FIRST CHINA PHARMACEUTICAL GROUP, INC. - FORM 8-K/A - EX-99.1(B) - FCPG HK PRO FORMA UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2010

Attached files

file	filename
8-K/A - AMENDED CURRENT REPORT - FIRST CHINA PHARMACEUTICAL GROUP, INC.	v235169_8ka.htm
EX-99.1(A) - XYT AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 - FIRST CHINA PHARMACEUTICAL GROUP, INC.	v235169_ex99-1a.htm
EX-99.2(B) - PRO FORMA FINANCIAL STATEMENTS OF THE REGISTRANT AND FCPG HK AS OF AND FOR THE PERIODS ENDED JUNE 30, 2010 - FIRST CHINA PHARMACEUTICAL GROUP, INC.	v235169_ex99-2b.htm
EX-99.2(A) - PRO FORMA FINANCIAL STATEMENTS OF THE REGISTRANT AND XYT AS OF AND FOR THE YEAR ENDED MARCH 31, 2010 - FIRST CHINA PHARMACEUTICAL GROUP, INC.	v235169_ex99-2a.htm
EX-99.1(C) - FCPG HK UNAUDITED FINANCIAL STATEMENTS FROM THE DATE OF INCORPORATION TO JUNE 30, 2010 - FIRST CHINA PHARMACEUTICAL GROUP, INC.	v235169_ex99-1c.htm

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Stated in US Dollars)

(Unaudited)

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

INDEX TO PRO FORMA COMBINED FINANCIAL STATEMENTS

	Pages

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		1

PRO FORMA COMBINED BALANCE SHEETS		2

PRO FORMA COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME		4

PRO FORMA COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY		5

PRO FORMA COMBINED STATEMENTS OF CASH FLOWS		6

NOTES TO THE PRO FORMA COMBINED FINANCIAL STATEMENTS		7 - 19

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

First China Pharmaceutical Group Limited

We have reviewed the accompanying pro forma combined balance sheets of First China Pharmaceutical Group Limited as of June 30, 2010, and the related pro forma combined statement of operations and cash flows for the six months ended June 30, 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of pro forma combined interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying pro forma combined financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

Parker Randall CF (H.K.) CPA Limited

Certified Public Accountants

Hong Kong

August 14, 2010

Except for note 3 on September 15, 2011.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED BALANCE SHEETS

(Stated in US Dollars)

(Unaudited)

		At		At
		June 30,		December 31,
	Notes	2010		2009
		$		$
ASSETS
Current Assets
Cash and cash equivalents			19,417		37,906
Restricted cash	2(e)		-		808,439
Inventories	4		5,909,293		2,938,291
Total current assets			5,928,710		3,784,636
Non-Current Assets
Plant and equipment, net	5		3,499		4,271
Intangible assets, net	6		2,607		3,003
Total non-current assets			6,106		7,274

TOTAL ASSETS			5,934,816		3,791,910

See accompanying notes to the financial statements

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED BALANCE SHEETS

(Stated in US Dollars)

(Unaudited)

		At			At
		June 30,			December 31,
	Notes	2010			2009
		$			$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings	7		859,797			732,408
Other payable and accrued liabilities	8		10,141,168			7,728,348
Notes payable	9		-			314,935
Income tax payable			2,310,648			1,740,599

Total Current Liabilities			13,311,613			10,516,290

TOTAL LIABILITIES			13,311,613			10,516,290

COMMITMENTS AND CONTINGENCIES	13		-			-

STOCKHOLDERS’ EQUITY
Common stock	10
Authorized, issued and outstanding:
10,000 common shares, par value HK$1 per share			1,282			1,282
Additional paid-in capital			266,101			266,101
Retained earnings			(7,794,015	)		(7,108,914	)
Accumulated other comprehensive income
- foreign currency translation adjustments			149,835			117,151

TOTAL STOCKHOLDER’S EQUITY			(7,376,796	)		(6,724,380	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			5,934,816			3,791,910

See accompanying notes to the financial statements

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Stated in US Dollars)

(Unaudited)

			Three months ended						Six months ended
			June 30,						June 30,
	Notes		2010			2009			2010			2009
			$			$			$			$

Net sales				7,178,612			6,222,593			13,878,888			11,983,956
Costs of sales				(5,928,686	)		(5,215,556	)		(11,444,144	)		(10,347,899	)

