UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT 3 TO
FORM 10-12G
_____________________
CHINA DU KANG CO., LTD.
_____________________
GENERAL FORM FOR REGISTRATION OF SECURITES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
NEVADA 86-0565860
--------------------------- ------------------------------------
(State of Incorporation or (I.R.S. Employer Identification No.)
Organization)
Town of Dukang, Baishui County, Shaanxi province, China
A-28,Van Metropolis,#35 Tangyan Road,
Xi'an, Shaanxi, PRC, 710065
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(Address of Principal Executive Offices) (Zip Code)
8629-88830106-822
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TELEPHONE NUMBER
Copies to:
CHARLES BARKLEY, ESQ.
6201 FAIRVIEW ROAD, SUITE 200
CHARLOTTE, NC 28210
(704) 944-4290
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, .001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "small
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [X]
CHINA DU KANG CO., LTD.
___________________________
TABLE OF CONTENTS
Item No. Item Caption Page
1. Business......................................................3
1A. Risk Factors..................................................6
2. Financial Information.........................................12
3. Properties....................................................25
4. Security Ownership of Certain Beneficial
Owners and Management.........................................27
5. Directors and Executive Officers..............................27
6. Executive Compensation........................................28
7. Certain Relationships and Related Transactions,
and Director Independence.....................................30
8. Legal Proceedings.............................................31
9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.................31
10. Recent Sale of Unregistered Securities........................33
11. Description of Registrant's Securities to be Registered.......35
12. Indemnification of Directors and Officers.....................38
13. Financial Statements and Supplementary Data including
the Consolidated Financial Statements.........................39
14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................41
15. Financial Statements and Exhibits.............................42
EXPLANATORY NOTE
We are filing this General Form for Registration of Securities on Form 10 to
register our common stock, par value $0.001 per share (the "Common Stock"),
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
We intend to be subject to the requirements of Regulation 13A under the
Exchange Act, which requires us to file annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K, and we are required to
comply with all other obligations of the Exchange Act applicable to issuers
filing registration statements pursuant to Section 12(g) of the Exchange Act.
Unless otherwise noted, references in this registration statement to the
"Registrant," the "Company," "we," "our" or "us" means China Du Kang Co.,
Ltd. Our principal place of business is located at A-28,Van Metropolis,#35
Tangyan Road, Xi'an, Shaanxi, PRC, 710065. Our telephone number is 8629-
88830106-822.
FORWARD LOOKING STATEMENTS
There are statements in this registration statement that are not historical
facts. These "forward-looking statements" can be identified by use of
terminology such as "believe," "hope," "may," "anticipate," "should," "intend,"
"plan," "will," "expect," "estimate," "project," "positioned," "strategy" and
similar expressions. You should be aware that these forward-looking statements
are subject to risks and uncertainties that are beyond our control. For a
discussion of these risks, you should read this entire Registration Statement
carefully, especially the risks discussed under the section entitled "Risk
Factors." Although management believes that the assumptions underlying the
forward looking statements included in this Registration Statement are
reasonable, they do not guarantee our future performance, and actual results
could differ from those contemplated by these forward looking statements. The
assumptions used for purposes of the forward-looking statements specified in
the following information represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative, industry, and
other circumstances. As a result, the identification and interpretation of data
and other information and their use in developing and selecting assumptions
from and among reasonable alternatives require the exercise of judgment. To the
extent that the assumed events do not occur, the outcome may vary substantially
from anticipated or projected results, and, accordingly, no opinion is
expressed on the achievability of those forward-looking statements. In light
of these risks and uncertainties, there can be no assurance that the results
and events contemplated by the forward-looking statements contained in this
Registration Statement will in fact transpire. You are cautioned to not place
undue reliance on these forward-looking statements, which speak only as of
their dates. We do not undertake any obligation to update or revise any
forward-looking statements.
ITEM 1.BUSINESS
China Du Kang Co., Ltd ("Du Kang" or the "Company") was incorporated as U. S.
Power Systems, Inc., in the State of Nevada on January 16, 1987. On or about
June 8, 2006 the Company's name was changed to Premier Organic Farms Group,
Inc. On or about November 30, 2006 the name was changed to Amstar Financial
Holdings, Inc. ("AFLH"). On or about March 18, 2008 the name was changed to its
current name of China Du Kang Co., Ltd. with its corporate charter still
residing in Nevada. The Company changed its fiscal year ending from September
30 to December 31 in February 2008.
3
OVERVIEW
The Company had been engaged in the business to provide various financial
services since it's incorporation. The Company was not successful and
discontinued the majority of its operation by December 31, 2007.
"WE PREVIOUSLY WERE A SHELL COMPANY, THEREFORE THE EXEMPTION OFFERED PURSUANT
TO RULE 144 IS NOT AVAILABLE. ANYONE WHO PURCHASED SECURITIES DIRECTLY OR
INDIRECTLY FROM US OR ANY OF OUR AFFILIATES IN A TRANSACTION OR CHAIN OF
TRANSACTIONS NOT INVOLVING A PUBLIC OFFERING CANNOT SELL SUCH SECURITIES IN AN
OPEN MARKET TRANSACTION."
On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the
"Agreement") with Hong Kong Merit Enterprise Limited ("Merit"), a holding
company incorporated in Hong Kong. Pursuant to the terms of the Agreement, the
Company agreed to issue post split 88,000,000 shares of its common stock to the
shareholder(s) of Merit in exchange for Merit to transfer all of its issued and
outstanding shares of common stock to the Company, thereby causing Merit to
become a wholly-owned subsidiary of the Company. Merit also agreed to pay
$260,000 to the Company at closing. The parties closed the transaction
contemplated by the Agreement on February 11, 2008.
This transaction is being accounted for as a reverse merger, since the
shareholders of Merit owns a majority of the outstanding shares of the
Company's common stock immediately following the share exchange. Merit is
deemed to be the acquirer in the reverse merger. Consequently, the assets and
liabilities and the historical operations that will reflected in the
consolidated financial statements for periods prior to the share exchange will
be those of Merit and its subsidiaries and will be recorded at the historical
cost basis. After completion of the share exchange, the Company`s consolidated
financial statements will include the assets and liabilities of both Du Kang
and Merit, the historical operations of Merit and the operations of the Company
and its subsidiaries from the closing date of the share exchange.
Merit was incorporated on September 8, 2006 in Hong Kong under the Companies
Ordinances as a Limited Liability company. Merit was formed for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Statement of Financial Accounting Standards (SFAS) No. 7.
On January 22, 2008, Merit entered into a Share Purchase Agreement (the
"Purchase Agreement") with the owners of Shaanxi Huitong Food Co., Inc.
("Huitong"), a limited liability company incorporated in the People's Republic
of China ("PRC") on August 9, 2007 with a registered capital of $128,200
(RMB1,000,000). Pursuant to the Purchase Agreement, the Merit agreed to
purchase 100% of the equity ownership in Huitong for a cash consideration of
$128,200 (RMB 1,000,000). Subsequent to the completion of the Agreement,
Huitong became a wholly-owned subsidiary of Merit.
Huitong was formed for the purpose of seeking and consummating a merger or
acquisition with a business entity organized as a private corporation,
partnership, or sole proprietorship. On December 26, 2007 Huitong executed a
share exchange agreement (the "Exchange Agreement") with the owners of Shaanxi
Xidenghui Technology Stock Co., Ltd. ("Xidenghui"), whereby Huitong exchanged
100% of its issued and outstanding capital for 98.24% of the equity ownership
in Xidenghui. Subsequent to completion of the Share Exchange, Xidenghui
became a majority-owned subsidiary of Huitong.
Xidenghui was incorporated in Weinan City, Shaanxi Province, PRC on March 29,
2001 under the Company Law of PRC. Xidenghui was engaged in the business of
production and distribution of distilled spirit with a brand name of
"Xidenghui". Currently, its principal business is to hold an equity ownership
interest in Shannxi Baishui Dukang Liquor Co., Ltd. ("Baishui Dukang") and
Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. ("Brand Management").
4
Baishui Dukang was incorporated in Baishui County, Shaanxi Province, PRC on
March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally
engaged in the business of production and distribution of distilled spirit with
a brand name of "Baishui Dukang". On May 15, 2002, Xidenghui invested inventory
and fixed assets, totally valued at $ 4,470,219 (RMB 37,000,000) to Baishui
Dukang and owns 90.51% of Baishui Dukang's equity interest ownership, thereby
causing Baishui Dukang to become a majority-owned subsidiary of Xidenghui.
On October 30, 2007, Xidenghui executed an agreement with Mr. Zhang Hongjun, a
PRC citizen, toestablish a joint venture, Shaanxi Baishui Dukang Liquor Brand
Management Co., Ltd. ("Brand Management"). Pursuant to the agreement,
Xidenghui contributed cash of $769,200 (RMB 700,000), and owns 70% equity
interest ownership therein. Brand Management was subsequently incorporated on
November 12, 2007. Upon the completion of incorporation, Brand Management
became a majority-owned subsidiary of the Xidenghui. Xidenghui is principally
engaged in the business of distribution of Baishui Dukang's liquor and manage
the franchise of the "Baishui Dukang" brand name.
Baishui Dukang and Brand Management are the two of these affiliated companies
that are engaged in business operations. Du Kang, Merit, Huitong, and
Xidenghui are holding companies, whose business is to hold an equity ownership
interest in Baishui Dukang and Brand Management. All these affiliated
companies are hereafter referred to as the "Company". Currently, the Company
is principally engaged in the business of production and distribution of
distilled spirit with the brand name of "Baishui Dukang". The Company also
franchises the brand name to other liquor productors. The Company's structure
is summarized in the flow chart found in Item 14. Supplementary Data.
Previous to this, on or about October 25, 2006 a Definitive Agreement was
entered into by Premier Organic Farms Group, Inc. and Amstar International,
Inc. On or about December 19, 2006, the merger defined in this agreement was
closed. In the definitive agreement Amstar International, Inc. was to merge
with Premier Organic Farms Group, Inc. (PFOG). Prior to the merger PFOG was to
change its name to Amstar Financial Holdings, inc., dilute their shares down to
approximately 608,771 shares with 96.12% of the ownership passing to Amstar
International Stockholders. In addition, as part of the terms of this
agreement a favorable hearing before a judge of competent jurisdiction,
regarding a petition of fairness subject to section 3(a)(10) of the Securities
Act of 1933 was to be approved. An order granting this petition of fairness
was signed on December 18, 2006 by a judge in State of Nevada, County of Elko,
case number CV-C-06-1016. This transaction closed on December 19, 2006, in
Phoenix, Arizona.
5
CURRENT OPERATIONS
Shaanxi Xi Deng Hui Technology Stock Co. Ltd. is holding company which
established on March 29, 2001 after being restructured enterprise with added
capital. The registered capital is 129,000,000 RMB ($17,793,103 USD). On or
about January 31, 2008 Shaanxi Xi Deng Hui Technology Stock Co. Ltd purchased a
majority interest in Amstar Financial Holdings, Inc. (formerly AFLH) in a
reverse merger. The company's new name is China Du Kang Company Limited now
listed as CDKG.
Shaanxi Xi Deng Hui Stock Co. Ltd., Holds
- 90.51% and controls Shaanxi Bai Shui Du Kang Liquor Co., Ltd., and
holds
- 70% Shaanxi Bai Shui Du Kang Brand Management Co., Ltd.;
These companies manufacture and sale respectively a famous white wine called
"DU KANG". Du Kang is one of the most famous Chinese white wine brands, and
Shaanxi Bai Shui Du Kang Liquor Co. Ltd owns the "Bai Shui Du Kang" brand.
Shaanxi Bai Shui Du Kang also has ownership three other 3 brands. These brands
include Bai Shui Du Kang , Thirteen Dynasties and Jiu Zu Gong. Shaanxi Xi Deng
Hui Technology Stock Co. Ltd. has also invested 12,000,000 RMB ($1,753,156 USD)
into Huanghe Wetland Part Co. Ltd. (and holds 7.9% ownership in Huanghe Wetland
Company). Huanghe Wetland Company. is engaged in the theme park business
starting 2007. At present, Shaanxi Xi Deng Hui Technology Stock Co. Ltd.
businesses involve the production and sales of Bai Shui Du Kang liquor
production, tourism and trading.
Shaanxi Xi Deng Hui Stock Co., Ltd. is the first company to cooperate with The
Chinese Academy of Sciences on a Chinese made 3#-7# Shenzhou spaceflight and
shipped Du Kang yeast and grain which is used into Du Kang Liquor brewing for
the flight to the space to make a serial of scientific experiment and developed
the first serial of space liquor. At present, Du Kang has 6000 ton production
capacity per year including (brewing and packaging). Liquor products unit
price ranges from $2.00 USD to $150.00 USD. Du Kang Liquor products now are
sold in most cities in China. In northeast, north, south coastal region and
middle areas of China there are long-term contracts with agencies. In Shaanxi
province we have franchise stores in Xi'an ,Bai Shui, Hua yin, Han Cheng, Fu
Ping Pu Cheng, Da Li, Wei Nan city. Throughout China the Du Kang market sales,
awareness and brand image is broadening.
There are almost 1.5 billion people in China; the liquor consumption market is
very great. The sales revenue and profit of Dukang liquor increase at a rate of
50%, which shows extensive future prospects. Though some debts are created when
Xidenghui acquired Baishui Dukang Liquor Company and had the workers ensconced,
Baishui Dukang reaches the normal, even excellent manufacturability and the
sales through the products development and market operations these years.
The company signed a 5-year exclusive distributor contract with Shaanxi Baishui
Dukang Spirits Industry Development Co., Ltd. and Shaanxi Baishui Dukang
Marketing Management Co., Ltd. respectively. The material terms are as
follows:
1. During the contract term, Shaanxi Baishui Dukang Spirits
Industry Development Co., Ltd. can only act as the distributor of the
series products of Baishui Dukang and Jiu Zu Gong, and cannot act as a
distributor in any other products of the third party.
2 During the contract term, Shaanxi Baishui Dukang Marketing
Management Co., Ltd. can only act as the distributor of the series
products of Thirteen Dynasties, and cannot act as a distributor in any
other products of the third party.
A. Distribution methods of the products or services;
The issuer's subsidiaries in China sale and develop liquor,*liquor raw
materials, deep processing of agricultural and sideline products and research
and develop of high-tech products and the brewing produce of liquor are in the
process orderly. And it makes Du Kang and Thirteen Dynasties brand management
program and also the scheme of liquor and beverages.
Du Kang set new sales strategy, including "sales territory covers hundreds of
counties" and "1950 project" since July 2007. Du Kang Liquor products now have
been sold mostly in the larger cities in China, and in northeast, north, south
coastal region and middle area in China there are long-term contracts with
agencies. In 2007 Du Kang liquor productions market share has been raised 40%.
In Shaanxi province we have franchised stores in Xi'an Bai Shui, Hua yin, Han
Cheng, Fu Ping*Pu Cheng, Da Li, Wei Nan city and, Du Kang market awareness and
brand image is raising. We especially set Du Kang and Thirteen Dynasties brand
management program according to the requirement of the market.
Major products include the Baishui Dukang series, Thirteen Dynasties series,
Shen Zhou Nectar, Guo Bin Special, and Jiu Zu Gong.
B. Chinese Regulation.
We are currently regulated People's Government of Shaanxi Province approved
Business License, Organization Code of PRC. We have obtained and maintain China
Manufacture Certificate, Sanitation License and Food Security permits to
issuer's parent company in China, which we believe are all of the necessary
legal government approvals if a manufacturer in PRC starts its business and
continue its operation.
ITEM 1A.RISK FACTORS
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE
CANNOT ASSURE THAT WE WILL EVER GENERATE SIGNIFICANT REVENUES, DEVELOP
OPERATIONS, OR MAKE A PROFIT.
6
OUT AUDITORS HAVE NOTED THERE IS CERTAIN DOUBT ABOUT OUR ABILITY TO OPERATE AS
A GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
has an accumulated deficit of $17,070,657 at September 30, 2009 that includes
losses of $166,2943 and $1,502,067 for the nine months ended September 30, 2009
and the year ended December 31, 2008, respectively. In addition, The Company
has a working capital deficiency of $11,301,318 and a shareholders' deficiency
of $6,724,249 at September 30, 2009. The Company has an accumulated deficit of
$16,904,363 at December 31, 2008 that includes losses of $1,502,067 and
$1,482,180 for the year ended December 31, 2008 and 2007, respectively. In
addition, The Company has a working capital deficiency of $11,410,023 and a
shareholders' deficiency of $6,568,764 at December 31, 2008. These factors
raise certain doubt about its ability to continue as a going concern.
Management has taken steps to revise the Company's operating and financial
requirements. The Company is actively pursuing additional funding and a
potential merger or acquisition candidate and strategic partners, which would
enhance owners' investment. However, there can be no assurance that sufficient
funds required during the next year or thereafter will be generated from
operations or that funds will be available from external sources such as debt
or equity financings or other potential sources. The lack of additional capital
resulting from the inability to generate cash flow from operations or to raise
capital from external sources would force the Company to substantially curtail
or cease operations and would, therefore, have a material adverse effect on its
business. Furthermore, there can be no assurance that any such required funds,
if available, will be available on attractive terms or that they will not have
a significant dilutive effect on the Company's existing stockholders.
The accompanying financial statements do not include any adjustments related to
the recoverability or classification of asset-carrying amounts or the amounts
and classification of liabilities that may result should the Company be unable
to continue as a going concern.
WE HAVE HAD LOSSES FROM OPERATIONS AND ANTICIPATE TO ACHIEVE PROFIT THROUGH THE
INCOME AND DECREASE THE LOSSES FOR THE FORESEEABLE FUTURE.
Since inception we have had limited revenues from operation. Revenues for the
year ended December 31, 2008 totaled $ 1,143,195 as compared to $745,115 for
the year ended 2007. For the year ended December 31, 2008 we experienced a loss
from operations of $(1,510,538) as compared to a loss of $(1,367,179) for the
prior year. For the nine month period ended September 30, 2009, we had revenues
of $1,486,899 and gross profit of $635,784, For the nine months period ended
September 30, 2009, we experienced losses from operation $99,713.We have not
achieved profitability. We expect to incur significant operating expenses and,
as a result, will need to generate significant revenues to achieve
profitability, which may not occur. Even if we do achieve profitability, we
may be unable to sustain or increase profitability on an ongoing basis.
OUR CURRENT SHAREHOLDERS CONTROL OUR BUSINESS AFFAIRS IN WHICH CASE YOU WILL
HAVE LITTLE OR NO PARTICIPATION IN OUR BUSINESS.
Our principal stockholders owns a majority of our common stock. As a result,
they will have control over all matters requiring approval by our stockholders
without the approval of minority stockholders. In addition, they will also be
able to elect all of the members of our Board of Directors, which will allow
they to control our affairs and management. They will also be able to affect
most corporate matters requiring stockholder approval by written consent,
without the need for a duly noticed and duly-held meeting of stockholders. As
a result, they will have significant influence and control over all matters
requiring approval by our stockholders. Accordingly, you will be limited in
your ability to affect change in how we conduct our business.
7
WE MAY INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH CORPORATE GOVERNANCE
AND ACCOUNTING REQUIREMENTS.
We expect to incur significant costs associated with our public company
reporting requirements, costs associated with applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the SEC. We expect all of these applicable rules and
regulations to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. While we have no experience as
a public company, we estimate that these additional costs will total
approximately $60,000 per year. We also expect that these applicable rules and
regulations may make it more difficult and more expensive for us to obtain
director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more difficult for
us to attract and retain qualified individuals to serve on our board of
directors or as executive officers. We are currently evaluating and monitoring
developments with respect to these newly applicable rules, and we cannot
predict or estimate the amount of additional costs we may incur or the timing
of such costs.
RISKS RELATING TO OUR SECURITIES
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND YOU MAY NEVER RECEIVE
DIVIDENDS. THERE IS A RISK THAT AN INVESTOR IN OUR COMPANY WILL NEVER SEE A
RETURN ON INVESTMENT AND THE STOCK MAY BECOME WORTHLESS.
We have never paid dividends on our common stock. We intend to retain earnings,
if any, to finance the development and expansion of our business. Future
dividend policy will be at the discretion of the Board of Directors and will be
contingent upon future earnings, if any, our financial condition, capital
requirements, general business conditions and other factors. Future dividends
may also be affected by covenants contained in loan or other financing
documents, which may be executed by us in the future. Therefore, there can be
no assurance that cash dividends of any kind will ever be paid. If you are
counting on a return on your investment in the common stock, the shares are a
risky investment.
THERE IS CURRENTLY NO SUBSTANTIAL MARKET FOR OUR COMMON STOCK AND NO ASSURANCE
THAT ONE WILL DEVELOP.
8
There is currently on an extremely limited trading market for our shares of
Common Stock, under the symbol "CDKG." We have provided no public information
and our symbol contains a "skull and crossbones" insignia on the pink sheets.
We are filing this information partly to provide such information to the public
although there can be no assurance that a more substantial market will ever
develop or be maintained. Any market price for shares of our Common Stock is
likely to be very volatile, and numerous factors beyond our control may have a
significant adverse effect. In addition, the stock markets generally have
experienced, and continue to experience, extreme price and volume fluctuations
which have affected the market price of many small capital companies and which
have often been unrelated to the operating performance of these companies.
These broad market fluctuations, as well as general economic and political
conditions, may also adversely affect the market price of our Common Stock.
Further, there is no correlation between the present limited market price of
our Common Stock and our revenues, book value, assets or other established
criteria of value. The present limited quotations of our Common Stock should
not be considered indicative of the actual value of the Company or our Common
Stock.
Future sales of our common stock could put downward selling pressure on our
shares, and adversely affect the stock price. There is a risk that this
downward pressure may make it impossible for an investor to sell his shares at
any reasonable price.
Future sales of substantial amounts of our common stock in the public market,
or the perception that such sales could occur, could put downward selling
pressure on our shares, and adversely affect the market price of our common
stock. Such sales could be made pursuant to Rule 144 under the Securities Act
of 1933, as amended, as shares become eligible for sale under the Rule.
BECAUSE OUR SHARES ARE DEEMED HIGH RISK "PENNY STOCKS," YOU MAY HAVE DIFFICULTY
SELLING THEM IN THE SECONDARY TRADING MARKET.
The Commission has adopted regulations which generally define a "penny stock"
to be any equity security that has a market price (as therein defined) less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. Additionally, if the equity security is not
registered or authorized on a national securities exchange, the equity security
also constitutes a "penny stock." As our common stock falls within the
definition of penny stock, these regulations require the delivery, prior to any
transaction involving our common stock, of a risk disclosure schedule
explaining the penny stock market and the risks associated with it. These
regulations generally require broker-dealers who sell penny stocks to persons
other than established customers and accredited investors to deliver a
disclosure schedule explaining the penny stock market and the risks associated
with that market. Disclosure is also required to be made about compensation
payable to both the broker-dealer and the registered representative and current
quotations for the securities. These regulations also impose various sales
practice requirements on broker-dealers. In addition, monthly statements are
required to be sent disclosing recent price information for the penny stocks.
The ability of broker/dealers to sell our common stock and the ability of
shareholders to sell our common stock in the secondary market is limited. As a
result, the market liquidity for our common stock is severely and adversely
affected. We can provide no assurance that trading in our common stock will not
be subject to these or other regulations in the future, which would negatively
affect the market for our common stock.
9
IF A MARKET DEVELOPS FOR OUR SECURITIES THE COULD BE VOLATILE AND MAY NOT
APPRECIATE IN VALUE.
If a market should develop for our securities, of which we have no assurance,
the market price is likely to fluctuate significantly. Fluctuations could be
rapid and severe and may provide investors little opportunity to react. Factors
such as changes in results from our operations, and a variety of other factors,
many of which are beyond the control of the Company, could cause the market
price of our common stock to fluctuate substantially. Also, stock markets in
penny stock shares tend to have extreme price and volume volatility. The market
prices of shares of many smaller public companies securities are subject to
volatility for reasons that frequently unrelated to the actual operating
performance, earnings or other recognized measurements of value. This
volatility may cause declines including very sudden and sharp declines in the
market price of our common stock. We cannot assure investors that the stock
price will appreciate in value, that a market will be available to resell your
securities or that the shares will retain any value at all.
