SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 8-K
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CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.: 0-24185
Date of Report: April 18, 2006
CENTRAL AMERICAN EQUITIES CORP.
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(Exact name of registrant as specified in its charter)
Florida 65-0636168
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(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Wall Street, 15th Floor, New York, NY 10005
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(Address of principal executive offices) (Zip Code)
212-232-0120 ext. 221
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(Registrant's telephone number including area code)
Hotel Alta Interlink 964, POB 02-5635, Miami, FL 33102
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(Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01 COMPLETION OF ACQUISITION OF ASSETS
ITEM 3.02 UNREGISTERED SALE OF EQUITY SECURITIES
ITEM 5.01 CHANGE IN CONTROL OF REGISTRANT
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS
On April 18, 2006 Ostar Pharmaceutical, Inc. was merged into a wholly-owned
subsidiary of Central American Equities Corp. Ostar Pharmaceutical owns 60%
of Hebei Aoxing Pharmaceutical Group, which is involved in the business of
manufacturing and distributing analgesic drugs in the People's Republic of
China. In connection with the merger, Central American Equities Corp.
issued to the shareholders of Ostar Pharmaceutical 39,464,612 share of
common stock and 297,018 shares of a new Series C Preferred Stock. The
Series C Preferred Stock will be convertible into a total of 118,807,200
shares of common stock. Accordingly, the previous shareholders of Ostar
Pharmaceutical now own, after the merger, on a fully-diluted basis,
158,271,812 shares of Central American Equities Corp common stock.
In connection with the merger, the Board of Directors of Central American
Equities resigned. Prior to resigning, they elected to serve as their
replacements Zhenjiang Yue and John C. Leo. Mr. Yue will also serve as
Chief Executive Officer and Chief Financial Officer of Central American
Equities. Mr. Leo will serve as Corporate Secretary and a director of
Central American Equities.
Information Regarding Central American Equities after the Acquisition of
Ostar Pharmaceutical, Inc.
The information set forth in the remainder of this Report describes the
business and financial condition of Central American Equities after the
merger and other facts regarding the effect of the merger on Central
American Equities.
Ostar Pharmaceutical, Inc.
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Ostar Pharmaceutical, Inc. is a Delaware corporation that was organized in
2005. It has conducted no business. It is a holding company whose only
asset is shares in Hebei Aoxing Pharmaceutical Group Co. Ltd. that represent
60% of the outstanding shares in that company. The remaining 40% of Hebei
Aoxing is owned by Zhenjiang Yue and his family. Mr. Yue is the new
Chairman of Central American Equities.
Business of Aoxing Hebei Pharmaceutical Group
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Founded in 2002, Hebei Aoxing Pharmaceutical Group Co. Ltd is one of first
nongovernmental enterprises to enter the analgesic industry in China. The
Company's facilities are located in Xinle City, Shijiazhuang, Hebei
province, about 143 miles from Beijing.
In April 2002, the Chinese National Food and Drug Administration granted
Hebei Aoxing Pharmaceutical Group a permit to produce analgesic drugs on a
trial level. To date only two other companies possess this permit to manu-
facture analgesic medicines. In May, 2003, the Development and Reform Committee
of Hebei Province approved the Company's application for land requisition of
49.4 acres in the industrial zone of Xinle City. In May 2004 Hebei Aoxing
completed its initial facilities for an investment of 172 million RMB
(U.S.D. $20 million). In June 2004 the facilities received the necessary
government certification.
To date, Hebei Aoxing has been involved in developing its facilities,
conducting research and development, and obtaining the requisite approvals
from the Chinese government. Hebei Aoxing is currently awaiting the final
government approvals which will be the permits to manufacture and market its
products. Hebei Aoxing expects to receive the permit to market its Naloxone
products in the third quarter of 2006 and to promptly initiate marketing and
production.
Facilities
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The headquarters of Hebei Aoxing currently covers 29.6 acres of the 49.4
leased by Hebei Aoxing. On that land, the Company has located a building
complex that offers an aggregate of 32,268 m2 in floor space. The complex
includes office facilities, research facilities, 13,000 m2 in factory space,
and a five story residential facility for employees.
The Company's technology center is the 4600 m2 Aoxing Special Medicine
Research Center. The Research Center is equipped with advanced
pharmaceutical research facilities, including troche testing equipment,
capsule testing equipment, injection testing equipment, composition testing
equipment, chemical analysis equipment, and Chinese traditional medicine
extraction testing equipment. The Center is equipped to conduct the research
and pilot experimental production of new medicines. The central laboratory
of the Research Center includes a precision instrument room, normal
instrument room, heating chamber laboratory, chemical reagent room, bacteria
inspection room, culture room, specimen room, and observation room. The
facility is capable of conducting the entire quality-control supervision and
inspection process of raw material, supplementary materials, crude and
finished product. The employee training center located in the Research
Center has advanced teaching facilities, and is capable of long-distance
training and education. The Company has also established close
relationships with the Beijing Medical University, the Academy of Military
Medical Science, and the Shanghai Medical University.
The Company's factories are equipped with capsule filling machinery
manufactured by the Bosch Group of Germany and automatic box filling
equipment manufactured by the Uhlmann Company in Germany. The production
capacity of the first stage analgesic project can reach 140 million
capsules, 160 million pieces of troche, 100 million pieces of injection, 100
million pieces of oral liquid and 100 million bags of palletized granule.
The supporting facilities, such as the extraction workshop, engine house,
thermal workshop, storehouse, office building, and employee housing, have all
been completed.
Products - Analgesic
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Hebei Aoxing is currently equipped to manufacture a line of products based
on Naloxone and a line of products based on Oxycodone. If Hebei Aoxing is
able to add $15.3 million to its capital, it intends to develop the capacity
to manufacture a third line of products, this based on the Tilidine
compounds that Hebei Aoxing has already developed.
Naloxone Series. As an opioid antagonist, Naloxone has curative effects for
pain, shock, alcoholism, and cerebral infarction. Naloxone has shown
limited side effects, and is widely applied in clinical treatment. Naloxone
or Naloxone Hydrochloride, is recommended by the WHO (World Health
Organization) to treat acute alcoholism and acute poisoning of opiod and
nonopioid drugs. The Company's application for this project was approved by
China's National Food and Drug Administration in January, 2005.
Naloxone Hydrochloride was developed by the DuPont Company, and was
introduced into the US market in the 1970's. Since then it has been
introduced into the additional markets of Britain, Germany, France and
Italy. The Beijing Academy of Military Medical Sciences first used Naloxone
Hydrochloride as morphine antagonist to ease the indication of breath
suppression and awakening after a morphine-based anesthesia. To date, two
other Chinese companies have produced Naloxone: Beijing Sihuan
Pharmaceutical Co. Ltd. and Chengdu Beite Pharmaceutical Co. Ltd. Market
research by Hebei Aoxing indicates that the demand for Naloxone in China
exceeds the domestic supply to a significant extent.
