,298,522 | 7,008,730 | ||||||||||||
|
INCOME
TAXES EXPENSE
|
84,880 | 943,888 | 3,056,621 | 1,915,119 | ||||||||||||
|
NET
INCOME
|
$ | 449,035 | $ | 2,461,220 | $ | 9,241,901 | $ | 5,093,611 | ||||||||
|
COMPREHENSIVE
INCOME:
|
||||||||||||||||
|
NET
INCOME
|
$ | 449,035 | $ | 2,461,220 | $ | 9,241,901 | $ | 5,093,611 | ||||||||
|
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||||||
|
Unrealized
foreign currency translation gain
|
83 | 470,464 | 38,504 | 1,224,967 | ||||||||||||
|
COMPREHENSIVE
INCOME
|
$ | 449,118 | $ | 2,931,684 | $ | 9,280,405 | $ | 6,318,578 | ||||||||
See notes
to unaudited consolidated financial statements
F-3
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Six Months Ended
|
||||||||
|
June 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income
|
$ | 9,241,901 | $ | 5,093,611 | ||||
|
Adjustments
to reconcile net income from operations to net cash provided by operating
activities:
|
||||||||
|
Depreciation
|
448,917 | 452,979 | ||||||
|
Amortization
of land use rights
|
273,781 | 264,901 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
5,110,943 | 5,669 | ||||||
|
Inventories
|
13,604,321 | 12,582,715 | ||||||
|
Prepaid
and other current assets
|
995,776 | 14,139 | ||||||
|
Prepaid
value-added taxes on purchases
|
221,262 | 372,344 | ||||||
|
Accounts
payable
|
(615,052 | ) | (2,302 | ) | ||||
|
Accrued
expenses
|
(153,989 | ) | (149,233 | ) | ||||
|
VAT
and service taxes payable
|
98,302 | 956,639 | ||||||
|
Income
taxes payable
|
686,617 | (2,837,811 | ) | |||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
29,912,779 | 16,753,651 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase
of property and equipment
|
- | (3,188 | ) | |||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
- | (3,188 | ) | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Payment
on loan payable
|
(10,039,970 | ) | (5,096,172 | ) | ||||
|
Payments
on acquisition payables
|
(851,865 | ) | (1,783 | ) | ||||
|
NET
CASH USED IN FINANCING ACTIVITIES
|
(10,891,835 | ) | (5,097,955 | ) | ||||
|
EFFECT
OF EXCHANGE RATE ON CASH
|
(1,576 | ) | 930,864 | |||||
|
NET
INCREASE IN CASH
|
19,019,368 | 12,583,372 | ||||||
|
CASH -
beginning of year
|
2,028,858 | 9,171,445 | ||||||
|
CASH
- end of period
|
$ | 21,048,226 | $ | 21,754,817 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
|
Cash
paid for:
|
||||||||
|
Interest
|
$ | 189,117 | $ | 559,461 | ||||
|
Income
taxes
|
$ | 2,370,004 | $ | 4,752,931 | ||||
|
Non-cash
investing and financing activities:
|
||||||||
|
Acquisition
of land use rights for accrued expense
|
$ | - | $ | 11,106,195 | ||||
See notes
to unaudited consolidated financial statements.
F-4
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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
Management
acknowledges its responsibility for the preparation of the accompanying interim
financial statements which reflect all adjustments, consisting of normal
recurring adjustments, considered necessary in its opinion for a fair statement
of its financial position and the results of its operations for the interim
period presented. These financial statements should be read in conjunction with
the summary of significant accounting policies and notes to financial statements
included in the Company’s audited financial statements for the year ended
December 31, 2008. The accompanying 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
financial statements in accordance with U.S. GAAP. Operating results
for interim periods are not necessarily indicative of results that may be
expected for the fiscal year as a whole.
F-5
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
Lonkang 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-6
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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 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 financial statements
and during the reporting period. Actual results could materially differ from
these estimates. Significant estimates in 2009 and 2008 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 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 balance sheets at
fair value in accordance with SFAS 157.
Cash and cash
equivalents
For
purposes of the 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-7
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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 June
30, 2009 and December 31, 2008, the Company has established, based on a review
of its outstanding balances, an allowance for doubtful accounts and an allowance
for sales discount in the amount of $41,655 and $41,598,
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 $92,517 and $92,390 at June30, 2009 and
December 31, 2008, 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-8
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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 six months ended
June30, 2009 and 2008.
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 uses FIN 48, “Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statements No. 109”. 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.
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 June 30, 2009 and December 31, 2008, 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-9
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Shipping
costs
Shipping
costs are included in selling expenses and totaled $133,738 and $139,192 for the
six months ended June 30, 2009 and 2008, 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 six months ended
June 30, 2009 and 2008, the costs of these payments are charged to general and
administrative expenses in the same period as the related salary costs and
amounted to $43,740 and $33,499, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling expenses on the accompanying
statement of operations. For the six months ended June 30, 2009 and 2008,
advertising expense amounted to $66,927 and $18,756, respectively.
Research and
development
Research
and development costs are expensed as incurred. For the six months ended June
30, 2009 and 2008, research and development costs amounted to $71,019 and
$99,465, 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 six months ended June 30, 2009
and 2008 was $(1,576) and $930,864, 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 June 30, 2009 and December 31, 2008 were translated at
6.8448 RMB to $1.00 and at 6.8542 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 six months ended June 30, 2009 and 2008 were
6.84323 RMB and 7.07263 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-10
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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 six months ended
June 30, 2009 and 2008, 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, did not have any impact on
the Company’s financial position or results of operations.