Gross profit				1,249,926			1,007,037			2,434,744			1,636,057
Selling expenses				(4,618	)		(5,949	)		(8,905	)		(13,425	)
Administrative expenses				(38,379	)		(24,278	)		(78,657	)		(57,564	)
Depreciation and amortization				(725	)		(1,243	)		(1,202	)		(4,444	)
Other operating expenses				(21,221	)		(4,656	)		(91,977	)		(7,441	)

Income from operations				1,184,983			970,911			2,254,003			1,553,183
Interest income				3,650			5,889			4,951			7,856
Interest expense				(11,837	)		-			(21,585	)		-

Income before tax				1,176,796			976,800			2,237,369			1,561,039
Income tax		12		(294,226	)		(244,200	)		(559,369	)		(390,260	)

Net income				882,570			732,600			1,678,000			1,170,779
Other comprehensive income - foreign currency translation adjustments				16,447			(2,194	)		32,684			26,270

Comprehensive income				899,017			730,406			1,710,684			1,197,049

See accompanying notes to the financial statements

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Stated in US Dollars)

		Common stock				Additional paid-in		Retained			Accumulated other comprehensive
		Shares		Amount		capital		earnings			income		Total
				$		$		$			$		$

Balance, January 1, 2009			10,000		1,282		266,101		1,948,825			119,485		2,335,693
Net income			-		-		-		1,170,779			-		1,170,779
Foreign currency translation adjustments			-		-		-		-			26,270		26,270
Deemed distribution of dividend	3		-		-		-		(11,801,235	)		-		( 11,801,235	)

Balance, June 30, 2009			10,000		1,282		266,101		(8,681,631	)		145,755		(8,268,493	)


Balance, January 1, 2010			10,000		1,282		266,101		(7,108,914	)		117,151		(6,724,380	)
Net income			-		-		-		1,678,000			-		1,678,000
Foreign currency translation adjustments			-		-		-		-			32,684		32,684
Deemed distribution of dividend	3		-		-		-		(2,363,101	)		-		( 2,363,101	)

Balance, June 30, 2010			10,000		1,282		266,101		(7,794,015	)		149,835		(7,376,796	)

See accompanying notes to the financial statements

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED STATEMENT OF CASH FLOWS

(Stated in US Dollars)

(Unaudited)

	Six months ended
	June 30,
	2010		2009
	$		$

Cash Flows from Operating Activities
Net income		1,678,000		1,170,779
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,202		4,444
Changes in operating assets and liabilities:
Due from (to) a related party		(2,294,640)		(1,404,652)
Inventories		(2,947,677)		(1,643,210)
Other payables and accrued liabilities		2,367,118		1,983,417
Notes payable		(315,766)		(543,584)
Income tax payable		559,369		390,260

Net cash used in operating activities		(952,394)		(42,546)

Cash Flows from Investing Activities
Purchase of plant and equipment		-		(2,892)

Net cash used in investing activities		-		(2,892)

Cash flows from financing activities
New borrowings raised		123,192		-
Decrease (increase) in restricted cash		810,570		(26,367)

Net cash provided by (used in) financing activities		933,762		(26,367)

Effect of foreign currency translation on cash and cash equivalents		143		(57)

Net decrease in cash and cash equivalents		(18,489)		(71,862)

Cash and cash equivalents - beginning of period		37,906		80,857

Cash and cash equivalents - end of period		19,417		8,995

Supplemental disclosures for cash flow information:

Cash paid for:
Interest		21,585		-
Income taxes		-		-

See accompanying notes to the financial statements

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

First China Pharmaceutical Group Limited (the “Company”) was incorporated in Hong Kong on April 29, 2010. The principal activity of the Company is investment holding. Kun Ming Xin Yuan Tang Pharmacies Co. Ltd. (“Xin Yun Tang”) was established in the People’s Republic of China (“PRC”) on November 12, 2002 with a paid-in capital of RMB2,000,000 as of June 30, 2010 and December 31, 2009. The principal activities of Xin Yun Tang are the sales of Chinese patent drug, antibiotics, bio-chemicals, chemical preparations and biological in Yun Nan Province, the PRC.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)	Basis of Preparation and Presentation

The pro forma combined statements of income and comprehensive income and pro form combined statements of cash flows of the companies (including the Company and Sin Yun Tang) now comprising the group (the “Group”) have been prepared as if the current group structure had been in existence throughout the periods for the six months ended June 30, 2010 and June 30, 2009.