RISKS RELATING TO DOING BUSINESS IN THE PEOPLE'S REPUBLIC OF CHINA
WE ARE SUBJECT TO THE POLITICAL AND ECONOMIC POLICIES OF THE PEOPLES REPUBLIC
OF CHINA, AND GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
INTENDED BUSINESS.
All of our assets and operations are in the PRC. As a result our operating
results and financial performance as well as the value of our securities could
be affected by any changes in economic, political and social conditions in
China.
The Chinese government adopted an "open door" policy to transition from a
planned economy to a market driven economy in 1978. Since then the economy of
the PRC has undergone rapid modernization although the Chinese government still
exerts a dominant force in the nation's economy. There has historically been a
substantial market in liquor consumption in China.
The Chinese government operates the economy in many industries through various
five-year plans and even annual plans. A large degree of uncertainty is
associated with potential changes in these plans. Since the economic reforms
have no precedent, there can be no assurance that future changes will not
create materially adverse conditions on our business.
Due to the limited effectiveness of judicial review, public opinion and popular
voting there are few avenues available if the governmental action has a
negative effect. Any adverse changes in the economic conditions, in government
policies, or in laws and regulations in China could have a material adverse
effect on the overall economic growth, which in turn could lead to a reduction
in demand for our products and consequently have a material adverse effect on
our business.
THERE ARE RISKS INHERENT IN DOING BUSINESS IN CHINA OVER WHICH WE HAVE NO
CONTROL.
The political and economic systems of the PRC are very different from the
United States and more developed countries. China remains volatile in its
social, economic and political issues which could lead to revocation or
adjustment of reforms. There are also issues between China and the United
States that could result in disputes or instabilities. Both domestically and
internationally the role of China and its government remain in flux and could
suffer shocks, or setbacks that may adversely affect our business.
THE CHINESE LEGAL SYSTEM IS MUCH DIFFERENT FROM THAT OF THE UNITED STATES WITH
CONSIDERABLY LESS PROTECTION FOR INVESTORS, AND IT MAY BE EXTREMELY DIFFICULT
FOR INVESTORS TO SEEK LEGAL REDRESS IN CHINA AGAINST US OR OUR OFFICERS AND
DIRECTORS, INCLUDING CLAIMS THAT ARE BASED UPON U.S. SECURITIES LAWS.
10
All of our current operations are conducted in China. All of our current
directors and officers are nationals or residents of China. It may be difficult
for shareholders to serve us with service of process in legal actions. All of
the assets of these persons are located outside the United States in China. The
PRC legal system is a civil law system. Unlike the common law system, the civil
law system is based on written statutes in which decided legal cases have
little value as precedents. As a result there is no established body of law
that has precedential value as is the case in most western legal systems.
Differences in interpretations and rulings can occur with little or no
opportunity for redress or appeal.
As a result, it may not be possible to effect service of process within the
United States or elsewhere outside China upon our officers and directors. Even
if service of process was successful, considerable uncertainty exists as to
whether Chinese courts would enforce U. S. laws or judgments obtained in the
United States. Federal and state securities laws in the U. S. confer
substantial rights to investors and shareholders that have no equivalent in
China. Therefore a claim against us or our officers and/or directors or even a
final judgment in the U. S. based on U. S. may not be heard or enforced by the
Chinese courts.
In 1979, the PRC began to adopt a complex and comprehensive system legal system
and has approved many laws regulating economic and business practices in the
PRC including foreign investment. Currently many of the approvals required for
our business can be obtained at a local or provincial level. We believe that
it is generally easier and faster to obtain provincial approval than central
government approval. Changes to existing laws that repeal or alter the local
regulatory authority and replacements by national laws could negatively affect
our business and the value of our securities.
NEW CHINESE LAWS MAY RESTRICT OUR ABILITY TO CONTINUE TO MAKE ACQUISITIONS OF
BUSINESSES IN CHINA.
New regulations on the acquisition of businesses commonly referred to as "SAFE"
regulations (State Administration of Foreign Exchange) were jointly adopted on
August 8, 2006 by six Chinese regulatory agencies with jurisdictional
authority. Known as the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors the new Rule requires creation of offshore
Special Purpose Ventures, or SPVs, for overseas listing purposes. Acquisitions
of domestic Chinese companies require approval prior to listing securities on
foreign exchanges.
We obtained the approvals that we believe are required in making the
acquisitions that formed the present company. Nonetheless, our growth has
largely been by acquisition and we intend to continue to make acquisitions of
Chinese businesses. Since the "SAFE" rules are very recent there are many
ambiguities and uncertainties as to interpretation and requirements. These
uncertainties and any changes or revisions to the regulations could limit or
eliminate our ability to make new acquisitions of Chinese businesses in the
future.
WE MAY BE AFFECTED BY RECENT CHANGES TO CHINA'S FOREIGN INVESTMENT POLICY,
WHICH WILL CHANGE THE INCOME TAX RATE FOR FOREIGN ENTERPRISES.
On January 1, 2008 a new Enterprise Income Tax Law will take effect. The new
law revises income tax policy and sets a unified income tax rate for domestic
and foreign companies at 25 percent. It also abolishes favorable treatment for
foreign invested enterprises. When the new law takes effect, foreign invested
enterprises will no longer receive favorable tax treatment. Any earnings we
may obtain may be adversely affected by the new law.
CHINA CONTROLS THE CURRENCY CONVERSION AND EXCHANGE RATE OF ITS CURRENCY, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
11
The Chinese government imposes control over the conversion of the Chinese
currency, the Renminbi, into foreign currencies, although recent pronouncements
indicate that this policy may be relaxed. Under the current system, the
People's Bank of China publishes a daily exchange rate based on the prior day's
activity which controls the inter-bank foreign exchange market. Financial
institutions are permitted a narrow range above or below the exchange rate
based on then current market conditions. Since 1997, the State Council has
prohibited restrictions on certain international payments or transfers for
current account items. The regulations also permit conversion for distributions
of dividends to foreign investors. Investment in securities, direct investment,
and loans, and security investment, are still subject to certain restrictions.
For more than a decade the exchange rate for the Renminbi ("RMB") was pegged
against the United States dollar leaving the exchange rates relatively stable
at roughly 8 RMB for 1 US Dollar. The Chinese government announced in 2005 that
it would begin pegging the Renminbi exchange rate against a basket of
currencies, instead of relying solely on the U.S. dollar. This has recently
caused the dollar to depreciate as against the RMB. As of September 12, 2009,
the rate was 6.829 RMB for 1 US Dollar. Since all of our expected operations
are in China, significant fluctuations in the exchange rate may materially and
adversely affect our revenues, cash flow and overall financial condition.
CHINESE LAW REQUIRES APPROVAL BY CHINESE GOVERNMENT AGENCIES AND COULD LIMIT OR
PROHIBIT THE PAYMENT OF DIVIDENDS FROM ANY PROCEEDS OBTAINED FROM LIQUIDATION
OF OUR ASSETS.
All of our assets are located inside the Peoples Republic of China. Chinese law
governs the distributions that can be made in the event of liquidation of
assets of foreign invested enterprises. While dividend distribution is allowed
it is subject to governmental approval. Liquidation proceeds would also be
subject to foreign exchange control. We are unable to predict the outcome in
the event of liquidation insofar as it affects dividend payment to non- Chinese
nationals.
CHINA HAS BEEN THE LOCALE FOR THE OUTBREAK OF VARIOUS DISEASES AND A PANDEMIC
CAUSED BY DISEASES SUCH AS SARS, THE AVIAN FLU, OR SIMILAR DISEASES COULD HAVE
A MATERIALLY ADVERSE EFFECT ON OUR WORKERS AND EVEN THE CHINESE ECONOMY IN
GENERAL, WHICH MAY ADVERSELY AFFECT BUSINESS.
The World Health Organization reported in 2004 that large scale outbreaks of
avian flu throughout most of Asia, including China, had nearly caused a
pandemic that would have resulted in high mortality rates and which could cause
wholesale civil and societal disruption. There have also been several
potential outbreaks of similar pathogens in China with the potential to cause
large scale disruptions, such as SARS, pneumonia and influenza. Any future
outbreak which infiltrates the areas of our operations would likely have an
adverse effect on our ability to conduct normal business operations.
ITEM 2.FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR
CHINA DU KANG CO., LTD.,
The discussion contained in this prospectus contains "forward-looking
statements" that involve risk and uncertainties. These statements may be
identified by the use of terminology such as "believes", "expects", "may", or
"should", or "anticipates", or expressing this terminology negatively or
similar expressions or by discussions of strategy. The cautionary statements
made in this prospectus should be read as being applicable to all related
forward-looking statements wherever they appear in this prospectus. Our actual
results could differ materially from those discussed in this prospectus.
Important factors that could cause or contribute to such differences include
those discussed under the caption entitled "risk factors," as well as those
discussed elsewhere in this prospectus.
12
Cautionary statement identifying important factors that could cause actual
results to differ from those projected in forward looking statements.
This document contains both statements of historical facts and forward looking
statements. Forward looking statements are subject to certain risks and
uncertainties, which could cause actual result to differ materially from those
indicated by the forward looking statements. Examples of forward looking
statements include, but are not limited to, (i) projection of revenues, income
or loss, earnings per share, capital expenditures, dividends, capital
structure, and other financial items, (ii) statements of our plans and
objectives with respect to business transactions and enhancement of shareholder
value, (iii) statements of future economic performance, and (iv) statements of
assumptions underlying other statements and statements about our business
prospects. This document also identifies important factors that could cause
actual results to differ materially from those indicated by the forward looking
statement. These risks and uncertainties include the factors discussed under
the heading "Risk Factors" beginning at page 6 of this Prospectus.
The section "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with our audited
consolidated or un-audited condensed consolidated financial statements and the
notes thereto appearing elsewhere in this prospectus.
OVERVIEW
China Du Kang Co., Ltd ("China Du Kang" or the "Company") was incorporated as
U. S. Power Systems, Inc., in the State of Nevada on January 16, 1987. On or
about June 8, 2006 the Company's name was changed to Premier Organic Farms
Group, Inc. On or about November 30, 2006 the name was changed to Amstar
Financial Holdings, Inc. ("AFLH"). On or about March 18, 2008 the name was
changed to its current name of China Du Kang Co., Ltd. with its corporate
charter still residing in Nevada. The Company changed its fiscal year ending
from September 30 to December 31 in February 2008.
The Company had been engaged in the business to provide various financial
services since it's incorporated. The Company was not successful and
discontinued the majority of its operation by December 31, 2007.
On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the
"Exchange Agreement") with Hong Kong Merit Enterprise Limited ("Merit"), a
holding company incorporated in Hong Kong. Pursuant to the terms of the
Exchange Agreement, the Company agreed to issue post split 88,000,000 shares of
its common stock to the shareholders of Merit in exchange for Merit to transfer
all of its issued and outstanding shares of common stock to the Company,
thereby causing Merit to become a wholly-owned subsidiary of the Company. The
parties closed the transaction contemplated by the Agreement on February 11,
2008.
This transaction is being accounted for as a reverse merger, since the
shareholders of Merit owns a majority of the outstanding shares of the
Company's common stock immediately following the share exchange. Merit is
deemed to be the acquirer in the reverse merger. Consequently, the assets and
liabilities and the historical operations that will reflected in the
consolidated financial statements for periods prior to the share exchange will
be those of Merit and its subsidiaries and will be recorded at the historical
cost basis. After completion of the share exchange, the Company`s consolidated
financial statements will include the assets and liabilities of both Du Kang
and Merit, the historical operations of Merit and the operations of the Company
and its subsidiaries from the closing date of the share exchange.
13
Merit was incorporated on September 8, 2006 in Hong Kong under the Companies
Ordinances as a Limited Liability company. Merit was formed for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Statement of Financial Accounting Standards (SFAS) No. 7.
On January 22, 2008, Merit entered into a Share Purchase Agreement (the
"Purchase Agreement") with the owners of Shaanxi Huitong Food Co., Inc.
("Huitong"), a limited liability company incorporated in the People's Republic
of China ("PRC") on August 9, 2007 with a registered capital of $128,200
(RMB1,000,000). Pursuant to the Purchase Agreement, Merit agreed to purchase
100% of the equity ownership in Huitong for a cash consideration of $136,722
(RMB 1,000,000). The local government approved the transaction on February 1,
2008. Subsequent to the completion of the acquisition, Huitong became a
wholly-owned subsidiary of Merit.
Huitong was formed for the purpose of seeking and consummating a merger or
acquisition with a business entity organized as a private corporation,
partnership, or sole proprietorship. On December 26, 2007, Huitong executed
an acquisition agreement with shareholders of Shaanxi Merithui Technology Stock
Co., Ltd. ("Xidenghui"), whereby Huitong agreed to acquire 98.24% of the equity
ownership of Xidenghui from the shareholders. Subsequent to completion of the
acquisition agreement, Xidenghui became a majority-owned subsidiary of
Huitong.
Xidenghui was incorporated in Weinan City, Shannxi Province, PRC on March 29,
2001 under the Company Law of PRC. Xidenghui was engaged in the business of
production and distribution of distilled spirit with a brand name of
"Xidenghui". Currently, its principal business is to hold an equity ownership
interest in Shannxi Baishui Dukang Liquor Co., Ltd. ("Baishui Dukang") and
Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. ("Brand Management").
Baishui Dukang was incorporated in Baishui County, Shanxi Province, PRC on
March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally
engaged in the business of production and distribution of distilled spirit with
a brand name of "Baishui Du Kang". On May 15, 2002, Xidenghui invested
inventory and fixed assets, totally valued at $ 4,470,219 (RMB 37,000,000) to
Baishui Dukang and owns 90.51% of Baishui Dukang's equity interest ownership,
thereby causing Baishui Dukang to become a majority-owned subsidiary of
Xidenghui.
On October 30, 2007, Xidenghui executed an agreement with Mr. Zhang Hongjun, a
PRC citizen, to establish a joint venture, Shaanxi Baishui Dukang Liquor Brand
Management Co., Ltd. ("Brand Management"). Pursuant to the agreement,
Xidenghui contributed cash of $95,704 (RMB 700,000), and owns 70% equity
interest ownership therein. Brand Management was subsequently incorporated on
November 12, 2007. Upon the completion of incorporation, Brand Management
became a majority-owned subsidiary of the Xidenghui. Brand Management is
principally engaged in the business of distribution of Baishui Dukang's liquor
and manage the franchise of the "Baishui Du Kang" brand name.
Baishui Dukang and Brand Management are the two of these affiliated companies
that are engaged in business operations. Du Kang, Merit, Huitong, and
Xidenghui are holding companies, whose business is to hold an equity ownership
interest in Baishui Dukang and Brand Management. All these affiliated
companies are hereafter referred to as the "Company". Currently, the Company
is principally engaged in the business of production and distribution of
distilled spirit with the brand name of "Baishui Dukang". The Company also
franchises the brand name to other liquor predictors. The Company's structure
is summarized in the following chart.
14
--------------------------------------------------------
"China Du Kang Co., Ltd. (""Du Kang"")
F/K/A Amstar Financial Holdings, Inc. (""AFLH"")
Incorporated in the State of Nevada on January 16, 1987"
--------------------------------------------------------
\ Acquiring 100% equity interest on 2/11/2008
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Hong Kong Merit Enterprise Limited "Merit"
Incorporated in Hong Kong on September 8, 2006"
--------------------------------------------------------
\ Acquiring 100% equity interest on 1/22/2007
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Huitong Food Development Co., Inc. "Huitong"
Incorporated in Shaanxi Province, PRC on August 9, 2007"
--------------------------------------------------------
\ Acquiring 98.24% equity interest on 12/26/2007
\----------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Xidenghui Technology Stock Co., Ltd. "Xidenghui"
Incorporated in Shaanxi Province, PRC on March 29, 2001"
--------------------------------------------------------
\ \
-------------------------------- \ \ -----------------------------
Acquiring 90.51% equity interest \ \ Acquiring 70% equity interest
on 5/15/2002 \ \ on 11/12/2007
-------------------------------------------- ----------------------------------------
"Shaanxi Baishui Dukang" "Shaanxi Baishui Dukang Liquor Brand
Liquor Co., Ltd. "Dukang Management Co., Ltd. "Brand Management"
Incorporated in Shaanxi Province, Incorporated in Shaanxi Province,
PRC on March 1, 2002" PRC on November 12, 2007"
-------------------------------------------- ----------------------------------------
15
LIQUIDITY AND CAPITAL RESOURCES AND RESULTS OF OPERATIONS AS OF SEPTEMBER 30,
2009 AND 2008 AND FOR THE NINE MONTHS THEN ENDED (UNAUDITED)
We experienced a net loss of $(197,900) for the nine months ended September 30,
2009 as compared to a loss of $(1,497,345) for the same period of 2008.
Adjustments to reconcile the net loss to cash provided by operating activities
included $(31,606) for minority interest for the nine months ended September
30, 2009 as compared to $(80,911) for the same period of 2008. Depreciation
increased to $109,762 from $104,911 for the same respective periods. Also,
amortization increased to $7,355 from $7,192.
Changes in operating assets and liabilities included a decrease in supplies
from $(162,037) for the nine months ended September 30, 2008 to $70,885 for the
same period in 2009. Other payables were $(67,719) as compared to $5,525 for
the same periods. Similarly, the deferred revenues were $(11,545) as compared
to $389,035 for the six-month period ended September 30, 2009 and 2008
respectively. Net cash used by operating activities went from $(869,196) for
the nine months ended September 30, 2008 to $(16,091) for the same period ended
2009.
Purchase of fixed assets for the nine months ended September 30, 2008 were
$(166,269) to $(74,804) for the same period of 2009. The loans to related
parties accounted for $(55,227) for the nine months ended September 30, 2008
and $(325,736) for the same period of 2009. The net cash used by investing
activities were $(221,496) and $(400,540) for the nine months ended September
30, 2008 and 2009 respectively.
Net cash provided by financing activities changed from $492,910 for the nine
months ended September 30, 2008 to $245,326 for the same period of 2009. The
change was entirely attributable to loans from related parties in the period of
2008. For the 2009 period, bank loans were $291,983 and payback of loans from
related parties were $(46,657). Cash declined from $737,818 to $344,379 for the
nine months ended September 30, 2008, and from $698,050 to $606,691 for the
nine months ended September 30, 2009.
16
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
REVENUE
Total revenues for the period ended September 30, 2009 were $1,486,899 as
compared to $826,631 for the same period of 2008. These include sales of
liquor, which were $805,843 for the period ended September 30, 2009 and
$722,299 for the same period of 2008. The franchise fees in the period ended
September 30, 2009 were $681,056, and $104,332 for the same period of 2008.
OPERATING EXPENSES
Expenses from operations totaled $735,497 and $1,605,966 for the nine months
ended September 30, 2009 and September 30, 2008, respectively. The losses from
operations improved from ($1,457,166) to ($99,713) for the nine months ended
September 30, 2008 and 2009, respectively. Most of the improvements can be
attributed to the decrease of consultant fees from $138,727 for the period
ended September 30,2008 to $2,283 for the same period of 2009. Similarly,
professional fees improved from $318,045 to $7,365 for those same periods.
Repair and maintenance expenses likewise improved from $69,867 to $2,422 and
travel and entertainment expenses showed similar improvements from $194,600 to
$96,439.
Employee benefits for the nine months ended September 30, 2009 and 2008 were
$15,372 and $12,337 respectively.
Depreciation and amortization expenses were $117,117 as compared to $112,103
for the nine months ended September 30, 2009 and 2008 respectively. Office
expenses decreased to $79,576 from $103,980 for the same periods. Vehicle
expense also improved to $22,566 from $37,369 for those periods. Utilities
expenses improved to $9,477 from $18,035 for the comparable periods.
Rental expenses totaled $126,157 in the period ended September 30, 2009, as
compared to $122,045 for the same period of 2008. Payroll decreased from
$185,589 in 2008 to $167,437 for the same period of 2009.
LIQUIDITY AND CAPITAL RESOURCES AND RESULTS OF OPERATIONS AS OF DECEMBER 31,
2008 AND 2007 AND FOR THE YEARS THEN ENDED
The results of operations for the years ended December 31, 2007 and December
31, 2008.
REVENUES
For the year ended December 31, 2008 the total revenues of China Du Kang were
$1,143,195 as compared to $745,115 for the year ended December 31, 2007. Sales
of liquor constituted $953,751 for the year ended 2008, and $745,115 for the
prior period. In 2008 we added revenues from franchise fees of $189,444. There
were no franchise fees in the prior period.
Costs of Revenues
Total costs were $818,554 for the year ended 2008. Total costs for the prior
period were $708,247. This accounted for the total costs of sales.
Gross Profits for the year ended December 31, 2008 were $324,641 as compared to
$36,868 for the year ended December 31, 2007.
17
EXPENSES
The Company for the years ending December 31, 2008 and December 31, 2007,
respectively incurred total operating expenses of $1,835,179 and $1,404,047.
For the year ended December 31, 2008 the total selling expenses were $371,397.
The prior period incurred total selling expenses of $224,916.These selling
expenses included advertising expenses, which decreased from $184,908 for the
year ended December 31, 2007 to $136,006 for the year ended December 31, 2008.
For the same periods, the promotion expenses increased greatly from $22,333 to
$120,592 respectively. The travel and entertainment expenses also increased,
from $17,675 to $41,547 respectively. For the year ended December 31, 2008, the
package design expense accounted for $73,252. There was no package design
expense for the year ended December 31, 2007.
Depreciation and amortization expense increased from $123,617 for the year
ended December 31, 2007 to $152,953 for the year ended December 31, 2008.
Office expense increased for the same periods from $76,064 to
$126,881 respectively, and vehicle expense increased from $40,729 for the year
ended December 31, 2007 to $42,034 for the year ended December 31, 2008.
Professional fees increased to $319,887 as of December 31, 2008 from $19,430
as of December 31, 2007. There was an increase in consultancy fees for the
same periods from $42,415 to $68,758.
For the periods from December 31, 2007 to December 31, 2008, travel and
entertainment expense decreased from $240,888 to $215,369 respectively.
Expenses for repair and maintenance also decreased from $113,310 to $72,758
respectively. Rental expense increased from $124,924 to $161,841 respectively.
Utilities expense increased slightly from $15,981 to $23,135 respectively.
For the years ending December 31, 2007 and December 31, 2008, our payroll
expenses increased from $175,228 to $248,828. Employee benefit and pension
expense decreased significantly from $41,341 for the year ended December 31,
2007 to $15,510 for the year ended December 31, 2008. Other general and
administrative expenses decreased significantly as well, from $165,204 to
$15,828 respectively.
Loss from Operation for the year ended December 31, 2008 was $(1,510,538); for
the year ended December 31, 2007, loss from operation was $(1,367,179.)
Loss before income tax and minority interest was $(1,591,791) as of December
31, 2008 and $(1,524,337) as of December 31, 2007 as there was no provision
for income tax. This figure included interest income of $3,000 for December 31,
2008 and $11,947 for December 31, 2007. Total other expense was $(81,253) for
the year ended December 31, 2008, and $(157,158) for the prior period. Our net
loss was $(1,502,067) at December 31, 2008 and $(1,482,180) for December 31,
2007. This included minority interest of $89,724 as of December 31, 2008 and
$42,157 for 2007.
