United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
October 29, 2007
(Date of Report)
Carlateral, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 000-52639 20-4158835
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(State of (Commission File Number) (IRS Employer
incorporation) Identification No.)
112 North Currie Street, Carson City, NV 89703
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(Address of principal executive offices, including zip code)
775-321 8243
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report.)
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Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement.
Merger Agreement
On October 29, 2007, Carlateral, Inc. (the "Registrant") entered into an
agreement and plan of merger with its own wholly subsidiary, CARZ Merger Sub,
Inc., Dongfang Zhiye Holding Limited ("DZHL") and each of DZHL shareholders,
Zhenyong Liu, Xiaodong Liu, Chen Li, Ning Liu, Jie Liu, Shenzhen Huayin Guaranty
& Investment Company Limited, Top Good International Limited, Total Giant Group
Limited, Total Shine Group Limited, Victory High Investment Limited, Think Big
Trading Limited, Huge Step Enterprises Limited, and Sure Believe Enterprise
Limited (the "Merger Agreement"). A copy of the Merger Agreement is being filed
as Exhibit 10.2 to this Current Report.
The transaction described in the Merger Agreement is referred to in this
Current Report as the "Merger Transaction." A summary of the Merger Transaction,
as well as the material terms and conditions of the Merger Agreement, are set
forth below, but such summary is qualified in its entirety by the terms and
conditions of the Merger Agreement, which are incorporated herein by this
reference.
1. The Parties to the Merger Agreement
Prior to the completion of the Merger Transaction on October 29, 2007,
CARZ Merger Sub, Inc. was a Nevada corporation and a wholly-owned subsidiary of
the Registrant.
Dongfang Zhiye Holding Limited ("DZHL") is a holding corporation with no
operation and is formed on November 13, 2006 under the laws of the British
Virgin Islands. DZHL owns all of the issued and outstanding stock and ownership
of Hebei Baoding Orient Paper Milling Company Limited ("HBOP"). Additional
information about DZHL and HBOP, including audited financial statements for the
past two fiscal years and the six months ended June 30, 2007, is contained
elsewhere in this Current Report.
Prior to the completion of the Merger Transaction on October 29, 2007,
Zhenyong Liu, Xiaodong Liu, Chen Li, Ning Liu, Jie Liu, Shenzhen Huayin Guaranty
& Investment Company Limited, Top Good International Limited, Total Giant Group
Limited, Total Shine Group Limited, Victory High Investment Limited, Think Big
Trading Limited, Huge Step Enterprises Limited, and Sure Believe Enterprise
Limited were the shareholders of "DZHL" (the "DZHL Shareholders"). In addition,
Zhenyong Liu is the president and sole director of DZHL.
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2. The Merger Transaction
Pursuant to the Merger Agreement, DZHL merged with CARZ Merger Sub, Inc.,
with DZHL as the surviving entity. As a result of the Merger Transaction, DZHL
became a wholly- owned subsidiary of the Registrant, which, in turn, made the
Registrant the indirect owner of DZHL's operating company subsidiary, HBOP.
3. The Merger Consideration
Under the Merger Agreement, in exchange of surrendering their shares in
DZHL, the DZHL Shareholders received and aggregate of 29,801,987 newly-issued
shares of the Registrant's common stock, $.001 par value, which shares were
distributed pro ratably among the DZHL Shareholders in accordance with their
respective ownership interests in DZHL immediately before completion of the
Merger Transaction.
4. The Merger Agreement; Effective Date
The Merger Agreement was executed on October 29, 2007 and contains
customary terms and conditions for a transaction of this type, including
representations, warranties and covenants, as well as provisions describing the
consideration, the process of exchanging the consideration and the effect of the
Merger Transaction. The Merger Agreement contains reciprocal indemnification
provisions that provide for indemnification in the event of a breach of a
representation or warranty. The indemnification provisions survive the closing
of the Merger Transaction for 18 months.
