8-K/A 1 v098823_8ka.htm
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A
(Amendment No. 2)

Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
 
Date of Report (Date of Earliest Event Reported):  July 15, 2005
 
SYNUTRA INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
 (State or Other Jurisdiction of Incorporation)
 
000-50601
  
13-4306188
(Commission File Number)
  
(I.R.S. Employer Identification No.)
     
     
2275 Research Blvd, Suite 500
Rockville, Maryland
  
20850
(Address of Principal Executive Offices)
  
(Zip Code)
 
301-840-3888
 (Registrant’s Telephone Number, Including Area Code)
 
 
 (Former Name or Former Address, if Changed Since Last Report)


EXPLANATORY NOTE:

Synutra International, Inc. ("Synutra") is filing this Amendment No. 2 to the Current Report on Form 8-K  (the "Form 8-K/A") to the Current Report on Form 8-K filed on August 22, 2005 (the "Original Filing") to restate the audited consolidated Balance Sheets, Income Statement and Cash Flow Statements as of and for the calendar years ended December 31, 2003 and 2004 and the unaudited consolidated Balance Sheets, Income Statement and Cash Flow Statements as of and for the three and six months ended June 30, 2004 and 2005 (the "Restatement") of Synutra's wholly-owned subsidiary, Synutra, Inc. (the "Company").  The Company's financial statements have been restated to (i) reclassify certain other income as sales revenue and (ii) breakout certain cash and cash equivalents into cash and restricted cash line items. The Restatement is the result of Synutra's ongoing assessment of the effectiveness of its disclosure controls and procedures and internal controls over financial reporting. 

Additional information regarding the Restatement is included in Note 11 to the audited Notes to Consolidated Financial Statements for the years ended December 31, 2003 and 2004 and Note 3 to the unaudited Notes to Consolidated Financial Statements for the three and six months ended June 30, 2004 and 2005.

Except as described above, all other information herein is unchanged and reflects the disclosures made at the time of the Original Filing and this Form 8-K/A does not otherwise reflect events occurring after the Original Filing or otherwise modify or update these disclosures.  Accordingly, this Form 8-K/A should be read in conjunction with Synutra's SEC filings subsequent to the filing of the Original Filing.


Item 9.01 Financial Statements and Exhibits.
 
  (a) and (c) Financial Statement of Businesses Acquired.
 
  Set forth at the end of this Report are the following financial statements of Synutra, Inc. required by Rule 3-05(b) of Regulation S-X:
 
 
Audited Consolidated Financial Statements of Synutra, Inc. as of December 31, 2004
 
     
 
Report of Independent Registered Public Accounting Firm
7
 
 
 
 
Consolidated Balance Sheets at December 31, 2004 and 2003 (restated)
8
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the
 
 
Years Ended December 31, 2004 and 2003 (restated)
9
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 
 for the Years Ended December 31, 2004 and 2003 (restated)
10
 
 
 
 
Consolidated Statements of Cash Flows for the Years Ended
 
 
December 31, 2004 and 2003 (restated)
11
 
 
 
 
Notes to Consolidated Financial Statements
12 - 19
 
 
Unaudited Consolidated Financial Statements of Synutra, Inc. as of June 30, 2005
 
     
 
Report of Independent Registered Public Accounting Firm
25
 
 
 
 
Consolidated Balance Sheets at June 30, 2005 (Unaudited, restated) and December 31, 2004 (audited, restated)
26
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the
 
 
Six Months Ended June 30, 2005 and 2004 (Unaudited, restated)
27
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income for the
 
 
Six and Three Months Ended June 30, 2005 and 2004 (Unaudited, restated)
28
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended
 
 
June 30, 2005 and 2004 (Unaudited, restated)
29
 
 
 
 
Notes to Consolidated Financial Statements
30 - 33
 
-2-
 
(d) Exhibits

23.1 Consent of Independent Registered Public Accounting Firm
 
-3-
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
     
 
SYNUTRA INTERNATIONAL, INC.
 
 		  
 		  
 
Date: January 14, 2008
 By:  
/s/ Liang Zhang
 
Liang Zhang
 
Chairman of the Board and Chief Executive Officer
(principal executive officer)
 

 
 
-4-
 
SYNUTRA, INC.
Rockville, MD
 
 
 
FINANCIAL REPORTS
 
 
AT
 
 
DECEMBER 31, 2004
 

 
-5-

SYNUTRA, INC.
Rockville, MD

TABLE OF CONTENTS

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SYNUTRA, INC. AS OF DECEMBER 31, 2004
 
 
Report of Independent Registered Public Accounting Firm
7
 
 
Consolidated Balance Sheets at December 31, 2004 and 2003 (restated)
8
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the
 
Years Ended December 31, 2004 and 2003 (restated)
9
 
 
Consolidated Statements of Operations and Comprehensive Income (Loss)
 
 for the Years Ended December 31, 2004 and 2003 (restated)
10
 
 
Consolidated Statements of Cash Flows for the Years Ended
 
December 31, 2004 and 2003 (restated)
11
 
 
Notes to Consolidated Financial Statements
12 - 19

-6-

SYNUTRA, INC.
Rockville, MD

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and Stockholders
Synutra, Inc.
Rockville, Maryland

We have audited the accompanying consolidated balance sheets of Synutra, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' equity, and cash flows for the years then ended. 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts 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 consolidated 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 Synutra, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As described more fully in Note 11, the consolidated financial statements have been restated.
 
/s/ Rotenberg & Co., llp

Rotenberg & Co., llp
Rochester, New York
August 19, 2005 (except for the restatement discussed in Note 11 to the consolidated financial statements, as to which the date is December 27, 2007)

-7-

SYNUTRA, INC.
Rockville, MD

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
 
December 31,
  
(In thousands, except per share value) 
  
2004
  
2003
  
   
  (Restated)
  
(Restated)
  
ASSETS
 
   
      
Current Assets:
 
   
      
Cash and cash equivalents
 
$
5,893
   
7,191
 
Restricted cash
   
10,089
   
3,595
 
Short term investment
    
49
   
66
 
Accounts receivable, net of allowance for doubtful accounts of $167 and $98, respectively
   
3,297
   
1,139
 
Inventories
   
6,264
   
6,702
 
Other receivable
   
1,526
   
4,354
 
Due from related parties
   
4,680
   
1,261
 
Advances to suppliers
   
742
   
563
 
Deferred expenses and other current assets
   
284
   
271
 
Total current assets
   
32,824
   
25,142
 
 
             
Property, plant and equipment, net
   
25,325
   
12,330
 
Land use rights, net
   
1,536
   
1,155
 
Other assets
   
164
   
31
 
 
         
TOTAL ASSETS
 
$
59,849
   
38,658
 
 
           
           
 
           
Current Liabilities:
           
Bank loans
 
$
29,880
   
12,919
 
Accounts payable
   
5,826
   
3,985
 
Due to related parties
   
8,527
   
3,142
 
Advances from customers
   
1,401
   
1,300
 
Tax payables
   
633
   
153
 
Other current liabilities
   
4,394
   
6,286
 
Total current liabilities
   
50,661
   
27,785
 
Long term debts
   
4,833
   
8,458
 
Total liabilities
   
55,494
   
36,243
 
Minority interest
   
1,365
   
(1,233
)
Shareholders' equity:
             
Preferred Stock, $0.0001 par value, 20,000 authorized 0 issued and outstanding.
    
-
    
-
  
Common Stock, $0.0001 par value: 250,000 authorized; 46,000  issued and outstanding at December 31,2004 and 2003
   
5
   
5
 
Additional paid-in capital
   
7,001
   
7,184
 
Retained earnings (Accumulated deficits)
    
(3,807
)
  
(3,427
)
Accumulated other comprehensive income
   
(209
)
  
(114
)
Total shareholders' equity
   
2,990
   
3,648
 
 
             
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
59,849
   
38,658
 
 
The accompanying notes are an integral part of these financial statements.