18
LIQUIDITY AND CAPITAL RESOURCES
Our auditors have noted that there is substantial doubt about our ability to
continue as a going concern. The company had an accumulated deficit of
$16,904,363 at December 31, 2008 that includes losses of $1,502,067 and
$1,482,180 for the year ended December 31, 2008 and 2007, respectively. In
addition, the Company had a working capital deficiency of $11,410,023 and a
shareholders' deficiency of $6,568,764 at December 31, 2008. The company relied
heavily for its financing needs on its shareholders/directors. The total
contributions from related parties were $14,318,396 for the year ended December
31, 2008 as compared to $12,206,510 for the year ended December 31, 2007. This
consisted of 8 loans from directors and 6 loans from affiliates.
We will have to seek other sources of financing or we may have to curtail our
business plans. There is no assurance that any other sources of financing will
be available or at a reasonable cost. We anticipate expenses as described
elsewhere in this filing. As of December 31, 2008, we had a net loss of
$(1,502,067) as compared to $(1,482,180) for the year ended December 31, 2007
and a stockholders' deficit of $(6,568,764), as compared to $(4,725,923) for
the period ended December 31, 2007.
There were adjustments to reconcile net income as follows: depreciation
increased from $114,806 in the year ended December 31, 2007 to $143,314 in the
year ended December 31, 2008. For the same periods, amortization increased from
$8,811 to $9,639 respectively. As of December 31, 2008 minority interest was
$(89,724), as compared to $(42,157) in 2007.
Net cash used by operating activities experienced a change improving to
$(1,169,098) at December 31, 2008 from $(1,727,006) at December 31, 2007.
Net cash used by investing activities also experienced a change to ($554,304)
for the year ended December 31, 2008 from ($294,424) for the year ended
December 31, 2007. Most of the change can be attributed to cash used to acquire
Huitong in 2008 of ($136,722) and loans to related parties of ($217,388) for
the year ended December 31, 2008. Purchases of fixed assets went to ($200,194)
from ($383,070) at December 31, 2008 and 2007 respectively.
Net cash provided by financing activities increased to $1,409,517 for the
year ended December 31, 2008 from $1,179,663 for the year ended December 31,
2007. This change was largely occasioned by the loans from related parties in
2007 of $1,042,941 increasing to $1,272,795 in the year ended December 31,
2008. Proceeds from capital contributions in both periods were $136,722.
Cash at the end of the period declined from $737,818 at December 31, 2007 to
$698,050 at December 31, 2008. For the period ended December 31, 2007 effects
of exchange rates was $(240,623) and increased to $274,117 at December 31,
2008. Cash at the beginning of the period declined to $737,818 at December
31, 2008 and had been $1,820,208 at December 31, 2007.
IMPACT OF INFLATION.
We believe that inflation will have a negligible effect on operations. The
Company can offset inflationary increases in the cost of labor by increasing
sales and improving operating efficiencies.
19
LIQUIDITY AND CAPITAL RESOURCES.
Access to short and long term sources of cash is important to the continuation
of our research and development and commencement of our operations. Our ability
to operate is limited by our financial capacity to obtain cash and additional
lines of credit in the future.
We use cash primarily for:
- research and development
- general and administrative costs
-and other operating expenses.
So far, we have received cash primarily from shareholder loans and paid in
capital.
ASSETS
As of December 31, 2008, we had total assets of $9,293,486 as compared to
assets at December 31, 2007, of $8,762,054. The change was due to a reduction
in cash and cash equivalents from $737,818 to $698,050 and prepaid expenses
decreased from $986,285 at December 31, 2007 to $511,243 at December 31, 2008.
Current assets were $4,006,948 which included the cash as well as the prepaid
expenses and $2,267,383 in inventory and $8,248 in other receivables at
December 31, 2007. Current assets were $4,400,895 at December 31, 2008 which
included the prepaid expenses, $2,959,595 in inventory and $3,494 in other
receivables. The amount due to related parties increased significantly from
$7,214 in the year ended December 31, 2007 to $228,513 in the year ended
December 31, 2008.
A chart of the prepaid expenses is as follows:
Prepaid expenses consist of the following:
December 31, December 31,
2008 2007
----------- -----------
Machinery and parts $ 10,664 $ 2,846
Raw materials 16,129 438
Packing and supply materials 103,727 493,141
Repair & maintenance - 101,668
Advertising advance - 6,836
Project advance 7,878 -
Advance to consultants - 3,814
Prepaid rental expenses 372,845 364,592
Prepaid office expenses - 12,950
----------- -----------
Total $ 511,243 $ 986,285
=========== ===========
20
A chart of the company's property plant equipment is as follows:
PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
December 31, December 31,
2008 2007
---------- ----------
Building and warehouses $2,913,855 $2,607,737
Machinery and equipment 1,820,095 1,615,659
Office equipment and furniture 191,029 151,780
Motor vehicles 491,005 473,304
5,415,984 4,848,480
---------- ----------
Less: Accumulated depreciation (2,362,458) (1,862,367)
3,053,526 2,986,113
---------- ----------
Add: Construction in progress 12,231 47,853
---------- ----------
Total $3,065,757 $3,033,966
========== ==========
21
Liabilities
As of December 31, 2008, we had current liabilities of $15,810,918, consisting
of $96,627 in accrued expenses and $28,200 in other payables. As of December
31, 2007, we had current liabilities of $13,354,465, consisting of $78,887 in
accrued expenses and $25,243 in other payables. The largest liability was an
amount due to related parties of $14,318,396, up from $12,206,510 at December
31, 2007. We had deferred revenue of $395,426 and $78,786 in employee's
security deposits as compared to none of either at December 2007.
Stockholder's Equity
The number of our common stocks issued and outstanding was 100,113,791 and
88,000,000 as of December 31, 2008 and 2007, respectively. There was a
stockholders' deficit of (6,568,764) in 2008 as compared to (4,725,923) in the
prior period. The total liabilities and stockholders' equity for the years
ending December 31, 2008 and 2007 were $9,293,486 and $8,762,054, respectively.
Our registered capital was $19,178,986 and $19,191,100 as of December 31, 2008
and 2007, of which (8,507,724) was to be received as of both December 31, 2008
and 2007.
"Capital to-be received" principally represents the difference between the
historical cost and the appraised value of the property, which the owners
contributed to China Du Kang. The Company does not expect to collect any
portion of this sum, but reflects this amount on its financial statements as
set forth below.
In PRC, when a company is formed, its articles of incorporation are filed with
the local government and must indicate the amount of capital that the owners
will contribute to the company, which is called registered capital. The
owners can contribute the registered capital within certain period of time
after the company is formed.
We had an accumulated deficiency of $(16,904,363) as compared to $(15,402,296)
at December 31, 2007, which included $(435,777) and $(226,157) in accumulated
other comprehensive income at December 31, 2008 and 2007 respectively.
If we are able to commence operations, we will likely need additional financing
as we will not likely be able to substantially rely on the revenue from our
business. If the projected revenues fall short of needed capital we may not be
able to commence operations or sustain our projected growth. There can be no
assurance that additional capital in the future will be available to us when
needed or available on terms favorable to the Company.
Off-Balance Sheet Arrangements.
None.
22
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Company, which are prepared in accordance with the "Accounting
Principles of China " ("PRC GAAP").
The consolidated financial statements include the accounts of the Company and
all its majority-owned subsidiaries which require consolidation. Inter-company
transactions have been eliminated in consolidation.
Foreign Currencies Translation
The Company maintains its books and accounting records in PRC currency
"Renminbi" ("RMB"), which is determined as the functional currency.
Transactions denominated in currencies other than RMB are translated into RMB
at the exchange rates quoted by the People's Bank of China ("PBOC") prevailing
at the date of the transactions. Monetary assets and liabilities denominated in
currencies other than RMB are translated into RMB using the applicable exchange
rates quoted by the PBOC at the balance sheet dates. Exchange differences are
included in the statements of changes in owners' equity. Gain and losses
resulting from foreign currency transactions are included in operations.
The Company's financial statements are translated into the reporting currency,
the United States Dollar ("US$"). Assets and liabilities of the Company are
translated at the prevailing exchange rate at each reporting period end.
Contributed capital accounts are translated using the historical rate of
exchange when capital is injected. Income and expense accounts are translated
at the average rate of exchange during the reporting period. Translation
adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income (loss) in
the consolidated statement of shareholders' equity.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the statement of changes in owners' equity
and amounted to $(444,772) and $(435,777) as of September 30, 2009 and December
31, 2008, respectively. The balance sheet amounts with the exception of equity
at September 30, 2009 were translated at 6.838 RMB to $1.00 USD as compared to
6.854 RMB at December 31, 2008. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement
accounts for the nine months ended September 30, 2009 and 2008 were 6.843 RMB
and 7.000 RMB, respectively.
Others Receivable
Others receivable principally includes advance to employees who are working on
projects on behalf of the Company. After the work is finished, they will
submit expense reports with supporting documents to the accounting department.
Upon being properly approved, the expenses are debited into the relevant
accounts and the advances are credited out. Cash flows from these activities
are classified as cash flows from operating activities.
Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash
equivalents, receivables, prepaid expenses, accounts payable, and accrued
expenses, approximates their fair value due to the relatively short-term nature
of these instruments.
23
Inventory
Inventories are stated at the lower of cost or market value. Actual cost is
used to value raw materials and supplies. Finished goods and work-in-progress
are valued on the weighted-average-cost method. Elements of costs in finished
good and work-in-progress include raw materials, direct labor, and
manufacturing overhead.
Statement of Cash Flows
In accordance with FASB guidance, cash flows from the Company's operations is
calculated based upon the functional currency. As a result, amounts related to
assets and liabilities reported on the statement of cash flows may not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to unaffiliated customer, title and
risk of loss have been transferred, collectability is reasonably assured and
pricing is fixed or determinable.
The Company does not provide an unconditional right of return, price protection
or any other concessions to our customers. Sales returns and other allowances
have been immaterial in our operation.
Deferred Revenue
Deferred revenue consists of prepayments to the Company for products that have
not yet been delivered to the customers. Payments received prior to satisfying
the Company's revenue recognition criteria are recorded as deferred revenue.
Use of Estimates
The preparation of financial statements in conformity with 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 revenue and expenses during the reporting period.
Actual results when ultimately realized could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid investments which are
unrestricted as to withdrawal or use, and which have original maturities of
three months or less.
Concentrations of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents. The Company maintains its cash
and cash equivalents with high-quality institutions. Deposits held with banks
in PRC may not be insured or exceed the amount of insurance provided on such
deposits. Generally these deposits may be redeemed upon demand and therefore
bear minimal risk. All banks with which we hold deposits in PRC are majority-
owned by the state and no bank has ever bankrupted since PRC was established in
1949. Generally, there is no insurance provided on bank deposits in PRC.
However, all deposits may be redeemed upon demand and therefore bear minimal
risk.
24
ITEM 3. Properties
September 30,
2009
(unaudited)
------------
Building and warehouses $2,925,165
Machinery and equipment 1,847,064
Office equipment and furniture 194,176
Motor vehicles 329,448
------------
$5,295,853
Less: Accumulated depreciation (2,598,845)
------------
2,967,008
Add: Construction in progress 58,071
Total $2,755,079
Property, Plant and Equipment
charged to operations was $109,762 and $104,911 for the nine months ended
September 30, 2009 and 2008, respectively. The property, plant and equipment
shown in the chart are those held directly by the Company. Remaining
properties are owned per an operational lease and are therefore not
capitalized.
Pursuant to the lease agreement, Baishui Dukang is required to absorb the
pension and unemployment insurance expenses of Sanjiu's original employees
until they all reach their retirement age. Pursuant to the applicable laws
in PRC, male employees retire when they reach 60 years old, while female
employees retire when they reach 55 years old. Accordingly, Sanjiu's
original employees will gradually retire until Year 2032. The pension and
unemployment insurance expenses are based on a certain percentage of the
employees' gross payroll. The percentage may be changed as the applicable
law is amended. In practice, the expenses can be based on the local
average salary published by the local government. Over the life of the
lease, the Management anticipates the percentage will remain the same while
the local average salary will increase 8% annually. The number of
employees that we need to absorb their pension and unemployment insurance
expenses will gradually decrease as they reach their retirement ages. To
the best of our estimation, we anticipate the future payment for pension
and unemployment insurance expenses as following:
25
Estimated Pension and Unemployment Insurance Expenses
Pension Insurance Expense Unemployment Insurance Expense Total
------------------------- ------------------------------ -----
Year Province Annual Per- No of Estimated pension City Annual Per- No. of Estimated USD$1.00=RMB 6.83720
average increase cent- employ- insurance expense average increase cent- employees pension @12/31/2009
salary rate age ees (RMB) salary rate age insurance
(RMB) (RMB) expense
(RMB) (USD)
2009 13,764 8% 20% 325 894,629 10,964 8% 2.50% 325 89,084 983,713 143,877
2010 14,865 8% 20% 316 939,443 11,841 8% 2.50% 316 93,546 1,032,989 151,084
2011 16,054 8% 20% 309 992,123 12,789 8% 2.50% 309 98,792 1,090,915 159,556
2012 17,338 8% 20% 301 1,043,752 13,812 8% 2.50% 301 103,933 1,147,685 167,859
2013 18,725 8% 20% 282 1,056,097 14,917 8% 2.50% 282 105,162 1,161,259 169,844
2014 20,223 8% 20% 268 1,083,960 16,110 8% 2.50% 268 107,937 1,191,896 174,325
2015 21,841 8% 20% 258 1,126,994 17,399 8% 2.50% 258 112,222 1,239,216 181,246
2016 23,588 8% 20% 244 1,151,107 18,791 8% 2.50% 244 114,623 1,265,730 185,124
2017 25,475 8% 20% 228 1,161,674 20,294 8% 2.50% 228 115,675 1,277,350 186,823
2018 27,513 8% 20% 215 1,183,074 21,917 8% 2.50% 215 117,806 1,300,880 190,265
2019 29,714 8% 20% 199 1,182,633 23,671 8% 2.50% 199 117,762 1,300,396 190,194
2020 32,092 8% 20% 173 1,110,368 25,564 8% 2.50% 173 110,566 1,220,934 178,572
2021 34,659 8% 20% 148 1,025,903 27,610 8% 2.50% 148 102,156 1,128,059 164,988
2022 37,432 8% 20% 135 1,010,653 29,818 8% 2.50% 135 100,637 1,111,290 162,536
2023 40,426 8% 20% 113 913,630 32,204 8% 2.50% 113 90,976 1,004,606 146,932
2024 43,660 8% 20% 102 890,668 34,780 8% 2.50% 102 88,689 979,358 143,240
2025 47,153 8% 20% 77 726,157 37,563 8% 2.50% 77 72,308 798,465 116,782
2026 50,925 8% 20% 52 529,623 40,568 8% 2.50% 52 52,738 582,361 85,175
2027 54,999 8% 20% 41 450,994 43,813 8% 2.50% 41 44,908 495,903 72,530
2028 59,399 8% 20% 25 296,996 47,318 8% 2.50% 25 29,574 326,570 47,764
2029 64,151 8% 20% 18 230,944 51,103 8% 2.50% 18 22,997 253,941 37,141
2030 69,283 8% 20% 12 166,280 55,192 8% 2.50% 12 16,558 182,837 26,742
2031 74,826 8% 20% 6 89,791 59,607 8% 2.50% 6 8,941 98,732 14,440
2032 80,812 8% 20% 1 16,162 64,376 8% 2.50% 1 1,609 17,772 2,599
Total 19,273,656 1,919,199 21,192,854 3,099,639
Lease
On March 4, 2002, Baishui Dukang signed a lease agreement with Shaanxi Sanjiu
Dukang Liquor Production Co., Ltd ("Sanjiu"), pursuant to which Dukang agreed
to lease all fixed assets of Sanjiu for a period of 20 years, which was
latterly extended to 30 years. On February 3, 2005, Sanjiu was acquired by
Shannxi Baishui Dukang Liquor Development Co., Ltd. On April 30, 2005, Baishui
Dukang signed a supplemental lease agreement with Shannxi Baishui Dukang Liquor
Development Co., Ltd, pursuant to which Dukang agreed to continue to lease all
fix assets of Sanjiu for the rest of the original 30-year period. Bai Shui
Dukang also agreed to pay $362,450 (RMB 3,000,000) to continue the lease and to
absorb the pension and unemployment insurance expenses of Sanjiu's original
employees. Baishui Dukang amortized the $ 362,450 (RMB 3,000,000) over a 27-
year beneficial period. Dukang paid $126,157 and $122,045 for Sanjiu's original
employees' pension and unemployment insurance expenses in the nine months ended
September 30, 2009 and 2008, respectively.
26
ITEM 4.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table contains certain information as of December 23, 2009 as to
the number of shares of Common Stock beneficially owned by (i) each person
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each person who is a Director of the Company, (iii) all persons as
a group who are Directors and Officers of the Company, and as to the percentage
of the outstanding shares held by them on such dates and as adjusted to give
effect to this Offering.
Name and Position Shares Percentage
Wang Yongsheng 9,030,000 9.05%
CEO, Director
Liu Su Ying 0 0%
Chief Financial Officer, Director
Nie fen Ying 4,000,000 4.01%
Director
Deng Guo Gang 8,800,000 8.82%
Totals 13,030,000 13.06%
The directors, executive officers, their affiliates, and related parties own,
directly or indirectly, beneficially and in the aggregate, the majority of the
voting power of the outstanding capital of the Company. Accordingly, directors,
executive officers and their affiliates, if they voted their shares uniformly,
would have the ability to control the approval of most corporate actions,
including approving significant expenses, increasing the authorized capital and
the dissolution, merger or sale of the Company's assets.
ITEM 5.DIRECTORS AND EXECUTIVE OFFICERS.
DATE OF PERCENT OF
NAME AGE TITLE APPOINTMENT TIME DEVOTED
- ---- --- ----- ----------- ------------
Wang Yongsheng 36 CEO 05-Jan-08 100%
Liu Su Ying 58 Chief Financial Officer05-Jan-08 100%
Nie fen Ying 43 Director 05-Jan-08 100%
WANG YONGSHENG, 36, VICE CHAIRMAN
Mr. Wang also serves as chairman of one of the company's subsidiaries Bai Shui
Du Kang Liquor Co.,Ltd.. He Studied EMBA in Xi'an Jiao Tong University, and
obtained his certificate. He was the vice general manager of Du Kang Liquor
Limited Liability Company in 2002. Mr. Wang served as the purchasing and
supplying manager and as the vice producing director of Xi Deng Hui Alcohol Co.
Ltd. in 1996.Currently, he is the Chief Executive Officer of China Dukang
Co.,Ltd.
27
LIU SU YING, 58, CFO.
Passed the Adult Self*Study Examination in Shaanxi from 1987 to 1990 major:
Accounting.
From 1990 to 1998 she was deputy section chief of accounting department of
Shaanxi Wei Nan Textile Factory. In 1999 she worked in Shaanxi Hui Huang
Construction and Building Material Company as manager of accounting department.
In 2001, she was appointed as the CFO of Shannxi Xidenghui Technology Co.,Ltd.
Currently she is the CFO of China Dukang Co.,Ltd.
NIE FEN YING, 42, DIRECTOR
Nie Fen Ying graduated from Xian Yang Normal University majoring in physical
distribution management. After 3 years of studying, she served as sales manager
in Shaanxi Bai Shui Dukang Liquor Co., Ltd. from 2001 to 2003 which is a liquor
production and sales company. Since then she has been sales manager of Shaanxi
Xi Deng Hui Stock Co., Ltd. which is holding company of the company she first
served in after acquisition in 2003. Currently, she is appointed as the
Director of China Dukang Co.,LTD.
Under the bylaws of the company, directors are elected at each annual meeting
of the stockholders and serve until a successor has been duly elected and
qualified except upon death, resignation, or removal. Vacancies on the Board of
Directors may be filled by appointment by the remaining directors until the
next shareholder meeting. Presently, directors are not compensated for their
service in such capacities but are permitted reimbursement of any costs or
expenses of attendance. The company is not aware of any current legal
proceedings or legal proceedings that have occurred within the past 5 years as
to any current director.
The prior CEO and Chairman of the Board of Directors, Howard Wayland, Jr.,
remained as a member of the Board of Directors until August 26, 2008. Mr.
Wayland filed for protection from creditors under Chapter 7 of the United
States Bankruptcy Code shortly after his resignation as a director of the
company.
ITEM 6.EXECUTIVE COMPENSATION
No compensation was awarded to or paid to any executive officer or director of
the Company during the years 2008, 2007, and 2006 other than as shown in the
table below.
The following table and the accompanying notes provide summary information for
each of the last three fiscal years concerning cash and non-cash compensation
paid or accrued.
28
SUMMARY COMPENSATION TABLE
Name and Year Salary Bonus Other Restricted Securities LTIP
Principal Position ($) (5)($) Annual Stock Underlying Payouts
Compensation Award(s) Options ($)
($) ($) (#)
Wang Yongsheng CEO
2006 2,151 0 0 0 0 0
2007 3,474 0 0 0 0 0
2008 3,026 0 0 0 0 0
Liu Su Ying CFO
2006 2590 0 0 0 0 0
2007 3250 0 0 0 0 0
2008 3550 0 0 0 0 0
Nie Fen Ying
Director 2006 2,454 0 0 0 0 0
2007 3,150 0 0 0 0 0
2008 3,447 0 0 0 0 0
29
ITEM 7.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
We have entered into or acquired a series of transactions with related parties
including our affiliate companies and member of our board of directors. Most of
these transactions are related to acquisitions of the affiliate companies. The
related party transactions are all loans made on a demand note basis by the
related party to the Company. There is no security or collateral and no
definite time for repayment.
September 30, December 31,
2009 2008
Name of Related Party Description (unaudited)
----------- -----------
Shaanxi Dukang Group Co., Ltd. Affiliate $ 267,217 $ 471,244
Shaanxi Zhongke Spaceflight Agriculture
Development Stock Co., Ltd. Affiliate 33,506 33,512
Shaanxi Baishui Dukang Marketing Management Co., Ltd. Affiliate 12,853 1,179
Shaanxi Baishui Dukang Commerce and Trade Co., Ltd. Affiliate 72,126 72,853
Shaanxi Baishui Dukang Spirits Industry
Development Co., Ltd. Affiliate 1,215,936 876,721
Shaanxi Changjiang Electric Power and Energy
Sources Co., Ltd. Affiliate - 291,792
Mr. Hongjun Zhang Director 3,179,492 3,058,821
Mr. Guoqi Diao Director 392,645 392,107
Ms. Ping Li Director 582,237 581,438
Mr. Pingjun Nie Director 4,386,284 4,380,268
Ms. Hong Ge Director 264,354 263,991
Mr. Hailong Tian Director 2,764,471 2,760,680
Ms. Min Chen Director 356,249 355,761
Mr. Shengli Wang Director 779,097 778,029
----------- -----------
Total $14,306,467 $14,318,396
=========== ===========
30
ITEM 8.LEGAL PROCEEDINGS
The Company's prior CEO, Howard Wayland, Jr., filed for protection from
creditors under Chapter 7 of the United States Bankruptcy Code in Houston, TX.
Mr. Wayland resigned as CEO in 2008 and resigned as a director prior to filing
the petition. Mr. Wayland discharged, among other things, various guarantees he
had made in connection with the prior operations of the Company.
We are not presently involved in any litigation that is material to our
business. We are not aware of any pending or threatened legal proceedings. In
addition, none of our officers, directors, promoters or control persons has
filed or been involved for the past five years:
- in any bankruptcy petition
- in any conviction of a criminal proceeding or involved in a pending criminal
proceeding (excluding traffic violations and minor offenses)
- is subject to any order, judgment or decree enjoining, barring suspending or
otherwise limiting their involvement in any type of business, securities, or
banking activities,
- or has been found to have violated a federal or state securities or
commodities law.
There have been no securities trading suspensions by any regulator, and there
is no pending or threatened litigation for which the adverse effect, assuming
an unfavorable outcome, would exceed $25,000.