The Articles of Merger were filed with the State of Nevada on October 30,
2007, the effective date of the Merger Transaction.
5. Material Relationships
There were no material relationships between the Registrant or its
affiliates and any of the parties to the Merger Agreement, other than in respect
of the Merger Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets.
On October 29, 2007, the Registrant entered into the Merger Agreement,
pursuant to which the Registrant completed the Merger Transaction and acquired
DZHL from the DZHL Shareholders and thereby indirectly acquired DZHL's Chinese
operating subsidiary company, HBOP. Further information about the Merger
Agreement and the Merger Transaction is provided above under Item 1.01 of this
Current Report.
In exchange for transferring DZHL to the Registrant, the DZHL Shareholders
received an aggregate of 29,801,987 newly-issued shares of the Registrant's
common stock, which were distributed pro ratably among the DZHL Shareholders in
accordance with their respective ownership interests in DZHL immediately before
completion of the Merger Transaction. Further information about the
consideration is provided above under Item 1.01 of this Current Report.
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Item 3.02 Unregistered Sales of Equity Securities.
The 29,801,987 aggregate shares of the Registrant's common stock issued to
the DZHL Shareholders in the Merger Transaction were issued without registration
under Section 5 of the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on the exemptions from registration contained (i) in Section
4(2) of the Securities Act and (ii) under Regulation S of the the Securities Act
afforded generally to offshore transactions involving non-U.S. persons.
Item 5.01 Changes in Control of Registrant.
Prior to the Merger Transaction, Max Time Enterprises Limited controlled
the Registrant by virtue of the 7,000,000 shares of the Registrant's common
stock held by it, representing approximately 68% of the then issued and
outstanding common stock of the Registrant. Under the Merger Transaction, the
largest DZHL Shareholder, Zhenyong Liu, received an aggregate of 15,6446,043
shares of the Registrant's common stock, which shares constituted approximately
39% of the issued and outstanding shares, resulting in a change in the
controlling interest of the Registrant. After giving effect to the Merger
Transaction, Max Time Enterprises Limited's percentage interest in the
Registrant was reduced to approximately 17.46% of the issued and outstanding
shares. Although neither Zhenyong Liu nor Max Time Enterprises Limited, acting
alone, has a majority of the outstanding shares of the Registrant's securities,
if they were to act as a group it is conceivable that they could influence
management. The Registrant is not aware of any arrangement or understanding
among these two shareholders to act as a group.
For information about the Merger Transaction, please see the information
set forth above under Item 1.01 and Item 2.01 of this Current Report, which
information is incorporated hereunder by this reference.
Item 5.06 Change in Shell Company Status.
Because the Registrant may be deemed to be a "shell company" (as such term
is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) immediately before the Merger Transaction, in accordance
with Item 2.01(a)(f) of Form 8-K set forth below is the information that would
be required if the Registrant were filing a form for registration of securities
on Form 10-SB under the Exchange Act. The Registrant believes that, as a result
of its acquisition in the Merger Transaction of a subsidiary having an operating
business, it can no longer be deemed to be a shell company.
Description of Business
DZHL is a holding company founded on November 13, 2006 under the laws of
the British Virgin Islands. DZHL is a holding company which does not generate
any financial or operating transactions. It owns all of the issued and
outstanding stock and ownership of HBOP, which was founded in 1996 and engages
mainly in production and distribution of products such as copy paper, uncoated
and coated paper, digital photo paper, corrugated paper, plastic paper, Kraft
paper, graphic design paper, antifraud thermal security paper, and other paper
and packaging related products. HBOP uses recycled paper as its raw materials
and has its corporate offices in Baoding, PRC.
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HBOP's main products include various specifications of: (i) corrugated
paper, (ii) tea paperboard, (iii) middle-grade offset paper, (iv) high-grade
offset paper and (v) printing paper.
Products currently in development include (a) security paper, (b)
environmental newsprinting paper and (c) digital photographic paper. With
respect to each of these products, HBOP has already established process orders,
installed production equipment and completed small pilot production.