-8-

SYNUTRA, INC.
Rockville, MD
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
 
  
Common
      
Additional
  
Retained earnings
  
Accumulated
  
Total
      
 
Stock
  
Share
  
Paid-in
  
(Accumulated
  
Comprehensive
  
Stockholder’s
  
Minority
  
(in thousands)
  
Outstanding
  
Capital
  
Capital
  
Deficits)
  
Income (Loss)
  
Equity
  
Interest
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
Balance - January 1, 2003(Restated)
    
46,000
  
$
5
  
$
479
  
$
(82
)
$
—
  
$
402
  
$
—
  
 
                              
Net loss
    
—
    
—
    
—
    
(3,345
)
  
—
    
(3,345
)
  
235
 
 
                              
Other comprehensive Income (loss)
    
—
    
—
    
—
    
—
    
(114
)
  
(114
)
  
—
 
 
                              
Shareholder contributions
    
—
    
—
    
6,705
    
—
    
—
    
6,705
    
(1,468
)
 
                              
Balance - December 31, 2003(Restated)
    
46,000
    
5
    
7,184
    
(3,427
)
  
(114
)
  
3,648
    
(1,233
)
 
                              
Net loss
    
—
    
—
    
—
    
(380
)
  
—
    
(380
)
  
2,598
 
 
                              
Other comprehensive income (loss)
    
—
    
—
    
—
    
—
    
(95
)
  
(95
)
  
—
 
 
                              
Shareholder contributions
    
—
    
—
    
(183
)
  
—
    
—
    
(183
)
  
—
 
 
                              
Balance - December 31, 2004(Restated)
  
 
46,000
  
$
5
  
$
7,001
  
$
(3,807
)
$
(209
)
$
2,900
  
$
1,365
  
 
The accompanying notes are an integral part of these financial statements.
 
-9-

SYNUTRA, INC.
Rockville, MD

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

   
Years ended December 31,
  
   
2004
  
2003
  
(in thousands, except earning per share data)
  
(Restated)
  
(Restated)
  
Net sales 
  
$
57,542
    
40,978
 
Cost of sales
    
33,605
   
26,240
  
Gross profit
    
23,937
   
14,738
 
Selling & distribution expenses
    
9,428
   
8,641
 
Advertising and promotion expenses 
    
8,479
   
6,458
 
General & administrative expenses
    
3,218
   
2,127
 
Total operating expense
    
21,125
   
17,226
  
Income from operations
    
2,812
   
(2,488
)
Interest expenses
    
638
   
820
  
Interest income
    
(88
)
  
(107
)
Other income, net
    
(32
)
  
(165
)
Income before provision for income tax
    
2,294
    
(3,035
)
Provision for income tax
    
76
   
74
 
Net income before minority interests
    
2,218
   
(3,110
)
Minority interests
    
2,598
   
235
 
Net income attributable to shareholders
  
$
(380
)
  
(3,345
)
Other comprehensive income
   
(95
)
  
(114
)
Comprehensive income
    
(475
)
  
(3,459
)
               
Earning per share—basic
  
$
(0.01
)
  
(0.07
)
Earning per share—diluted
  
$
(0.01
)
  
(0.07
)
Weighted average common share outstanding-basic
    
46,000
   
46,000
  
Weighted average common share outstanding-diluted
    
46,000
    
46,000
  
 
The accompanying notes are an integral part of these financial statements.
 
-10-

SYNUTRA, INC.
Rockville, MD

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Years Ended December 31,
  
(in thousands)
  
2004
  
2003
  
Cash flow from operating activities:
 
  (restated)
  
  (restated)
  
Net income
 
$
(380
)
$
(3,345
)
Adjustments to reconcile net income to net cash provided by operating activities
             
Depreciation and amortization
   
1,387
   
2,184
 
Bad debt expense
   
68
   
96
 
Loss on short term investment
    
17
   
7
 
Loss on disposal of property, plant and equipment
   
1
   
-
  
Minority interest
   
2,598
   
235
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(2,226
)
  
(1,232
)
Inventories
   
438
   
(6,702
)
Advance to suppliers
    
(179
)
  
(562
)
Due from related parties
   
(3,418
)
  
(879
)
Other receivable
    
2,828
    
(4,357
)
Deferred expenses and other current assets
   
(14
)
  
(271
)
Accounts payable
   
1,840
   
3,985
  
Due to related parties
   
5,386
   
3,142
  
Advances from customers
   
101
   
1,300
 
Tax payables
   
479
   
153
  
Other liabilities
   
(1,892
)
  
6,286
  
Net cash provided by operating activities
   
7,034
    
40
  
 
             
Cash flow from investing activities:
             
Acquisition of property, plant and equipment
   
(14,349
)
  
(14,478
)
Purchases of land use right
    
(415
)
  
(1,191
)
Purchases of intangible assets
   
(133
)
  
(31
)
Purchases of Short term investment
    
-
   
(73
)
Change in restricted cash
   
(6,494
)
  
(3,595
)
Net cash (used in) provided by investing activities
   
(21,391
)
  
(19,368
)
             
Cash flow from financing activities:
             
Proceeds from bank loans
   
31,480
   
32,133
  
Repayment of bank loans
   
(18,143
)
  
(10,757
)
Capital Contributions(Shareholder Distributions)-Net
    
(183
)
  
5,237
  
Net cash provided by financing activities
   
13,154
   
26,613
  
 
             
Net change in cash and cash equivalents
 
$
(1,203
)
$
7,285
  
               
Effect of exchange rate changes on cash and cash equivalents
   
(95
)
  
(114
)
Cash and cash equivalents, beginning of period
   
7,191
   
20
 
Cash and cash equivalents, end of period
 
$
5,893
 
$
7,191
 
Supplementary cash flows disclosure
             
Interest paid
 
$
1,141
  
$
854
 
Income taxes paid
 
$
109
  
$
31
 
 
The accompanying notes are an integral part of these financial statements.
 
-11-

SYNUTRA, INC.
Rockville, MD


NOTE 1 - ORGANIZATION / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business
 
Synutra, Inc. is a U.S. incorporated company that at June 30, 2005 owns 100% of six subsidiary companies in the People’s Republic of China “PRC”. For the years ended December 31, 2004 and 2003, the Company held minority, majority and in some cases no interest in these subsidiaries. For those companies where no stock was held, they have been consolidated based on significant influence and/or common control. These six subsidiaries are all principally engaged in different stages of the production, distribution, and sales of dairy based infant formulas and other nutritional products. The Company’s extensive sales network covers 24 provinces, 227 cities, and more than 800 countries throughout China. In 2004, the Company’s infant formula market share was rated number eight among international manufacturers and number three among domestic manufacturers in China.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting method - The Company uses the accrual method of accounting for financial statement and tax return purposes. The accrual method of accounting recognizes revenues when earned and expenses when incurred.

Principles of Consolidation
 
The consolidated financial statements include the accounts of Synutra, Inc. and its subsidiaries held under common control. All significant intercompany balances and transactions have been eliminated in the consolidation.

The following companies are consolidated for financial statement presentation:

Company
 
Incorporation Date
 
 
 
Qingdao St. George Dairy Co. Ltd.
 
September 2001
Qingdao Shengyuan Dairy Co. Ltd.
 
January 1998
Chabei Shengyuan Dairy Co. Ltd.
 
February 2002
Heilongjiang Luobei Shengyuan Food Co. Ltd.
 
April 2001
Bei’an Yipin Dairy Co. Ltd.
 
June 2004
Qingdao Women and Children Nutrition Study Co. Ltd.
 
April 2004
Zhangjiakou Shengyuan Co. Ltd.
 
March 2004

Use of estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.
 
-12-

Fair value of financial instruments - For certain of the Company's financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.

Financial risk factors and financial risk management - The Company is exposed to the following risk factors:

(i) Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The Company also has a concentration of credit risk due to geographic sales as a majority of its products are marketed and sold in the PRC.

(ii) Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.

(iii) Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 5.31% to 7.31% per annum. The Company's income and cash flows are substantially independent of changes in market interest rates. The Company has no significant interest-bearing assets. The Company's policy is to maintain all of its borrowings in fixed rate instruments.

Cash and cash equivalents - Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.

Restricted cash - Restricted cash is 30%, 50%, or 100% bank demand deposit used as security against notes payable. This is used by the Company as a short term instrument to reduce financing cost. Cash restricted are called at the same terms of notes.

Short term investments - The Company has classified its short term investment as Available-for-Sale. Available-for-Sale securities are stated at fair value with unrealized gains and losses included as a separate component of stockholders’ equity. Realized gains and losses are included in income (expense). The cost of securities sold is based on the specific identification method.

Inventories - Inventories are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Property, plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is provided using the straight-line method over the assets estimated useful life for periods ranging from five to fifty years. Significant improvements and betterments are capitalized where it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained form the use of the asset beyond its originally assessed standard of performance. Routine repairs and maintenance are expensed when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the carrying amount of the assets.
 
-13-

Impairment of long-lived assets - Long-lived assets, such as property, plant and equipment and other non-current assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

Land use rights - According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 20 to 50 years.