ITEM 9.MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently on an extremely limited trading market for our shares of
Common Stock, under the symbol "CDKG." Until the filing of this Form 10, we
have not provided public information and our symbol contained a "skull and
crossbones" insignia on the pink sheets. In 2007, the Pink Sheets Electronic
OTC Markets developed OTC marketiers that were designed to provide investors
with rankings as to how well companies disclosed financial information and
other pertinent information to the public. The marketiers ranged from trusted
to transparent to distressed to dark and finally, toxic. The toxic designation
was noted with a skull and crossbones "caviat emptor" or "buyer beware"
insignia. This designation indicated a public interest concern associated with
the company and blocked the publication of stock quotes on pinksheets.com. The
company now has a "yield sign" which denotes limited information. This tier
indicates that the company has limited financial information or has not been
filing for more than 6 months. This designation does permit publication of
stock quotes on pinksheets.com and the company currently has published quotes
and other information available on pinksheets.com.
31
We are filing this information partly to provide such information to the public
although there can be no assurance that a more substantial market will ever
develop or be maintained. Any market price for shares of our Common Stock is
likely to be very volatile, and numerous factors beyond our control may have a
significant adverse effect. In addition, the stock markets generally have
experienced, and continue to experience, extreme price and volume fluctuations
which have affected the market price of many small capital companies and which
have often been unrelated to the operating performance of these companies.
These broad market fluctuations, as well as general economic and political
conditions, may also adversely affect the market price of our Common Stock.
Further, there is no correlation between the present limited market price of
our Common Stock and our revenues, book value, assets or other established
criteria of value. The present limited quotations of our Common Stock should
not be considered indicative of the actual value of the Company or our Common
Stock.
Future sales of our common stock could put downward selling pressure on our
shares, and adversely affect the stock price. There is a risk that this
downward pressure may make it impossible for an investor to sell his shares at
any reasonable price. Management believes that we currently have approximately
9,000 holders of common stock as of December 21, 2009.
The Company's Common Stock is traded over-the-counter and quoted from time to
time in the Pink Sheets Electronic OTC Markets under the trading symbol
"CDKG.PK". Consequently, there is currently no established public trading
market for the Company's Common Stock. The following table sets forth the range
of high and low bid prices as reported by the Pink Sheets Electronic OTC
Markets for the periods indicated. Such quotations represent inter-dealer
prices without retail markup, markdown, or commission, and may not necessarily
represent actual transactions. As of November 25,2009, the opening bid was $.10
and the closing bid was $.10 with 5000 shares traded.
BID PRICE
CALENDAR YEARS BY QUARTER HIGH LOW
2009 Interim First $0.01 N/A
Second 0.0475 0.01
Third 0.05 0.01
2008 First $0.02 0.01
Second 0.11 0.11
Third 0.05 0.01
Fourth N/A 0.02
2007 First $0.08 0.02
Second 0.48 0.023
Third 0.1 0.03
Fourth 0.02 0.065
32
Shaanxi Xi Deng Hui Technology Stock Co. Ltd. is a holding company which was
established on March 29, 2001 after being restructured as an enterprise with
added capital. The current registered capital is 129,000,000 RMB ($17,793,103
USD). On January 31, 2008, Shaanxi Xi Deng Hui Technology Stock Company, Ltd.
purchased a majority interest in Amstar Financial Holdings, Inc. (formerly
AFLH) in a reverse merger. The company's new name is CHINA DU KANG CO.LTD..,
now listed as CDKG.
Shaanxi Xi Deng Hui Technology Stock Co. Ltd., holds
- 90.51% of Shaanxi Bai Shui Du Kang Liquor Co., Ltd.
- 70% of Shaanxi Bai Shui Du Kang Brand Management Co., Ltd.
These two companies respectively manufacture and sell the famous white wine
known as Du Kang. Du Kang is one of the most famous Chinese white wine brands,
and Shaanxi Bai Shui Du Kang Liquor Co. Ltd owns the "Baishui Du Kang" brand.
Shaanxi Bai Shui Du Kang also owns three other brands of beverage. These
brands include Bai Shui Du Kang, Thirteen Dynasties and Jiu Zu Gong. Shaanxi Xi
Deng Hui Technology Stock Co. Ltd. has also invested 12,000,000 RMB ($1,655,172
USD) into Huanghe Wetland Part Co. Ltd., and holds 7.9% ownership in Huanghe
Wetland Company. Huanghe Wetland Company is engaged in the theme park
business, and began in 2007. At the present, Shaanxi Xi Deng Hui Technology
Stock Co. Ltd. businesses involve the production and sales of Bai Shui Du Kang
liquor, and also focuses on tourism and trading.
Shaanxi Xi Deng Hui Stock Co., Ltd. is the first company to cooperate with The
Chinese Academy of Sciences on a spaceflight Shenzhou and shipped Du Kang yeast
which is used into Du Kang Liquor brewing for the flight. At present, Du Kang
has 6000 ton production capacity per year including (brewing and packaging).
Liquor products unit price ranges from $2.00 USD to $150.00 USD. Du Kang Sales
Co. Ltd. has set and implemented new sales strategy, including "sales territory
covering hundreds of counties" and "1950 project" since July 2007. Du Kang
Liquor products now are sold in most cities in China. In northeast, north and
middle areas of China there are long-term contracts with agencies. In 2007 Du
Kang liquor productions market share has risen 40%. In Shaanxi province we have
franchise stores in Bai Shui, Han Cheng, Fu Ping Pu Cheng, Da Li, Wei Nan city.
Throughout China the Du Kang market sales, awareness and brand image is
broadening.
There are almost 1.5 billion people in China; the liquor consumption market is
very great.
ITEM 10.RECENT SALES OF UNREGISTERED SECURITIES
On or about January 28th 2008 the company issued 88 million shares to Mr. Deng
Guo Gang as trustee for the shareholders of Hongkong Merit Enterprise
("Merit"), limited, a Hongkong business corporation, which shares were in turn
distributed to 9,146 shareholders of merit all of whom where citizens and
residents of The people's Republic of China. Under the terms of the plan of
merger in exchange, we received 100% of the shares of Merit. Thereafter, Merit
exchanged the shares held to their non-U. S. shareholders, being the
shareholders of China Du Kang. As a result of these transactions the business
of a Merit and its subsidiaries became the business of the Company.
33
We believe the securities offered in the exchange, including the common stock,
were issued and sold in reliance upon exemptions from registration contained in
Regulation S promulgated there under, which exempt transactions by an issuer
not involving any public offering and issuances to non-US persons. The issuance
of the shares was undertaken without general solicitation or advertising. Each
recipient of the shares was a non- US person as defined in Regulation S, was
acquiring the shares of for investment purposes and not with a view to any
public resale or other distribution and otherwise met the requirements of
Regulation S. In addition, the stock certificate representing these shares
contained a legend that they are restricted securities under the Securities Act
of 1933 pursuant to Regulation S.
All shares were issued through the following exemptions: Rule 506 and Rule 701
of the securities these were made in three offerings. However the main
exemption to unregistered securities was made through the petition of fairness
listed above (in this section number 1). This petition of fairness relied
under section 3(a)(10) of the Securities Act of 1933 and was approved. An
order granting this petition of fairness was signed on December 18, 2006 by a
judge in State of Nevada, County of Elko, case number CV-C-06-1016. At the time
of the fairness hearing, Amstar had 18,662,000 shares of common stock issued
and outstanding to its shareholders. All of the issued and outstanding shares
of Amstar were exchanged for 18,662,000 shares of common stock of Premier
Organic Farms Group, Inc. The order issued from the fairness hearing covered
the 18,662,000 shares, which represented all of the issued and outstanding
shares at the time. This in effect made all shares issued free trading shares.
Shares officers and control persons are still subject to rule 144 regarding
their disposition of shares.
POFG was originally incorporated in the State of Nevada in January 1997 as US
Power
Systems, Inc. In 2006, the company changed its name to Premier Organic Farms
Group, Inc., following its acquisition of Premier Organic Farms Corporation,
which was an organic farming enterprise utilizing aquaculture and hydroponics
in farming operations. Immediately prior to commencing negotiations with
Amstar, POFG spun off its farming subsidiary in September 2006 through a mutual
rescission agreement, and began focusing its efforts on the multi-billion
dollar mortgage industry opportunity afforded by Amstar.
On or about November 30, 2005 the company issued 100,000,000 shares of
restricted common stock as payment to First American Stock Transfer for
services rendered. This was duly confirmed the board after the event.
POFG's President and Director, Stanley F. Wilson, acquired control of POFG in
March 2006, through the purchase of 100,000,000 shares of the company which
were originally issued to 1st American Transfer, the company's transfer agent,
in November 2005 for unpaid services rendered by the transfer agent. Following
the acquisition of Amstar, Mr. Wilson will be stepping down as an officer and
director of the company, but will provide consulting services to Amstar.
34
On or about April 20, 2006 the Company undertook a private offering, exempted
under Section 4(2) and Rule 504 of Regulation D and 20,000,000 restricted
shares were sold. Stanley F. Wilson had an employment contract to issue
200,000,000 shares of common on or about April 11, 2006 which were canceled on
or about June 6, 2006.
In November, 2006 POFG agreed to issue 18,662,000 shares directly to the
shareholders of Amstar International shareholders in a stock for stock
exchange for all of the issued and outstanding shares of Amstar. The exchange
was submitted for a fairness hearing in the General Courts of Justice in the
State of Nevada under 3(a)10 of the Securities Act of 1933, as amended. An
Order approving the fairness of the exchange was issued in December 2006.
On or about January 31, 2008 the company issued 88,000,000 shares to Zhang Hong
Jun, the sole shareholder of HONGKONG MERIT ENTERPRISE LIMITED ("MERIT"). Mr.
Zhang Hong Jun was a "non-US person," being a citizen and resident of the
People's Republic of China. Mr. Zhang Hong Jun thereafter distributed the
88,000,000 shares to the shareholders of China Du Kang, all of which were "non-
US persons," being citizens and residents of the People's Republic of China. We
believe that the securities exchanged to the non-US persons were private
placements under Section 4(2) under the Securities Act of 1933, as amended and
exempt from registration under Regulation S as promulgated under the Act.
AFLH also issued 362,200 shares of newly issued common voting shares to
Sedgefield Capital Corporation for consulting services rendered by Sedgefield
prior to the reverse acquisition by Hongkong Merit Enterprise Limited. The
Company then changed its name to China Du Kang.
In June, 2008, the Company issued a total of One Million Shares to four
persons, including 850,000 shares 3 non-US persons or entities residing in
China and 150,000 shares to their securities counsel, valued at the market
price of $0.04 per share. These shares were issued to defray costs of
maintaining the public corporation, preparation of business plan information,
conformation of financial and legal information, and related services. We
believe that the securities exchanged to the non-US persons were private
placements under Section 4(2) under the Securities Act of 1933, as amended
and exempt from registration under Regulation S as promulgated under the Act.
ITEM 11.DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The company is only registering its class of common stock at this time. There
are 250,000 of common shares of common stock in the amended articles of
incorporation which were filed in the Nevada Secretary of State on or about
February 11, 2008.
The Company's authorized capital consists of 250,000,000 shares of Common Stock
and 5,000,000 shares of convertible preferred shares, each with par value
$.001. We have issued 100,113,791 shares of Common Stock, which are currently
outstanding and no preferred shares.
35
Common Stock
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Our stockholders may not cumulate
their votes. Except as otherwise required by applicable law, the holders of
shares of Common Stock shall vote together as one class on all matters
submitted to a vote of stockholders of the Corporation (or, if any holders of
shares of Preferred Stock are entitled to vote together with the holders of
Common Stock, as a single class with such holders of shares of Preferred
Stock). Holders of common stock are entitled to share in all dividends that the
board of directors, in its discretion, declares from legally available funds.
Each share of Common Stock shall be entitled to the same rights and privileges
as every other share of Common Stock.
Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. The Common Stock shall be subject to the express terms of the
Preferred Stock and any series of Preferred stock.
In the event of any voluntary or involuntary liquidation, distribution or
winding up of the Corporation, after distribution in full of preferential
amounts to the holders of shares of Preferred Stock, the common stockholders
will be entitled to receive all of the remaining assets of the Corporation.
Each stockholder is entitled to a ratable distribution in proportion to the
number of shares of Common Stock held by them. The Common Stock shall be
subject to the express terms of the Preferred Stock and any series thereof.
Each share of Common Stock shall be equal to every other share of Common Stock,
except as otherwise provided herein or required by law.
Subject to the preferential and other dividend rights applicable to Preferred
Stock, holders of Common Stock shall be entitled to such dividends and other
distributions in cash, stock or property of the Corporation as may be declared
thereon by the Board of Directors from time to time out of assets or funds of
the Corporation legally available therefore. All dividends and distributions on
the Common Stock payable in stock of the Corporation shall be made in shares of
Common Stock.
Preferred Stock
Under Nevada law, we have authorized up to a total of 5,000,000 preferred
shares "blank check" preferred stock. Nevada law permits broad discretion is
determining the rights and preferences of blank check preferred stock. The
Preferred Stock may be issued from time to time in one or more series. All
shares of Preferred Stock shall be of equal rank and shall be identical, except
in respect of the matters that may be fixed and determined by the Board of
Directors as hereinafter provided, and each share of each series shall be
identical with all other shares of such series, except as to the date from
which dividends are cumulative. The preferred stock shall have voting rights
over the voting rights of common stock as established by the Board of
Directors.The Board of Directors hereby is authorized to cause such shares to
be issued in one or more classes or series and with respect to each such class
or series to fix and determine the designation, powers, preferences and rights
of the shares of each such series and the qualifications, limitations or
restrictions thereof.
36
The Board of Directors is authorized to cause preferred shares to be issued in
one or more classes or series and with may designate preferences with respect
to each such class or series. Each class or series may have designations,
powers, preferences and rights with respect to the shares of each such series
as well as qualifications, limitations or restrictions.
Subject to certain limitations prescribed by law and the rights and preferences
of the preferred stock. Each new series of preferred stock may have different
right s and preferences that may be established by our board of directors. We
may offer preferred stock to our officers, directors, holders of 5% or more of
any class of our securities, or similar parties except on the same terms as the
preferred stock is offered to all other existing or new stockholders.
The Board may determine the rights and preferences of future series of
preferred stock such as:
- Shares;
- Dividends;
- Conversion rights to common stock or other securities;
- Voting rights;
- Preferential payments upon liquidation;
- Establishment of reserves for preferred payments; and
- Redemption prices to be paid upon redemption of the preferred stock.
Common Stock - General Provisions. The Common Stock shall be subject to the
express terms of the Preferred Stock and any series thereof. Each share of
Common Stock shall be equal to every other share of Common Stock, except as
otherwise provided herein or required by law.
Shares of Common Stock authorized hereby shall not be subject to preemptive
rights. The holders of shares of Common Stock now or hereafter outstanding
shall have no preemptive right to purchase or have offered to them for purchase
any of such authorized but unissued shares, or any shares of Preferred Stock,
Common Stock or other equity securities issued or to be issued by the Company.
Subject to the preferential and other dividend rights applicable to Preferred
Stock, the holders of shares of Common Stock shall be entitled to receive such
dividends (payable in cash, stock or otherwise) as may be declared on the
Common Stock by the Board of Directors at any time or from time to time out of
any funds legally available therefore.
In the event of any voluntary or involuntary liquidation, distribution or
winding up of the Corporation, after distribution in full of the preferential
or other amounts to be distributed to the holders of shares of Preferred Stock,
the holders of shares of Common Stock shall be entitled to receive all of the
remaining assets of the Corporation available for distribution to its
stockholders, ratably in proportion to the number of shares of Common Stock
held by them.
Common Stock - Other Provisions.
(a) Voting Rights. The shares of Common Stock shall have the following voting
rights:
(1) Each share of Common Stock shall entitle the holder thereof to one vote
upon all matters upon which stockholders have the right to vote.
37
Except as otherwise required by applicable law, the holders of shares of Common
Stock shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation (or, if any holders of shares of Preferred
Stock are entitled to vote together with the holders of Common Stock, as a
single class with such holders of shares of Preferred Stock).
(b) Dividends and Distributions. Except as otherwise provided in this
Certificate of Incorporation, holders of Common Stock shall be entitled to such
dividends and other distributions in cash, stock or property of the Corporation
as may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefore; provided,
however, that in no event may the rate of any dividend payable on outstanding
shares of any class of Common Stock be greater than the dividend rate payable
on outstanding shares of the other class of Common Stock. All dividends and
distributions on the Common Stock payable in stock of the Corporation shall be
made in shares of Common Stock. In no event will shares of Common Stock be
split, divided or combined unless the outstanding shares of the Common Stock
shall be proportionately split, divided or combined.
ITEM 12.INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation provide that we will indemnify any person who is
or was a director, officer, employee, agent or fiduciary of our company to the
fullest extent permitted by applicable law. Nevada law permits a Nevada
corporation to indemnify its directors, officers, employees and agents against
liabilities and expenses they may incur in such capacities in connection with
any proceeding in which they may be involved, if (i) such director or officer
is not liable to the corporation or its stockholders due to the fact that his
or her acts or omissions constituted a breach of his or her fiduciary duties as
a director or officer and the breach of those duties involved intentional
misconduct, fraud or a knowing violation of law, or (ii) he or she acted in
good faith and in a manner reasonably believed to be in or not opposed to our
best interests, or that with respect to any criminal action or proceeding, he
or she had no reasonable cause to believe that his or her conduct was unlawful.
In addition, our bylaws include provisions to indemnify our officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with the action,
suit or proceeding against such persons by reason of serving or having served
as officers, directors, or in other capacities, if such person either is not
liable pursuant to Nevada Revised Statutes 78.138 or acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of our company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendre or its equivalent will not, of
itself, create a presumption that the person is liable pursuant to Nevada
Revised Statutes 78.138 or did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of our
company and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such person's conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable.
There are no provisions in our articles of incorporation or bylaws that would
delay, defer or prevent a change or control.
38
ITEM 13.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCLUDING THE CONSOLIDATED
FINANCIAL STATEMENTS
Flowchart of Business Organization
--------------------------------------------------------
"China Du Kang Co., Ltd. (""Du Kang"")
F/K/A Amstar Financial Holdings, Inc. (""AFLH"")
Incorporated in the State of Nevada on January 16, 1987"
--------------------------------------------------------
\ Acquiring 100% equity interest on 2/11/2008
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Hong Kong Merit Enterprise Limited "Merit"
Incorporated in Hong Kong on September 8, 2006"
--------------------------------------------------------
\ Acquiring 100% equity interest on 1/22/2007
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Huitong Food Development Co., Inc. "Huitong"
Incorporated in Shaanxi Province, PRC on August 9, 2007"
--------------------------------------------------------
\ Acquiring 98.24% equity interest on 12/26/2007
\----------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Xidenghui Technology Stock Co., Ltd. "Xidenghui"
Incorporated in Shaanxi Province, PRC on March 29, 2001"
--------------------------------------------------------
\ \
-------------------------------- \ \ -----------------------------
Acquiring 90.51% equity interest \ \ Acquiring 70% equity interest
on 5/15/2002 \ \ on 11/12/2007
-------------------------------------------- ----------------------------------------
"Shaanxi Baishui Dukang" "Shaanxi Baishui Dukang Liquor Brand
Liquor Co., Ltd. "Dukang Management Co., Ltd. "Brand Management"
Incorporated in Shaanxi Province, Incorporated in Shaanxi Province,
PRC on March 1, 2002" PRC on November 12, 2007"
-------------------------------------------- ----------------------------------------
39
Keith Zhen, our independent registered public accountant, has advised us that
he personally conducted all of the audit field work while present in our office
in Xi'an City, PRC. No foreign audit firm played a role in the preparation or
furnishing of the audit reports. Although Mr. Zhen was trained as an
accountant in the U.S. and maintains his principal office in Brooklyn, New
York, Mr. Zhen has concluded that it is appropriate for him to render the audit
report on our financial statements because Chinese is his native language, he
specializes in providing accounting services to SEC filers whose operations are
located in China, and he spends a considerable portion of each year within the
PRC.
40
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
FINANCIAL REPORT
At December 31, 2008 and 2007 and
For the Years Ended December 31, 2008 and 2007
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
INDEX
PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS F-3
CONSOLIDATED STATEMENTS OF OPERATIONS F-4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-F-33
KEITH K. ZHEN, CA
CERTIFIED PUBLIC ACCOUNTANT
2070 WEST 6TH STREET
BROOKLYN, NY 11223
TEL (347) 408-0693
FAX (347) 602-4686
EMAIL KEITHZHEN@KEITHZHENCPA.COM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
China Du Kang Co., Ltd.
(f/k/a Amstar Financial Holdings, Inc.)