HBOP's main competitors are: (1) Nine Dragons Paper (Holdings) Limited;
(2) Huatai Group Limited; (3) Chenming Paper Group Limited. (4) Sun Paper Group
Limited; (5) Qingshan Paper Co., Ltd.
HBOP's main suppliers are Dongfang Business Company Limited, Beijing
Heerwang Industrial Material Company Limited, Shanghai Paper Machine Company
Limited-Beijing Branch, Tianhe Coal Company Limited, and AP Procurement Business
Company Limited-Macao Branch.
HBOP's main customers are Beijing Zhongji Star Paper Company Limited,
Shanghai Hengshi Paper Company Limited, Hebei Mancheng Printing Company Limited,
Beijing Star Paper Company Limited and Baoding Hengyi Printing Company Limited.
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Risk Factors
Following the Merger Transaction, management intends to change the
Registrant's business focus to the paper product manufacturing operations in
which GHL's subsidiary, JXL, is currently engaged in China. The following are
risks associated with the Registrant and such business operations. If any of
these risks were to develop into actual events, the Registrant's business,
financial condition or results of operations could be materially adversely
affected and the trading price of the Registrant's Common Stock could decline
significantly.
Risk Related to the Registrant's Business and Industry
Risk related to changes in customer order patterns
The Registrant's financial outcomes also can be risked by changes in the
levels of inventory maintained by customers and the timing of customer
purchases, which may be affected by announced price changes, changes in the
Registrant's incentive programs, or the customer's ability to achieve incentive
goals. Changes in customers' preferences for our products can also affect the
demand for our products.
Risk related to changes in the cost of raw material and energy
As a manufacturer, the Registrant's sales and profitability are also
dependent upon the cost and availability of raw materials and energy, which are
subject to price fluctuations, and the ability to control or pass on costs of
raw materials and labor. Inflationary and other increases in the costs of raw
materials, labor and energy have occurred in the past and are expected to recur,
and our performance depends in part on our ability to pass on to customers
changes in costs in our selling prices for products and on improvements in
productivity. Also, it is important that we are able to obtain timely delivery
of materials, equipment, and packaging from suppliers. A disruption to our
supply chain could adversely affect our sales and profitability.
Risk related to customers concentration
The Registrant's customers are widely diversified, but in certain portions
of business, industry concentration has increased the importance and decreased
the number of significant customers. In particular, sales of consumer products
in China are concentrated in a few major customers. The business risk associated
with this concentration, including increased credit risks for these and other
customers, and the possibility of related bad debt write-offs, could negatively
affect our margins and profits.
Risk related to product development
The Registrant's ability to develop and successfully market new products
and applications is important in maintaining growth. The timely introduction of
new products and improvements in current products helps determine our success.
Research and development for each of the Registrant's operating segments is
complex and uncertain and requires innovation and anticipation of market trends.
The Registrant could focus on products that ultimately are not accepted by
customers.
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Infringing intellectual property rights of third parties or inadequately
acquiring or protecting intellectual property and patents could harm the
Registrant's ability to grow
Because the products involve complex technology and chemistry, the
Registrant is sometimes involved in litigation involving patents and other
intellectual property. Parties have filed, and in the future may file, claims
against us alleging that we have infringed their intellectual property rights.
We could be held to be liable to pay damages or obtain licenses. There can be no
assurance that licenses will be available, or will be available on commercially
reasonable terms, and the cost to defend these infringement claims and to
develop new technology could be significant. The Registrant also could have its
intellectual property infringed. We attempt to protect and restrict access to
our intellectual property and proprietary information, but it may be possible
for a third party to obtain our information and develop similar technologies. In
addition, many of the regions in which we operate have limited or no protection
for intellectual property rights. The costs involved to protect our intellectual
property rights could adversely impact our profitability.