Intangible assets - Intangible assets represent computer software and applications. Intangible assets are measured initially at cost. Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives. The gross carrying amount of the intangible assets was approximately $243,000, and $61,000 at December 31, 2004 and 2003, respectively. Accumulated amortization at December 31, 2004 and 2003 was $79,000 and $30,000, and amortization expense for the periods presented was $47,000 and $34,000, respectively. Future amortization expense is as follows:

(in thousands)
 
2005
  
2006
 
2007
 
2008
 
2009
  
$ 48
  
$
46
  
$
41
  
$
28
  
$
—
  

Trade receivables and allowance for bad debts - The Company presents trade, net of allowances for doubtful accounts and sales returns. Trade receivables generated from credit sales, are non-interest bearing and have general credit terms of 30 to 60 days. The allowances are calculated based on detailed review of certain individual customer accounts, historical rates and an estimation of the overall economic conditions affecting the Company's customer base. The Company reviews a customer's credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Revenue recognition - Revenues from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. Revenues consist of the invoice value for the sale of goods and services net of value-added tax ("VAT"), rebates and discounts. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The Company is subject to the following surtaxes, which are recorded as deductions from gross sales: 5% City Construction Tax and Education Supplementary Tax (levied at 3 - 4% of net VAT payable).

Shipping and handling fees - Shipping and handling fees are classified as selling expenses and amounted to approximately $2.1 million and $1.9 million for the years ended December 31, 2004 and 2003, respectively.

Research and development expenses - Research and development costs are classified as general and administrative expenses and are expensed as incurred. They amounted to approximately $90,422 and $60,085 for the years ended December 31, 2004 and 2003, respectively.
 
-14-

Advertising costs - Advertising costs are expensed as incurred and are classified as selling expenses. Advertising costs amounted to approximately $8.5million and $6.5 million for the years ended December 31, 2004 and 2003, respectively.

Income taxes - The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards ("SFAS" No. 109), "Accounting for Income Taxes," whereby deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary; to reduce deferred income tax assets to the amount expected to be realized.

Foreign currency translation - The reporting currency of the Company is U.S. dollars and the financial records are maintained and the financial statements are prepared in Renminbi ("RMB"). Transactions in other currencies are translated into the reporting currencies at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchanges differences are recognized in the income statement in the period in which they arise.

Recently Issued Accounting Standards 
 
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" (“SFAS 151”). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SFAS 151 on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" (“SFAS 123R”). SFAS 123R revises FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). SFAS 123R is effective for small business issuers for all interim periods beginning after December 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal quarter ended September 30, 2005. Retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. The Company is currently evaluating the impact of SFAS 123R on its consolidated financial statements.

NOTE 2 - RELATED PARTY TRANSACTIONS
 
The following related party transactions occurred during the years ended December 31, 2004 and 2003:
 
   
2004
  
2003
  
(in thousands)
  
 
  
 
  
Purchases
  
 
  
 
  
Beijing Kelqin Dairy Company, Ltd.
  
$
1,159
  
$
400
  
Sheng Zhi Da Dairy Group Corp.
    
1,214
    
—
  
Heilongjiang Baoquanling Shengyuan Dairy Company, Ltd.
    
7,385
    
5,131
  
St. Angel (Beijing Business Service)
    
32
    
—
  
Beijing Honnete Dairy Corporation, Ltd.
    
3,118
    
1,926
  
 
          
Total Purchases
  
$
12,908
  
$
7,457
  
 
-15-
 
Related party payables consist of accounts payable and deposits received from customers from the following companies:
 
   
2004
  
2003
  
 (in thousands)
  
 
  
 
  
Due to Related Companies
  
 
  
 
  
Beijing Kelqin Dairy Company, Ltd.
  
$
877
  
$
181
  
Sheng Zhi Da Dairy Group Corp.
    
4,242
    
—
  
Heilongjiang Baoquanling Shengyuan Dairy Company, Ltd.
    
356
    
518
  
St. Angel (Beijing Business Service)
    
35
    
—
  
Beijing Honnete Dairy Corporation, Ltd.
    
3,017
    
2,443
  
 
          
Total Related Party Companies
  
$
8,527
  
$
3,142
  
 
   
2004
  
2003
  
 (in thousands)
  
 
  
 
  
Due from Related Companies
  
 
  
 
  
Beijing Kelqin Dairy Company, Ltd.
  
$
—
  
$
241
  
Sheng Zhi Da Dairy Group Corp.
    
4,589
    
394
  
Beijing Ao Naier Feed Stuff LLC
    
—
    
221
  
St. Angel (Beijing Business Service)
    
—
    
25
  
Beijing Honnete Dairy Corporation, Ltd.
    
91
    
380
  
 
          
Total Due from Related Companies
  
$
4,680
  
$
1,261
  

   
2004
  
2003
  
 (in thousands)
  
(Restated)
  
(Restated)
  
Sales
  
 
  
 
  
Beijing Kelqin Dairy Company, Ltd.
  
$
262
  
$
14
  
Sheng Zhi Da Dairy Group Corp.
    
351
    
20
  
Heilongjiang Baoquanling Shengyuan Dairy Company, Ltd.
    
2,197
    
2,363
  
St. Angel (Beijing Business Service)
    
210
    
—
  
 
            
Total Sales
  
$
3,020
  
$
2,397
  
 
-16-

NOTE 3 - ACCOUNTS RECEIVABLE
 
The Company’s accounts receivable at December 31, 2004 and 2003 are summarized as follows:
 
(in thousands)
  
2004
  
2003
  
 
  
(Restated)
  
(Restated)
  
Accounts Receivable
  
$
3,464
  
$
1,237
  
Less: Allowance for Doubtful Accounts
    
167
    
98
  
 
          
Net Accounts Receivable
  
$
3,297
  
$
1,139
  

The change in the allowance for doubtful accounts at December 31, 2004 and 2003 are summarized as follows:
 
(in thousands)
  
2004
  
2003
  
 
  
 
  
 
  
Balance - Beginning of Year
  
$
98
  
$
6
  
Add: Current Year Provision
    
69
    
92
  
Less: Accounts Written Off
    
—
    
—
  
 
          
Balance - End of Year
  
$
167
  
$
98
  
 
NOTE 4 - INVENTORIES
 
Inventories consist of the following:
 
(in thousands)
  
2004
  
2003
  
 
  
 
  
 
  
Raw Materials
  
$
1,072
  
$
1,648
  
Work in Process
    
3,037
    
2,615
  
Finished Goods
    
1,471
    
1,892
  
Packing Materials and Other Consumables
    
684
    
547
  
 
          
Total Inventories
  
$
6,264
  
$
6,702
  
 
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consisted of the following:
 
(in thousands)
  
2004
  
2003
  
 
  
(Restated)
  
(Restated)
  
Building
  
$
6,868
  
$
6,372
  
Machinery
    
6,061
    
5,832
  
Office Equipment
    
776
    
542
  
Vehicles
    
1,378
    
1,341
  
Construction in Progress
    
13,675
    
391
  
 
  
$
28,758
  
$
14,478
  
Less: Accumulated Depreciation
    
3,433
    
2,148
  
 
          
Net Property and Equipment
  
$
25,325
  
$
12,330
  

Depreciation expense charged to operations was $1.3 million and $989,000 for the years ended December 31, 2004 and 2003, respectively.

-17-
 
NOTE 6 - LAND USE RIGHTS
 
Land use rights consisted of the following:
 
(in thousands)
  
2004
  
2003
  
 
  
 
  
 
  
Land use rights
  
$
1,606
  
$
1,191
  
               
Less: Accumulated amortization
    
70
    
36
  
 
          
Net Land use rights
  
$
1,536
  
$
1,155
  
 
NOTE 7 - BANK BORROWINGS
 
Bank borrowings represent the following:
 
(in thousands)
  
2004
  
2003
  
 
  
(Restated)
  
(Restated)
  
Secured
  
$
10,729
  
$
829
  
Unsecured
    
23,984
    
20,548
  
 
  
$
34,713
  
$
21,377
  
Less: Current Portion
    
29,880
    
12,919
  
 
          
Non-Current Portion
  
$
4,833
  
$
8,458
  

The loans were borrowed from the banks. Some are secured and guaranteed by various related parties while others are secured only by fixed assets. These bank borrowings were from the local banks or financial institutions and were for financing general working capital. Interest was charged at various rates between 5.8% and 6.903% per annum.

-18-
 
NOTE 8 - INCOME TAXES
 
The Company registered in the PRC is subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with relevant income tax laws. According to applicable tax laws regarding foreign direct investment entities, some of the consolidated companies are exempted from income taxes in the PRC for 2 years beginning in their first profitable year. For the years ended December 31, 2004 and 2003, Heilongjiang Luobei Shengyuan Food Co. Ltd. was the only subsidiary that was liable for corporate income taxes, therefore, the provision for taxes was recorded based on their net income.
 