We have audited the accompanying consolidated balance sheets of China Du Kang
Co., Ltd. and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the years in the two-year period ended
December 31, 2008. China Du Kang Co., Ltd.'s management is responsible for
these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of China Du Kang Co., Ltd. and
subsidiaries as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the two-year period
ended December 31, 2008 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 incurred an operating loss for each of
the years in the two-year period ended December 31, 2008, and as of December
31, 2008, has a working capital deficiency and a shareholders' deficiency.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
2. The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/Keith K. Zhen, CPA
- ---------------------
Keith K. Zhen, CPA
Brooklyn, New York
November 6, 2009 (Except for Note 1, Note 4, and Note 13 dated January 4, 2010)
F-2
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2008 2007
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 698,050 $ 737,818
Others receivable 3,494 8,248
Prepaid expenses (Note 5) 511,243 986,285
Inventory (Note 6) 2,959,595 2,267,383
Due from related parties (Note 9) 228,513 7,214
--------------- ---------------
Total current assets 4,400,895 4,006,948
Property, Plant and Equipment, net (Note 7) 3,065,757 3,033,966
Intangible assets, net (Note 8) 76,083 80,473
Long-term investment 1,750,751 1,640,667
--------------- ---------------
Total Assets $ 9,293,486 $ 8,762,054
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 844,240 $ 1,001,622
Accrued expenses (Note 10) 96,627 78,887
Others payable 28,200 25,243
Taxes payable 49,243 42,203
Deferred revenue 395,426 -
Due to related parties (Note 11) 14,318,396 12,206,510
Employee security deposit 78,786 -
--------------- ---------------
Total Current Liabilities 15,810,918 13,354,465
Minority Interest 51,332 133,512
Commitments and Contingencies (Note 15) - -
Stockholders' Equity:
Common stock, par value $0.001, 250,000,000
shares authorized; 100,113,791 shares
issued and outstanding as of December 31, 2008
88,000,000 shares issued and outstanding
as of December 31, 2007 100,114 88,000
Registered capital 19,178,986 19,191,100
Registered capital to-be-received (8,507,724) (8,507,724)
Accumulated deficiency (16,904,363) (15,402,296)
Accumulated other comprehensive income (435,777) (95,003)
--------------- ---------------
Stockholders' Equity (Deficit) (6,568,764) (4,725,923)
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 9,293,486 $ 8,762,054
=============== ===============
See Notes to Consolidated Financial Statements
F-3
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
2008 2007
--------------- ---------------
Revenues
Sales of Liquor $ 953,751 $ 745,115
--------------- ---------------
Gross Profit 1,143,195 745,115
--------------- ---------------
Costs of Revenues
Costs of Liquor Sold 818,554 708,247
Costs of Franchise Fees - -
--------------- ---------------
Total Costs of Sales 818,554 708,247
--------------- ---------------
Gross Profit 324,641 36,868
--------------- ---------------
Operating Expenses
Selling Expenses
Adverting expenses 136,006 184,908
Package design 73,252 -
Promotion expenses 120,592 22,333
Travel and entertainment 41,547 17,675
--------------- ---------------
Total Selling Expenses 371,397 224,916
--------------- ---------------
General and administrative expenses
Payroll 248,828 175,228
Employee benefit and pension 15,510 41,341
Depreciation and amortization expenses 152,953 123,617
Professional fees 319,887 19,430
Consultancy fees 68,758 42,415
Office expenses 126,881 76,064
Vehicle expenses 42,034 40,729
Utilities 23,135 15,981
Rental 161,841 124,924
Repair and maintenance 72,758 113,310
Travel and entertainment 215,369 240,888
Other general and administrative expenses 15,828 165,204
--------------- ---------------
Total Operating Expenses 1,463,782 1,179,131
--------------- ---------------
Total Operating Expenses 1,835,179 1,404,047
Income (Loss) from Operation (1,510,538) (1,367,179)
Other Income (Expenses)
Interest income 3,000 11,947
Charity donation (15,296) -
Other income (expense) (68,957) (169,105)
--------------- ---------------
Total other income (expenses) (81,253) (157,158)
Income before income tax and minority interest (1,591,791) (1,524,337)
Provision for Income Tax - -
--------------- ---------------
Income before Minority Interest (1,591,791) (1,524,337)
Minority Interest 89,724 42,157
--------------- ---------------
Net Income (Loss) $ (1,502,067) $ (1,482,180)
=============== ===============
Basic and Fully Diluted Earnings per Share $ (0.02) $ (0.02)
=============== ===============
Weighted average shares outstanding 98,730,800 88,000,000
=============== ===============
See Notes to Consolidated Financial Statements
F-4
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
2008 2007
------------------ ------------------
Operating Activities
Net income (loss) $ (1,502,067) $ (1,482,180)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Minority interest (89,724) (42,157)
Depreciation 143,314 114,806
Amortization 9,639 8,811
Changes in operating assets and liabilities:
(Increase)/Decrease in accounts payable - -
(Increase)/Decrease in others payable 5,225 5,542
(Increase)/Decrease in prepaid expenses 532,820 663,371
(Increase)/Decrease in supplies (531,695) (728,423)
Increase/(Decrease) in accounts payable (221,103) (39,339)
Increase/(Decrease) in accrued expenses 12,254 (149,894)
Increase/(Decrease) in other payable 1,244 (23,230)
Increase/(Decrease) in taxes payable 4,143 (54,314)
Increase/(Decrease) in deferred revenue 389,289 -
Increase/(Decrease) in employee security deposit 77,563 -
------------------ ------------------
Net cash provided (used) by operating activities (1,169,098) (1,727,006)
Investing Activities
Cash used for long-term investment - (1,575,382)
Cash used to acquire Huitong (136,722) -
Purchase of fixed assets (200,194) (383,070)
Loans to related parties (217,388) -
Payback of loans to related parties - 1,664,029
------------------ ------------------
Net cash (used) by investing activities (554,304) (294,424)
Financing Activities
Proceeds from capital contribution 136,722 136,722
Loans from related parties 1,272,795 1,042,941
Payback of loans from related parties - -
------------------ ------------------
Net cash provided (used) by financing activities 1,409,517 1,179,663
Increase (decrease) in cash (313,885) (841,767)
Effects of exchange rates on cash 274,117 (240,623)
Cash at beginning of period 737,818 1,820,208
------------------ ------------------
Cash at end of period $ 698,050 $ 737,818
================== ==================
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during year for:
Interest $ - $ -
================== ==================
Income taxes $ - $ -
================== ==================
See Notes to Financial Statements
F-5
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Accumulated
Common Stock Additional Registered Retained Other
$0.001 Par Value Paid-in Registered Capital Earnings Comprehensive
Shares Amount Capital Capital to-be-received (Deficit) Income Totals
----------- -------- ---------- ----------- -------------- ------------ ------------- -----------
Balances at
December 31,
2006 1 $ 1 $ - $19,142,377 $ (8,507,724) $(13,920,116) $ 173,301 $(3,112,161)
=========== ======== ========== =========== ============== ============ ============= ===========
Proceeds from
registered capital
contribution-
Huitong - - - 136,722 - - - 136,722
Common stocks
issued for
acquisition of
Merit
(Reverse merger) 88,000,000 88,000 - (88,000) - - - -
Success Mater
share exchange (1) (1) - 1 - - - -
Net income - - - - - (1,482,180) - (1,482,180)
Other
comprehensive
income - - - - - - (268,304) (268,304)
----------- -------- ---------- ----------- -------------- ------------ ------------- -----------
Balances at
December 31,
2007 88,000,000 $ 88,000 $ - $19,191,100 $ (8,507,724) $(15,402,296) $ (95,003) $(4,725,923)
=========== ======== ========== =========== ============== ============ ============= ===========
Reverse merger
adjustment* 12,113,791 12,114 - (12,114) - - - -
Proceeds from
additional
paid-in capital
contribution-
Merit - - - 136,722 - - - 136,722
Cash used for
Merit to
acquire Huitong - - - (136,722) - - - (136,722)
Net income - - - - - (1,502,067) - (1,502,067)
Other
comprehensive
income - - - - - - (340,774) (340,774)
----------- -------- ---------- ----------- -------------- ------------ ------------- -----------
Balances at
December 31,
2008 100,113,791 $100,114 $ - $19,178,986 $ (8,507,724) $(16,904,363) $ (435,777) $(6,568,764)
=========== ======== ========== =========== ============== ============ ============= ===========
*The reverse merger adjustment represents the recording of the minority shareholders' shares outstanding
at the time of the reverse merger.
See Notes to Financial Statements
F-6
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- ORGANIZATION AND BUSINESS BACKGROUND
China Du Kang Co., Ltd ("China Du Kang" or the "Company") was incorporated as
U. S. Power Systems, Inc., in the State of Nevada on January 16, 1987. On or
about June 8, 2006 the Company's name was changed to Premier Organic Farms
Group, Inc. On or about November 30, 2006 the name was changed to Amstar
Financial Holdings, Inc. ("AFLH"). On or about March 18, 2008 the name was
changed to its current name of China Du Kang Co., Ltd. with its corporate
charter still residing in Nevada. The Company changed its fiscal year ending
from September 30 to December 31 in February 2008.
The Company had been engaged in the business to provide various financial
services since it's incorporated. The Company was not successful and
discontinued the majority of its operation by December 31, 2007.
On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the
"Exchange Agreement") with Hong Kong Merit Enterprise Limited ("Merit"), a
holding company incorporated in Hong Kong. Pursuant to the terms of the
Exchange Agreement, the Company agreed to issue post split 88,000,000 shares of
its common stock to the shareholders of Merit in exchange for Merit to transfer
all of its issued and outstanding shares of common stock to the Company,
thereby causing Merit to become a wholly-owned subsidiary of the Company. The
parties closed the transaction contemplated by the Agreement on February 11,
2008.
This transaction is being accounted for as a reverse merger, since the
shareholders of Merit owns a majority of the outstanding shares of the
Company's common stock immediately following the share exchange. Merit is
deemed to be the acquirer in the reverse merger. Consequently, the assets and
liabilities and the historical operations that will reflected in the
consolidated financial statements for periods prior to the share exchange will
be those of Merit and its subsidiaries and will be recorded at the historical
cost basis. After completion of the share exchange, the Company`s consolidated
financial statements will include the assets and liabilities of both Du Kang
and Merit, the historical operations of Merit and the operations of the Company
and its subsidiaries from the closing date of the share exchange.
Merit was incorporated on September 8, 2006 in Hong Kong under the Companies
Ordinances as a Limited Liability company. Merit was formed for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Statement of Financial Accounting Standards (SFAS) No. 7.
F-7
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND BUSINESS BACKGROUND (CONTINUED)
On January 22, 2008, Merit entered into a Share Purchase Agreement (the
"Purchase Agreement") with the owners of Shaanxi Huitong Food Co., Inc.
("Huitong"), a limited liability company incorporated in the People's Republic
of China ("PRC") on August 9, 2007 with a registered capital of $128,200
(RMB1,000,000). Pursuant to the Purchase Agreement, Merit agreed to purchase
100% of the equity ownership in Huitong for a cash consideration of $136,722
(RMB 1,000,000). The local government approved the transaction on February 1,
2008. Subsequent to the completion of the acquisition, Huitong became a
wholly-owned subsidiary of Merit.
Huitong was formed for the purpose of seeking and consummating a merger or
acquisition with a business entity organized as a private corporation,
partnership, or sole proprietorship. On December 26, 2007, Huitong executed an
acquisition agreement with shareholders of Shaanxi Merithui Technology Stock
Co., Ltd. ("Xidenghui"), whereby Huitong agreed to acquire 98.24% of the equity
ownership of Xidenghui from the shareholders. Subsequent to completion of the
acquisition agreement, Xidenghui became a majority-owned subsidiary of Huitong.
Xidenghui was incorporated in Weinan City, Shaanxi Province, PRC on March 29,
2001 under the Company Law of PRC. Xidenghui was engaged in the business of
production and distribution of distilled spirit with a brand name of
"Xidenghui". Currently, its principal business is to hold an equity ownership
interest in Shannxi Baishui Dukang Liquor Co., Ltd. ("Baishui Dukang") and
Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. ("Brand Management").
Baishui Dukang was incorporated in Baishui County, Shanxi Province, PRC on
March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally
engaged in the business of production and distribution of distilled spirit with
a brand name of "Baishui Du Kang". On May 15, 2002, Xidenghui invested
inventory and fixed assets with a total fair value of $ 4,470,219 (RMB
37,000,000) to Baishui Dukang and owns 90.51% of Baishui Dukang's equity
interest ownership, thereby causing Baishui Dukang to become a majority-owned
subsidiary of Xidenghui.
On October 30, 2007, Xidenghui executed an agreement with Mr. Zhang Hongjun, a
PRC citizen, to establish a joint venture, Shaanxi Baishui Dukang Liquor Brand
Management Co., Ltd. ("Brand Management"). Pursuant to the agreement,
Xidenghui contributed cash of $95,704 (RMB 700,000), and owns 70% equity
interest ownership therein. Brand Management was subsequently incorporated on
November 12, 2007. Upon the completion of incorporation, Brand Management
became a majority-owned subsidiary of the Xidenghui. Brand Management is
principally engaged in the business of distribution of Baishui Dukang's liquor
and manage the franchise of the "Baishui Du Kang" brand name.
F-8
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND OPERATIONS (CONTINUED)
Baishui Dukang and Brand Management are the two of these affiliated companies
that are engaged in business operations. Du Kang, Merit, Huitong, and
Xidenghui are holding companies, whose business is to hold an equity ownership
interest in Baishui Dukang and Brand Management. All these affiliated
companies are hereafter referred to as the "Company". Currently, the Company
is principally engaged in the business of production and distribution of
distilled spirit with the brand name of "Baishui Dukang". The Company also
franchises the brand name to other liquor productors. The Company's structure
is summarized in the following chart.
Under the PRC regulations on acquisition of businesses, commonly referred to as
"SAFE" regulations (State Administration of Foreign Exchange), which were
jointly adopted on August 8, 2006 by six PRC regulatory agencies with
jurisdictional Authority, a Chinese entity may not be owned or controlled
directly by foreign investors or shareholders but may be acquired in a two-step
transaction with a wholly owned foreign enterprise ("WOFE").
China Du Kang is the US holding company for Merit, a Hong Kong entity organized
under the Companies Ordinance as a limited liability company. Merit was
established as a WOFE corporation for the purpose of effecting an acquisition
transaction with Huitong, a WOFE corporation incorporated in PRC. Huitong in
turn contracted with Xidenghui, which was a Chinese holding company. Xidenghui
had two subsidiaries, Baishui Dukang and Brand Management.
This arrangement provides separate holding companies for the United States,
Hong Kong, and PRC. This allows the Company to lawfully conduct operations in
China while ownership is represented in shares of the U. S. holding company.
F-9
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION AND OPERATIONS (CONTINUED)
--------------------------------------------------------
"China Du Kang Co., Ltd. (""Du Kang"")
F/K/A Amstar Financial Holdings, Inc. (""AFLH"")
Incorporated in the State of Nevada on January 16, 1987"
--------------------------------------------------------
\ Acquiring 100% equity interest on 2/11/2008
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Hong Kong Merit Enterprise Limited "Merit"
Incorporated in Hong Kong on September 8, 2006"
--------------------------------------------------------
\ Acquiring 100% equity interest on 1/22/2007
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Huitong Food Development Co., Inc. "Huitong"
Incorporated in Shaanxi Province, PRC on August 9, 2007"
--------------------------------------------------------
\ Acquiring 98.24% equity interest on 12/26/2007
\----------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Xidenghui Technology Stock Co., Ltd. "Xidenghui"
Incorporated in Shaanxi Province, PRC on March 29, 2001"
--------------------------------------------------------
\ \
-------------------------------- \ \ -----------------------------
Acquiring 90.51% equity interest \ \ Acquiring 70% equity interest
on 5/15/2002 \ \ on 11/12/2007
-------------------------------------------- ----------------------------------------
"Shaanxi Baishui Dukang" "Shaanxi Baishui Dukang Liquor Brand
Liquor Co., Ltd. "Dukang Management Co., Ltd. "Brand Management"
Incorporated in Shaanxi Province, Incorporated in Shaanxi Province,
PRC on March 1, 2002" PRC on November 12, 2007"
-------------------------------------------- ----------------------------------------
F-10
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2- CONTROL BY PRINCIPAL OWNERS
The directors, executive officers, their affiliates, and related parties own,
directly or indirectly, beneficially and in the aggregate, the majority of the
voting power of the outstanding capital of the Company. Accordingly, directors,
executive officers and their affiliates, if they voted their shares uniformly,
would have the ability to control the approval of most corporate actions,
including approving significant expenses, increasing the authorized capital and
the dissolution, merger or sale of the Company's assets.
NOTE 3- GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $16,904,363 at December 31, 2008 that includes
losses of $1,502,067 and $1,482,180 for the year ended December 31, 2008 and
2007, respectively. In addition, The Company had a working capital deficiency
of $11,410,023 and a shareholders' deficiency of $6,568,764 at December 31,
2008. These factors raise substantial doubt about its ability to continue as a
going concern.
Management has taken steps to revise the Company's operating and financial
requirements. The Company is actively pursuing additional funding and a
potential merger or acquisition candidate and strategic partners, which would
enhance owners' investment. However, there can be no assurance that sufficient
funds required during the next year or thereafter will be generated from
operations or that funds will be available from external sources such as debt
or equity financings or other potential sources. The lack of additional capital
resulting from the inability to generate cash flow from operations or to raise
capital from external sources would force the Company to substantially curtail
or cease operations and would, therefore, have a material adverse effect on its
business. Furthermore, there can be no assurance that any such required funds,
if available, will be available on attractive terms or that they will not have
a significant dilutive effect on the Company's existing stockholders.
The accompanying financial statements do not include any adjustments related to
the recoverability or classification of asset-carrying amounts or the amounts
and classification of liabilities that may result should the Company be unable
to continue as a going concern.
The Company relied heavily for its financing needs on its
shareholders/directors as more fully disclosed in Note 11.
F-11
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Company, which are prepared in accordance with the "Accounting
Principles of China " ("PRC GAAP").
The consolidated financial statements include the accounts of the Company and
all its majority-owned subsidiaries which require consolidation. Inter-company
transactions have been eliminated in consolidation.
FOREIGN CURRENCIES TRANSLATION
The Company maintains its books and accounting records in PRC currency
"Renminbi" ("RMB"), which is determined as the functional currency.
Transactions denominated in currencies other than RMB are translated into RMB
at the exchange rates quoted by the People's Bank of China ("PBOC") prevailing
at the date of the transactions. Monetary assets and liabilities denominated in
currencies other than RMB are translated into RMB using the applicable exchange
rates quoted by the PBOC at the balance sheet dates. Exchange differences are
included in the statements of changes in owners' equity. Gain and losses
resulting from foreign currency transactions are included in operations.
The Company's financial statements are translated into the reporting currency,
the United States Dollar ("US$"). Assets and liabilities of the Company are
translated at the prevailing exchange rate at each reporting period end.
Contributed capital accounts are translated using the historical rate of
exchange when capital is injected. Income and expense accounts are translated
at the average rate of exchange during the reporting period. Translation
adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income (loss) in
the consolidated statement of shareholders' equity.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the statement of changes in owners' equity
and amounted to $(435,778) and $(95,004) as of December 31, 2008 and 2007,
respectively. The balance sheet amounts with the exception of equity at
December 31, 2008 were translated at 6.85 RMB to $1.00 USD as compared to 7.31
RMB at December 31, 2007. The equity accounts were stated at their historical
rate. The average translation rates applied to income statement accounts for
the years ended December 31, 2008 and 2007 were 6.96 RMB and 7.61 RMB,
respectively.
F-12
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the functional currency. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to unaffiliated customer, title and
risk of loss have been transferred, collectability is reasonably assured and
pricing is fixed or determinable.
The Company does not provide an unconditional right of return, price protection
or any other concessions to our customers. Sales returns and other allowances
have been immaterial in our operation.
DEFERRED REVENUE
Deferred revenue consists of prepayments to the Company for products that have
not yet been delivered to the customers. Payments received prior to satisfying
the Company's revenue recognition criteria are recorded as deferred revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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 revenue and expenses during the reporting period.
Actual results when ultimately realized could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid investments which are
unrestricted as to withdrawal or use, and which have original maturities of
three months or less.
13
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents. The Company maintains its cash
and cash equivalents with high-quality institutions. Deposits held with banks
in PRC may not be insured or exceed the amount of insurance provided on such
deposits. Generally these deposits may be redeemed upon demand and therefore
bear minimal risk.
OTHERS RECEIVABLE
Others receivable principally includes advance to employees who are working on
projects on behalf of the Company. After the work is finished, they will
submit expense reports with supporting documents to the accounting department.
Upon being properly approved, the expenses are debited into the relevant
accounts and the advances are credited out. Cash flows from these activities
are classified as cash flows from operating activities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, receivables, prepaid expenses, accounts payable and accrued
expenses, approximates their fair value due to the relatively short-term nature
of these instruments.
INVENTORY
Inventories are stated at the lower of cost or market value. Actual cost is
used to value raw materials and supplies. Finished goods and work-in-progress
are valued on the weighted-average-cost method. Elements of costs in finished
good and work-in-progress include raw materials, direct labor, and
manufacturing overhead.
F-14
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included
in income in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated useful
life of the assets without residual value. The percentages or depreciable life
applied are:
Building and warehouses 20 years
Machinery and equipment 7-10 years
Office equipment and furniture 5 years
Motor vehicles 5 years
INTANGIBLE ASSETS
Intangible assets are carried at cost. Amortization is calculated on a
straight-line basis over the estimated useful life of the assets without
residual value. The percentages or amortizable life applied are:
Land use right 50 years
Trade Mark 10 years
LAND USE RIGHT
All land belongs to the State in PRC. Enterprises and individuals can pay the
State a fee to obtain a right to use a piece of land for commercial purpose or
residential purpose for an initial period of 50 years or 70 years,
respectively. The land use right can be sold, purchased, and exchanged in the
market. The successor owner of the land use right will reduce the amount of
time which has been consumed by the predecessor owner.
The Company owns the right to use a piece of land, approximately 657 acre,
located in Weinan City, Shaanxi Province for a fifty-year period ended February
9, 2051. The costs of these land use rights are amortized over their
prospective beneficial period, using the straight-line method with no residual
value.
F-15
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
LONG-TERM INVESTMENT
On March 1, 2006, Xidenghui executed an investment agreement with Shaanxi
Yichuan Nature Park Co., Inc., pursuant to which, Xidenghui agreed to invest
cash of $1,596,254 (RMB 12,000,000) to establish a join-venture named Huanghe
Shidi Park Co., Inc., and owns 7.9% equity ownership interest therein.
Huanghe Shidi Park Co., Inc. is engaged in the business of recreation and
entertainment.
Xidenghui finished the investment contribuiton in September 2007. As the
project is currently ongoing, the Management believes the amount invested
approximates the fair value and uses the cost method to record the investment.
RELATED PARTIES
For the purposes of these financial statements, parties are considered to be
related if one party has the ability, directly or indirectly, to control the
party or exercise significant influence over the party in making financial and
operating decisions, or vice versa, or where the Company and the party are
subject to common control or common significant influence. Related parties may
be individuals or other entities.
DUE FROM/TO AFFILIATES
Due from/to affiliates represent temporally short-term loans to/from
affiliates, which are directly or indirectly, beneficially and in the
aggregate, majority-owned and controlled by directors and principal
shareholders of the Company. These loans are unsecured, non-interest bearing
and have no fixed terms of repayment, therefore, deemed payable on demand.
Cash flows from due from related parties are classified as cash flows from
investing activities. Cash flows from due to related parties are classified as
cash flows from financing activities.
F-16
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS FROM DIRECTORS AND OFFICERS
Loans from directors and officers are temporally short-term loans from our
directors and officers to finance the Company's operation due to lack of cash
resources. These loans are unsecured, non-interest bearing and have no fixed
terms of repayment, therefore, deemed payable on demand. Cash flows from these
activities are classified as cash flows from financing activates.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 93-7,
"Reporting for Adverting Costs". The advertising costs were $136,006, and
$184,908 for the years ended December 31, 2008 and 2007, respectively.
LEASE
On March 4, 2002, Baishui Dukang signed a lease agreement with Shaanxi Sanjiu
Dukang Liquor Production Co., Ltd ("Sanjiu"), pursuant to which Baishui Dukang
agreed to lease all fixed assets of Sanjiu for a period of 20 years, which was
latterly extended to 30 year. On February 3, 2005, Sanjiu was acquired by
Shannxi Baishui Dukang Liquor Development Co., Ltd. On April 30, 2005, Baishui
Dukang signed a supplemental lease agreement with Shannxi Baishui Dukang Liquor
Development Co., Ltd, pursuant to which Baishui Dukang agreed to continue to
lease all fix assets of Sanjiu for the rest of the original 30-year period.
Baishui Dukang also agreed to pay $362,450 (RMB 3,000,000) to continue the
lease and to absorb the pension and unemployment insurance expenses of Sanjiu's
original employees. Baishui Dukang amortized the 362,450 (RMB 3,000,000) over a
27-year beneficial period. Baishui Dukang paid $161,841 and 124,924 for
Sanjiu's original employees' pension and unemployment insurance expenses in the
year ended December 31, 2008 and 2007, respectively.
VALUE-ADDED TAX ("VAT") (RESTATED)
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company's products that are sold in PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by VAT paid
on purchase of raw materials included in the cost of producing the finished
goods. The Company presents VAT on a net basis.
F-17
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALES TAX (RESTATED)
Baishui Dukang produces and distributes distilled liquor, which is subject to
sales tax in PRC. Sales tax rate is $0.14 (RMB1.00) per kilogram and 10%-20% of
gross sales revenue.The Company presents sales tax on a net basis.
PENSION AND EMPLOYEE BENEFITS
Full time employees of the PRC entities participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labor regulations require
the Company to accrue for these benefits based on certain percentages of the
employees' salaries. The Management believes full time employees who have
passed the probation period are entitled to such benefits. The total
provisions for such employee benefits was $15,510 and $41,341 for the year
ended December 31, 2008 and 2007, respectively.
INCOME TAXES
The Company accounts for income tax using SFAS No. 109 "Accounting for Income
Taxes", which requires the asset and liability approach for financial
accounting and reporting for income taxes. Under this approach, deferred income
taxes are provided for the estimated future tax effects attributable to
temporary differences between financial statement carrying amounts of assets
and liabilities and their respective tax bases, and for the expected future tax
benefits from loss carry-forwards and provisions, if any. Deferred tax assets
and liabilities are measured using the enacted tax rates expected in the years
of recovery or reversal and the effect from a change in tax rates is recognized
in the statement of operations in the period of enactment. A valuation
allowance is provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of the deferred
tax assets will not be realized.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on de-
recognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure, and transition. In
accordance with FIN 48, the Company performed a self-assessment and concluded
that there were no significant uncertain tax positions requiring recognition in
its financial statements.
F-18
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
The Company has accumulated deficit in its operation. Because there is no
certainty that we will realize taxable income in the future, we did no record
any deferred tax benefit as a result of these losses.