The pro forma combined balance sheets of the Group as at June 30, 2010 and December 31, 2009 have been prepared to present the assets and liabilities of the Group as at the respective dates as if the current group structure had been in existence as at those dates.

The Company’s pro forma combined financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for illustrative of interim combined financial information. Accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the six-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

(b)	Use of Estimates

In preparing of the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of due from a related party, inventories and the estimation on useful lives of plant and machinery and intangible assets. Actual results could differ from those estimates.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(c)	Concentration of Credit Risk

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and due from a related party. The Company places its cash with financial institutions with high-credit ratings and quality. The Company conducts periodic reviews of the related party financial conditions and payment practices.

No single external customer exceeded 10% of the Group’s total revenue for the periods presented.

The Company relies on supplies from numerous vendors. The Company had one vendor that accounted for approximately 22% and 15% of total purchases for the six months ended June 30, 2010 and 2009 respectively.

(d)	Cash and Cash Equivalents

The Group considers all highly liquid investments with initial maturities of three months or less to be cash equivalents. The Group maintains bank accounts in the PRC only.

(e)	Restricted Cash

Deposits in banks for securities of notes payable that are restricted in use are classified as restricted cash under current assets.

(f)	Trade and Other Receivables

Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is the difference between the receivable’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate computed at initial recognition. The amount of the allowance is recognised in the statement of income and comprehensive income.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(g)	Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of inventories, principally comprising purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.

During the reporting periods, the Group did not make any allowance for slow-moving or defective inventories.

(h)	Plant and Equipment

Plant and equipment are stated at cost less depreciation and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Depreciation of plant and equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The principal annual rates are as follows:

Office equipment	331/3	%
Other equipment	20	%
Motor vehicles	25	%

(i)	Intangible Assets

Intangible assets are stated at cost less amortization and accumulated impairment loss. The intangible assets of the Group represent software in used. The intangible assets are amortized over their estimated useful lives of 10 years using the straight-line method.

(j)	Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets. No impairment of long-lived assets was recognized for any of the periods presented.

(k)	Revenue Recognition

Revenue from sales of the Group’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(l)	Advertising expenses

Advertising expenses are charged to expense as incurred. No advertising expenses were incurred during the six months ended June 30, 2010 and 2009.

(m)	Income taxes

The Group uses the asset and liability method of accounting for income taxes pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

(n)	Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustments.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(o)	Foreign Currency Translation

The Group maintains its financial statements in the functional currency. The functional currency of the Company is Hong Kong dollar (“HK$”) and the functional currency of Xin Yun Tang is the Renminbi (“RMB”). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements of the Company and Xin Yun Tang which are prepared using the functional currency have been translated into United States dollars (“US$”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

Exchange rates applied for the foreign currency translation during the period are as follows:

US$1 to RMB	2010		2009

Closing rate		6.7909		6.8307
Average rate		6.8089		6.8266

HK$ is pegged to US$ and hence there is no significant translation adjustment impact on these financial statements.

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

(p)	Financial instruments

The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash and cash equivalents, restricted cash, due from (to) a related party, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of short-term borrowings approximate the fair value based on the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.

It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(q)	Recent Accounting Pronouncements

In April 2009, the FASB issued FSP 157-4 “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”. FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP 157-4 requires comparative disclosures only for periods ending after initial adoption.

In May 2009, the FASB issued FSP SFAS 165 “Subsequent Events”. The objective of this Statement is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the interim and annual periods ending after June 15, 2009, which is now codified as FASB ASC 855 “Subsequent Events”. The adoption of FASB ASC 855 did not have a material impact on the Company’s financial position, results of operations and cash flows. Effective February 24, 2010, the Company adopted Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”, which removes the requirement to disclose the date through which subsequent events have been evaluated.

In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”. This statement is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and is required to be adopted by the Company in the first quarter of fiscal year 2011. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(q)	Recent Accounting Pronouncements (cont’d)

In June 2009, the FASB issued SFAS No.167, “Amendments to FASB Interpretation No.46(R)”, which is codified as ASC 810. ASC 810 amends FASB Interpretation No.46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance.

ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. ASC 810 is effective for the Company in the first quarter of fiscal 2011.