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
adoption of SFAS No. 160 did not 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 adoption of SFAS No. 161 did not have a
material impact on the preparation of its consolidated financial
statements.
F-11
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
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 adoption of FSP APB 14-1 did not have any impact on the
Company’s 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
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 adoption of (FSP) No. EITF 03-6-1 did not have any impact on
the Company’s financial position or results of operations.
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
adoption of EITF 07-5 did not have an impact on the Company’s 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-12
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
NOTE 2 –
ACCOUNTS
RECEIVABLE
At June
30, 2009 and December 31, 2008, accounts receivable consisted of the
following:
|
2009
|
2008
|
|||||||
|
Accounts
receivable
|
$ | 41,655 | $ | 5,144,361 | ||||
|
Less:
allowance for doubtful accounts
|
(41,655 | ) | (41,598 | ) | ||||
| $ | - | $ | 5,102,763 | |||||
NOTE 3 -
INVENTORIES
At June
30, 2009 and December 31, 2008, inventories consisted of the
following:
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 208,322 | $ | 266,581 | ||||
|
Work
in process
|
- | 690 | ||||||
|
Finished
goods
|
1,894,381 | 15,415,096 | ||||||
| 2,102,703 | 15,682,367 | |||||||
|
Less:
Reserve for obsolete inventory
|
(92,517 | ) | (92,390 | ) | ||||
| $ | 2,010,186 | $ | 15,589,977 | |||||
NOTE 4 -
PROPERTY AND
EQUIPMENT
At June
30, 2009 and December 31, 2008, property and equipment consisted of the
following:
|
Useful Life
|
2009
|
2008
|
||||||||
|
Office
equipment and furniture
|
10 Years
|
$ | 113,292 | $ | 113,136 | |||||
|
Manufacturing
equipment
|
10 Years
|
7,961,470 | 7,950,552 | |||||||
|
Vehicles
|
10 Years
|
76,405 | 76,300 | |||||||
|
Building
and building improvements
|
10-20 Years
|
3,091,844 | 3,087,605 | |||||||
| 11,243,011 | 11,227,593 | |||||||||
|
Less:
accumulated depreciation
|
(4,216,894 | ) | (3,762,913 | ) | ||||||
| $ | 7,026,117 | $ | 7,464,680 | |||||||
For the
six months ended June 30, 2009 and 2008, depreciation expense amounted to
$448,917 and $452,979, of which $344,187 and $351,646 is included in cost of
sales, and $104,730 and $101,333 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
116,966,170 at June 30, 2009 and December 31, 2008, 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 six months
ended June 30, 2009 and 2008, amortization of land use rights amounted to
$273,781 and $264,901, respectively, and has been included in general and
administrative expenses.
F-13
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
NOTE 5 –
LAND USE
RIGHTS
At June
30, 2008 and December 31, 2008, land use rights consist of the
following:
|
Useful Life
|
2009
|
2008
|
||||||||
|
Land
Use Rights
|
30 - 50 years
|
$ | 17,088,325 | $ | 17,064,890 | |||||
|
Less:
Accumulated Amortization
|
(1,052,585 | ) | (777,799 | ) | ||||||
| $ | 16,035,740 | $ | 16,287,091 | |||||||
Amortization
of land use rights attributable to future periods is as follows:
|
Year
ending June 30:
|
||||
|
2010
|
$ | 547,437 | ||
|
2011
|
547,437 | |||
|
2012
|
547,437 | |||
|
2013
|
547,437 | |||
|
Thereafter
|
13,845,992 | |||
| $ | 16,035,740 | |||
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 June 30, 2009, future maturities of loan payable are
as follows:
|
Period ending December 31:
|
||||
|
2010
|
$ | 3,762,603 | ||
| $ | 3,762,603 | |||
During
the six months ended June 300, 2009, the Company repaid $10,212,716 of its loan
payable.
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. At June 30, 2009 and December 31, 2008,
acquisition payables amounted to $0 and $850,501, 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-14
MERIT
TIMES INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2009 and 2008
NOTE 8 –
INCOME TAXES
(continued)
Under the
Income Tax Laws of PRC, since January 2008, Chinese companies are generally
subject to an income tax at an effective rate of 25%, 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 as follows for the six months ended June 30,
2009 and 2008:
|
2009
|
2008
|
|||||||
|
China
statutory rates
|
25.0 | % | 25.0 | % | ||||
|
Non-deductible
items
|
(0.1 | )% | 2.3 | % | ||||
|
Total
provision for income taxes
|
24.9 | % | 27.3 | % | ||||
Income
tax expense for the six months ended June 30, 2009 and 2008 was $3,056,621 and
$1,915,119, 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. For the six months ended June
30, 2009, statutory reserve activity is as follows:
|
Statutory
|
Non-Statutory
|
Total
|
||||||||||
|
Balance
– December 31, 2008
|
$ | 622,823 | $ | 2,326,991 | $ | 2,949,814 | ||||||
|
Addition
to reserves
|
- | - | - | |||||||||
|
Balance
– June 30, 2009
|
$ | 622,823 | $ | 2,326,991 | $ | 2,949,814 | ||||||
NOTE 10 –
SUBSEQUENT
EVENT
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-15