STATUTORY RESERVES
Pursuant to the applicable laws in PRC, PRC entities are required to make
appropriations to three non-distributable reserve funds, the statutory surplus
reserve, statutory public welfare fund, and discretionary surplus reserve,
based on after-tax net earnings as determined in accordance with the PRC GAAP,
after offsetting any prior years' losses. Appropriation to the statutory
surplus reserve should be at least 10% of the after-tax net earnings until the
reserve is equal to 50% of the Company's registered capital. Appropriation to
the statutory public welfare fund is 5% to 10% of the after-tax net earnings.
The statutory public welfare fund is established for the purpose of providing
employee facilities and other collective benefits to the employees and is non-
distributable other than in liquidation. Beginning from January 1, 2006,
enterprise is no more required to make appropriation to the statutory public
welfare fund. The Company does not make appropriations to the discretionary
surplus reserve fund.
Since the Company has been accumulating deficiency, no statutory surplus
reserve fund and statutory public welfare reserve fund have been made.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income as defined includes all changes in equity during a period from non-owner
sources. Accumulated comprehensive income, as presented in the accompanying
statements of changes in owners' equity consists of changes in unrealized gains
and losses on foreign currency translation. This comprehensive income is not
included in the computation of income tax expense or benefit.
F-19
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about operating
segments on a basis consistent with the Company's internal organization
structure as well as information about geographical areas, business segments
and major customers in financial statements. The Company currently operates in
two principal business segments.
EARNINGS (LOSS) PER SHARE
The Company reports earnings per share in accordance with the provisions of
SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings (loss)
per share is computed by dividing income (loss) available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were
dilutive. There are no potentially dilutive securities outstanding (options
and warrants) for the years ended December 31, 2008 and 2007, respectively.
F-20
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF MEASUREMENTS
The Company adopted Statement of Financial Accounting Standards No. 157, "Fair
Value Measurements" ("SFAS 157"), effective January 1, 2008. The provisions of
SFAS 157 are to be applied prospectively.
SFAS 157 clarifies that fair value is an estimate of the exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
(i.e., the exit price at the measurement date). Under SFAS 157, fair value
measurements are not adjusted for transaction cost. SFAS 157 provides for use
of a fair value hierarchy that prioritizes inputs to valuation techniques used
to measure fair value into three levels:
LEVEL 1: Unadjusted quoted prices in active markets for identical assets
or liabilities
LEVEL 2: Input other than quoted market prices that are observable,
either directly or indirectly, and reasonably available. Observable
inputs reflect the assumptions market participants would use in
pricing the asset or liability and are developed based on market data
obtained from sources independent of the Company.
LEVEL 3: Unobservable inputs. Unobservable inputs reflect the assumptions
that the Company develops based on available information about what
market participants would use in valuing the asset or liability.
An asset or liability's level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement.
Availability of observable inputs can vary and is affected by a variety of
factors. The Company uses judgment in determining fair value of assets and
liabilities and Level 3 assets and liabilities involve greater judgment than
Level 1 and Level 2 assets or liabilities.
F-21
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF SFAS NO. 157
In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements". SFAS No. 157 defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value measurements.
In February 2008, the FASB issued FASB Staff Position 157-1, "Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13" ("FSP 157-1") and FASB Staff
Position 157-2, "Effective Date of FASB Statement No. 157" ("FSP 157-2"). FSP
157-1 amends SFAS No. 157 to remove certain leasing transactions from its
scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), until fiscal years beginning after
November 15, 2008. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The Company adopted SFAS No. 157 effective January 1, 2008
for all financial assets and liabilities as required. The partial adoption of
FAS No. 157, as allowed by FSP FAS 157-2, did not have a material impact on
the Company's financial position and results of operations.
On October 10, 2008, the FASB issued FSP FAS 157-3, "Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active." The FSP
clarifies the application of FASB Statement No. 157, "Fair Value Measurements,"
in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The FSP is effective
immediately, and includes prior period financial statements that have not yet
been issued.
ADOPTION OF SFAS NO. 159
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115", which is effective for fiscal years beginning after
November 15, 2007. SFAS No. 159 is an elective standard which permits an
entity to choose to measure many financial instruments and certain other items
at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be
reported in earnings. The Company did not elect the fair value option for any
assets or liabilities that were not previously carried at fair value.
Accordingly, the adoption of SFAS 159 did not have a material impact on the
Company's financial position and results of operations.
F-22
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2008, the Financial Accounting Standards Board ("FASB") issued FSP No.
EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities ("FSP EITF 03-6-1"). FSP EITF 03-6-1
concludes that unvested share-based payment awards that contain rights to
receive non-forfeitable dividends or dividend equivalents are participating
securities, and thus, should be included in the two-class method of computing
earnings per share ("EPS"). FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years.
Early application of EITF 03-6-1 is prohibited. It also requires that all
prior-period EPS data be adjusted retrospectively. The Management does not
expect that the adoption of FSP EITF 03-6-1 would have a material effect on the
Company's financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles". SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The guidance will become effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles". The Company is
currently evaluating the impact of adopting SFAS 162 on its financial
statements.
In April 2008, the FASB issued Staff Position FAS 142-3, Determination of the
Useful Life of Intangible Assets ("FSP FAS 142-3") which amends the factors an
entity should consider in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FAS No. 142,
Goodwill and Other Intangible Assets ("FAS No. 142"). FSP FAS 142-3 applies to
intangible assets that are acquired individually or with a group of assets and
intangible assets acquired in both business combinations and asset
acquisitions. It removes a provision under FAS No. 142, requiring an entity to
consider whether a contractual renewal or extension clause can be accomplished
without substantial cost or material modifications of the existing terms and
conditions associated with the asset. Instead, FSP FAS 142-3 requires that an
entity consider its own experience in renewing similar arrangements. An entity
would consider market participant assumptions regarding renewal if no such
relevant experience exists. FSP FAS 142-3 is effective for year ends beginning
after December 15, 2008 with early adoption prohibited. The Management does not
expect that the adoption of FSP FAS 142-3 would have a material effect on the
Company's financial position and results of operations.
F-23
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Hedging Instruments and Hedging Activities -
an amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161, which is
effective January 1, 2009, requires enhanced qualitative and quantitative
disclosures with respect to derivatives and hedging activities. The Management
does not expect that the adoption of SFAS No. 161 would have a material effect
on the Company's financial position and results of operations.
In December 2007, the FASB issued Statements of Financial Accounting Standards
No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") and No. 160,
"Noncontrolling Interests in Consolidated Financial Statements - an amendment
to ARB No. 51" ("SFAS 160"). Both SFAS 141R and SFAS 160 are to be adopted
effective January 1, 2009. SFAS 141R requires the application of several new
or modified accounting concepts that, due to their complexity, could introduce
a degree of volatility in periods subsequent to a material business
combination. SFAS 141R requires that all business combinations result in
assets and liabilities acquired being recorded at their fair value, with
limited exceptions. Other areas related to business combinations that will
require changes from current GAAP include: contingent consideration,
acquisition costs, and contingencies, restructuring costs, in process research
and development and income taxes, among others. SFAS 160 will primarily impact
the presentation of minority or noncontrolling interests within the Balance
Sheet and Statement of Operations as well as the accounting for transactions
with noncontrolling interest holders. The Management does not expect that the
adoption of SFAS 141R and SFAS 160 would have a material effect on the
Company's financial position and results of operations.
F-24
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-PREPAID EXPENSES
Prepaid expenses consist of the following:
December 31, December 31,
2008 2007
------------ -----------
Machinery and parts $ 10,664 $ 2,846
Raw materials and supplies 16,129 438
Packing and supply materials 103,727 493,141
Repair & maintenance - 101,668
Adverting advance - 6,836
Project advance 7,878 -
Advance to consultants - 3,814
Prepaid rental expenses 372,845 364,592
Prepaid office expenses - 12,950
------------ -----------
Total $ 511,243 $ 986,285
============ ===========
NOTE 6-INVENTORIES
Inventories consist of following:
December 31, December 31,
2008 2007
------------ ------------
Finished goods $ 1,131,381 $ 837,493
Work-in-progress 1,564,281 890,085
Raw materials 95,218 296,984
Supplies and packing materials 168,715 242,821
------------ ------------
$ 2,959,595 $ 2,267,383
============ ============
F-25
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7-PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
December 31, December 31,
2008 2007
------------ ------------
Building and warehouses $ 2,913,855 $ 2,607,737
Machinery and equipment 1,820,095 1,615,659
Office equipment and furniture 191,029 151,780
Motor vehicles 491,005 473,304
5,415,984 4,848,480
Less: Accumulated depreciation (2,362,458) (1,862,367)
3,053,526 2,986,113
Add: Construction in progress 12,231 47,853
------------ ------------
Total $ 3,065,757 $ 3,033,966
============ ============
Depreciation expense charged to operations was $143,314 and $114,806 for the years
ended December 31, 2008 and 2007, respectively.
NOTE 8-INTANGIBLE ASSETS
The following is a summary of intangible assets, less amortization:
December 31, December 31,
2008 2007
------------ ------------
Land use right $ 58,471 $ 54,794
Trade Mark of "Xidenghui" 65,653 61,525
Trade Mark of "Baishui Du Kang" 24,073 22,559
Total intangible assets 148,197 138,878
Less: Accumulated amortization (72,114) (58,405)
------------ ------------
Total instangible assets, net $ 76,083 $ 80,473
============ ============
Amortization expense charged to operations was $9,639 and $8,811 for the years
ended December 31, 2008 and 2007, respectively.
F-26
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-DUE FROM RELATED PARTIES
Due from related parties consists of the
following:
December 31, December 31,
Name of Related Party Description 2008 2007
----------- ------------
Shaanxi yellow-river Wetlands Park Co.ltd Affiliate $ 116,717 $ -
Shaanxi Baishui Dukang Trade Co.ltd Affiliate 48,332 7,214
Ms.Fenying Zhang Director 41,580 -
Mr.Yongsheng Wang Director 21,884 -
----------- ------------
Total $ 228,513 $ 7,214
=========== ============
NOTE 10-ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, December 31,
2008 2007
------------ ------------
Accrued Payroll $ 29,374 $ 12,655
Accrued employee benefits 63,331 62,324
Accrued office expenses 3,922 3,908
------------ ------------
Total $ 96,627 $ 78,887
============ ============
NOTE 11-DUE TO RELATED PARTIES
Due to related parties consists of the following:
December 31, December 31,
Name of Related Party Description 2008 2007
------------ ------------
Shaanxi Dukang Group Co., Ltd. Affiliate $ 471,244 $ -
Shaanxi Zhongke Spaceflight Agriculture Development Stock Affiliate 33,512 31,405
Co., Ltd
Shaanxi Baishui Dukang Marketing Management Co.Ltd Affiliate 1,179 13,286
Shaanxi Baishui Dukang Commerce and Trade Co.Ltd Affiliate 72,853 68,975
Shaanxi Baishui Dukang Spirits Industry Development Co.Ltd Affiliate 876,721 444,148
Shaanxi Changjiang electric power and Energy sources Co.Ltd Affiliate 291,792 -
Mr. Hongjun Zhang Director 3,058,821 2,742,484
Mr. Guoqi Diao Director 392,107 367,452
Ms. Ping Li Director 581,438 544,878
Mr. Pingjun Nie Director 4,380,268 4,104,843
Ms. Hong Ge Director 263,991 247,392
Mr.Hailong Tian Director 2,760,680 2,587,092
Ms. Ming Chen Director 355,761 333,391
Mr. Shengli Wang Director 778,029 721,164
------------ ------------
Total $ 14,318,396 $ 12,206,510
============ ============
F-27
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12-SEGMENT REPORTING
The Company operates in two reportable business segments that
are determined based upon differences in products and services.
Summarized information by business segment for the year ended December
31, 2008 and 2007 is as follows:
For the Year Ended
December 31,
2008 2007
------------ -----------
REVENUE
Liquor production and distribution $ 953,751 $ 745,115
Franchise Fees of Brand Names 189,444 -
COST OF SALES
Liquor production and distribution $ 818,554 $ 08,247
Franchise Fees of Brand Names - -
GROSS PROFITS
Liquor production and distribution $ 135,197 $ 36,868
Franchise Fees of Brand Names 189,444 -
December 31,
2008 2007
------------ ------------
TOTAL ASSETS OF LIQUOR PRODUCTION AND DISTRIBUTION $ 6,057,652 $ 5,416,665
TOTAL ASSETS OF BRAND NAME FRANCHISE $ 253,988 $ 133,523
F-28
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13- INCOME TAX
The Company's PRC subsidiaries, Huitong, Xidenghui, Dukang, and Brand
Management, are governed by the Enterprise Income Tax Law of PRC concerning
Foreign Investment Enterprises and Foreign Enterprises and various local income
tax laws ("the Income Tax Laws").
Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law has
replaced the old laws for Domestic Enterprises ("DES") and Foreign Invested
Enterprises ("FIEs").
The key changes are:
a. The new standard EIT rate of 25% replaces the 33% rate applicable to both
DES and FIEs, except for High Tech companies that pay a reduced rate of 15%;
b. Companies established before March 16, 2007 continue to enjoy tax holiday
treatment approved by local government for a grace period of either for the
next 5 years or until the tax holiday term is completed, whichever is sooner.
In addition, the new EIT also grants tax holidays to entities operating in
certain beneficial industries, such as the agriculture, fishing, and
environmental protection. Entities in beneficial industries enjoy a three-year
period tax exempt and a three-year period with 50% reduction in the income tax
rates.
The Company's PRC subsidiaries, Huitong Xidenghui, Dukang, and Brand Management
are subject to effective income tax rate of 25% beginning from January 1, 2008.
F-29
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13- INCOME TAX (CONTINUED)
The following table reconciles the PRC statutory rates to the Company's
effective tax rate:
For the Year Ended
December 31,
2008 2007
------- -------
U.S. Statutory rate 34.00% 34.00%
Foreign income not recognized in USA (34.00%) (34.00%)
PRC income tax rate 25.00% 30.00%
Effect of tax holiday (25.00%) (30.00%)
Effective income tax rate 0.00% 0.00%
As of December 31, 2008 and 2007, the Company had net operating losses of
approximately $15,119,220 and $14,509,725 carried forward from prior years.
Although the PRC Income Tax Law allows the enterprises to offset their future
taxable income with operating losses carried forward in a 5-year period,
enterprises need approval from local tax authority before they can claim such
tax benefit, and the outcome of the application is generally uncertain. In
addition, the Management believes that there is no certainty that the Company
will realize taxable income in the future. Therefore, the Management
established a 100% valuation allowance for the operation losses carried forward
and no deferred tax assets have been recorded as a result of these losses.
F-30
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- OWNERS' EQUITY
AMSTAR FINANCIAL HOLDINGS, INC. ("AFLH")
In February 2008, the Company effected a reverse stock split of its common
stock in the ratio of 1:10. The number of common stocks issued and outstanding
immediately after the reverse stock split was 1,951,574. All share and per
share information included in these consolidated financial statements have been
adjusted to reflect this reverse stock split.
In February 2008, the Company issue post split 8,800,000 shares of common stock
to a shareholder for $260,000. Since this issuance happened before the reverse
merge, the transactions have no affect on the consolidated financial statements
presented.
In February 2008, the Company issue post split 362,214 shares of common stock
to a shareholder for it consultant services. Since this issuance happened
before the reverse merge, the transactions have no affect on the financial
statements presented.
In February 2008, the Company issue post split 1,000,000 shares of common stock
to an consultant and the Company security legal conunsel for their consultant
services. Since this issuance happened before the reverse merge, the
transactions have no affect on the financial statements presented.
In February 2008, the Company issued post split 88,000,000 shares of its common
stock to acquire 100% of Merit's equity ownership interest, thereby causing
Merit to become a wholly-owned subsidiary of the Company.
HONG KONG MERIT ENTERPRISE LIMITED ("MERIT")
The Articles of Incorporation authorized Merit to issue 10,000 shares of common
stock with a par value of $0.128 (HK$ 1.00). Upon formation of the Company,
one share of common stock was issued for $0.128 (HK$ 1.00) on September 8,
2006.
In January 2008, the shareholders contributed $136,722 (RMB 1,000,000) as
additional paid-in capital for the acquisition of Huitong. The proceed was
subsequently paid to the prior owners of Huitong.
F-31
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14- OWNERS' EQUITY (CONTINUED)
SHAANXI HUITONG FOOD DEVELOPMENT CO., LTD. ("HUITONG")
In accordance with the Articles of Incorporation of Huitong, the registered
capital at the date of incorporation on August 9, 2007 was $136,722
(RMB1,000,000), which was fully paid in cash by two individual owners.
SHAANXI XIDENGHUI TECHNOLOGY STOCK CO., LTD. ("XIDENGHUI")
In accordance with the Articles of Incorporation of Xidenghui, the registered
capital at the date of incorporation on March 29, 2001 was $5,557,569
(RMB46,000,000). Upon formation of Xidenghui, owners contributed cash of
$1,915,549 (RMB 15,855,000) and properties of $3,642,020 (RMB 30,145,000) into
Xidenghui toward registered capital.
On December 15, 2001, Xidenghui amended its Bylaws to increase its registered
capital to $10,825,176 (RMB 89,600,000). New owners contributed cash of $
5,076,717(RMB 42,020,000) and property of $190,890 (RMB 1,580,000) into
Xidenghui toward registered capital.
On March 1, 2005, Xidenghui amended its Bylaws to increase its registered
capital to $19,485,320 (RMB 16,280,000).
SHAANXI BAISHUI DUKANG LIQUOR CO., LTD. ("BAISHUI DUKANG")
In accordance with the Articles of Incorporation of Zhongke, the registered
capital at the date of incorporation on March 1, 2002 was $362,450
(RMB3,000,000), , which was fully paid in cash by two individual owners.
On May 15, 2002, Baishui Dukang amended its Bylaws to increase its registered
capital to $4,832,669 (RMB 40,000,000). A new owner, Xidenghui, contributed
properties of $4,470,219 (RMB 37,000,000) to Baishui Dukang toward registered
capital, and owns 90.51% equity ownership interest in Baishui Dukang.
SHAANXI BAISHUI DUKANG LIQUOR BRAND MANAGEMENT CO., LTD. ("BRAND MANAGEMENT")
In accordance with the Articles of Incorporation of Brand Management, the
registered capital at the date of incorporation on November 12, 2007 was
$136,722 (RMB1,000,000), which was fully paid in cash by two individual owners.
F-32
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITY FROM PRIOR OPERATION
Prior to the merger with Hong Kong Merit Enterprise Limited on February 11,
2008, the Company has not been active since discontinuing its financial service
operations by December 31,2007. Management believes that there are no valid
outstanding liabilities from prior operations. If a creditor were to come
forward and claim a liability, the Company has committed to contest such claim
to the fullest extent of the law. No amount has been accrued in the financial
statements for this contingent liability.
THE COMPANY'S ASSETS ARE LOCATED IN PRC AND REVENUES ARE DERIVED FROM
OPERATIONS IN PRC.
In terms of industry regulations and policies, the economy of PRC has been
transitioning from a planned economy to market oriented economy. Although in
recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reforms, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in PRC are still owned by the Chinese government. For example, all lands are
state owned and are leased to business entities or individuals through
governmental granting of Land Use Rights. The Chinese government also exercises
significant control over PRC's economic growth through the allocation of
resources and providing preferential treatment to particular industries or
companies. Uncertainties may arise with changing of governmental policies and
measures.
The Company faces a number of risks and challenges not typically associated
with companies in North America and Western Europe, since its assets exist
solely in the PRC, and its revenues are derived from its operations therein.
The PRC is a developing country with an early stage market economic system,
overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are in a state of change. The
PRC also faces many social, economic and political challenges that may produce
major shocks and instabilities and even crises, in both its domestic arena and
in its relationships with other countries, including the United States. Such
shocks, instabilities and crises may in turn significantly and negatively
affect the Company's performance.