Oxycodone Series. Oxycodone is a derivative of the emisynthetic opioid
alkaloid thebaine. Its pharmacological properties are similar to those of
morphine. It is an activator of the opiod receptor, and is able to relieve
acute pain.
In 1980's, after the World Health Organization introduced the Three Step
Principle in Cancer Pain Treatment, the production and consumption of
Oxycodone increased quickly in the world. In 1999, the global stock of
Oxycodone had increased to 7.9 tons, 5.9 tons of which was in the United
States. Even though advanced countries like the United States have large
production and consumption of Oxycodone, the demand for the drug in
developing countries in Asia and Africa is still quite large and unsatisfied.
Hence the development of Oxycodone has great international market potential.
The effectiveness and safeness of Oxycodone in treating cancer pain have
been acknowledged by the Chinese medicine community. But since China does
not produce Oxycodone in bulk, the clinical application of Oxycodone is
still impossible. Although the National Food & Drug Administration had
granted import licenses for Oxycodone controlled-release tablets (Oxycontin)
and the composite capsule of Oxycodone and paracetamol (Tylox), most
patients in China cannot afford the imported drugs. Therefore the Chinese
government is heavily committed to producing Oxycodone pharmaceuticals in
bulk domestically.
Tilidine Series. Tilidine is a new generation of analgesic drug
characterized by its outstanding narcotic and analgesic effect and minimal
side effects. One particularly attractive characteristic of Tilidine is
that it is non-addictive. The product is primarily used to relieve physical
pain and discomfort.
Tilidine is the second best seller after Oxycodone in the global analgesic
market. The annual growth rate of Tilidine's sales is 25%. The total
clinical consumption of Tilidine in 1999 exceeded 145 tons. However since
bulk production of Tilidine in China is non-existent, the per capita
consumption of Tilidine is less than 1% of the average level in other
industrialized countries. Hebei Aoxing is currently seeking to obtain
capital to fund its development of manufacturing facilities for Tilidine
production, with the goal of meeting the domestic demand for the product.
Products - Cough and Congestion
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Hebei Aoxing has also developed a number of products that relieve symptoms
of cough and cold. It expects to receive the government permit to market
these products in the third quarter of 2006.
Compound Pholcodine Syrup. This Syrup tranquilizes cough, removes phlegm,
and eases nasal congestion. It also has a limited capacity to relieve
asthma symptoms. The Syrup can be used in treating coughs caused by acute
bronchitis and respiratory infections. Preclinical research on acute and
chronic toxicity shows that Pholcodine's toxicity is lower than that of
codeine. Repeated drug administrations do not cause obvious drug tolerance
and astriction. Pholcodine does not have convulsioncentral virulence and its
central tranquilizing effect is strong.
Zhi Ke Bao Pian. Cough Reliever (Zhi Ke Bao Pian) is a traditional Chinese
medicine compound made from opium poppy. The Cough Reliever can be used to
remove phlegm and relieve cough. This product has been listed in the First
Pharmacopoeia of the People's Republic of China. The Cough Reliever has
been applied in clinical treatment for a long period and has proven to be
safe and highly effective. It does not have any toxic side-effect.
The Market
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For the foreseeable future, Hebei Aoxing intends to focus its marketing
efforts exclusively in China. Because China is only now developing a
domestic supply of bulk analgesics, the market potential is sufficient to
fully occupy the Company's efforts.
China entered the "Single Convention on Narcotic Drugs, 1961" in 1985 which
resulted in the gradual loosening of government policy toward the control of
analgesic supplies. Before 2000, the average consumption of analgesics in
China was less than 1% of the consumption in industrialized countries. There
were only six varieties of analgesics available in production. By 2005,
Chinese government has approved the production of 11 varieties of
analgesics. In the near future, patients in China will find 30 varieties
and over 80 specifications of different types of analgesics. Since 1993, the
annual growth rate of analgesic sales in China has been on average 35%. If
the drug consumption per capita in China reaches the level of industrialized
countries, the market size will exceed $50 billion.
Employees
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Hebei Aoxing currently has 186 employees, including 126 full-time employees.
There are 36 employees in middle and senior management team, all having
college degrees; 46 employees in the R&D department, among whom 14 employees
have Master's degrees and 22 employees have Bachelor's degrees. There are
126 workers at the production line. 52% of them have at least a high school
diploma.
Plan of Operations
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Hebei Aoxing plans to introduce its Naloxone and cough and congestion products
in the third quarter of 2006. It plans to introduce its Oxycodone products
later in 2006. Assuming that Hebei Aoxing obtains the funds necessary to
develop the production facilities for its Tilidine products ($15.3 million),
the Company plans to introduce that product line by the end of 2007.
Currently Hebei Aoxing has little cash and negative working capital. At
December 31, 2005 its working capital deficit was ($4,907,234). The greater
portion of the deficit was represented by $3,126,226 due to the Bank of
China during 2006. That payment is the current portion of two loans
totalling $10,651,960 that call for annual payments over the next four
years. The loans bear interest at 5.58% per annum, and are collateralized
by most of Hebei Aoxing's assets.
Hebei Aoxing expects to be able to service its debt to the Bank of China if
it is successful in initiating production during 2006. In order to do so,
the Company will have to obtain additional working capital. Hebei Aoxing is
currently conducting discussions with potential investors, but has received
no commitment of funds to date.
Risk Factors That May Affect Future Results
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You should carefully consider the risks described below before buying our
common stock. If any of the risks described below actually occurs, that
event could cause the trading price of our common stock to decline, and you
could lose all or part of your investment.
I. Risks attendant to our business
WE LACK THE WORKING CAPITAL NECESSARY TO INITIATE PRODUCTION.
At December 31, 2005 we had $141,310 in current assets, only $15,821 of
which was liquid. On the same date we had $5,048,544 in current
liabilities. In order to initiate production, we will need additional
working capital. If we are not able to obtain the necessary working
capital, our business will fail.
WE LACK SUFFICIENT CAPITAL TO FULLY CARRY OUT OUR BUSINESS PLAN.
In order to make our operations cost-efficient, it is necessary that we
expand our operations. At the present time, however, our capital resources
are sparse. In order to expand our operations, we will need an infusion of
capital to fund the build-out of our manufacturing facility and an
accumulation of inventory. We are engaged in discussions with potential
sources of capital, but have received no commitments. It is not clear
whether sufficient capital will become available to us to permit us to
expand to an efficient operating point.
OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN
KEY PERSONNEL THAT ARE IN HIGH DEMAND.