Risk related to competition
The Registrant operates in a high competitive market. If the Registrant
does not compete effectively, it could lose market share and experience falling
prices, adversely affecting its financial results. The Registrant's competitors
will expand in the key markets and implement new technologies making them more
competitive. There is also the possibility that competitors will be able to
offer additional products, services, lower prices, or other incentives that the
Registrant can not or will not offer or that will make the Registrant's products
less profitable. There can be no assurance that the Registrant will be able to
compete successfully against current and future competitors.
Risks related to litigation
Potential adverse developments in legal proceedings and investigations
regarding competitive activities and other legal, compliance and regulatory
matters, including those involving product liabilities, product and trade
compliance, and other matters, could impact us materially. The Registrant's
financial results could be materially adversely impacted by an unfavorable
outcome to pending or future litigation and investigations.
Risks related to environmental, health, and safety laws.
Due to the nature of the business, we are subject to environmental,
health, and safety laws and regulations, including those related to the disposal
of hazardous waste from our manufacturing processes. Compliance with existing
and future environmental, health and safety laws could subject us to future
costs or liabilities; impact our production capabilities; constrict our ability
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to sell, expand or acquire facilities; and generally impact our financial
performance. We have accrued liabilities for environmental clean-up sites,
including sites for which governmental agencies have designated us as a
potentially responsible party, where it is probable that a loss will be incurred
and the cost or amount of loss can be reasonably estimated. However, because of
the uncertainties associated with environmental assessment and remediation
activities, future expense to remediate currently identified sites and other
sites, which could be identified in the future for cleanup, could be higher than
the liability currently accrued.
Risk affected by the macro economy
The demand for products is impacted by economic conditions of the country
and the principal provinces in which the Registrant operates. A decline in the
economies in these regions could have an adverse effect on our sales and
profitability.
Risks Related to Doing Business in China
Adverse changes in economic and political policies of the People's Republic of
China government could have a material adverse effect on the overall economic
growth of China, which could adversely affect our business.
Because the Registrant's operations are all located outside of the United
States and are subject to Chinese laws, any change of Chinese laws may adversely
affect the Registrant's business.
All of the Registrant's operations are outside the United States and are
located in China, which exposes it to risks, such as exchange controls and
currency restrictions, currency fluctuations and devaluations, changes in local
economic conditions, changes in Chinese laws and regulations, exposure to
possible expropriation or other Chinese government actions, and unsettled
political conditions. These factors may have a material adverse effect on the
Registrant's operations or on the Registrant's business, results of operations
and financial condition.
China's economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of
resources. While the People's Republic of China economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The People's Republic of
China government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall People's Republic of China economy, but may also have a
negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. Since early
2004, the People's Republic of China government has implemented certain measures
to control the pace of economic growth. Such measures may cause a decrease in
the level of economic activity in China, which in turn could adversely affect
our results of operations and financial condition.
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The Registrant faces risks associated with currency exchange rate fluctuation,
any adverse fluctuation may adversely affect the Registrant's operating margins.
Although the Registrant is incorporated in the United States, the majority
of its current revenues are in Chinese currency. Conducting business in
currencies other than US dollars subjects the Registrant to fluctuations in
currency exchange rates that could have a negative impact on the Registrant's
reported operating results. Fluctuations in the value of the US dollar relative
to other currencies impact the Registrant's revenue; cost of revenues and
operating margins and result in foreign currency translation gains and losses.
Historically, the Registrant has not engaged in exchange rate hedging
activities. Although the Registrant may implement hedging strategies to mitigate
this risk, these strategies may not eliminate the Registrant's exposure to
foreign exchange rate fluctuations and involve costs and risks of their own,
such as ongoing management time and expertise, external costs to implement the
strategy and potential accounting implications.
The Chinese legal and judicial system may negatively impact foreign investors.
In 1982, the National Peoples Congress amended the Constitution of China
to authorize foreign investment and guarantee the "lawful rights and interests"
of foreign investors in China. However, China's system of laws is not yet
comprehensive. The legal and judicial systems in China are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may be varied to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption
of local regulations by national laws may adversely affect foreign investors.