NOTE 9 - LEASES
 
The Company has several lease agreements with non-related parties for the rental of offices, warehouse, and marketing center. The leases are for various terms ending in December 2009. Rent expense for the years ended December 31, 2004 and 2003 was $94,429 and $73,516, respectively.
+
Future minimum rental payments as of December 31, 2004 are as follows:

(in thousands)
 
2005
  
2006
 
2007
 
2008
 
2009
 
Thereafter
 
Total
  
$ 141
  
$
142
  
$
132
  
$
132
  
$
132
  
$
—
  
$
679
  
 
NOTE 10 - SUBSEQUENT EVENT

Entry into a Material Definition Agreement - On June 14, 2005 the Company entered into a share exchange agreement whereby the Company will acquire 48,879,500 shares of common stock of Vorsatech Ventures, Inc., in exchange for all of the Company’s issued and outstanding shares. This transaction was consummated on July 15, 2005.

As a result of the above agreement, Synutra, Inc. will change its year end to that of Vorsatech Ventures which is March 31.

NOTE 11 - RESTATEMENT

We are filing this Amendment No. 2 to the Company’s Current Report on Form 8-K/A filed on August 22, 2005 (“the Original Filing”) to reclassify certain other income as sales revenue, to breakout certain cash and cash equivalents into cash and restricted cash line items, and to reclassify certain notes payable to short-term loans, and to break out the fixed assets line item into various sub line items to conform with subsequent presentation changes in the financial statements. This restatement is necessary to reconcile subsequent restatement of certain audited annual financial statements due to the Company’s ongoing assessment of the effectiveness of its financial reporting controls and procedures.
 
-19-

Consolidated Balance Sheets

Two years ended December 31, 2004 and 2003

The following table sets forth the consolidated balance sheets for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments described above in this Note.
 
   
Year ended
 
Year ended
 
   
December 31, 2004  
  
December 31, 2003 
  
(in thousands, except per share value)
  
　Previously Reported
  
　Restated
  
　Previously Reported
  
　Restated
  
ASSETS
                      
Current Assets
                      
Cash and cash equivalents
  
$
15,982
   
　5,893
  
$
10,786
 
$
　7,191
 
Restricted cash
    
　-
   
　10,089
    
　-
   
　3,595
 
Short term investment - at market
    
　49
   
　49
   
　66
   
　66
 
Trade receivables, net of provisions
    
　3,086
   
　3,297
   
　1,092
   
　1,139
 
Other receivables, net of provisions
    
　1,526
   
　1,526
   
　4,354
   
　4,354
 
Notes receivable
    
　211
   
　-
    
　47
   
　-
  
Inventory
    
　6,264
   
　6,264
    
　6,702
   
　6,702
 
Prepaid expenses
    
　742
   
　-
    
　563
   
　
  
Due from related companies
    
　4,680
   
　4,680
   
　1,261
   
　1,261
 
Advance to suppliers
    
　-　
    
　742
   
　-　
    
　563
 
Deferred expenses and other current assets
   
　284
   
　284
   
　271
   
　271
 
 
    
　
    
　
    
　
    
　
  
Total Current Assets
    
　32,824
   
　32,824
   
　25,142
   
　25,142
 
                           
Property, plant and equipment, net
    
　13,187
   
　25,325
   
　13,094
   
　12,330
 
Land use rights, net
    
　-
   
　1,536
   
　-
    
　1,155
 
Other Assets
    
　-
   
　164
   
　-
    
　31
 
Intangible assets, net
    
　164
   
　-
    
　31
   
　-
 
Construction in progress
    
　13,675
   
　-
    
　391
   
　-
  
 
    
　
    
　
    
　
    
　
  
TOTAL ASSETS
  
$
59,849
 
$
　59,849
 
$
38,658
 
$
　38,658
 
                           
LIABILITIES AND SHAREHOLDERS’ EQUITY
                          
                           
Current Liabilities
                          
Accounts payable
  
$
3,953
   
　5,826
 
$
3,985
 
$
　3,985
 
Other payables
    
　4,323
   
　-
    
　6,116
   
　-
  
Notes payable
    
　19,453
   
　-
   
　7,914
   
　-
 
Advances from customers
    
　1,401
   
　1,401
   
　1,300
   
　1,300
 
Bank loans
    
　12,300
   
　29,880
   
　5,005
   
　12,919
 
Accrued expenses
    
　704
   
　-
   
　323
   
　-　
  
Due to related companies
    
　8,527
   
　8,527
   
　3,142
   
　3,142
 
Tax payables
    
　-
   
　633
   
　-
    
　153
 
Other current liabilities
    
　-
   
　4,394
   
　-
   
　6,286
 
 
    
　
    
　
    
　
    
　
  
Total Current Liabilities
    
　50,661
   
　50,661
   
　27,785
   
　27,785
 
                           
Long Term Liabilities
    
　
    
　
    
　
    
　
  
Long term debts
    
　4,833
   
　4,833
   
　8,458
   
　8,458
 
 
    
　
    
　
    
　
    
　
  
Total Liabilities
    
　55,494
   
　55,494
   
　36,243
   
　36,243
  
 
    
　
    
　
    
　
    
　
  
Minority Interest
    
　1,365
   
　1,365
   
　(1,233
)
  
　(1,233
)
 
    
　
    
　
    
　
    
　
  
Shareholders’ Equity
    
　
    
　
    
　
    
　
  
Preferred Stock ($0.0001 par value,20,000 authorized;0 issued and outstanding)
    
-
    
-
    
-
    
-
  
Common Stock, $.0001 par value: 250,000 authorized; 46,000  issued and outstanding at December 31,2004 and 2003, respectively
   
　10
   
　5
   
　10
   
　5
 
Additional Paid-in Capital
    
　6,996
   
　7,001
   
　7,179
   
　7,184
  
Retained earnings
    
　46
   
　-　
    
　29
   
-
  
Deficit
    
　(3,853
)
  
　(3,807
)
  
　(3,456
)
  
　(3,427
)
Accumulated other comprehensive income (loss)
    
　(209
)
  
　(209
)
  
　(114
)
  
　(114
)
                           
Total Shareholders’ Equity
   
　2,990
   
　2,990
   
　3,648
   
　3,648
  
 
                      
　
  
Total Liabilities and Shareholders’ Equity
 
$
59,849
   
　59,849
 
$
38,658
   
　38,658
 
 
 
-20-
 
Consolidated Statements of Operations and Comprehensive Income (Loss)

Two years ended December 31, 2004 and 2003

The following table sets forth the consolidated statements of operations and comprehensive income (loss) for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments described above in this Note. 
 
   
Year ended
 
Year ended
 
   
December 31, 2004  
  
December 31, 2003  
  
(in thousands)
  
　Previously Reported
  
　Restated
  
　Previously Reported
  
　Restated
  
Sales
  
$
51,783
 
$
　57,542
 
$
　36,282
 
$
　40,978
 
Cost of sales
    
　26,806
   
　33,605
   
　20,916
   
　26,240
 
Gross Profit
    
　24,977
   
　23,937
   
　15,366
   
　14,738
 
 
    
　
    
　
    
　
    
　
  
Selling expenses
    
　9,428
   
　9,428
   
　8,641
   
　8,641
 
Advertising and sales promotion
    
　9,746
   
　8,479
   
　7,410
   
　6,458
 
General and administrative expenses
    
　2,706
   
　3,218
   
　2,093
   
　2,127
 
Income (Loss) from Operations
    
　3,097
   
　2,812
   
　(2,778
)
  
　(2,488
)
 
    
　
    
　
    
　
    
　
  
Interests income
    
　-
    
　(88
)
  
　-　
    
　(107
)
Other income, net
    
　661
   
　(32
)
  
　631
   
　(165
)
Interest expense
    
　1,149
   
　638
   
　854
    
　820
  
Other expenses
    
　315
   
　-
   
　35
   
　-
 
 
    
　
    
　
    
　
    
　
  
Income before provision for income tax
    
　2,294
   
　2,294
   
　(3,036
)
  
　(3,036
)
 
    
　
    
　
    
　
    
　
  
Income Taxes - Current
    
　76
   
　76
   
　74
   
　74
 
 
    
　
    
　
    
　
    
　
  
Net income (loss) before minority interest
    
　2,218
   
　2,218
   
　(3,110
)
  
　(3,110
)
                           
Minority Interest
    
　2,598
    
　2,598
   
　235
    
　235
 
 
    
　
    
　
    
　
    
　
  
Net Loss
    
　(380
)
  
　(380
)
  
　(3,345
)
  
　(3,345
)
 
    
　
    
　
    
　
    
　
  
Comprehensive income (loss)
    
　
    
　
    
　
    
　
  
Other comprehensive income
   
　(95
)
  
　(95
)
  
　(114
)
  
　(114
)
Comprehensive income (loss)
  
$
(475
)
$
　(475
)
$
　(3,459
)
$
　(3,459
)
 
 
-21-
 
Consolidated Statements of Cash Flows

Two years ended December 31, 2004 and 2003

The following table sets forth the consolidated statements of cash flows for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments described above in this Note.
 