F-33
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
FINANCIAL REPORT
At September 30, 2009 and December 31, 2008 and
For the Three and Nine Months Ended September 30, 2009 and 2008
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
INDEX
PAGE
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6-F-30
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2009 2008
(unaudited)
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 606,691 $ 698,050
Others receivable 71,270 3,494
Prepaid expenses (Note 6) 602,012 511,243
Inventory (Note 7) 2,895,844 2,959,595
Due from related parties (Note 10) 768,769 228,513
--------------- ---------------
Total current assets 4,944,586 4,400,895
Property, Plant and Equipment, net (Note 8) 2,755,079 3,065,757
Intangible assets, net (Note 9) 68,834 76,083
Long-term investment 1,753,156 1,750,751
--------------- ---------------
Total Assets $ 9,521,655 $ 9,293,486
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank loans $ 292,193 $ -
Accounts payable 780,063 844,240
Accrued expenses (Note 11) 195,462 96,627
Others payable 37,781 28,200
Taxes payable 171,965 49,243
Deferred revenue 384,833 395,426
Due to related parties (Note 12) 14,306,467 14,318,396
Employee Security deposit 77,140 78,786
--------------- ---------------
Total Current Liabilities 16,245,904 15,810,918
--------------- ---------------
Commitments and Contingencies (Note 15) - -
Shareholders' Equity:
China Du Kang Co., Ltd. Shareholders' Equity
Preferred stock, par value $0.001,
5,000,000 shares authorized;
no shares issued and outstanding as of
September 30, 2009 and December 31, 2008 - -
Common stock, par value $0.001, 250,000,000
shares authorized; 100,113,791 shares issued
and outstanding as of September 30, 2009
and December 31, 2008 100,114 100,114
Registered capital 19,178,986 19,178,986
Registered capital to-be-received (8,507,724) (8,507,724)
Deficit accumulated during the development stage (17,070,657) (16,904,363)
Accumulated other comprehensive income (444,772) (435,777)
--------------- ---------------
Total China Du Kang Co., Ltd. Shareholders' equity (deficit) (6,744,053) (6,568,764)
Noncontrolling Interest 19,804 51,332
--------------- ---------------
Total Shareholders' Equity (6,724,249) (6,517,432)
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 9,521,655 $ 9,293,486
=============== ===============
See Notes to Consolidated Financial Statements
F-2
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
---------------- ---------------- ---------------- ----------------
Revenues
Sales of Liquor $ 306,101 $ 291,999 $ 805,843 $ 722,299
Franchise Fees 485,546 49,249 681,056 104,332
---------------- ---------------- ---------------- ----------------
Gross Profit 791,647 341,248 1,486,899 826,631
---------------- ---------------- ---------------- ----------------
Costs of Revenues
Costs of Liquor Sold 330,249 282,538 851,115 677,831
Costs of Franchise Fees - - - -
---------------- ---------------- ---------------- ----------------
Total Costs of Sales 330,249 282,538 851,115 677,831
---------------- ---------------- ---------------- ----------------
Gross Profit 461,398 58,710 635,784 148,800
Operating Expenses
Selling Expenses
Sales commission 1 ,096 - 2,723 -
Adverting expenses 16,074 48,301 28,188 115,082
Package Design - 29,038 12,766 72,869
Promotion expenses 14,171 61,386 25,147 71,479
Travel and entertainment 2,822 9,774 20,462 33,839
---------------- ---------------- ---------------- ----------------
Total Selling Expenses 34,163 148,499 89,286 293,269
---------------- ---------------- ---------------- ----------------
General and administrative expenses
Payroll 49,726 60,649 167,437 185,589
Employee benefit and pension 4,846 5,930 15,372 12,337
Depreciation and amortization expenses 33,749 38,546 117,117 112,103
Professional fees - 10,754 7,365 318,045
Consultancy fees - 2,521 2,283 138,727
Office expenses 17,650 64,087 79,576 103,980
Vehicle expenses 12,467 8,956 22,566 37,369
Utilities (1,370) 10,350 9,477 18,035
Rental 40,354 41,086 126,157 122,045
Repair and maintenance 731 1,489 2,422 69,867
Travel and entertainment 27,100 46,840 96,439 194,600
Other general and administrative expenses - - - -
---------------- ---------------- ---------------- ----------------
Total Operating Expenses 185,253 291,208 646,211 1,312,697
---------------- ---------------- ---------------- ----------------
Total Operating Expenses 219,416 439,707 735,497 1,605,966
---------------- ---------------- ---------------- ----------------
Income (Loss) from Operation 241,982 (380,997) (99,713) (1,457,166)
Other Income (Expenses)
Interest income 304 849 1,054 2,016
Interest expense (5,156) - (13,674) -
Charity donation (1,461) (1,006) (1,534) (15,216)
Other income (expense) 8,472 (28,592) 8,165 (26,979)
---------------- ---------------- ---------------- ----------------
Total other income (expenses) 2,159 (28,749) (5,989) (40,179)
---------------- ---------------- ---------------- ----------------
Income before Provision for Income Tax 244,141 (409,746) (105,702) (1,497,345)
Provision for Income Tax (92,198) - (92,198) -
---------------- ---------------- ---------------- ----------------
Net Income (Loss) 151,943 (409,746) (197,900) (1,497,345)
Less: Net income attributable to
noncontrolling interest 2,963 21,414 31,606 80,911
---------------- ---------------- ---------------- ----------------
Net Income attributable to
China Du Kang Co., Ltd. $ 154,906 $ (388,332) $ (166,294) $ (1,416,434)
================ ================ ================ ================
Basic and Fully Diluted Earnings per Share $ 0.00 $ (0.00) $ (0.00) $ (0.01)
================ ================ ================ ================
Weighted average shares outstanding 100,113,791 94,581,826 100,113,791 98,269,803
================ ================ ================ ================
See Notes to Consolidated Financial Statements
F-3
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30,
2009 2008
(unaudited) (unaudited)
----------------- -------------------
Operating Activities
Net income (loss) $ (166,294) $ (1,416,434)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Minority interest (31,606) (80,911)
Depreciation 109,762 104,911
Amortization 7,355 7,192
Changes in operating assets and liabilities:
(Increase)/Decrease in others payable (67,719) 5,525
(Increase)/Decrease in prepaid expenses (89,464) 171,065
(Increase)/Decrease in supplies 70,885 (162,037)
Increase/(Decrease) in accounts payable (66,179) (33,787)
Increase/(Decrease) in accrued expenses 98,530 99,543
Increase/(Decrease) in other payable 9,506 (1,317)
Increase/(Decrease) in taxes payable 122,514 (9,134)
Increase/(Decrease) in deferred revenue (11,545) 389,035
Increase/(Decrease) in security deposit (1,836) 57,153
----------------- -------------------
Net cash provided (used) by operating activities (16,091) (869,196)
Investing Activities
Purchase of fixed assets (74,804) (166,269)
Payback of loans to related parties - -
Loans to related parties (325,736) (55,227)
----------------- -------------------
Net cash (used) by investing activities (400,540) (221,496)
Financing Activities
Bank loans 291,983 -
Loans from related parties - 492,910
Payback of loans from related parties (46,657) -
----------------- -------------------
Net cash provided (used) by financing activities 245,326 492,910
Increase (decrease) in cash (171,305) (597,782)
Effects of exchange rates on cash 79,946 204,343
Cash at beginning of period 698,050 737,818
----------------- -------------------
Cash at end of period $ 606,691 $ 344,379
================= ===================
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during year for:
Interest $ 13,674 $ -
================= ===================
Income taxes $ - $ -
================= ===================
See Notes to Financial Statements
F-4
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock Additional Registered Retained Other Total
$0.001 Par Value Paid-in Registered Capital Earnings Comprehensive Noncontrolling Shareholders' Comprehensive
Shares Amount Capital Capital to-be-received (Deficit) Income Interest Equity Income
------ ------ ---------- ---------- -------------- --------- ------------- -------------- -------------- --------------
Balances at
December 31, 2006 1 $ 1 $ - $ 19,142,377 $ (8,507,724) $ (13,920,116) $ 173,301 $ 127,896 $ (2,984,265)
Proceeds from registered capital
contribution-Huitong - - - 136,722 - - - - 136,722
Common stocks issued for
acquisition of Merit
(Reverse merger) 88,000,000 88,000 - (88,000) - - - - -
Success Mater
share exchange (1) (1) - 1 - - - - -
Comprehensive income
Net income - - - - - (1,482,180) - (42,157) (1,524,337) $ (1,524,337)
Other comprehensive income,
net of tax: Effects of foreign
currency conversion - - - - - - (268,304) 47,773 (220,531) (220,531)
Total other comprehensive income - - - - - - - - - (220,531)
Total comprehensive income - - - - - - - - - $ (1,744,868)
Balances at
December 31, 2007 88,000,000 $ 88,000 $ - $ 19,191,100 $ (8,507,724 $ (15,402,296) $ (95,003) $ 133,512 $ (4,592,411)
---------- --------- ---- ------------ ------------- -------------- ---------- --------- -------------- --------------
Reverse merger adjustment* 12,113,791 12,114 - (12,114) - - - - -
Proceeds from additional paid-in
captial contribution-Merit - - - 136,722 - - - - - 136,722
Cash used for Merit to
acquire Huitong - - - (136,722) - - - - - (136,722)
Comprehensive income
Net income - - - - - (1,502,067) - (89,724) (1,591,791) $ (1,591,791)
Other comprehensive income,
net of tax: Effects of foreign
currency conversion - - - - - - (340,774) 7,544 (333,230) (333,230)
Total other comprehensive income - - - - - - - - - (333,230)
Total comprehensive income - - - - - - - - - $ (1,925,021)
---------- --------- ---- ------------ ------------- -------------- ---------- --------- -------------- --------------
Balances at
December 31, 2008 100,113,791 $ 100,114 $ - $ 19,178,986 $ (8,507,724) $ (16,904,363) $ (435,777) $ 51,332 $ (6,517,432)
=========== ========= ==== ============ ============= ============== ========== ========== ============== ===============
Comprehensive income
Net income - - - - - (166,294) - (31,606) (197,900) $ (197,900)
Other comprehensive income,
net of tax:Effects of foreign
currency conversion - - - - - - (8,995) 78 (8,917) (8,917)
Total other comprehensive income - - - - - - - - - (8,917)
Total comprehensive income - - - - - - - - - $ (206,817)
---------- --------- ---- ------------ ------------- -------------- ---------- --------- -------------- --------------
Balances at
September 30, 2009 100,113,791 $ 100,114 $ - $ 19,178,986 $ (8,507,724) $ (17,070,657) $ (444,772) $ 19,804 $ (6,724,249)
=========== ========= ==== ============ ============= ============== ========== ========== ============== ===============
*The reverse merger adjustment represents the recording of the minority shareholders' shares outstanding
at the time of the reverse merger.
See Notes to Financial Statements
F-5
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited financial statements of China Du Kang Co., Ltd. and
subsidiaries, (the "Company" or "Du Kang") were prepared pursuant to the rules
and regulations of the United States Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. Management of the Company ("Management") believes that
the following disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
audited financial statements and the notes for the year ended December 31,
2008.
These unaudited financial statements reflect all adjustments, consisting only
of normal recurring adjustments that, in the opinion of Management, are
necessary to present fairly the financial position and results of operations of
the Company for the periods presented. Operating results for the three and nine
months ended September 30, 2009, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009.
NOTE 2-ORGANIZATION AND BUSINESS BACKGROUND
China Du Kang Co., Ltd ("Du Kang" or the "Company") was incorporated as U. S.
Power Systems, Inc., in the State of Nevada on January 16, 1987. On or about
June 8, 2006 the Company's name was changed to Premier Organic Farms Group,
Inc. On or about November 30, 2006 the name was changed to Amstar Financial
Holdings, Inc. ("AFLH"). On or about March 18, 2008 the name was changed to its
current name of China Du Kang Co., Ltd. with its corporate charter still
residing in Nevada. The Company changed its fiscal year ending from September
30 to December 31 in February 2008.
The Company had been engaged in the business to provide various financial
services since it's incorporated. The Company was not successful and
discontinued the majority of its operation by December 31, 2007.
On January 10, 2008, the Company entered into a Plan of Exchange Agreement (the
"Agreement") with Hong Kong Merit Enterprise Limited ("Merit"), a holding
company incorporated in Hong Kong. Pursuant to the terms of the Agreement, the
Company agreed to issue post split 88,000,000 shares of its common stock to the
shareholder(s) of Merit in exchange for Merit to transfer all of its issued and
outstanding shares of common stock to the Company, thereby causing Merit to
become a wholly-owned subsidiary of the Company. Merit also agreed to pay
$260,000 to the Company at closing. The parties closed the transaction
contemplated by the Agreement on February 11, 2008.
F-6
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-ORGANIZATION AND BUSINESS BACKGROUND (CONTINUED)
This transaction is being accounted for as a reverse merger, since the
shareholders of Merit owns a majority of the outstanding shares of the
Company's common stock immediately following the share exchange. Merit is
deemed to be the acquirer in the reverse merger. Consequently, the assets and
liabilities and the historical operations that will reflected in the
consolidated financial statements for periods prior to the share exchange will
be those of Merit and its subsidiaries and will be recorded at the historical
cost basis. After completion of the share exchange, the Company`s consolidated
financial statements will include the assets and liabilities of both Du Kang
and Merit, the historical operations of Merit and the operations of the Company
and its subsidiaries from the closing date of the share exchange.
Merit was incorporated on September 8, 2006 in Hong Kong under the Companies
Ordinances as a Limited Liability company. Merit was formed for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship as
defined by Statement of Financial Accounting Standards (SFAS) No. 7.
On January 22, 2008, Merit entered into a Share Purchase Agreement (the
"Purchase Agreement") with the owners of Shaanxi Huitong Food Co., Inc.
("Huitong"), a limited liability company incorporated in the People's Republic
of China ("PRC") on August 9, 2007 with a registered capital of $128,200
(RMB1,000,000). Pursuant to the Purchase Agreement, Merit agreed to purchase
100% of the equity ownership in Huitong for a cash consideration of $136,722
(RMB 1,000,000). The local government approved the transaction on February 1,
2008. Subsequent to the completion of the acquisition, Huitong became a
wholly-owned subsidiary of Merit.
Huitong was formed for the purpose of seeking and consummating a merger or
acquisition with a business entity organized as a private corporation,
partnership, or sole proprietorship. On December 26, 2007, Huitong executed
an acquisition agreement with shareholders of Shaanxi Merithui Technology Stock
Co., Ltd. ("Xidenghui"), whereby Huitong agreed to exchange 100% of its issued
and outstanding capital for 98.24% of the equity ownership of Xidenghui.
Subsequent to completion of the acquisition agreement, Xidenghui became a
majority-owned subsidiary of Huitong.
Xidenghui was incorporated in Weinan City, Shannxi Province, PRC on March 29,
2001 under the Company Law of PRC. Xidenghui was engaged in the business of
production and distribution of distilled spirit with a brand name of
"Xidenghui". Currently, its principal business is to hold an equity ownership
interest in Shannxi Baishui Dukang Liquor Co., Ltd. ("Baishui Dukang") and
Shaanxi Baishui Dukang Liquor Brand Management Co., Ltd. ("Brand Management").
F-7
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-ORGANIZATION AND BUSINESS BACKGROUND (CONTINUED)
Baishui Dukang was incorporated in Baishui County, Shanxi Province, PRC on
March 1, 2002 under the Company Law of PRC. Baishui Dukang was principally
engaged in the business of production and distribution of distilled spirit with
a brand name of "Baishui Du Kang". On May 15, 2002, Xidenghui invested
inventory and fixed assets with a total fair value of $ 4,470,219 (RMB
37,000,000) to Baishui Dukang and owns 90.51% of Baishui Dukang's equity
interest ownership, thereby causing Baishui Dukang to become a majority-owned
subsidiary of Xidenghui.
On October 30, 2007, Xidenghui executed an agreement with Mr. Zhang Hongjun, a
PRC citizen, to establish a joint venture, Shaanxi Baishui Dukang Liquor Brand
Management Co., Ltd. ("Brand Management"). Pursuant to the agreement,
Xidenghui contributed cash of $95,704 (RMB 700,000), and owns 70% equity
interest ownership therein. Brand Management was subsequently incorporated on
November 12, 2007. Upon the completion of incorporation, Brand Management
became a majority-owned subsidiary of the Xidenghui. Brand Management is
principally engaged in the business of distribution of Baishui Dukang's liquor
and manage the franchise of the "Baishui Du Kang" brand name.
Baishui Dukang and Brand Management are the two of these affiliated companies
that are engaged in business operations. Du Kang, Merit, Huitong, and
Xidenghui are holding companies, whose business is to hold an equity ownership
interest in Baishui Dukang and Brand Management. All these affiliated
companies are hereafter referred to as the "Company". Currently, the Company
is principally engaged in the business of production and distribution of
distilled spirit with the brand name of "Baishui Dukang". The Company also
franchises the brand name to other liquor productors. The Company's structure
is summarized in the following chart.
Under the PRC regulations on acquisition of businesses, commonly referred to as
"SAFE" regulations (State Administration of Foreign Exchange), which were
jointly adopted on August 8, 2006 by six PRC regulatory agencies with
jurisdictional Authority, a Chinese entity may not be owned or controlled
directly by foreign investors or shareholders but may be acquired in a two-step
transaction with a wholly owned foreign enterprise ("WOFE").
China Du Kang is the US holding company for Merit, a Hong Kong entity organized
under the Companies Ordinance as a limited liability company. Merit was
established as a WOFE corporation for the purpose of effecting an acquisition
transaction with Huitong, a WOFE corporation incorporated in PRC. Huitong in
turn contracted with Xidenghui, which was a Chinese holding company. Xidenghui
had two subsidiaries, Baishui Dukang and Brand Management.
F-8
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-ORGANIZATION AND BUSINESS BACKGROUND (CONTINUED)
This arrangement provides separate holding companies for the United States,
Hong Kong, and PRC. This allows the Company to lawfully conduct operations in
China while ownership is represented in shares of the U. S. holding company.
--------------------------------------------------------
"China Du Kang Co., Ltd. (""Du Kang"")
F/K/A Amstar Financial Holdings, Inc. (""AFLH"")
Incorporated in the State of Nevada on January 16, 1987"
--------------------------------------------------------
\ Acquiring 100% equity interest on 2/11/2008
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Hong Kong Merit Enterprise Limited "Merit"
Incorporated in Hong Kong on September 8, 2006"
--------------------------------------------------------
\ Acquiring 100% equity interest on 1/22/2008
\ -------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Huitong Food Development Co., Inc. "Huitong"
Incorporated in Shaanxi Province, PRC on August 9, 2007"
--------------------------------------------------------
\ Acquiring 98.24% equity interest on 12/26/2007
\----------------------------------------------
\
\
\
--------------------------------------------------------
"Shaanxi Xidenghui Technology Stock Co., Ltd. "Xidenghui"
Incorporated in Shaanxi Province, PRC on March 29, 2001"
--------------------------------------------------------
\ \
-------------------------------- \ \ -----------------------------
Acquiring 90.51% equity interest \ \ Acquiring 70% equity interest
on 5/15/2002 \ \ on 11/12/2007
-------------------------------------------- ----------------------------------------
"Shaanxi Baishui Dukang" "Shaanxi Baishui Dukang Liquor Brand
Liquor Co., Ltd. "Dukang Management Co., Ltd. "Brand Management"
Incorporated in Shaanxi Province, Incorporated in Shaanxi Province,
PRC on March 1, 2002" PRC on November 12, 2007"
-------------------------------------------- ----------------------------------------
F-9
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3-CONTROL BY PRINCIPAL OWNERS
The directors, executive officers, their affiliates, and related parties own,
directly or indirectly, beneficially and in the aggregate, the majority of the
voting power of the outstanding capital of the Company. Accordingly, directors,
executive officers and their affiliates, if they voted their shares uniformly,
would have the ability to control the approval of most corporate actions,
including approving significant expenses, increasing the authorized capital and
the dissolution, merger or sale of the Company's assets.
NOTE 4-GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company
had an accumulated deficit of $17,070,657 at September 30, 2009 that includes
losses of $166,294 and $1,502,067 for the nine months ended September 30, 2009
and the year ended December 31, 2008, respectively. In addition, The Company
had a working capital deficiency of $11,301,318 and a shareholders' deficiency
of $6,724,249 at September 30, 2009. These factors raise substantial doubt
about its ability to continue as a going concern.
Management has taken steps to revise the Company's operating and financial
requirements. The Company is actively pursuing additional funding and a
potential merger or acquisition candidate and strategic partners, which would
enhance owners' investment. However, there can be no assurance that sufficient
funds required during the next year or thereafter will be generated from
operations or that funds will be available from external sources such as debt
or equity financings or other potential sources. The lack of additional capital
resulting from the inability to generate cash flow from operations or to raise
capital from external sources would force the Company to substantially curtail
or cease operations and would, therefore, have a material adverse effect on its
business. Furthermore, there can be no assurance that any such required funds,
if available, will be available on attractive terms or that they will not have
a significant dilutive effect on the Company's existing stockholders.
The accompanying financial statements do not include any adjustments related to
the recoverability or classification of asset-carrying amounts or the amounts
and classification of liabilities that may result should the Company be unable
to continue as a going concern.
The Company relied heavily for its financing needs on its
shareholders/directors as more fully disclosed in Note 12.
F-10
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Company, which are prepared in accordance with the "Accounting
Principles of China " ("PRC GAAP").
The consolidated financial statements include the accounts of the Company and
all its majority-owned subsidiaries which require consolidation. Inter-company
transactions have been eliminated in consolidation.
FOREIGN CURRENCIES TRANSLATION
The Company maintains its books and accounting records in PRC currency
"Renminbi" ("RMB"), which is determined as the functional currency.
Transactions denominated in currencies other than RMB are translated into RMB
at the exchange rates quoted by the People's Bank of China ("PBOC") prevailing
at the date of the transactions. Monetary assets and liabilities denominated in
currencies other than RMB are translated into RMB using the applicable exchange
rates quoted by the PBOC at the balance sheet dates. Exchange differences are
included in the statements of changes in owners' equity. Gain and losses
resulting from foreign currency transactions are included in operations.
The Company's financial statements are translated into the reporting currency,
the United States Dollar ("US$"). Assets and liabilities of the Company are
translated at the prevailing exchange rate at each reporting period end.
Contributed capital accounts are translated using the historical rate of
exchange when capital is injected. Income and expense accounts are translated
at the average rate of exchange during the reporting period. Translation
adjustments resulting from translation of these consolidated financial
statements are reflected as accumulated other comprehensive income (loss) in
the consolidated statement of shareholders' equity.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the statement of changes in owners' equity
and amounted to $(444,772) and $(435,777) as of September 30, 2009 and December
31, 2008, respectively. The balance sheet amounts with the exception of equity
at September 30, 2009 were translated at 6.838 RMB to $1.00 USD as compared to
6.854 RMB at December 31, 2008. The equity accounts were stated at their
historical rate. The average translation rates applied to income statement
accounts for the nine months ended September 30, 2009 and 2008 were 6.843 RMB
and 7.00 RMB, respectively.
F-11
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
In accordance with FASB guidance, cash flows from the Company's operations is
calculated based upon the functional currency. As a result, amounts related to
assets and liabilities reported on the statement of cash flows may not
necessarily agree with changes in the corresponding balances on the balance
sheet.
REVENUE RECOGNITION
The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to unaffiliated customer, title and
risk of loss have been transferred, collectability is reasonably assured and
pricing is fixed or determinable.
The Company does not provide an unconditional right of return, price protection
or any other concessions to our customers. Sales returns and other allowances
have been immaterial in our operation.
DEFERRED REVENUE
Deferred revenue consists of prepayments to the Company for products that have
not yet been delivered to the customers. Payments received prior to satisfying
the Company's revenue recognition criteria are recorded as deferred revenue.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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 revenue and expenses during the reporting period.
Actual results when ultimately realized could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, deposits in banks with
maturities of three months or less, and all highly liquid investments which are
unrestricted as to withdrawal or use, and which have original maturities of
three months or less.
F-12
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents. The Company maintains its cash
and cash equivalents with high-quality institutions. Deposits held with banks
in PRC may not be insured or exceed the amount of insurance provided on such
deposits. Generally these deposits may be redeemed upon demand and therefore
bear minimal risk.
OTHERS RECEIVABLE
Others receivable principally includes advance to employees who are working on
projects on behalf of the Company. After the work is finished, they will
submit expense reports with supporting documents to the accounting department.
Upon being properly approved, the expenses are debited into the relevant
accounts and the advances are credited out. Cash flows from these activities
are classified as cash flows from operating activities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, receivables, prepaid expenses, accounts payable, and accrued
expenses, approximates their fair value due to the relatively short-term nature
of these instruments.
INVENTORY
Inventories are stated at the lower of cost or market value. Actual cost is
used to value raw materials and supplies. Finished goods and work-in-progress
are valued on the weighted-average-cost method. Elements of costs in finished
good and work-in-progress include raw materials, direct labor, and
manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included
in income in the year of disposition.
F-13
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Depreciation is calculated on a straight-line basis over the estimated useful
life of the assets without residual value. The percentages or depreciable life
applied are:
Building and warehouses 20 years
Machinery and equipment 7-10 years
Office equipment and furniture 5 years
Motor vehicles 5 years
INTANGIBLE ASSETS
Intangible assets are carried at cost. Amortization is calculated on a
straight-line basis over the estimated useful life of the assets without
residual value. The percentages or amortizable life applied are:
Land use right 50 years
Trade Mark 10 years
LAND USE RIGHT
All land belongs to the State in PRC. Enterprises and individuals can pay the
State a fee to obtain a right to use a piece of land for commercial purpose or
residential purpose for an initial period of 50 years or 70 years,
respectively. The land use right can be sold, purchased, and exchanged in the
market. The successor owner of the land use right will reduce the amount of
time which has been consumed by the predecessor owner.
The Company owns the right to use a piece of land, approximately 657 acre,
located in Weinan City, Shaanxi Province for a fifty-year period ended February
9, 2051. The costs of these land use rights are amortized over their
prospective beneficial period, using the straight-line method with no residual
value.
F-14
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
LONG-TERM INVESTMENT
On March 1, 2006, Xidenghui executed an investment agreement with Shaanxi
Yichuan Nature Park Co., Inc., pursuant to which, Xidenghui agreed to invest
cash of $1,596,254 (RMB 12,000,000) to establish a join-venture named Huanghe
Shidi Park Co., Inc., and owns 7.9% equity ownership interest therein.
Huanghe Shidi Park Co., Inc. is engaged in the business of recreation and
entertainment.
Xidenghui finished the investment contribution in September 2007. As the
project is currently ongoing, the Management believes the amount invested
approximates the fair value and uses the cost method to record the investment.
RELATED PARTIES
For the purposes of these financial statements, parties are considered to be
related if one party has the ability, directly or indirectly, to control the
party or exercise significant influence over the party in making financial and
operating decisions, or vice versa, or where the Company and the party are
subject to common control or common significant influence. Related parties may
be individuals or other entities.
DUE FROM/TO AFFILIATES
Due from/to affiliates represent temporally short-term loans to/from
affiliates, which are directly or indirectly, beneficially and in the
aggregate, majority-owned and controlled by directors and principal
shareholders of the Company. These loans are unsecured, non-interest bearing
and have no fixed terms of repayment, therefore, deemed payable on demand.
Cash flows from due from related parties are classified as cash flows from
investing activities. Cash flows from due to related parties are classified as
cash flows from financing activities.
F-15
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS FROM DIRECTORS AND OFFICERS
Loans from directors and officers are temporally short-term loans from our
directors and officers to finance the Company's operation due to lack of cash
resources. These loans are unsecured, non-interest bearing and have no fixed
terms of repayment, therefore, deemed payable on demand. Cash flows from these
activities are classified as cash flows from financing activates.
ADVERTISING COSTS
Advertising costs are expensed as incurred in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position 93-7,
"Reporting for Adverting Costs". The advertising costs were $28,188, and
$115,082 for the nine months ended September 30, 2009 and 2008, respectively.