However, the trend of legislation over the last 20 years has significantly
enhanced the protection of foreign investment and allowed for more control by
foreign parties of their investments in Chinese enterprises. There can be no
assurance that a change in leadership, social or political disruption, or
unforeseen circumstances affecting China's political, economic or social life,
will not affect the Chinese government's ability to continue to support and
pursue these reforms. Such a shift could have a material adverse effect on the
Registrant business and prospects.
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The practical effect of the Peoples Republic of China legal system on the
Registrant business operations in China can be viewed from two separate but
intertwined considerations. First, as a matter of substantive law, the Foreign
Invested Enterprise laws provide significant protection from government
interference. In addition, these laws guarantee the full enjoyment of the
benefits of corporate Articles and contracts to Foreign Invested Enterprise
participants. These laws, however, do impose standards concerning corporate
formation and governance, which are not qualitatively different from the general
corporation laws of the several states. Similarly, the Peoples Republic of China
accounting laws mandate accounting practices, which are not consistent with U.S.
Generally Accepted Accounting Principles. China's accounting laws require that
an annual "statutory audit" be performed in accordance with Peoples Republic of
China accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the Peoples Republic of China Wholly Foreign-Owned Enterprise Law requires
a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designate financial and tax authorities, at the risk of business
license revocation. Second, while the enforcement of substantive rights may
appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Economic Reform Issues
Although the Chinese government owns the majority of productive assets in
China, during the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
o The Registrant will be able to capitalize on economic reforms;
o The Chinese government will continue its pursuit of economic
reform policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time
to time; and
o Business operations in China will not become subject to the
risk of nationalization.
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Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect the Registrant operations.
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi (RMB), restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets.
To date, reforms to China's economic system have not adversely impacted
the Registrant operations and are not expected to adversely impact operations in
the foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that the Registrant will not be
adversely affected by changes in China's political, economic, and social
conditions and by changes in policies of the Chinese government, such as changes
in laws and regulations, measures which may be introduced to control inflation,
changes in the rate or method of taxation, imposition of additional restrictions
on currency conversion and remittance abroad, and reduction in tariff protection
and other import restrictions
Risks Related to the Registrant
The Registrant will continue to incur significant increased costs as a result of
operating as a public company, and management will be required to devote
substantial time to new compliance requirements.
As a public company the Registrant incurs significant legal, accounting
and other expenses under the Sarbanes-Oxley Act of 2002, together with rules
implemented by the Securities and Exchange Commission and applicable market
regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Management and other
personnel will need to devote a substantial amount of time to these new
compliance requirements. Moreover, these rules and regulations will increase the
Registrant's legal and financial compliance costs and will make some activities
more time-consuming and costly.
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In addition, the Sarbanes-Oxley Act requires, among other things, that the
Registrant maintains effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in 2007, the
Registrant must perform system and process evaluations and testing of the
Registrant's internal controls over financial reporting to allow management and
the Registrant's independent registered public accounting firm to report on the
effectiveness of the Registrant's internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act. The Registrant's testing, or
the subsequent testing by the Registrant's independent registered public
accounting firm, may reveal deficiencies in the Registrant's internal controls
over financial reporting that are deemed to be material weaknesses. Compliance
with Section 404 may require that the Registrant incurs substantial accounting
expenses and expend significant management efforts. If the Registrant is not
able to comply with the requirements of Section 404 in a timely manner, or if
the Registrant's accountants later identify deficiencies in the Registrant's
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of the Registrant's stock could decline and the
Registrant could be subject to sanctions or investigations by the SEC or other
applicable regulatory authorities.
Risks Related to the Common Stock
There is a limited public market for the common stock.