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No 162”, which supersedes all existing non-SEC accounting and reporting standards. The codification does not change GAAP but rather organizes it into a new hierarchy with two levels: authoritative and non-authoritative. All authoritative GAAP carries equal weight and is organized in a topical structure.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value”, which is codified as ASC 820, “Fair Value Measurements and Disclosures”. This Update provides amendments to ASC 820-10, Fair Value Measurements and Disclosures –Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of ASC 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(q)	Recent Accounting Pronouncements (cont’d)

The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the assets are required are Level 1 fair value measurements. ASC 820 is effective for the first reporting period (including interim periods) beginning after August 28, 2009.

In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, and it provides implementation guidance on accounting for uncertainty in income taxes effective for interim and annual reporting period ending on or after September 15, 2009.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”)”. ASU 2009-17 amends the variable-interest entity guidance in FASB ASC 810-10-05-8 to clarify the accounting treatment for legal entities in which equity investors do not have sufficient equity at risk for the entity to finance its activities without financial support. ASU 2009-17 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. ASU 2009-17 is effective for the Company in the first quarter of fiscal 2011.

The Company does not anticipate that the adoption of the above recent accounting pronouncements will have a material impact on these financial statements.

3.	Deemed distribution of dividend

The accompanying financial statements have been presented in accordance with US Generally Accepted Accounting Principles (GAAP) as requested by the US Securities and Exchange Commission (SEC). The Company has a loan receivable from a related party in the amount of $11,801,235 as of December 31, 2010 and $14,164,336 as of June 30, 2010, which the SEC has deemed to be treated as a distribution to the related party and therefore a reduction of retained earnings. This is not in accordance with the treatment required by Generally Accepted Accounting Principles of the Peoples Republic of China (PRC GAAP).

The balance sheets of the Company contain a loan receivable from a related party in the amount of $11,801,235 as of December 31, 2010 and $14,164,336 as of June 30, 2010, per US GAAP and the determination of the SEC these amounts are to be treated as a distribution and therefore a reduction of retained earnings. However, in accordance with PRC GAAP these amounts are not to be charged to retained earnings. Therefore the balance sheets of the Company are presented in this footnote under PRC GAAP to depict what is required under PRC GAAP.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

PRO FORMA COMBINED BALANCE SHEETS

(Stated in US Dollars)

(Unaudited)

				At		At
				June 30,		December 31,
	Notes			2010		2009
				$		$

ASSETS
Current Assets
Cash and cash equivalents					19,417		37,906
Restricted cash		2	(e)		-		808,439
Inventories		4			5,909,293		2,938,291
Total current assets					5,928,710		3,784,636

Due from a related party		3			14,164,336		11,801,235
Plant and equipment, net		5			3,499		4,271
Intangible assets, net		6			2,607		3,003

TOTAL ASSETS					20,099,152		15,593,145

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings		7			859,797		732,408
Other payable and accrued liabilities		8			10,141,168		7,728,348
Notes payable		9			-		314,935
Income tax payable					2,310,648		1,740,599

Total Current Liabilities					13,311,613		10,516,290

TOTAL LIABILITIES					13,311,613		10,516,290

COMMITMENTS AND CONTINGENCIES		13			-		-

STOCKHOLDERS’ EQUITY
Common stock		10
Authorized, issued and outstanding:
10,000 common shares, par value HK$1 per share					1,282		1,282
Additional paid-in capital					266,101		266,101
Retained earnings					6,370,321		4,692,321
Accumulated other comprehensive income
- foreign currency translation adjustments					149,835		117,151

TOTAL STOCKHOLDER’S EQUITY					6,787,539		5,076,855

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY					20,099,152		15,593,145

INVENTORY

	At		At
	June 30,		December 31,
	2010		2009
	$		$

Finished goods		5,909,293		2,938,291

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

5.	PLANT AND EQUIPMENT, NET

	At		At
	June 30,		December 31,
	2010		2009
	$		$

Cost
Office equipment		9,939		9,887
Other equipment		29,874		29,717
Motor vehicles		21,824		21,709

Total		61,637		61,313
Accumulated depreciation		(58,138)		(57,042)

Property, plant and equipment, net		3,499		4,271

Depreciation charged for the six months ended June 30, 2010 and 2009 were $1,096 and $3,835 respectively.