   
Year ended
 
Year ended
 
   
December 31, 2004  
  
December 31, 2003  
  
(in thousands)
  
　Previously Reported
  
　Restated
  
　Previously Reported
  
　Restated
  
Cash Flows from Operating Activities
                      
                       
Net Loss
  
$
(380
)
$
(380
)
$
(3,345
)
$
(3,345
)
                           
Adjustments to Reconcile Net Loss to Net Cash
                          
Provided by (Used in) Operating Activities
                          
Minority interest
    
2,598
   
2,598
   
235
   
235
 
Depreciation and amortization
    
1,387
   
1,387
   
2,184
   
2,184
 
Bad debts
    
68
   
68
   
96
   
96
 
Loss on short term investment
    
-
    
17
   
-
   
7
 
Loss on disposal of property, plant and equipment
    
1
    
1
    
-
    
-
  
Inventory
    
438
   
438
   
(6,702
)
  
(6,702
)
Trade receivables, net of provisions
    
(2,063
)
  
(2,226
)
  
(1,184
)
  
(1,232
)
Advance to suppliers
    
-
    
(179
)
  
-
    
(562
)
Duo from related parties
    
-
    
(3,418
)
  
-
   
(879
)
Other receivables, net of provisions
    
2,828
   
2,828
    
(4,357
)
  
(4,357
)
Deferred expenses and other current assets
    
(193
)
  
(14
)
  
(833
)
  
(271
)
Accounts payable
    
(32
)
  
1,840
   
3,985
   
3,985
  
Duo to related parties
    
-
    
5,386
   
-
   
3,142
 
Advances from customers
   
-
    
101
   
-
   
1,300
 
Tax payables
   
-
    
479
   
-
   
153
  
Other liabilities
   
-
    
(1,892
)
  
-
    
6,286
  
Other payables and accrued expenses
    
(1,412
)
  
-
    
6,439
   
-
 
Deposit received from customers
    
101
   
-
   
1,300
   
-
 
                           
Net Cash Provided By (Used in) Operating Activities
    
　3,340
   
　7,034
   
　(2,182
)
  
　40
  
                           
Cash Flows from Investing Activities
                          
Purchase of short term investment
    
-
    
-
    
(73
)
  
(73
)
Funds Investment
    
-
    
-
    
1,000
   
-
  
Acquisition of property, plant and equipment
    
(1,486
)
  
(14,349
)
  
(15,278
)
  
(14,478
)
Purchases of land use right
    
-
    
(415
)
  
-
   
(1,191
)
Cash proceeds from sale of fixed assets
    
53
   
-
    
-
   
-
  
Cash used for construction in progress
    
(13,284
)
  
-
    
(391
)
  
-
 
Notes receivable - cash paid
    
(164
)
  
-
    
(47
)
  
-
  
Purchase of Intangible Assets
    
(180
)
  
(133
)
  
(31
)
  
(31
)
Due from related companies - cash paid
    
(3,418
)
  
-
    
(1,261
)
  
-
  
Change in restricted cash
    
-
    
(6,494
)
  
-
    
(3,595
)
Net Cash Used in Investing Activities
    
　(18,479
)
  
　(21,391
)
  
　(16,082
)
  
　(19,368
)
                           
Cash Flows from Financing Activities
                          
Registered capital
    
-
   
-
   
10
   
-
  
Reserve
    
-
    
-
   
15
   
-
  
Loans from shareholders
    
-
    
-
   
(618
)
  
-
  
Proceeds frombank Loans
    
3,671
   
31,480
   
13,462
   
32,133
  
Repayment of bank loans
   
-
    
(18,143
)
  
-
    
(10,757
)
Proceeds from notes payable
    
11,538
   
-
   
7,914
   
-
 
Retained earnings
    
-
   
-
   
(1,468
)
  
-
  
Capital contributions (Shareholder Distributions) - net
    
(183
)
  
(183
)
  
6,680
   
5,237
  
Due to related companies - cash received
    
5,386
   
-
   
3,142
   
-
  
                           
Net Cash Provided by Financing Activities
    
　20,412
   
　13,154
   
　29,137
   
　26,613
  
                           
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
(77
)
  
(95
)
  
(107
)
  
(114
)
                           
Net Change in Cash and Cash Equivalents
    
　5,196
   
　(1,203
)
  
　10,766
   
　7,285
 
                           
Cash and cash equivalents - beginning of year
    
10,786
   
7,191
   
20
   
20
 
                           
Cash and Cash Equivalents - End of Year
  
$
15,982
   
　5,893
 
$
10,786
 
$
　7,191
 
                           
SUPPLEMENTARY CASH FLOWS DISCLOSURES
                          
Interest Paid
  
$
1,141
   
　1,141
 
$
854
 
$
　854
 
Taxes Paid
  
$
109
   
　109
 
$
31
 
$
　31
 


-22-
 
SYNUTRA, INC.
Rockville, MD
 
 
 
FINANCIAL REPORTS
 
 
AT
 
 
JUNE 30, 2005
 

 
-23-

SYNUTRA, INC.
Rockville, MD

TABLE OF CONTENTS
 
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SYNUTRA, INC. AS OF JUNE 30, 2005
 
 
Report of Independent Registered Public Accounting Firm
25
 
 
Consolidated Balance Sheets at June 30, 2005 (Unaudited, restated) and December 31, 2004 (audited, restated)
26
 
 
Consolidated Statements of Changes in Stockholders’ Equity for the
 
Six Months Ended June 30, 2005 and 2004 (Unaudited, restated)
27
 
 
Consolidated Statements of Operations and Comprehensive Income for the
 
Six and Three Months Ended June 30, 2005 and 2004 (Unaudited, restated)
28
 
 
Consolidated Statements of Cash Flows for the Six Months Ended
 
June 30, 2005 and 2004 (Unaudited, restated)
29
 
 
Notes to Consolidated Financial Statements
30 - 33
 

-24-

SYNUTRA, INC.
Rockville, MD

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and Stockholders
Synutra, Inc.
Rockville, Maryland

We have reviewed the accompanying interim consolidated financial statements of Synutra, Inc. as of June 30, 2005, and for the three-month and six-month periods ended June 30, 2005 and 2004. These interim consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Synutra, Inc. as of December 31, 2004 (presented herein), and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 19, 2005 (except for the restatement discussed in Note 11 to the consolidated financial statements, as to which the date is December 27, 2007), we expressed an unqualified opinion on those consolidated financial statements.


/s/ Rotenberg & Co., llp

Rotenberg & Co., llp
Rochester, New York
August 19, 2005 (except for the restatement discussed in Note 3 to the interim consolidated financial statements, as to which the date is December 27, 2007)

-25-

SYNUTRA, INC.
Rockville, MD

CONSOLIDATED BALANCE SHEETS 
 
   
June  30, 
 
December  31,
 
   
2005
  
2004
  
(in thousands except share par value)
  
(Unaudited,
restated)
  
(Audited,
restated)
  
ASSETS
 
 
 
   
 
Current Assets:
 
 
 
   
 
Cash and cash equivalents
 
$
7,703
  
$
5,893
  
Restricted cash
   
11,240
    
10,089
  
Short term investment, net
    
49
    
49
  
Accounts receivable, net of allowance for doubtful accounts of $202 and $167, respectively
   
2,014
    
3,297
  
Inventories
   
6,446
    
6,264
  
Other receivable
    
2,308
    
1,526
  
Due from related parties
   
5,315
    
4,680
  
Advance to suppliers
    
638
    
742
  
Deferred expenses and other current assets
   
2,820
    
284
  
Total current assets
   
38,533
    
32,824
  
 
         
Property, plant and equipment, net
   
27,635
    
25,325
  
Land use rights, net
   
1,524
    
1,536
  
Other assets
   
314
    
164
 
 
         
TOTAL ASSETS
 
$
68,006
  
$
59,849
  
 
         
LIABILITIES AND SHAREHOLDERS' EQUITY
         
 
         
Current Liabilities:
           
Bank loans
 
$
33,329
  
$
29,880
  
Accounts payable
   
6,732
    
5,826
  
Due to related parties
   
7,357
    
8,527
  
Advances from customers
   
1,397
    
1,401
  
Tax payables
   
275
    
633
  
Other current liabilities
   
4,239
    
4,394
  
Total current liabilities
   
53,329
    
50,661
  
Other long term liabilities
    
4,833
    
4,833
  
Total liabilities
   
58,162
   
55,494
  
Minority interest
   
-
   
1,365
 
Shareholders' equity:
             
               
Preferred Stock ($0.0001 par value,20,000 authorized;0 issued and outstanding)
    
-
    
-
  
Common Stock, $.0001 par value: 250,000 authorized; 46,000  issued and outstanding at June 30 ,2005 and December 31, 2004
    
5
    
5
  
Additional paid-in capital
   
7,676
    
7,001
  
Retained earnings (Accumulated Deficits)
    
2,354
    
(3,807
)
Accumulated other comprehensive income
   
(191
)
  
(209
)
Total shareholders' equity
   
9,844
    
2,990
  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
68,006
  
$
59,849
  

The accompanying notes are an integral part of these financial statements.