There is currently a limited public market for the common stock. holders
of the Registrant's common stock may, therefore, have difficulty selling their
common stock, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any shares of common stock,
which may be purchased, may be sold without incurring a loss. Any such market
price of the common stock may not necessarily bear any relationship to the
Registrant's book value, assets, past operating results, financial condition or
any other established criteria of value, and may not be indicative of the market
price for the common stock in the future. Further, the market price for the
common stock may be volatile depending on a number of factors, including
business performance, industry dynamics, and news announcements or changes in
general economic conditions.
The common stock may be deemed penny stock with a limited trading market.
The Registrant's common stock is currently listed for trading in the
Over-The-Counter Market on the NASD Electronic Bulletin Board or in the "pink
sheets" maintained by the National Quotation Bureau, Inc., which are generally
considered to be less efficient markets than markets such as NASDAQ or other
national exchanges, and which may cause difficulty in conducting trades and
difficulty in obtaining future financing. Further, the Registrant's securities
are subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the
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Securities Exchange Act of 1934, as amended (the "Exchange Act"). The penny
stock rules apply to non-NASDAQ companies whose common stock trades at less than
$5.00 per share or which have tangible net worth of less than $5,000,000
($2,000,000 if the Registrant has been operating for three or more years). Such
rules require, among other things, that brokers who trade "penny stock" to
persons other than "established customers" complete certain documentation, make
suitability inquiries of investors and provide investors with certain
information concerning trading in the security, including a risk disclosure
document and quote information under certain circumstances. Many brokers have
decided not to trade "penny stock" because of the requirements of the penny
stock rules and, as a result, the number of broker-dealers willing to act as
market makers in such securities is limited. In the event that the Registrant
remains subject to the "penny stock rules" for any significant period, there may
develop an adverse impact on the market, if any, for the Registrant securities.
Because the Registrant's securities are subject to the "penny stock rules"
investors will find it more difficult to dispose of the Registrant's securities.
Further, for companies whose securities are traded in the Over-The-Counter
Market, it is more difficult: (i) to obtain accurate quotations; (ii) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
The Registrant has not and does not anticipate paying any dividends on its
common stock; because of this the Registrant's securities could face devaluation
in the market.
The Registrant has paid no dividends on its common stock to date and it is
not anticipated that any dividends will be paid to holders of its common stock
in the foreseeable future. While the Registrant's dividend policy will be based
on the operating results and capital needs of the business, it is anticipated
that any earnings will be retained to finance the Registrant's future expansion
and for the implementation of the Registrant's new business plan. Lack of a
dividend can further affect the market value of the Registrant's common stock,
and could significantly affect the value of any investment in the Registrant.
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Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding the Registrant's capital needs, business strategy and expectations.
Any statements contained herein that are not statements of historical facts may
be deemed to be forward-looking statements. In some cases, forward-looking
statements can be identified by terminology such as "may", "will", "should",
"expect", "plan", "Intend", "anticipate", "believe", estimate", "predict",
"potential" or "continue", the negative of such terms or other comparable
terminology. Actual events or results may differ materially. The Registrant
disclaims any obligation to publicly update these statements, or disclose any
difference between its actual results and those reflected in these statements.
The information constitutes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
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Management's Discussion and Analysis
Following the Merger Transaction, DZHL became the Registrant's direct
subsidiary. DZHL is a holding company which does not generate any financial
transactions. HBOP is DZHL's wholly-owned subsidiary. The following discussion
and analysis summarizes the significant factors affecting HBOP's results of
operations for fiscal year 2006 compared to fiscal year 2005. This discussion
and analysis should be read in conjunction with the financial statements and
notes included with this report.
Results of Operations
The following table presents the statement of operations for the year
ended December 31, 2006 as compared to the comparable period of the year ended
December 31, 2005 for HBOP. The discussion following the table is based on these
results.