6.	INTANGIBLE ASSET, NET

	At		At
	June 30,		December 31,
	2010		2009
	$		$

Cost		8,217		8,174
Accumulated amortization		(5,610)		(5,171)

Intangible asset, net		2,607		3,003

Amortization recognized in the administrative expenses for the six months ended June 30, 2010 and 2009 were $106 and $609 respectively.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

6.	INTANGIBLE ASSET, NET (CONT’D)

The estimated aggregate amortization expenses for each of the five succeeding years are as follows:

Twelve months ending June 30	$

2011		817
2012		817
2013		688
2014		163
2015 and thereafter		122

		2,607

7.	SHORT-TERM BORROWINGS

The details of short-term borrowings as of June 30, 2010 are as follows:

Nature	Annual Interest Rate			Period	Outstanding loan amount		Collateral
					$

Bank loan		7.97	%	27/04/2010 – 26/04/2011		123,518		N/A
Bank loan		5.31	%	07/12/2009 – 06/12/2010		736,279		N/A

						859,797

Interest expense charged to operations for the short-term borrowings was $21,585 for the six months ended June 30, 2010. There was no default of bank loan or interest payments during the period.

8.	OTHER PAYABLE AND ACCRUED LIABILITIES

	At		At
	June 30,		December 31,
	2010		2009
	$		$

Rental payable		58,902		58,592
Other payables		147,256		146,482
Staff costs payables		225,373		133,420
Value added tax payable		9,708,720		7,388,582
Other accrued expenses		887		1,272

		10,141,168		7,728,348

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

9.	NOTES PAYABLE

The notes payable which were issued by the Company with bank guarantees are secured by the restricted cash.

10.	SHARE CAPITAL

On the date of incorporation, the Company issued 10,000 common stock of HK$1 each to the subscriber for initial working capital.

11.	PENSION PLANS

The Group contributes on a monthly basis to various defined contribution retirement benefit plans organized by relevant municipal and provincial governments in the PRC. The municipal and provincial governments undertake to assume the retirement benefit obligations payable to all existing and future retired employees under these plans and the Group has no further obligation for post-retirement benefits beyond the contributions made. Contributions to these plans are expensed as incurred.

During the six months ended June 30, 2010 and 2009, total pension costs recognized were $1,965 and $1,056 respectively.

12.	INCOME TAX

Income tax expense for the six months ended June 30, 2010 and 2009 represents the provision for current income tax expenses in the PRC.

A reconciliation of the tax expense applicable to income before tax using the statutory rate of 25% to the tax expense at the effective tax rate is as follows:

	Six months ended
	June 30,
	2010		2009
	$		$

Income before tax		2,237,369		1,561,039

Tax at the statutory rate		559,342		390,260
Expenses not deductible for tax		17		-
Others		10		-

Effective income tax expenses		559,369		390,260

No provision for Hong Kong profits tax has been made as the Company did not generate any assessable profits arising in Hong Kong during the periods.

There was no unprovided deferred tax in respect of the periods and as at the balance sheet dates.

FIRST CHINA PHARMACEUTICAL GROUP LIMITED

NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS

(Stated in US Dollars)

(Unaudited)

13.	COMMITMENTS AND CONTINGENCIES

The Company leases the office and warehouse under non-cancelable operating lease agreement that expire in 2018.

14.	RELATED PARTY TRANSACTIONS

Apart from the transactions and balances disclosed elsewhere in the financial statements, the Company had no material transactions with its related parties during the periods presented.

15.	SEGMENT INFORMATION

No segment information is disclosed as the Company is engaged in the sales of Chinese patent drug, antibiotics, bio-chemicals, chemical preparations and biological. The nature of the products, the type of their customers and their distribution methods are substantially similar. The Company operates in a single segment in the PRC. All of long-lived assets are located in the PRC.

16.	POST BALANCE SHEET EVENTS

On August 23, 2010, the Company entered into a voluntary share exchange transaction with First China Pharmaceutical Group, Inc., a Nevada corporation (“FCPG-US”), a Nevada corporation which stocks trade on the Over-The-Counter Bulletin Board pursuant to a Share Exchange Agreement (the “Exchange Agreement”) by and among FCPG-US, on the one hand, and the Company, Xin Yun Tang and Mr. Zhen Jiang Wang (the “Selling Shareholder”), on the other hand.

Following the Exchange Transaction, the Selling Shareholder will own approximately 25% of FCPG-US’s issued and outstanding common stock, the Company and Xin Yun Tang will become FCPG-US’s wholly owned subsidiaries, and FCPG-US will acquire the business and operations of the Group.

Attached files

FIRST CHINA PHARMACEUTICAL GROUP, INC. Reports

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