Our future success depends on our ability to attract and retain highly
skilled chemists, pharmaceutical engineers, technical, marketing and
customer service personnel, especially qualified personnel for our
operations in China. Qualified individuals are in high demand in China, and
there are insufficient experienced personnel to fill the demand. Therefore
we may not be able to successfully attract or retain the personnel we need
to succeed.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY,
WHICH COULD CAUSE US TO BE LESS COMPETITIVE.
We are continuously designing and developing new technology. We rely on a
combination of patents, trade secret laws, and restrictions on disclosure to
protect our intellectual property rights. Unauthorized use of our technology
could damage our ability to compete effectively. In China, monitoring
unauthorized use of our products is difficult and costly. In addition,
intellectual property law in China is less developed than in the United
States and historically China has not protected intellectual property to the
same extent as it is protected in other jurisdictions, such as the United
States. Any resort to litigation to enforce our intellectual property rights
could result in substantial costs and diversion of our resources, and might
be unsuccessful.
WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT AND FINANCIAL
CONTROLS IN CHINA.
The People's Republic of China has only recently begun to adopt the
management and financial reporting concepts and practices that investors in
the United States are familiar with. We may have difficulty in hiring and
retaining employees in China who have the experience necessary to implement
the kind of management and financial controls that are expected of a United
States public company. If we cannot establish such controls, we may
experience difficulty in collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet U.S. standards.
CAPITAL OUTFLOW POLICIES IN CHINA MAY HAMPER OUR ABILITY TO PAY
DIVIDENDS TO SHAREHOLDERS IN THE UNITED STATES.
The People's Republic of China has adopted currency and capital transfer
regulations. These regulations require that we comply with complex
regulations for the movement of capital. Although Chinese governmental
policies were introduced in 1996 to allow the convertibility of RMB into
foreign currency for current account items, conversion of RMB into foreign
exchange for capital items, such as foreign direct investment, loans or
securities, requires the approval of the State Administration of Foreign
Exchange. We may be unable to obtain all of the required conversion
approvals for our operations, and Chinese regulatory authorities may impose
greater restrictions on the convertibility of the RMB in the future. Because
most of our future revenues will be in RMB, any inability to obtain the
requisite approvals or any future restrictions on currency exchanges will
limit our ability to fund our business activities outside China or to pay
dividends to our shareholders.
WE HAVE LIMITED BUSINESS INSURANCE COVERAGE.
The insurance industry in China is still at an early stage of development.
Insurance companies in China offer limited business insurance products, and
do not, to our knowledge, offer business liability insurance. As a result,
we do not have any business liability insurance coverage for our operations.
Moreover, while business disruption insurance is available, we have
determined that the risks of disruption and cost of the insurance are such
that we do not require it at this time. Any business disruption, litigation
or natural disaster might result in substantial costs and diversion of
resources.
CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT OUR BUSINESS.
We generate revenues and incur expenses and liabilities in Chinese RMB.
However we report our financial results in the United States in U.S.
Dollars. As a result, we are subject to the effects of exchange rate
fluctuations between these currencies. Recently, there have been
suggestions made to the Chinese government that it should adjust the
exchange rate and end the linkage that in recent years has held the RMB-U.S.
dollar exchange rate constant. If the RMB exchange rate is adjusted or is
allowed to float freely against the U.S. dollar, our revenues, which are
denominated in RMB, may fluctuate significantly in U.S. dollar terms. We
have not entered into agreements or purchased instruments to hedge our
exchange rate risks.
II. RISKS ATTENDANT TO OUR MANAGEMENT
OUR BUSINESS DEVELOPMENT WOULD BE HINDERED IF WE LOST THE SERVICES OF
OUR CHAIRMAN.
Zhenjiang Yue is the Chief Executive Officer of Central American Equities
Corp. and of its operating subsidiary, Hebei Aoxing Pharmaceutical Group.
Mr. Yue is responsible for strategizing not only our business plan but also
the means of financing it. If Mr. Yue were to leave Hebei Aoxing or become
unable to fulfil his responsibilities, our business would be imperilled. At
the very least, there would be a delay in the development of Hebei Aoxing
until a suitable replacement for Mr. Yue could be retained.
CENTRAL AMERICAN EQUITIES CORP. IS NOT LIKELY TO HOLD ANNUAL SHARE-
HOLDER MEETINGS IN THE NEXT FEW YEARS.
Management does not expect to hold annual meetings of shareholders in the
next few years, due to the expense involved. The current members of the
Board of Directors were appointed to that position by the previous
directors. If other directors are added to the Board in the future, it is
likely that the current directors will appoint them. As a result, the
shareholders of Central American Equities will have no effective means of
exercising control over the operations of Central American Equities.
YOUR ABILITY TO BRING AN ACTION AGAINST US OR AGAINST OUR DIRECTORS,
OR TO ENFORCE A JUDGMENT AGAINST US OR THEM, WILL BE LIMITED BECAUSE
WE CONDUCT ALL OF OUR OPERATIONS IN CHINA AND BECAUSE MOST OF OUR
MANAGEMENT RESIDES OUTSIDE OF THE UNITED STATES.
We conduct all of our operations in China through our wholly-owned
subsidiary. All but one of our directors and officers reside in China and
all of the assets of those Chinese residents are located outside of the
United States. As a result, it may be difficult or impossible for you to
bring an action against us or against these individuals in the United States
in the event that you believe that your rights have been infringed under the
securities laws or otherwise. Even if you are successful in bringing an
action of this kind, the laws of the United States and of China may render
you unable to enforce a judgment against our assets or the assets of our
directors.
Security Ownership of Certain Beneficial Owners and Management
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There are 40,000,000 shares of Central American Equities common stock issued
and outstanding as well as Series C Preferred Stock convertible into
118,807,200 common shares. The following table sets forth the number of
Central American Equities common shares beneficially owned by each person
who, as of the closing, will own beneficially more than 5% of Central
American Equities' common stock on a fully-diluted basis (i.e. assuming
conversion of the Series C Prefered Stock), as well as the ownership of such
shares by the individuals who will be the directors of Central American
Equities after the closing.
Name and Address of Amount and Nature of Percent
Beneficial Owner(1) Beneficial Ownership(2) of Class
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Zhenjiang Yue 32,000,000(3) 20.2%
John C. Leo 4,800,000(4) 3.0%
c/o American Union Securities, Inc.
100 Wall Street - 15th Floor
New York, NY 10005
All directors as a group
(2 persons) 36,800,000 23.2%
Yumin Yue(5) 12,000,000 7.6%
Yifa Yue(5) 12,000,000 7.6%
Jinshuan Yue(5) 11,200,000 7.1%
Zhonghui Yang 8,000,000 5.0%
Cuixia Liu 8,000,000 5.0%
Yongxia Sun 8,000,000 5.0%
Hongyue Hao 8,000,000 5.0%
Yongjun Hao 8,000,000 5.0%
Huaqin Zhou 8,800,000 5.5%
136 Hospital Rd., Suite 3
Jiangyang City, Sichuan
Province, China
__________________________________
(1) Unless otherwise indicated, the address of each owner is c/o Hebei
Aoxing Pharmaceutical Co., Ltd., No. 1 Industry District, Xinle City,
Hebei Province, China 050700All shares will be owned of record.