-26-
 
SYNUTRA, INC.
Rockville, MD
 
 
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED) 
 
   
Common
 
 
 
Additional
 
Retained
 
Accumulated
 
Total
 
 
Stock
 
Share
 
Paid-In
 
Earnings
 
Comprehensive
 
Stockholder’s
  
(in thousands)
  
Outstanding
 
Capital
 
Capital
 
(Deficit)
 
Income (Loss)
 
Equity
  
                           
Balance - January 1, 2004(Restated)
    
46,000
  
$
5
  
$
7,184
  
$
(3,427
)
$
(114
)
$
3,648
  
 
        
　
    
　
    
　
    
　
    
　
  
Capital Contributions
        
　—
    
　288
    
　—
    
　—
    
　288
  
 
        
　
    
　
    
　
    
　
    
　
  
Net Income for the Period Ended
        
　—
    
　—
    
　218
    
　—
    
　218
  
 
        
　
    
　
    
　
    
　
    
　
  
Other Comprehensive Income (Loss) for the Period Ended
          
—
    
—
    
—
    
(7
)
  
(7
)
 
        
　
    
　
    
　
    
　
    
　
  
Balance - June 30, 2004(Restated)
    
46,000
    
　5
    
　7,472
    
　(3,209
)
  
　(121
)
  
　4,147
  
 
        
　
    
　
    
　
    
　
    
　
  
Shareholder Distributions
        
　—
    
　(471
)
  
　—
    
　—
    
　(471
)
 
        
　
    
　
    
　
    
　
    
　
  
Net Loss for the Period Ended
        
　—
    
　—
    
　(598
)
  
　—
    
　(598
)
 
        
　
    
　
    
　
    
　
    
　
  
Other comprehensive Income (Loss) for the Period Ended
          
—
    
—
    
—
    
(88
)
  
(88
)
 
        
　
    
　
    
　
    
　
    
　
  
Balance - December 31, 2004(Restated)
    
46,000
    
　5
    
　7,001
  
$
(3,807
)
$
(209
)
  
　2,990
  
 
        
　
    
　
    
　
    
　
    
　
  
Capital Contributions
        
　—
    
　675
    
　—
    
　—
    
　675
  
 
        
　
    
　
    
　
    
　
    
　
  
Net Income for the Period Ended
        
　—
    
　—
    
　6,161
    
　—
    
　6,161
  
 
        
　
    
　
    
　
    
　
    
　
  
Other comprehensive Income (Loss) for the Period Ended
          
—
    
—
    
—
    
18
    
18
  
 
        
　
    
　
    
　
    
　
    
　
  
Balance - June 30, 2005(Restated)
    
46,000
  
$
5
  
$
7,676
  
$
2,354
  
$
(191
)
$
9,844
  
 
The accompanying notes are an integral part of these financial statements.

-27-

SYNUTRA, INC.
 
Rockville, MD
 
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
 
 
Three Months Ended June 30
 
 Six Months Ended June 30
  
 
2005
  
2004
  
2005
  
2004
  
(in thousands except earning per share data)
  
(Restated)
  
(Restated)
  
(Restated)
  
(Restated)
  
Net sales
 
$
21,164
  
$
11,176
  
$
39,856
 
$
23,958
  
                           
Cost of sales
   
11,655
    
6,839
    
20,780
    
14,395
  
                           
Gross profit
   
9,509
    
4,337
    
19,076
    
9,563
  
 
                         
Selling & distribution expenses
   
1,815
    
1,942
    
6,378
   
4,664
  
Advertising and promotion expenses
   
5,258
    
3,560
    
6,329
   
3,933
  
General & administrative expenses
   
915
    
563
    
1,580
   
1,119
  
Total operating expense
   
7,988
    
6,065
    
14,287
   
9,716
  
Income from operations
   
1,521
    
(1,728
)
  
4,789
    
(153
)
 
                         
Interest expense
   
360
    
234
   
543
   
379
  
Interest income
   
(64
)
  
(24
)
  
(139
)
  
(42
)
Other expenses/(income )
   
(525
)
  
102
   
(467
)
  
109
 
Income before provision for income tax
   
1,750
    
(2,040
)
  
4,852
    
(599
)
 
                         
Provision for income tax
   
25
   
15
   
57
   
34
  
Net income before minority interests
   
1,725
    
(2,055
)
  
4,795
    
(633
)
 
                         
Minority interests
   
1
   
(1,339
)
  
(1,365
)
  
(851
)
Net income attributable to shareholders
 
$
1,724
  
$
(716
)
$
6,160
 
$
218
  
 
                         
Other comprehensive income
   
27
   
(13
)
  
18
   
(7
)
Comprehensive income
   
1,751
    
(729
)
  
6,178
   
211
  
 
                         
Earning per share—basic
 
$
0.04
 
$
(0.02
)
$
0.13
 
$
0.005
 
Earning per share—diluted
 
$
0.04
 
$
(0.02
)
$
0.13
 
$
0.005
 
Weighted average common share outstanding-basic
   
46,000
    
46,000
    
46,000
   
46,000
  
 
                         
Weighted average common share outstanding-diluted
   
46,000
    
46,000
    
46,000
   
46,000
  

The accompanying notes are an integral part of these financial statements.
 
-28-

SYNUTRA, INC.Rockville, MD
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 
 
   
Six Months Ended
 
   
June 30,
  
(in thousands)
  
2005
  
2004
  
Cash flow from operating activities:
 
(Restated) 
 
  (Restated)
  
Net income
 
$
6,160
  
$
218
  
Adjustments to reconcile net income to net cash provided by operating activities
             
Depreciation and amortization
   
657
   
608
  
Bad debt expense
   
36
   
6
 
Loss on short term investment
    
-
   
7
 
Minority interest
   
(1,365
)
  
(851
)
Changes in operating assets and liabilities:
             
Accounts receivable
   
1,247
   
(910
)
Inventories
   
(183
)
  
(642
)
Due from related parties
   
(635
)
  
(2,502
)
Prepaid expenses and other current assets
   
(3,214
)
  
(7,786
)
Accounts payable
   
906
   
(220
)
Due to related parties
   
(1,171
)
  
12,850
 
Advances from customers
   
(4
)
  
(19
)
Tax payables
   
(358
)
  
186
  
Other liabilities
   
(155
)
  
459
  
Net cash provided by operating activities
   
1,920
    
1,404
  
 
             
Cash flow from investing activities:
             
Acquisition of property, plant and equipment
   
(2,954
)
  
(2,954
)
Purchases of intangible assets
   
(150
)
  
(155
)
Change in restricted cash
   
(1,151
)
  
(992
)
Net cash (used in) provided by investing activities
   
(4,255
)
  
(4,101
)
Cash flow from financing activities   :
             
Proceeds from bank loans
   
8,600
   
9,062
  
Repayment of bank loans
   
(5,149
)
  
(8,122
)
Capital contributions-Stockholders
   
676
   
288
 
Net cash provided by financing activities
   
4,127
   
1,228
  
 
             
Net change in cash and cash equivalents
 
$
1,792
  
$
(1,469
)
               
Effect of exchange rate changes on cash and cash equivalents
   
18
   
(7
)
Cash and cash equivalents, beginning of period
   
5,893
    
7,191
  
Cash and cash equivalents, end of period
 
$
7,703
  
$
5,715
  
Supplementary cash flows disclosure
             
Interest paid
 
$
654
  
$
509
  
Income taxes paid
 
$
66
  
$
34
  
 
The accompanying notes are an integral part of these financial statements.

-29-
 
SYNUTRA, INC.
Rockville, MD


NOTE 1 - ORGANIZATION / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited financial statements include all adjustments of a normal and recurring nature which, in the opinion of Company’s management, are necessary to present fairly the Company’s financial position as of June 30, 2005 and the results of its operations for the six and three months ended June 30, 2005 and 2004. and cash flows for the six months ended June 30, 2005 and 2004.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the financial statements and related notes contained in the Company’s annual report on Form 8-K to the Securities and Exchange Commission for the year ended December 31, 2004.