LEASE
On March 4, 2002, Baishui Dukang signed a lease agreement with Shaanxi Sanjiu
Dukang Liquor Production Co., Ltd ("Sanjiu"), pursuant to which Baishui Dukang
agreed to lease all fixed assets of Sanjiu for a period of 20 years, which was
latterly extended to 30 years. On February 3, 2005, Sanjiu was acquired by
Shannxi Baishui Dukang Liquor Development Co., Ltd. On April 30, 2005, Baishui
Dukang signed a supplemental lease agreement with Shannxi Baishui Dukang Liquor
Development Co., Ltd, pursuant to which Baishui Dukang agreed to continue to
lease all fix assets of Sanjiu for the rest of the original 30-year period.
Baishui Dukang also agreed to pay $362,450 (RMB 3,000,000) to continue the
lease and to absorb the pension and unemployment insurance expenses of Sanjiu's
original employees. Baishui Dukang amortized the 362,450 (RMB 3,000,000) over a
27-year beneficial period. Baishui Dukang paid $161,841 and $124,924 for
Sanjiu's original employees' pension and unemployment insurance expenses in the
year ended December 31, 2008 and 2007, respectively. Baishui Dukang paid
$126,157 and $122,045 for Sanjiu's original employees' pension and unemployment
insurance expense in the nine months ended September 30, 2009 and 2008,
respectively.
F-16
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUE-ADDED TAX ("VAT") (RESTATED)
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company's products that are sold in PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price or at a rate
approved by the Chinese local government. This VAT may be offset by VAT paid
on purchase of raw materials included in the cost of producing the finished
goods. The Company presents VAT on a net basis.
SALES TAX (RESTATED)
Baishui Dukang produces and distributes distilled liquor, which is subject to
sales tax in PRC. Sales tax rate is $0.14 (RMB1.00) per kilogram and 10%-20% of
gross sales revenue. The Company presents sales tax on a net basis.
PENSION AND EMPLOYEE BENEFITS
Full time employees of the PRC entities participate in a government mandated
multi-employer defined contribution plan pursuant to which certain pension
benefits, medical care, unemployment insurance, employee housing fund and other
welfare benefits are provided to employees. Chinese labor regulations require
the Company to accrue for these benefits based on certain percentages of the
employees' salaries. The Management believes full time employees who have
passed the probation period are entitled to such benefits. The total
provisions for such employee benefits was $14,168 and $8,650 for the nine
months ended September 30, 2009 and 2008, respectively.
INCOME TAXES
In accordance with FASB guidance, the Company accounts for income tax using the
asset and liability approach for financial accounting and reporting for income
taxes. Under this approach, deferred income taxes are provided for the
estimated future tax effects attributable to temporary differences between
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from loss carry-
forwards and provisions, if any. Deferred tax assets and liabilities are
measured using the enacted tax rates expected in the years of recovery or
reversal and the effect from a change in tax rates is recognized in the
statement of operations in the period of enactment. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of the deferred tax assets will
not be realized.
F-17
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES (CONTINUED)
Effective January 1, 2007, the Company adopted a new FASB guidance, which
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements. The new FASB guidance prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. The new FASB guidance also provides guidance on de-recognition
of tax benefits, classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure, and transition. In accordance with
the new FASB guidance, the Company performed a self-assessment and concluded
that there were no significant uncertain tax positions requiring recognition in
its consolidated financial statements.
The Company has accumulated deficit in its operation. Because there is no
certainty that we will realize taxable income in the future, we did no record
any deferred tax benefit as a result of these losses.
The Company accounts for income taxes in interim periods in accordance with
FASB guidance. The Company has determined an estimated annual effect tax rate.
The rate will be revised, if necessary, as of the end of each successive
interim period during the Company's fiscal year to its best current estimate.
The estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
The estimated annual effective tax rate is applied to the year-to-date ordinary
income (or loss) at the end of the interim period.
F-18
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATUTORY RESERVES
Pursuant to the applicable laws in PRC, PRC entities are required to make
appropriations to three non-distributable reserve funds, the statutory surplus
reserve, statutory public welfare fund, and discretionary surplus reserve,
based on after-tax net earnings as determined in accordance with the PRC GAAP,
after offsetting any prior years' losses. Appropriation to the statutory
surplus reserve should be at least 10% of the after-tax net earnings until the
reserve is equal to 50% of the Company's registered capital. Appropriation to
the statutory public welfare fund is 5% to 10% of the after-tax net earnings.
The statutory public welfare fund is established for the purpose of providing
employee facilities and other collective benefits to the employees and is non-
distributable other than in liquidation. Beginning from January 1, 2006,
enterprise is no more required to make appropriation to the statutory public
welfare fund. The Company does not make appropriations to the discretionary
surplus reserve fund. Since the Company has been accumulating deficiency, no
statutory surplus reserve fund and statutory public welfare reserve fund have
been made.
Since the Company has been accumulating deficiency, no statutory surplus
reserve fund and statutory public welfare reserve fund have been made.
COMPREHENSIVE INCOME
FASB guidance establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as
defined includes all changes in equity during a period from non-owner sources.
Accumulated comprehensive income, as presented in the accompanying statements
of changes in owners' equity consists of changes in unrealized gains and losses
on foreign currency translation. This comprehensive income is not included in
the computation of income tax expense or benefit.
SEGMENT REPORTING
FASB guidance establishes standards for reporting information about operating
segments on a basis consistent with the Company's internal organization
structure as well as information about geographical areas, business segments
and major customers in financial statements. The Company currently operates in
two principal business segments.
F-19
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION
The unaudited balance sheet, the unaudited statements of income and cash flows
have been prepared in accordance with United States generally accepted
accounting principles for interim financial information. In our opinion, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation of the financial position, results of
operations and cash flows as at September 30, 2009, and 2008, have been
included. Readers of these financial statements should note that the interim
results for the nine-month periods ended September 30, 2009, and September 30,
2008, are not necessarily indicative of the results that may be expected for
the fiscal year as a whole.
EARNINGS (LOSS) PER SHARE
The Company reports earnings per share in accordance with FASB guidance, which
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. There are no potentially dilutive securities outstanding
(options and warrants) for the nine months ended September 30, 2009 and 2008,
respectively.
F-20
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF MEASUREMENTS
Accounting principles generally accepted in the United States define fair value
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. Additionally, the inputs used to measure fair value are
prioritized based on a three-level hierarchy. This hierarchy requires entities
to maximize the use of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value are as follows:
LEVEL 1: Unadjusted quoted prices in active markets for identical assets or
liabilities
LEVEL 2: Input other than quoted market prices that are observable, either
directly or indirectly, and reasonably available. Observable inputs reflect
the assumptions market participants would use in pricing the asset or liability
and are developed based on market data obtained from sources independent of the
Company.
LEVEL 3: Unobservable inputs. Unobservable inputs reflect the assumptions that
the Company develops based on available information about what market
participants would use in valuing the asset or liability.
An asset or liability's level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value measurement.
Availability of observable inputs can vary and is affected by a variety of
factors. The Company uses judgment in determining fair value of assets and
liabilities and Level 3 assets and liabilities involve greater judgment than
Level 1 and Level 2 assets or liabilities.
SUBSEQUENT EVENTS
The Company evaluated subsequent events through the time of filing this
Quarterly Report on Form 10-Q on December 4, 2009. We are not aware of any
significant events that occurred subsequent to the balance sheet date but prior
to the filing of this report that would have a material impact on our financial
statements.
F-21
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board ("FASB") amended its
guidance on accounting for variable interest entities ("VIE"). Among other
things, the new guidance requires a qualitative rather than a quantitative
analysis to determine the primary beneficiary of a VIE; requires continuous
assessments of whether an enterprise is the primary beneficiary of a VIE;
enhances disclosures about an enterprise's involvement with a VIE; and amends
certain guidance for determining whether an entity is a VIE. Under the new
guidance, a VIE must be consolidated if the enterprise has both (a) the power
to direct the activities of the VIE that most significantly impact the entity's
economic performance, and (b) the obligation to absorb losses or the right to
receive benefits from the VIE that could potentially be significant to the VIE.
This new guidance will be effective as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, and
for interim periods within that first annual reporting period. Earlier
application is prohibited. The Management does not expect that the adoption of
this new guidance would have a material effect on the Company's financial
position and results of operations.
In May 2009, the FASB issued new accounting and disclosure guidance for
recognized and non-recognized subsequent events that occur after the balance
sheet date but before financial statements are issued. The new guidance also
requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. The new accounting guidance was
effective for our Company beginning with our Quarterly Report on Form 10-Q for
the three and six months ended June 30, 2009, and is being applied
prospectively. This change in accounting policy had no impact on our
consolidated financial statements.
In April 2009, the FASB issued new guidance regarding accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies. This new guidance amends and clarifies the accounting,
measurement and recognition provisions and the related disclosures arising from
contingencies in a business combination. The Company adopted this new guidance
on January 1, 2009. There was no significant impact upon adoption, and its
effects on future periods will depend on the nature and significance of
business combinations subject to this guidance.
F-22
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In April 2009, the FASB issued new guidance regarding determining fair value
when the volume and level of activity for the asset or liability have
significantly decreased and identifying transactions that are not orderly. This
new guidance provides additional guidance for estimating fair value when the
volume and level of market activity for an asset or liability have
significantly decreased when compared with normal market activity for the asset
or liability. If there is a significant decrease in the volume and activity for
the asset or liability, transactions or quoted prices may not be determinative
of fair value in an orderly transaction and further analysis and adjustment of
the transactions or quoted prices may be necessary. This new guidance was
applied prospectively and was effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after
March 15, 2009. The adoption of this new guidance did not have a material
effect on the Company's financial position and results of operations.
In April 2009, the FASB issued new guidance regarding recognition and
presentation of other-than-temporary impairments. This new guidance amends the
method for determining whether another-than-temporary impairment exists and the
classification of the impairment charge for debt securities and the related
disclosures. This new guidance was applied prospectively and was effective for
interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The adoption of this new
guidance did not have a material effect on the Company's financial position and
results of operations.
In December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance is being applied prospectively to all
business combinations subsequent to the effective date. Among other things, the
new guidance amends the principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. It also establishes new disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. The Company adopted this new guidance on January 1, 2009. There
was no material impact on the Company's financial position and results of
operations upon adoption, and their effects on future periods will depend on
the nature and significance of business combinations subject to this guidance.
F-23
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2007, the FASB issued new accounting and disclosure guidance
related to noncontrolling interests in subsidiaries (previously referred to as
minority interests), which resulted in a change in our accounting policy
effective January 1, 2009. Among other things, the new guidance requires that a
noncontrolling interest in a subsidiary be accounted for as a component of
equity separate from the parent's equity, rather than as a liability. The new
guidance is being applied prospectively, except for the presentation and
disclosure requirements, which have been applied retrospectively. The adoption
of this new accounting policy did not have a significant impact on our
consolidated financial statements.
In December 2007, the FASB issued new accounting guidance that defines
collaborative arrangements and establishes reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. It also establishes the
appropriate income statement presentation and classification for joint
operating activities and payments between participants, as well as the
sufficiency of the disclosures related to those arrangements. This new
accounting guidance was effective for our Company on January 1, 2009, and its
adoption did not have a significant impact on our consolidated financial
statements.
In September 2006, the FASB issued new accounting guidance that defines fair
value, establishes a framework for measuring fair value, and expands disclosure
requirements about fair value measurements. However, in February 2008, the FASB
delayed the effective date of the new accounting guidance for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until January 1, 2009. The adoption of this new accounting
guidance for our nonfinancial assets and nonfinancial liabilities did not have
a significant impact on our consolidated financial statements.
F-24
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6-PREPAID EXPENSES
Prepaid expenses consist of the following:
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
Machinery and parts $ 10,679 $ 10,664
Raw materials 36,359 16,129
Packing and supply materials 193,688 103,727
Project advance - 7,878
Prepaid rental expenses 361,182 372,845
Prepaid office expenses 104 -
----------- -----------
Total $ 602,012 $ 511,243
=========== ===========
NOTE 7-INVENTORIES
Inventories consist of following:
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
Finished goods $ 897,811 $ 1,131,381
Work-in-progress 1,711,657 1,564,281
Raw materials 81,741 95,281
Supplies and packing materials 204,635 168,715
----------- -----------
$ 2,895,844 $ 2,959,595
=========== ===========
F-25
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8-PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
Building and warehouses $ 2,925,165 $ 2,913,855
Machinery and equipment 1,847,064 1,820,095
Office equipment and furniture 194,176 191,029
Motor vehicles 329,448 491,005
----------- -----------
5,295,853 5,415,984
Less: Accumulated depreciation (2,598,845) (2,362,458)
----------- -----------
2,697,008 3,053,526
Add: Construction in progress 58,071 12,231
Total $ 2,755,079 $ 3,065,757
=========== ===========
Depreciation expense charged to operations was $109,762 and $104,911 for the
nine months ended September 30, 2009 and 2008, respectively.
NOTE 9- INTANGIBLE ASSETS
The following is a summary of intangible assets, less amortization:
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
Land use right $ 58,552 $ 58,471
Trade Mark of "Xidenghui" 65,743 65,653
Trade Mark of "Baishui Du Kang" 24,106 24,073
----------- -----------
Total intangible assets 148,401 148,197
Less: Accumulated amortization (79,567) (72,114)
----------- -----------
Total intangible assets, net 68,834 76,083
----------- -----------
Amortization expense charged to operations was $7,355 and $7,192 for the nine
months ended September 30, 2009 and 2008, respectively.
F-26
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10-DUE FROM RELATED PARTIES
Due from related parties consists of the following:
September 30, December 31,
2009 2008
Name of Related Party (unaudited)
----------- -----------
Shaanxi yello-river Wetlands Park Co., Ltd. Affiliate $ 555,166 $ 116,717
Shaanxi Baishui Dukang Trade Co., Ltd. Affiliate 48,398 48,332
Shaanxi Gurong Agriculture Development Co., Ltd. Affiliate 80,353 -
Ms. Fenying Zhang Director 41,637 41,580
Mr. Yongsheng Wang Director 43,215 21,884
----------- -----------
Total $ 768,769 $ 228,513
----------- -----------
NOTE 11- ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
Accrued Payroll $ 23,376 $ 29,374
Accrued employee benefits 61,144 63,331
Accrued rental 105,189 -
Accrued office expenses 5,753 3,922
----------- -----------
Total $ 195,462 $ 96,627
=========== ===========
F-27
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12- DUE TO RELATED PARTIES
Due to related parties consists of the following:
September 30, December 31,
2009 2008
Name of Related Party Description (unaudited)
----------- -----------
Shaanxi Dukang Group Co., Ltd. Affiliate $ 267,217 $ 471,244
Shaanxi Zhongke Spaceflight Agriculture
Development Stock Co., Ltd. Affiliate 33,506 33,512
Shaanxi Baishui Dukang Marketing Management Co., Ltd. Affiliate 12,853 1,179
Shaanxi Baishui Dukang Commerce and Trade Co., Ltd. Affiliate 72,126 72,853
Shaanxi Baishui Dukang Spirits Industry
Development Co., Ltd. Affiliate 1,215,936 876,721
Shaanxi Changjiang Electric Power and Energy
Sources Co., Ltd. Affiliate - 291,792
Mr. Hongjun Zhang Director 3,179,492 3,058,821
Mr. Guoqi Diao Director 392,645 392,107
Ms. Ping Li Director 582,237 581,438
Mr. Pingjun Nie Director 4,386,284 4,380,268
Ms. Hong Ge Director 264,354 263,991
Mr. Hailong Tian Director 2,764,471 2,760,680
Ms. Min Chen Director 356,249 355,761
Mr. Shengli Wang Director 779,097 778,029
----------- -----------
Total $14,306,467 $14,318,396
=========== ===========
NOTE 13-SEGMENT REPORTING
The Company operates in two reportable business segments that are determined
based upon differences in products and services. Summarized information by
business segment for the nine months ended September 30, 2009 and 2008 is as
follows:
For the Nine Months Ended
September 30,
2009 2008
(unaudited) (unaudited)
---------- ----------
REVENUE
Liquor production and distribution $ 805,843 $ 722,299
Franchise fees and Brand Names 681,056 104,332
COST OF SALES
Liquor production and distribution $ 851,115 $ 677,831
Franchise fees and Brand Names - -
GROSS PROFITS
Liquor production and distribution $ (45,272) $ 44,468
Franchise fees and Brand Names 681,056 104,332
September 30, December 31,
2009 2008
(unaudited)
----------- -----------
TOTAL ASSETS OF LIQUOR PRODUCTION
AND DISTRIBUTION $ 5,889,966 $ 6,057,652
TOTAL ASSETS OF BRAND NAME FRANCHISE $ 787,615 $ 253,988
F-28
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14-STATEMENT OF CONSOLIDATED COMPRESENTATIVE INCOME
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(unaudited) (unaudited) (unaudited) (unaudited)
---------- ---------- ---------- -----------
Net income $ 151,943 $ (409,746) $ (197,900) $(1,497,345)
---------- ---------- ---------- -----------
Other comprehensive income, net of tax:
Effects of foreign currency conversion (48) (11,513) (8,917) (338,886)
---------- ---------- ---------- -----------
Total other comprehensive, not of tax (48) (11,513) (8,917) (338,886)
Comprehensive income 151,985 (421,259) (206,817) (1,836,231)
Comprehensive income attributable to
the noncontrolling interest (2,962) (21,027) (31,528) (73,669)
---------- ---------- ---------- -----------
Comprehensive income attributable to
China Du Kang Co., Ltd. $ 154,857 $ (400,232) $ (175,289) $(1,762,562)
========== ========== ========== ===========
NOTE 15- COMMITMENTS AND CONTINGENCIES
CONTINGENT LIABILITY FROM PRIOR OPERATION
Prior to the merger with Hong Kong Merit Enterprise Limited on February 11,
2008, the Company has not been active since discontinuing its financial service
operations by December 31, 2007. Management believes that there are no valid
outstanding liabilities from prior operations. If a creditor were to come
forward and claim a liability, the Company has committed to contest such claim
to the fullest extent of the law. No amount has been accrued in the financial
statements for this contingent liability.
F-29
CHINA DU KANG CO., LTD. AND SUBSIDIARIES
F/K/A AMSTAR FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- COMMITMENTS AND CONTINGENCIES (CONTINUED)
THE COMPANY'S ASSETS ARE LOCATED IN PRC AND REVENUES ARE DERIVED FROM
OPERATIONS IN PRC.
In terms of industry regulations and policies, the economy of PRC has been
transitioning from a planned economy to market oriented economy. Although in
recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reforms, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in PRC are still owned by the Chinese government. For example, all lands are
state owned and are leased to business entities or individuals through
governmental granting of Land Use Rights. The Chinese government also exercises
significant control over PRC's economic growth through the allocation of
resources and providing preferential treatment to particular industries or
companies. Uncertainties may arise with changing of governmental policies and
measures.
The Company faces a number of risks and challenges not typically associated
with companies in North America and Western Europe, since its assets exist
solely in the PRC, and its revenues are derived from its operations therein.
The PRC is a developing country with an early stage market economic system,
overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are in a state of change. The
PRC also faces many social, economic and political challenges that may produce
major shocks and instabilities and even crises, in both its domestic arena and
in its relationships with other countries, including the United States. Such
shocks, instabilities and crises may in turn significantly and negatively
affect the Company's performance.
F-30
ITEM 14.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previous Principal Independent Accountants
Amstar Financial Holding, Inc. has engaged Greg Lamb & Associates as their
independent auditors located at 6409 Viking Trail, Arlington, TX 76001.
Subsequent, to the reverse merger that occurred on or about January 31, 2008,
Amstar Financial Holdings, Inc. was acquired by China Du Kang Company which was
and continues to be audited by Keith Zhen, CPA, 2070 West 6th Street, Brooklyn,
NY 1122.
Greg Lamb & Associates Co's reports on the financial statements did not
contain an adverse opinion or disclaimer of opinion and was not
modified as to uncertainty, audit scope, or accounting principles, except
that the reports contained an explanatory paragraph indicating that
substantial doubt exists about our ability to continue as a going concern.
We have had no disagreements with Greg Lamb & Associates on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the satisfaction
of Greg Lamb & Associates would have caused it to make reference to the
subject matter of any such disagreements in their reports on the financial
statement for the periods ended December 31,
2007. We requested that Greg Lamb & Associates furnish a letter addressed to
the Securities and Exchange Commission stating that it is not in a position to
agree or disagree with the above statements.
New Principal Independent Accountants
Effective as of the closing date of January 31, 2008, our Board of
Directors engaged Keith Zhen, CPA as our new independent registered
public accounting firm.
41
ITEM 15.FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements
The following historical and pro forma consolidated financial statements of the
Company are included in the information statement and filed as part of this
registration statement on Form 10:
(1) China Du Kang Co., LTD. And Subsidiaries F/K/A Amstar Financial Holdings,
Inc., Financial Report at December 31, 2008 and 2007 and for the Years Ended
December 31, 2008 and 2007;
(2) China Du Kang Co., LTD. And Subsidiaries F/K/A Amstar Financial Holdings,
Inc., Financial Report at September 30, 2009 and December 31, 2008 and for
the Three and Six Months Ended September 30, 2009 and 2008
(3) Amstar Financial Holdings, Inc. Financial Report at December 31, 2007 and
February 11, 2008 and the period January 1, 2008 through February 11, 2008
and the year ended December 31, 2007.
(b) Exhibits
The following exhibits are filed herewith unless otherwise indicated:
EXHIBIT EXHIBIT DESCRIPTION
NUMBER
3.1 Amended & Restated Articles
3.2 By-Laws of China Du Kang Co. LTD
4.1 Specimen common stock certificate of China Du Kang Co. LTD
10.1 PLAN OF EXCHANGE AGREEMENT dated 9th day of January, 2008, by
and among AMSTAR FINANCIAL HOLDINGS, INC., ("AFLH"), and HONGKONG
MERIT ENTERPRISE LIMITED, "MERIT") and its subsidiaries, SHAANXI
Xidenghui TECHNOLOGY STOCK CO., LTD ("XIDENHUI"), including
SHAANXI BAI SHUI DU KANG LIQUOR CO., LTD. ("Du Kang"), (all of
which shall be collectively referred to as "Du Kang").
10.2 Land Use Rights
10.3 Lease Agreements
21.1 List of Subsidiaries of China Du Kang Co. LTD
23.1 Consent of Keith Zhen, CPA
3.1 Amended & Restated Articles filed
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SIGNATURES
In accordance with the requirements of the Section 12 of the
Securities Act of 1934, the registrant certifies that it has reasonable
grounds to believe that it meets all the requirements of filing of Form
10 in the city of Xi'An, Shaanxi Province, Peoples Republic of China December
1, 2009.
China Du Kang Co. LTD.
/s/ Wang Yong Sheng
- -------------------
By:Wang Yong Sheng
Title: President & CEO, Director
China Du Kang Co. LTD.
/s/ Liu Su Ying
- -------------------
By: Liu Su Ying
Title: Chief Financial Officer,
In accordance with the requirements of the Securities Exchange Act of 1934,
this Form 10 was signed by the following persons in the capacities and on the
date stated.
/s/ Wang Yong Sheng
- -------------------
By: Wang Yong Sheng
Title: President, CEO, and Director
/s/ Liu Su Ying
- -------------------
By: Liu Su Ying
Date: December 1, 2009
A Majority of the Board of Directors
/s/ Wang Yong Sheng
- -------------------
By: Wang Yong Sheng
Title: President, CEO, and Director
/s/ Liu Su Ying
- -------------------
By: Liu Su Ying
Title: CFO,
/s/ Nie Fen Ying
- -------------------
By: Nie Fen Ying
Title: Director
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHINA DU KANG CO.LTD..
Dated: December 1,, 2009
By: /s/ Wang Youngsheng
-------------------
Name: Wang Youngsheng
Title: Chief Executive Officer
43