(2) Unless otherwise indicated, all shares are held of record.
(3) Includes 12,000,000 shares (fully-diluted) owned of record by Mr. Yue's
spouse, Cuiying Hao.
(4) Includes 4,000,000 shares that will be owned by American Union
Securities, Inc., of which Mr. Leo is the President.
(5) Yumin Yue, Yifa Yue and Jinshuan Yue are, respectively, the adult
daughter, adult son, and father of Zhenjiang Yue.
Directors, Executive Officers, Promoters and Control Persons
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The following individuals are the members of Central American Equities'
Board of Directors and its executive officers. Each of them assumed that
office on April 18, 2006 as a result of the closing of the merger of Ostar
Pharmaceutical into a subsidiary of Central American Equities Corp.
Name Age Position
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Zhenjiang Yue 46 Director, Chief Executive Officer,
Chief Financial Officer
John C. Leo 41 Director, Secretary
Zhenjiang Yue. In 2000, after securing the approval of the Hebei
Provincial Government, Mr. Yue established the Hebei Aoxing Group.
Since 2000, Mr. Yue has been employed as the President and General
Manager of Hebei Aoxing Pharmaceutical Co. Ltd. Prior to organizing
Hebei Aoxing, Mr. Yue was engaged in senior management of a number of
private enterprises, including a carpet factory, a precast metal
factory, the Hebei Brewery Plant, and China Aoxing Food & Brewery Co.
Ltd. As a result of his entrepreneurial activities, Mr. Yue was named
"Leader in the Science & Technology Development Project of the
Communist Youth League" and "Youth Entrepreneur of Hebei Province."
Mr. Yue has also served as the Vice President of the Pharmaceutical
Association of Shijiazhuang City, the Vice President of the Non-
Governmental Entrepreneur Association of Hebei Province, the Vice
President of Fuxi Culture Research Association of China, and the
President of the Zhouyi Research Association of Xinle City.
John C. Leo. Mr. Leo is the founder of American Union Securities,
Inc., and has served as its President since 2004. American Union
Securities is a full service investment banking firm registered with
the Securities and Exchange Commission and the National Association of
Securities Dealers. American Union Securities works with both domestic
and foreign issuers, with a specific expertise in identifying private
companies in China that have the potential to be successful public
companies in the United States. From 2001 through 2003, prior to
organizing American Union Securities, Mr. Leo was the founder and
managing member of Venture Capital Partners, LLC, a private merchant
banking and consulting firm. From 1996 through 2001, Mr. Leo was
employed as a registered principal and OTC market maker with AM
Capital and MH Meyerson. Mr. Leo became a registered representative in
1987 and during his career has focused on raising capital through IPOs
and reverse merger transactions. Mr. Leo maintains the following NASD
registrations: Series 7, 63, 55 and 24. Mr. Leo also serves on the
board of the following public companies: Goldtech Mining, China
International Enterprises Inc. and DK Investors.
Nominating and Audit Committee
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The Board of Directors will not have an audit committee or a nominating
committee immediately after the closing of the merger, due to the small size
of the Board. The Board will also not have an "audit committee financial
expert" within the definition given by the Regulations of the Securities and
Exchange Commission. The members of the Board expect to recruit an audit
committee financial expert to join the Board during 2006.
Shareholder Communications
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The Board of Directors will not adopt a procedure for shareholders to send
communications to the Board of Directors until it has reviewed the merits of
several alternative procedures.
Code of Ethics
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Hebei Aoxing has adopted a Code of Ethics that applies to its executive
officers. A copy of the Code of Ethics is filed as an exhibit to this Report.
Executive Compensation
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This table itemizes the compensation paid to Zhenjiang Yue by Hebei Aoxing
Pharmaceutical Co., Ltd. for services as its Chief Executive Officer during
the past three years. There was no officer of Ostar Pharmaceutical or Hebei
Aoxing whose salary and bonus for services rendered during the year ended
December 31, 2005 exceeded $100,000.
Year Salary
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Zhenjiang Yue ................. 2005 $ 25,000
2004 25,000
2003 25,000
Certain Relationships and Related Transactions
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John C. Leo, who became a director of Central American Equities as a result
of the merger, is the President of American Union Securities, Inc. American
Union Securities acted as advisor to Hebei Aoxing in connection with the
merger. In preparation for the reverse merger into Central American
Equities, the owners of Hebei Aoxing agreed to transfer 60% of Hebei Aoxing
to Ostar Pharmaceutical, a newly-formed holding company, in exchange for
81.1% of the outstanding stock of Ostar Pharmaceutical. The remaining stock
in Ostar Pharmaceutical was owned by American Union Securities and persons
associated with American Union Securities, persons associated with the
consulting company that introduced Hebei Aoxing to American Union Securities.
Therefore, when the merger was completed, John C. Leo acquired 800,000 common
shares of Central American Equities and American Union Securities acquired
4,000,000 such shares.
Description of Securities
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A description of Central American Equities' common stock is set forth at
Part I, Item 8 of Central American Equities' Registration Statement on Form
10-SB (File No. 000-24185) filed with the Securities and Exchange Commission
on May 4, 1998.
Market Price and Dividends on Central American Equities' Common Equity and
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Other Shareholder Matters
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Information regarding the market price of Central American Equities' common
equity, payment of dividends, and other shareholder matters is set forth in
Item 5 of Central American Equities' Annual Report on Form 10-KSB for the
year ended December 31, 2005, which was filed with the Securities and
Exchange Commission on April 7, 2006.
Legal Proceedings
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Neither Central American Equities nor Ostar Pharmaceutical nor Hebei Aoxing
is party to any legal proceedings.
Changes in and Disagreements with Accountants
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Information regarding the change in Central American Equities' certifying
accountant in September 2005 is set forth in Item 8 of Central American
Equities' Annual Report on Form 10-KSB for the year ended December 31, 2005,
which was filed with the Securities and Exchange Commission on April 7, 2006.
Recent Sales of Unregistered Securities
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Information regarding the sales by Central American Equities' of
unregistered securities during the previous three years is set forth in Item
5 of Central American Equities' Annual Reports on Form 10-KSB for the years
ended December 31, 2005, 2004 and 2003.