Description of Business
 
Synutra, Inc. is a U.S. incorporated company that owns 100% of six subsidiary companies in the People’s Republic of China “PRC”. These six subsidiaries are all principally engaged in different stages of the production, distribution, and sales of dairy based infant formulas and other nutritional products. The Company’s extensive sales network covers 24 provinces, 227 cities, and more than 800 counties throughout China. In 2004, the Company’s infant formula market share was rated number eight among international manufacturers and number three among domestic manufacturers in China

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounting method - The Company uses the accrual method of accounting for financial statement and tax return purposes. The accrual method of accounting recognizes revenues when earned and expenses when incurred.

Principles of Consolidation
 
The consolidated financial statements include the accounts of Synutra, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation.

The following companies are consolidated for financial statement presentation:
 
Company
 
Incorporation Date
 
 
 
Qingdao St. George Dairy Co. Ltd.
 
September 2001
Qingdao Shengyuan Dairy Co. Ltd.
 
January 1998
Chabei Shengyuan Dairy Co. Ltd.
 
February 2002
Heilongjiang Luobei Shengyuan Food Co. Ltd.
 
April 2001
Bei’an Yipin Dairy Co. Ltd.
 
June 2004
Qingdao Women and Children Nutrition Study Co. Ltd.
 
April 2004
Zhangjiakou Shengyuan Co. Ltd.
 
March 2004
 
-30-
 
Use of estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the ultimate outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.

Fair value of financial instruments - For certain of the Company's financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.

Related party transactions - A related party is generally defined as (i) any person that holds 10% or more of the Company's securities and their immediate families, (ii) the Company's management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

Financial risk factors and financial risk management - The Company is exposed to the following risk factors:

(i) Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history. The Company also has a concentration of credit risk due to geographic sales as a majority of its products are marketed and sold in the PRC.

(ii) Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.

(iii) Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 5.31% to 7.31% per annum. The Company's income and cash flows are substantially independent of changes in market interest rates. The Company has no significant interest-bearing assets. The Company's policy is to maintain all of its borrowings in fixed rate instruments.

Cash and cash equivalents - Cash and cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.

Restricted cash - Restricted cash is 30%, 50%, or 100% bank demand deposit used as security against notes payable. This is used by the Company as a short term instrument to reduce financing cost. Cash restricted are called at the same terms of notes.

Short term investments - The Company has classified its short term investment as Available-for-Sale. Available-for-Sale securities are stated at fair value with unrealized gains and losses included as a separate component of stockholders’ equity. Realized gains and losses are included in income (expense). The cost of securities sold is based on the specific identification method.

Inventories - Inventories are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis. Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. .
 
-31-

Property, plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is provided using the straight-line method over the assets estimated useful life for periods ranging from five to fifty years. Significant improvements and betterments are capitalized where it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained form the use of the asset beyond its originally assessed standard of performance. Routine repairs and maintenance are expensed when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the carrying amount of the assets.

Land use rights - According to the law of China, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being amortized using the straight-line method over the lease term of 20 to 50 years.

Impairment of long-lived assets - Long-lived assets, such as property, plant and equipment and other non-current assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.

Intangible assets - Intangible assets represent computer software and applications. Intangible assets are measured initially at cost. Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful lives are amortized on the straight-line basis over their useful lives.

Trade receivables and allowance for bad debts - The Company presents trade, net of allowances for doubtful accounts and sales returns. Trade receivables generated from credit sales, are non-interest bearing and have general credit terms of 30 to 60 days. The allowances are calculated based on detailed review of certain individual customer accounts, historical rates and an estimation of the overall economic conditions affecting the Company's customer base. The Company reviews a customer's credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Revenue recognition - Revenues from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. Revenues consist of the invoice value for the sale of goods and services net of value-added tax ("VAT"), rebates and discounts. Amounts billed to customers related to freight have been classified as sales in the accompanying consolidated statements of income. The Company is subject to the following surtaxes, which are recorded as deductions from gross sales: Education Supplementary Tax (levied at 4% of net VAT payable).

Shipping and handling fees - Shipping and handling fees are classified as selling expenses.

Research and development expenses - Research and development costs are classified as general and administrative expenses and are expensed as incurred.
 
-32-

Advertising costs - Advertising costs are expensed as incurred and are classified as selling expenses.

Income taxes - The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards ("SFAS" No. 109), "Accounting for Income Taxes," whereby deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary; to reduce deferred income tax assets to the amount expected to be realized.

Foreign currency translation - The reporting currency of the Company is U.S. dollars and the financial records are maintained and the financial statements are prepared in Renminbi ("RMB"). Transactions in other currencies are translated into the reporting currencies at exchange rates prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies at the balance sheet date are re-translated at exchange rates prevailing at that date. Non-monetary assets and liabilities in other currencies are translated at historical rates. Exchanges differences are recognized in the income statement in the period in which they arise.

Recently Issued Accounting Standards
 
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4" (“SFAS 151”). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of SFAS 151 on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" (“SFAS 123R”). SFAS 123R revises FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). SFAS 123R is effective for small business issuers for all interim periods beginning after December 15, 2005. As such, the Company is required to adopt these provisions at the beginning of the fiscal quarter ended September 30, 2005. Retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. The Company is currently evaluating the impact of SFAS 123R on its consolidated financial statements.
 
NOTE 2 - OTHER MATTERS

On June 14, 2005, the Company changed its corporate year end from December to March.

NOTE 3 - RESTATEMENT

We are filing this Amendment No. 2 to the Company’s Current Report on Form 8-K/A filed on August 22, 2005 (“the Original Filing”) to reclassify certain other income as sales revenue, to breakout certain cash and cash equivalents into cash and restricted cash line items, and to reclassify certain notes payable to short-term loans, and to break out the fixed assets line item into various sub line items to conform with subsequent presentation changes in the financial statements. This restatement is necessary to reconcile subsequent restatement of certain audited annual financial statements due to the Company’s ongoing assessment of the effectiveness of its financial reporting controls and procedures.
 
-33-

Consolidated Balance Sheets

As of June 30, 2005 and December 31, 2004

The following table sets forth the consolidated balance sheets for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments.
 
   
As of
  
Year ended
 
   
June 30, 2005 
(Unaudited)  
  
December 31, 2004
(Audited)  
  
(in thousands, except for per share value)
  
　Previously Reported
  
　Restated
  
　Previously Reported
  
　Restated
  
ASSETS
                     
Current Assets:
                     
Cash and cash equivalents
 
$
18,943
 
$
7,703
 
$
15,982
 
$
5,893
 
Restricted cash
   
-
    
11,240
   
-
    
10,089
 
Trade Receivables, Net of Provisions
    
1,982
   
-
    
3,086
   
-
  
Other Receivables, Net of Provisions
    
2,308
   
2,308
    
1,526
   
1,526
  
Notes Receivable
    
32
   
-
    
211
   
-
  
Accounts receivable, net of allowance for doubtful accounts of $202 and $167, respectively
   
-
   
2,014
   
-
    
3,297
 
Prepaid Expenses
    
638
   
-
    
742
   
-
  
Advance to suppliers
    
-
    
638
    
-
    
742
  
Deferred Costs
    
2,820
   
-
    
285
   
-
  
Deferred expenses and other current assets
   
-
    
2,820
    
-
    
284
  
Total current assets
   
　38,533
   
38,533
   
　32,824
   
32,824
 
 
                       
Property, plant and equipment, net
   
13,798
   
27,635
   
13,187
   
25,325
 
Land use rights, net
   
-
    
1,524
   
-
   
1,536
 
Intangible Assets, Net of Accumulated Amortization
    
312
   
-
    
164
   
-
  
Construction In Progress
    
15,361
   
-
    
13,674
   
-
  
Other Assets
    
2
   
314
   
-
    
164
 
 
    
　
    
　
    
　
    
　
  
TOTAL ASSETS
 
$
68,006
 
$
68,006
   
　59,849
 
$
59,849
 
 
                       
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
                         
Current Liabilities:
                       
Bank loans
 
$
13,508
 
$
33,329
   
12,300
 
$
29,880
 
Other Payables
    
3,280
   
-
    
4,323
   
-
  
Notes Payable
    
21,150
   
-
    
19,453
   
-
  
Accounts payable
   
5,403
   
6,732
   
3,953
   
5,826
 
Tax payables
   
-
   
275
   
-
   
633
 
Other current liabilities
   
-
   
4,239
   
-
   
4,394
 
Accrued Expenses
    
1,234
   
-
    
705
   
-
  
Total current liabilities
   
　53,329
   
53,329
   
　50,661
   
50,661
 
Total liabilities
   
　58,162
   
58,162
   
　55,494
   
55,494
 
Shareholders' equity:
                         
                           
Preferred Stock ($0.0001 par value,20,000 authorized;0 issued and outstanding)
    
-
    
-
    
-
    
-
  
Common Stock, $.0001 par value: 250,000 authorized; 46,000  issued and outstanding at June 30 , 2005 and December 31,2004 -, respectively
   
-
    
5
   
-
   
5
 
Registered Capital
   
10
   
-
    
10
   
-
  
Additional paid-in capital
   
7,671
   
7,676
   
6,996
   
7,001
 
Retained Earnings (Deficit)
    
2,308
   
-
    
(3,853
)
  
-
  
Retained earnings (Accumulated Deficits)
    
-
   
2,354
   
-
   
(3,807
)
Total shareholders' equity
   
　9,844
   
9,844
   
　2,990
   
2,990
 
 
                         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
68,006
 
$
68,006
 
$
　59,849
 
$
59,849
 
 
-34-
 
Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

Three months ended June 30, 2005 and 2004

The following table sets forth the consolidated statements of operations and comprehensive income (loss) for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments. 
 