2006 2005
Sales, net $30,561,249 $22,687,666
Gross profit $ 5,331,098 $ 4,072,012
General and Administrative expenses $ 292,833 $ 162,281
Income from operations $ 5,038,265 $ 3,909,731
Net Income $ 3,193,070 $ 2,457,153
Net sales
Net sales for FYE 2006 increased by 34.7 percent, as compared to FYE 2005,
for a total of $30,561,249 in FYE 2006 compared to $22,687,666 in FYE 2005. The
increase was driven primarily by:
a. HBOP launched a successful market expansion plan that increased
the sales volume in domestic market.
b. The appreciation of Chinese currency. The Chinese currency (Yuan)
appreciated almost 5 percent against the US Dollar from year 2005 to 2006.
Gross Profit
Gross Profit was $4,072,012 in FYE 2005 and increased to $5,331,098 in FYE
2006, an increase of 30.92%. The increase was attributed to the higher sales
volume.
15
General and Administrative Expense
In FYE 2006, the general and administrative expenses were $292,833, as
compared to $162,281 in FYE 2005. It increased about $130,552 or 80.44%. The
increase was due to the 81% increase in advertising fees and 77% increase in
transportation fees.
Income (Loss) from Operations
Income from operations in FYE 2006 was $5,038,265, an increase of
$1,128,534 or 28.86% compared to FYE 2005, which was $3,909,731. This was
primarily due to the higher net sales generated.
Net Income
Net income for FYE 2006 was $3,193,070, an increase of $735,917 or 29.94%
compared to FYE 2005, which was $2,457,153. The increase was due to the higher
sales volume with moderate increase in the cost of sales and expenses.
Liquidity and Capital Resources
Cash has historically been generated from operations. Operations and
liquidity needs are funded primarily through cash flows from operations and
short-term borrowings. Cash and cash equivalents were $80,970 at December 31,
2006 and current assets totaled $4,388,512 at December 31, 2006. The
Registrant's total current liabilities were $11,421,544 at December 31, 2006.
Working capital at December 31, 2006 was ($7,033,032). We believe that the funds
available to us are adequate to meet our operating needs for market expansion.
During 2006, net cash provided by operating activities was $7,861,997. Cash used
by financing activities was $7,250,939.
Working Capital Requirements
Historically operations and short term financing have been sufficient to
meet our cash needs. We believe that we will be able to generate revenues from
sales. However, our actual working capital needs for the long and short term
will depend upon numerous factors, including operating results, competition, and
the availability of credit facilities, none of which can be predicted with
certainty. Future expansion will be limited by the availability of financing
products and raising capital.
Plan of Operation
As a result of the closing of the Merger, the Registrant became a holding
company and has no significant business operations or assets other than its
interest in the operating subsidiary, its accounting predecessor company. The
Registrant's operating subsidiary's short to mid-term strategic plan is to focus
on market expansion in the Chinese domestic market. The long-term strategic goal
is to focus on market expansion in the international market.
16
The Registrant may issue additional shares of capital stock to raise
additional cash for working capital in the next twelve months. If the Registrant
issues additional shares of capital stock, the stockholders will experience
dilution in their respective percentage ownership in the Registrant. The
Registrant has not decided on the amount of the cash needed for working capital
at this point. Working capital will be used for expanding domestic market by
establishing more production lines and purchasing new equipments.
Description of Property
The assets of the Registrant and its subsidiary on a consolidated,
post-merger basis include cash and cash equivalents, accounts receivable from
customers, inventories, property and equipments.
HBOP headquarters are located at Unit: Hebei Baoding Orient Paper Milling
Company Limited, Science Park, Xushui Town, Baoding City, Hebei Province, P.R.