Indemnification of Directors and Officers
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A description of statutes, charter provisions and bylaws that govern Central
American Equities' indemnification of its directors and officers is set
forth at Part II, Item 5 of Central American Equities' Registration
Statement on Form 10-SB (File No. 000-24185) filed with the Securities and
Exchange Commission on May 4, 1998.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
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Audited Financial Statements of Ostar Pharmaceutical, Inc. for the period
from inception (September 12, 2005) to December 31, 2005.
Audited Financial Statements of Hebei Aoxing Pharmaceutical Group Co., Ltd.
for the years ended June 30, 2005 and June 30 2004 and for the period
from inception (January 20, 2002) to June 30, 2005.
Unaudited Financial Statements of Hebei Aoxing Pharmaceutical Group Co.,
Ltd. for the six month period ended December 31, 2005 and the period
from inception (January 20, 2002) to December 31, 2005.
Exhibits
10-a Agreement and Plan of Merger dated March 13, 2006 among Ostar
Pharmaceutical, Inc., Ostar Acquisition Corp. and Central American
Equities Corp. -filed as an exhibit to the Company's Current Report
on Form 8-K dated March 13, 2006 and incorporated herein by reference.
10-b Put and Call Option Agreement dated March 13, 2006 among Warner
Technology and Investment Corp. and Richard Wm. Talley, Michael
Caggiano and P. James Voloshin - filed as an exhibit to the Company's
Current Report on Form 8-K dated March 13, 2006 and incorporated
herein by reference.
10-c Subsidiary Purchase Agreement dated March 13, 2006 among Central
American Equities Corp. and Richard Wm. Talley, Michael Caggiano and
P. James Voloshin - filed as an exhibit to the Company's Current
Report on Form 8-K dated March 13, 2006 and incorporated herein by
reference.
10-d Midterm RMB Loan Contract Number 10, Year 2003 with Bank of China.
10-e Midterm RMB Loan Contract Number 11, Year 2003 with Bank of China
14 Hebei Aoxing Pharmaceutical Group Co., Ltd. Code of Conduct Policy
21 Subsidiaries: Ostar Pharmaceutical, Inc.
Hebei Aoxing Pharmaceutical Group Co., Ltd.
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.
CENTRAL AMERICAN EQUITIES CORP.
By: /s/ Zhenjiang Yue
--------------------------------------
Zhenjiang Yue, Chief Executive Officer
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Ostar Pharmaceutical Inc.:
(A Development Stage Company)
We have audited the accompanying balance sheet of Ostar
Pharmaceutical Inc. (a Delaware Corporation in the Development Stage)
for the period ended December 31, 2005, and the related statements of
operations and accumulated deficit, and cash flows for the period from
September 12, 2005 (Date of Inception) to December 31, 2005. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2005 financial statements referred to above
present fairly, in all material respects, the financial position of
Ostar Pharmaceutical Inc. (A Development Stage Company) as of December
31, 2005, and the results of their operations and cash flows for the
period from September 12, 2005 (Date of Inception) to December 31, 2005
in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company has suffered recurring
losses from operations and is in a working capital deficit position
that raises substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Patrizio & Zhao, LLC
- -------------------------
Patrizio & Zhao, LLC
Lodi, New Jersey
March 21, 2006
- 1 -
OSTAR PHARMACEUTICAL INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2005
ASSETS
CURRENT ASSETS
Cash $ 500
-----
Total Current Assets 500
-----
Total Assets $ 500
=====
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 500
-----
Total Current Liabilities 500
-----
STOCKHOLDERS' (DEFICIENCY)
Common stock, $.0001, par value
200,000,000 shares authorized
50,000,000 shares issued and outstanding 500
Accumulated (deficit) (500)
-----
Total Stockholders' (Deficiency) -
-----
Total Liabilities And Stockholders'
(Deficiency) $ 500
=====
See notes to financial statements.
- 2 -
OSTAR PHARMACEUTICAL INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS AND ACCUMULATED (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 12, 2005
(DATE OF INCEPTION) TO DECEMBER 31, 2005
REVENUE $ -
GENERAL AND ADMINISTRATIVE EXPENSES
Professional fees 500
-----
NET (LOSS) AND ACCUMULATED (DEFICIT) $ (500)
=====
LOSS PER COMMON SHARE, BASIC AND DILUTED $ -
=====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 50,000,000
==========
See notes to financial statements.
- 3 -
OSTAR PHARMACEUTICAL INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 12, 2005
(DATE OF INCEPTION) TO DECEMBER 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (500)
Changes in assets and liabilities:
Accrued expenses 500
-----
Net Cash Used In Operating Activities -
-----
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 500
-----
Net Cash Provided By Financing Activities 500
-----
INCREASE IN CASH 500
CASH - BEGINNING -
-----
CASH - ENDING $ 500
=====
See notes to financial statements.
- 4 -
OSTAR PHARMACEUTICAL INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - DEVELOPMENT STAGE COMPANY
The Company was incorporated in the state of Delaware on September
12, 2005, for the purpose of investing in pharmaceutical companies in
China. The Company has not earned any revenue from operations.
Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise", as set forth in Statement
of Financial Accounting Standards No. 7 ("SFAS 7"). Among the
disclosures required by SFAS 7 are that the Company's financial
statements disclose activity since the date of inception.
ACCOUNTING METHOD
The Company's financial statements are prepared using the accrual
method of accounting.
DEFERRED INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109") which requires that
deferred tax assets and liabilities be recognized for future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. In Addition, SFAS 109 requires recognition of future tax
benefits, such as carryforwards, to the extent that realization of such
benefits is more likely than not and that a valuation allowance be provided
when it is more likely than not that some portion of the deferred tax asset
will not be realized.
NOTE 2 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern that
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. The Company has not established
any source of revenue to cover its operating costs. If the Company
is unable to obtain revenue producing contracts or financing, or if
the revenue or financing it does obtain is insufficient to cover any
operating losses it may incur, it may substantially curtail or
terminate its operations or seek other business opportunities through
strategic alliances, acquisitions or other arrangements that may
dilute the interests of existing stockholders.
NOTE 3 - INCOME TAXES
The Company has a deferred tax asset of approximately $150 resulting
from available net operating loss carryforwards, for which a
valuation allowance has been provided. The Company has available net
operating loss carryforwards for tax purposes of approximately $500
which will expire in 2025.
- 5 -
Paritz & Company, P.A.
15 Warren Street, Suite 25
Hackensack, New Jersey 07601
(201)342-7753
Fax: (201) 342-7598
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
Hebei Aoxing Group Pharmaceutical Co., Ltd.
We have audited the accompanying balance sheets of Hebei Aoxing Group
Pharmaceutical Co., Ltd. (a development stage company) as of June 30, 2005 and
2004 and the related statements of operations and changes in stockholders'
equity and cash flows for the years ended June 30, 2005 and 2004 and for the
period from inception (January 20, 2002) to June 30, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whethe
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides 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 Hebei
Aoxing Group Pharmaceutical Co., Ltd. (a development stage company) as of June
30, 2005 and 2004, and the results of its operations and its cash flows for the
years ended June 30, 2005 and 2004 and the period from inception (January 20,
2002) to June 30, 2005 in conformity with accounting principles generally
accepted in the United States.