   
Three months ended
 
   
30-Jun-05  
  
30-Jun-04  
  
(in thousands)
  
Previously
Reported
  
　Restated
  
Previously
Reported
  
　Restated
  
Net sales
  $ 17,937  
$
21,164
 
$
9,774
 
$
11,176
 
Cost of sales
    8,456    
11,655
   
5,213
   
6,839
 
Gross profit
   
　　9,481
   
　9,509
   
　4,561
   
　4,337
 
                           
Advertising and promotion expenses
   
5,793
   
5,258
   
3,820
   
3,560
 
General & administrative expenses
   
860
   
915
   
541
   
563
 
Total operating expense
   
8,467
   
7,988
   
6,303
    
6,065
 
Income from operations
   
1,013
   
　1,521
   
　(1,742
)
  
　(1,728
)
                           
Interest expense
   
415
   
360
   
256
   
234
 
Interest income
    -    
(64
)
  
-
    
(24
)
Other Income
    1,242    
-
    
161
   
-
  
Other Expenses
    
90
   
-
    
203
   
-
  
Other expenses/(income )
   
-
   
(525
)
  
-
    
102
 
Income before provision for income tax
   
1,750
   
　1,750
   
　(2,040
)
  
　(2,040
)
Net income before minority interests
   
1,725
   
　1,725
   
　(2,055
)
  
　(2,055
)
Net income attributable to shareholders
   
1,724
   
　1,724
   
　(716
)
  
　(716
)
Comprehensive income
 
$
1,751
 
$
　1,751
 
$
　(729
)
$
　(729
)
 
-35-
 
Six months ended June 30, 2005 and 2004

The following table sets forth the consolidated statements of operation and comprehensive income (loss) for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments. 
 
   
Six months ended
 
   
30-Jun-05  
  
30-Jun-04  
  
(in thousands)
  
　Previously Reported
  
　Restated
  
　Previously Reported
  
　Restated
  
Net sales
 
$
35,653
 
$
39,856
 
$
21,815
 
$
23,958
 
Cost of sales
   
16,222
   
20,780
    
11,815
   
14,395
 
Gross profit
   
　19,431
   
　19,076
    
　10,000
   
　9,563
 
                           
Advertising and promotion expenses
   
7,312
   
6,329
   
4,410
   
3,933
 
General & administrative expenses
   
1,479
   
1,580
   
1,032
   
1,119
 
Total operating expense
   
15,169
   
14,287
   
10,105
    
9,716
 
Income from operations
   
　4,262
   
　4,789
    
　(105
)
  
　(153
)
 
                         
Interest expense
   
644
   
543
   
466
   
379
 
Interest income
   
-
   
(139
)
  
-
    
(42
)
Other Income
   
1,388
   
-
    
185
   
-
  
Other Expenses
    
153
    
-
    
213
   
-
  
Other expenses/(income )
   
-
    
(467
)
  
-
    
109
 
Income before provision for income tax
   
　4,852
    
　4,852
    
　(599
)
  
　(599
)
Net income before minority interests
   
　4,795
    
　4,795
    
　(633
)
  
　(633
)
Net income attributable to shareholders
   
　6,160
   
　6,160
   
　218
   
　218
 
Comprehensive income
 
$
　6,178
 
$
　6,178
 
$
211
 
$
211
 

-36-

Consolidated Statements of Cash Flows (Unaudited)

Six months ended June 30, 2005 and 2004

The following table sets forth the consolidated statements of cash flows for the Company as of the dates indicated, showing previously reported amounts and restated amounts giving effect to the Restatement Adjustments. 
 
   
 Six Months ended
 
 Six Months ended
 
   
June 30, 2005  
  
June 30, 2004  
  
(in thousands)
  
Previously Reported
  
Restated
  
Previously Reported
  
Restated
  
Cash flow from operating activities:
     
 
     
 
 
Net income
 
$
6,160
  
$
6,160
  
$
218
  
$
218
  
Adjustments to reconcile net income to net cash provided by operating activities
                         
Minority interest
   
(1,365
)
  
(1,365
)
  
(851
)
  
(851
)
Depreciation and amortization
   
657
   
657
   
608
   
608
 
Bad debt expense
   
36
   
36
   
6
   
6
 
Loss on short term investment
    
-
   
-
   
-
   
7
 
Changes in operating assets and liabilities:
                         
Inventories
   
(182
)
  
(183
)
  
(642
)
  
(642
)
Trade Receivables, Net of Provisions
    
1,068
   
-
    
(896
)
  
-
  
Other Receivables, Net of Provisions
    
(781
)
  
-
    
(8,097
)
  
-
  
Accounts receivable
   
-
    
1,247
   
-
   
(910
)
Due from related parties
   
-
   
(635
)
  
-
   
(2,502
)
Prepaid expenses and other current assets
   
(2,434
)
  
(3,214
)
  
311
   
(7,786
)
Accounts payable
   
1,450
   
906
   
(220
)
  
(220
)
Due to related parties
   
-
   
(1,171
)
  
-
   
12,850
 
Advances from customers
   
(4
)
  
(4
)
  
(19
)
  
(19
)
Tax payables
   
-
   
(358
)
  
-
   
186
 
Other liabilities
   
-
   
(155
)
  
-
    
459
 
Other Payables and Accrued Expenses
    
(513
)
  
-
    
645
   
-
  
Net cash provided by operating activities
   
4,092
   
1,920
    
(8,937
)
  
1,404
 
 
                         
Cash flow from investing activities:
                         
Cash Purchase of Short Term Investments
    
(12
)
  
-
    
-
   
-
  
Acquisition of property, plant and equipment
   
(1,269
)
  
(2,954
)
  
(1,325
)
  
(2,954
)
Cash Used for Construction in Progress
    
(1,686
)
  
-
    
(1,629
)
  
-
  
Notes Receivable - Cash Received (Cash Paid)
    
179
   
-
    
(14
)
  
-
  
Purchases of intangible assets
   
(148
)
  
(150
)
  
(155
)
  
(155
)
Change in restricted cash
   
-
    
(1,151
)
  
-
    
(992
)
Due from Related Companies - Cash Paid
    
(635
)
  
-
    
(2,502
)
  
-
  
Net cash (used in) provided by investing activities
   
(3,571
)
  
(4,255
)
  
(5,625
)
  
(4,101
)
                           
Cash flow from financing activities   :
                         
Proceeds from bank loans
   
1,208
   
8,600
   
1,254
   
9,062
 
Repayment of bank loans
   
-
   
(5,149
)
  
-
    
(8,122
)
Proceeds fro (Repayment of) Nots Payables
    
1,698
    
-
    
(314
)
  
-
  
Capital contributions-Stockholders
   
675
   
676
   
288
   
288
 
Due to Related Companies - Cash Received (Cash Paid)
    
(1,171
)
  
-
    
12,850
   
-
  
Net cash provided by financing activities
   
2,410
   
4,127
    
14,078
   
1,228
 
 
                         
Effect of exchange rate changes on cash and cash equivalents
   
30
   
18
   
-
   
(7
)
                           
Net change in cash and cash equivalents
   
2,961
   
(1,792
)
  
(484
)
  
(1,469
)
Cash and cash equivalents, beginning of period
   
15,982
   
5,893
   
10,786
   
7,191
 
Cash and cash equivalents, end of period
 
$
18,943
    
7,703
 
$
10,302
  
$
5,715
  
Supplementary cash flows disclosure
                 
Interest paid
 
$
654
    
654
 
$
509
  
$
509
  
Income taxes paid
 
$
66
    
66
 
$
34
  
$
34
  

-37-