Paritz & Company, P.A.
Hackensack, New Jersey
October 17, 2005
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
BALANCE SHEETS
(U.S. $)
----------------JUNE 30,---------------
2005 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,993 $ 1,759,167
Other receivables 7,529 21,714
Prepaid expenses and sundry
current assets 135,953 42,756
---------- ----------
TOTAL CURRENT ASSETS 180,475 1,823,637
---------- ----------
PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION 17,513,036 16,332,384
---------- ----------
TOTAL ASSETS $ 17,693,511 $ 18,156,021
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 759,023 $ 866,494
Due to stockholders 20,551 28,999
Due to officers 19,412 62,511
Current portion of long-term debt 511,676 -
Accrued expenses, taxes and
sundry current liabilities 525,348 89,190
---------- ----------
TOTAL CURRENT LIABILITIES 1,836,010 1,047,194
---------- ----------
LONG-TERM DEBT 10,016,291 10,527,840
---------- ----------
STOCKHOLDERS' EQUITY 5,841,210 6,580,987
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 17,693,511 $ 18,156,021
========== ==========
See notes to financial statements
2
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(U.S. $)
FROM INCEPTION
(JANUARY 20, 2002)
-------YEAR ENDED JUNE 30,------ TO
2005 2004 JUNE 30, 2005
INTEREST INCOME $ 12,307 $ 6,414 $ 18,721
-------- -------- --------
COSTS AND EXPENSES:
Research and development
costs 29,464 1,385 30,849
General and administrative
expenses 722,574 569,637 1,387,269
-------- -------- ---------
TOTAL COSTS AND EXPENSES 752,038 571,022 1,418,118
-------- -------- ---------
NET LOSS $(739,731) $(564,608) $(1,399,397)
======== ======== =========
See notes to financial statements
3
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM INCEPTION (JANUARY 20, 2002) TO JUNE 30, 2005
(U.S. $)
DEFICIT
ACCUMULATED OTHER
COMMON DURING DEVELOPMENT COMPREHENSIVE
STOCK STAGE LOSS TOTAL
--------------------------------------------------------
CONTRIBUTION BY
AFFILIATED COMPANY
OF EQUIPMENT IN
EXCHANGE FOR COMMON
STOCK $ 724,069 $ - $ - $ 724,069
NET LOSS - (28,657) - (28,657)
--------------------------------------------------
BALANCE - JUNE 30, 2002 724,069 (28,657) - 695,412
NET LOSS - (66,401) - (66,401)
--------------------------------------------------
BALANCE- JUNE 30, 2003 724,069 (95,058) - 629,011
CONTRIBUTION BY AFFIL-
IATED COMPANY OF RIGHT
TO USE LAND IN EXCHANGE
FOR COMMON STOCK 6,516,624 - - 6,516,624
OTHER COMPREHENSIVE LOSS - - (40) (40)
NET LOSS - (564,608) - (564,608)
---------------------------------------------------
BALANCE - JUNE 30, 2004 7,240,693 (659,666) (40) 6,580,987
OTHER COMPREHENSIVE LOSS - - (46) (46)
NET LOSS - (739,731) - (739,731)
---------------------------------------------------
BALANCE - JUNE 30, 2005 $7,240,693 $(1,399,397) $ (86) $5,841,210
===================================================
See notes to financial statements
4
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(U.S. $)
FROM INCEPTION
(JANUARY 20, 2002)
-------YEAR ENDED JUNE 30,------ TO
2005 2004 JUNE 30, 2005
OPERATING ACTIVITIES:
Net loss $ (739,731) $ (564,608) $ (1,399,397)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation 187,440 74,438 261,878
Changes in operating
assets and liabilities:
Other receivables 14,185 (21,714) (7,529)
Prepaid expenses and sundry
current assets (93,197) (25,078) (135,953)
Accounts payable (107,470) (391,109) 759,025
Accrued expenses, taxes
and sundry current
liabilities 436,068 (181,050) 525,347
---------- ---------- ----------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES (302,705) (1,109,121) 3,371
---------- ---------- ----------
INVESTING ACTIVITIES:
Acquisition of property
and equipment (1,368,092) (14,372,299) (17,774,914)
---------- ---------- ----------
NET CASH USED IN
INVESTING ACTIVITIES (1,368,092) (14,372,299) (17,774,914)
---------- ---------- ----------
FINANCING ACTIVITIES:
Bank borrowings - 10,527,967 10,527,967
Loans to (repayment of)
loans from stockholders
and officers (51,546) 91,509 39,963
Sale of common stock - 6,516,624 7,240,692
Other comprehensive income
(loss) 169 (179) (86)
---------- ---------- ----------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES (51,377) 17,135,921 17,808,536
---------- ---------- ----------
INCREASE (DECREASE) IN CASH (1,722,174) 1,654,501 36,993
CASH - BEGINNING OF PERIOD 1,759,167 104,666 -
---------- ---------- ----------
CASH - END OF PERIOD $ 36,993 $ 1,759,167 $ 36,993
========== ========== ==========
See notes to financial statements
5
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2005
1. ORGANIZATION
Hebei Aoxing Group Pharmaceutical Co., Ltd. ("the Company") was formed on
January 20, 2002 under the laws of the Peoples' Republic of China ("PRC").
The Company intends to manufacture and sell licensed pharmaceuticals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Development Stage Company
The Company has not earned any revenue from operations. Accordingly, the
Company's activities have been accounted for as those of a "Development Stage
Enterprise", as set forth in Financial Accounting Standards Board Statement
No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the
Company's financial statements be identified as those of a development stage
company, and that the statements of operations, stockholder's equity and cash
flows disclose activity since the date of the Company's inception.
Accounting methods
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a fiscal year ending on June 30, 2005.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions 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 net revenue and expenses during each reporting
period. Actual results could differ from those estimates.
Cash
The Company includes in cash and cash equivalents all short-term, highly
liquid investments that mature within three months of their acquisition date.
Cash equivalents consist principally of investments in interest-bearing
demand deposit accounts and liquidity funds with financial institutions and
are stated at cost, which approximates fair value.
The Company maintains cash and cash equivalents with financial institutions
in the PRC. The Company performs periodic evaluation of the relative credit
standing of financial institutions that are considered in the Company's
investment strategy.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in
amounts sufficient to amortize the cost of the related assets over their
useful lives using the straight line method for financial reporting purposes,
whereas accelerated methods are used for tax purposes.
6
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2005
The Company leases a parcel of land pursuant to a real estate contract from
the local government of the PRC government expiring in 2053, on which the
office and production facilities of the Company are situated.
Maintenance, repairs and minor renewals are charged to expense when
incurred. Replacements and major renewals are capitalized.
Research and development costs
Research and development costs are charged to expenses as incurred.
Deferred income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109") which requires that
deferred tax assets and liabilities be recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
SFAS 109 requires recognition of future tax benefits, such as carryforwards,
to the extent that realization of such benefits is more likely than not and
that a valuation allowance be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized.
Currency translation
Since the Company operates solely in the PRC, the Company's functional
currency is the Chinese Yuan ("RMB"). Revenue and expense accounts are
translated at the average rates during the period, and balance sheet items
are translated at year-end rates. Translation adjustments arising from the
use of differing exchange rates from period to period are included as a
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in net income for the period.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment and the estimated lives used in the
computation of depreciation and amortization is as follows:
-------------Amount-------------- Life
June 30, 2005 June 30, 2004
Right to use land $ 6,516,624 $ 6,516,624 Life of lease
Building and building
improvements 9,216,933 8,645,817 39 years
Machinery and equipment 1,486,995 885,174 5-8 years
Furniture and fixtures 276,672 42,501 5-8 years
Automobiles 277,690 316,706 3-5 years
---------- ----------
17,774,914 16,406,822
Accumulated depreciation 261,878 74,438
---------- ----------
$17,513,036 $16,332,384
========== ==========
4. DUE TO STOCKHOLDERS AND OFFICERS
The amounts due officers bear interest at 6.75% per annum and are due on
demand. The amounts due stockholders are non-interest bearing and are due on
demand.
7
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt consists of the following:
Notes payable to a bank bearing interest
at 5.58% per annum as follows:
Year ended June 30, 2006 $ 362,035
2007 2,534,242
2008 3,499,668
2009 3,982,381
----------
10,378,326
Note payable to credit union bearing
interest at 6.635% and due May 29, 2006 149,641
----------
10,527,967
Less current portion 511,676
----------
$10,106,291
==========
The notes payable bank are collateralized by a first security interest
in substantially all assets of the Company and $4,827,128 is guaranteed
by a vendor of the Company. The note payable to the credit union is
personally guaranteed by the majority stockholder of the Company.
6. RISK FACTORS
Vulnerability due to Operations in PRC
The Company's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for more than 20
years, no assurance can be given that the PRC government will continue to
pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the PRC's
political, economic and social conditions. There is also no guarantee
that the PRC government's pursuit of economic reforms will be consistent
or effective.
Substantially all of the Company's businesses are transacted in RMB, which
is not freely convertible. The People's Bank of China or other banks are
authorized to buy and sell foreign currencies at the exchange rates quoted
by the People's Bank of China. Approval of foreign currency payments by
the People's Bank of China or other institutions requires submitting a
payment application form together with suppliers invoices, shipping
documents and signed contracts.
8
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily cash and cash equivalents. As
of June 30. 2005, substantially all of the Company's cash and cash
equivalents were managed by financial institutions.
Other Risks
Although the process of approval by the government of the PRC to
manufacture pharmaceuticals is in its final stages, there is no assurance
that such approval will be obtained.
Paritz & Company, P.A.
15 Warren Street, Suite 25
Hackensack, New Jersey 07601
(201)342-7753
Fax: (201) 342-7598
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Hebei Aoxing Group Pharmaceutical Co., Ltd.
We have reviewed the accompanying balance sheet of Hebei Aoxing Group
Pharmaceutical Co., Ltd. as of December 31, 2005 and the related statements of
operations and changes in stockholders' equity and cash flows for the six
months ended December 31, 2005 and for the period from inception (January 22,
2002) to December 31, 2005 in accordance with the standards of the Public
Accounting Oversight Board (United States). All information included in these
financial statements is the representation of the management of Hebei Aoxing
Group Pharmaceutical Co., Ltd.
A revirew consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
examination in accordance with the standards of the Public Accounting Oversight
Board, the objective of which is the expression of an opinion regarding the
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 financial statements in order for them to be in
conformity with generally accepted accounting principles.
Paritz & Company, P.A.
Hackensack, New Jersey
March 2, 2006
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
BALANCE SHEET
DECEMBER 31, 2005
(Unaudited)
(U.S. $)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,821
Prepaid expenses and sundry current assets 125,489
----------
TOTAL CURRENT ASSETS 141,310
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION 17,804,677
----------
TOTAL ASSETS $17,945,987
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 784,181
Due to stockholders 21,093
Due to officers 19,924
Current portion of long-term debt 3,126,226
Accrued expenses, taxes and sundry current
liabilities 1,097,120
----------
TOTAL CURRENT LIABILITIES 5,048,544
----------
LONG-TERM DEBT 7,679,320
----------
STOCKHOLDERS' EQUITY 5,218,123
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,945,987
==========
See report of independent registered public accounting firm
2
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
(U.S. $)
SIX MONTHS FROM INCEPTION
ENDED (JANUARY 20, 2002)
DECEMBER 31, 2005 TO DECEMBER 31, 2005
------------------- --------------------
INTEREST INCOME $ - $ 18,721
--------- ---------
COSTS AND EXPENSES:
Research and development costs 23,843 54,692
General and administrative
expenses 751,342 2,138,611
--------- ---------
TOTAL COSTS AND EXPENSES 775,185 2,193,303
--------- ---------
NET LOSS $ (775,185) $(2,174,582)
========= =========
See notes to financial statements
3
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM INCEPTION (JANUARY 20, 2002) TO DECEMBER 31, 2005
(Unaudited)
(U.S. $)
DEFICIT
ACCUMULATED OTHER
COMMON DURING DEVELOPMENT COMPREHENSIVE
STOCK STAGE LOSS TOTAL
--------------------------------------------------------
CONTRIBUTION BY
AFFILIATED COMPANY
OF EQUIPMENT IN
EXCHANGE FOR COMMON
STOCK $ 724,069 $ - $ - $ 724,069
NET LOSS - (28,657) - (28,657)
--------------------------------------------------
BALANCE - JUNE 30, 2002 724,069 (28,657) - 695,412
NET LOSS - (66,401) - (66,401)
--------------------------------------------------
BALANCE- JUNE 30, 2003 724,069 (95,058) - 629,011
CONTRIBUTION BY AFFIL-
IATED COMPANY OF RIGHT
TO USE LAND IN EXCHANGE
FOR COMMON STOCK 6,516,624 - - 6,516,624
OTHER COMPREHENSIVE LOSS - - (40) (40)
NET LOSS - (564,608) - (564,608)
---------------------------------------------------
BALANCE - JUNE 30, 2004 7,240,693 (659,666) (40) 6,580,987
OTHER COMPREHENSIVE LOSS - - (46) (46)
NET LOSS - (739,731) - (739,731)
---------------------------------------------------
BALANCE - JUNE 30, 2005 7,240,693 (1,399,397) (86) 5,841,210
OTHER COMPREHENSIVE INCOME - - 152,098 152,098
NET LOSS - (775,185) - (775,185)
--------------------------------------------------
BALANCE -
DECEMBER 31, 2005 $7,240,693 $(2,174,582) $152,012 $5,218,123
==================================================
See report of independent registered public accounting firm
4
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. $)
SIX MONTHS FROM INCEPTION
ENDED (JANUARY 20, 2002)
DECEMBER 31, 2005 TO DECEMBER 31, 2005
------------------- --------------------
OPERATING ACTIVITIES:
Net loss $ (775,185) $ (2,174,582)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation 178,974 440,852
Changes in operating assets and
liabilities:
Other receivables 7,724 -
Prepaid expenses and sundry
current assets 13,981 (121,972)
Accounts payable 5,523 764,548
Accrued expenses, taxes and
sundry current liabilities 556,121 1,082,533
--------- ----------
NET CASH USED IN OPERATING
ACTIVITIES (12,862) (8,621)
--------- ----------
INVESTING ACTIVITIES:
Acquisition of property and
equipment (9,267) (17,784,181)
--------- ----------
NET CASH USED IN INVESTING
ACTIVITIES (9,267) (17,784,181)
--------- ----------
FINANCING ACTIVITIES:
Bank borrowings - 10,527,967
Loans to stockholders - 39,963
Sale of common stock - 7,240,693
--------- ----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES - 17,808,623
--------- ----------
INCREASE (DECREASE) IN CASH (22,129) 15,821
CASH - BEGINNING OF PERIOD 37,950 -
--------- ----------
CASH - END OF PERIOD $ 15,821 $ 15,821
========= ==========
See report of independent registered public accounting firm
5
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2005
(Unaudited)
1. ORGANIZATION
Hebei Aoxing Group Pharmaceutical Co., Ltd. ("the Company") was formed on
January 20, 2002 under the laws of the Peoples' Republic of China ("PRC").
The Company intends to manufacture and sell licensed pharmaceuticals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Development Stage Company
The Company has not earned any revenue from operations. Accordingly, the
Company's activities have been accounted for as those of a "Development Stage
Enterprise", as set forth in Financial Accounting Standards Board Statement
No. 7 ("SFAS 7"). Among the disclosures required by SFAS 7 are that the
Company's financial statements be identified as those of a development stage
company, and that the statements of operations, stockholder's equity and cash
flows disclose activity since the date of the Company's inception.
Accounting methods
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a fiscal year ending on June 30th.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions 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 net revenue and expenses during each reporting
period. Actual results could differ from those estimates.
Cash
The Company includes in cash and cash equivalents all short-term, highly
liquid investments that mature within three months of their acquisition date.
Cash equivalents consist principally of investments in interest-bearing
demand deposit accounts and liquidity funds with financial institutions and
are stated at cost, which approximates fair value.
The Company maintains cash and cash equivalents with financial institutions
in the PRC. The Company performs periodic evaluation of the relative credit
standing of financial institutions that are considered in the Company's
investment strategy.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in
amounts sufficient to amortize the cost of the related assets over their
useful lives using the straight line method for financial reporting purposes,
whereas accelerated methods are used for tax purposes.
6
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2005
(Unaudited)
The Company leases a parcel of land pursuant to a real estate contract from
the local government of the PRC government expiring in 2053, on which the
office and production facilities of the Company are situated.
Maintenance, repairs and minor renewals are charged to expense when
incurred. Replacements and major renewals are capitalized.
Research and development costs
Research and development costs are charged to expenses as incurred.
Deferred income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109") which requires that
deferred tax assets and liabilities be recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
SFAS 109 requires recognition of future tax benefits, such as carryforwards,
to the extent that realization of such benefits is more likely than not and
that a valuation allowance be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized.
Currency translation
Since the Company operates solely in the PRC, the Company's functional
currency is the Chinese Yuan ("RMB"). Revenue and expense accounts are
translated at the average rates during the period, and balance sheet items
are translated at year-end rates. Translation adjustments arising from the
use of differing exchange rates from period to period are included as a
component of stockholders' equity. Gains and losses from foreign currency
transactions are included in net income for the period.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment and the estimated lives used in the
computation of depreciation and amortization as of December 31, 2005 is as
follows:
Amount Life
-----------------------------------
Right to use land $ 6,688,400 Life of lease
Building and building improvements 9,459,946 39 years
Machinery and equipment 1,535,514 5-8 years
Furniture and fixtures 283,967 5-8 years
Automobiles 285,012 3-5 years
----------
18,252,839
Accumulated depreciation 448,162
----------
$17,804,677
==========
7
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2005
(Unaudited)
4. DUE TO STOCKHOLDERS AND OFFICERS
The amounts due officers bear interest at 6.75% per annum and are due on
demand. The amounts due stockholders are non-interest bearing and are due on
demand.
5. LONG-TERM DEBT
Long-term debt consists of the following:
Notes payable to a bank bearing interest
at 5.58% per annum as follows:
Year ended December 31,
2006 $ 2,972,640
2007 3,591,940
2008 4,087,380
----------
10,651,960
Note payable to credit union bearing
interest at 6.635% and due May 29, 2006 153,586
----------
10,805,546
Less current portion 3,126,226
----------
$ 7,679,320
==========
The notes payable bank are collateralized by a first security interest
in substantially all assets of the Company and $4,827,128 is guaranteed
by a vendor of the Company. The note payable to the credit union is
personally guaranteed by the majority stockholder of the Company.
6. RISK FACTORS
Vulnerability due to Operations in PRC
The Company's operations may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for more than 20
years, no assurance can be given that the PRC government will continue to
pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the PRC's
political, economic and social conditions. There is also no guarantee
that the PRC government's pursuit of economic reforms will be consistent
or effective.
Substantially all of the Company's businesses are transacted in RMB, which
is not freely convertible. The People's Bank of China or other banks are
authorized to buy and sell foreign currencies at the exchange rates quoted
by the People's Bank of China. Approval of foreign currency payments by
the People's Bank of China or other institutions requires submitting a
payment application form together with suppliers invoices, shipping
documents and signed contracts.
8
HEBEI AOXING GROUP PHARMACEUTICAL CO., LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2005
(Unaudited)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk are primarily cash and cash equivalents. As
of December 31, 2005, substantially all of the Company's cash and cash
equivalents were managed by financial institutions.
Other Risks
Although the process of approval by the government of the PRC to
manufacture pharmaceuticals is in its final stages, there is no assurance
that such approval will be obtained.