China. The headquarters, divided into two districts, has a total area of 258.06
mu or approximately 42.50 acres. All the office buildings and factory buildings
are built and owned by the company. As a result of the Merger, the corporate
office of the Registrant will be relocated to the above address. There are no
present plans for the improvement or development for all the properties.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of October 26,
2007, concerning shares of common stock of the Registrant, the only class of its
securities that are issued and outstanding, held by (1) each shareholder known
by the Registrant to own beneficially more than five percent of the common
stock, (2) each director of the Registrant, (3) each executive officer of the
Registrant, and (4) all directors and executive officers of the Registrant as a
group:
Amount and
Nature of
Beneficial Percentage of
Name and Address of Beneficial Owner (1) Ownership common stock (2)
-------------------------------------------------------------------------------------------------
Max Time Enterprises Limited (3) 7,000,000 68%
All directors and executive officers as a group (1 person) (3) 7,000,000 68%
----------
(1) Unless otherwise indicated in the footnotes to the table, each shareholder
shown on the table has sole voting and investment power with respect to
the shares beneficially owned by him or it. Unless otherwise indicated,
the address of each beneficial owner reported above is c/o Carlateral,
Inc., 112 North Currie Street, Carson City, NV 89703.
(2) Based on 10,300,000 shares of common stock outstanding.
(3) Hui-Ping Cheng is the sole owner, director and officer of Max Time
Enterprises Limited and by reason of her control position at Max Time
Enterprises Limited, Ms. Cheng may be deemed to be an indirect beneficial
owner of those shares of our common stock held by Max Time Enterprises
Limited.
17
The following table sets forth the ownership of our common stock as of
October 29, 2007 (after giving effect to the issuance of 29,801,987 shares of
the Registrant's common stock pursuant to the Merger Agreement) by each person
known by us to be the beneficial owner of more than 5% of our outstanding common
stock, our directors, and our executive officers and directors as a group.
Amount and
Nature of
Beneficial Percentage of
Name and Address of Beneficial Owner (1) Ownership common stock (2)
-------------------------------------------------------------------------------------------------
Zhenyong Liu 15,646,043 39%
Max Time Enterprises Limited (3) 7,000,000 17.46%
All directors and named executive officers as a group 7,000,000 17.46%
(1 person, Hui Ping Cheng) (3)
----------
(1) Unless otherwise indicated in the footnotes to the table, each shareholder
shown on the table has sole voting and investment power with respect to
the shares beneficially owned by him or it. Unless otherwise indicated,
the address of each beneficial owner reported above is c/o Carlateral,
Inc., 112 North Currie Street, Carson City, NV 89703.
(2) Based on 40,101,987 shares of common stock outstanding (after giving
effect to the Merger Transaction).
(3) Hui-Ping Cheng is the sole owner, director and officer of Max Time
Enterprises Limited and by reason of her control position at Max Time
Enterprises Limited, Ms. Cheng may be deemed to be an indirect beneficial
owner of those shares of our common stock held by Max Time Enterprises
Limited.
The above table is based upon information derived from our stock records.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, each of the shareholders named in this
table has sole or shared voting and investment power with respect to the shares
indicated as beneficially owned.
Change in Control Arrangements
Currently, there are no arrangements that would result in a change in
control of the Registrant.
18
Directors and Executive Officers, Promoters and Control Persons
Hui Ping Cheng, Director, President and Chief Financial Officer
Ms. Cheng, born in April 1964, age 43, has been employed as a senior
accountant and accounting department director by Shenzhen Yi Zhi Pharmaceutical
Company Limited from September 1998 until April 2007, where she manage and
oversee the company's accounting department. She was then employed as the
director and President by Max Time Enterprise Limited from April 2007 until now.
There are no family relationships between Ms. Cheng and the directors,
executive officers, or persons nominated or chosen by the Registrant to become
directors or executive officers. During the last two years, there have been no
transactions, or proposed transactions, to which the Registrant was or is to be
a party, in which Ms. Cheng (or any member of his immediate family) had or is to
have a direct or indirect material interest.
Ms. Cheng has not, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors). Ms.
Cheng has not, during the last five years, been a party to a civil proceeding of
a judicial or administrative body of competent jurisdiction and, as a result of
such proceeding, was or is subject to a judgment, decree or final order
enjoining future violations of, or prohibiting or mandating activities subject
to, federal or state securities laws, or finding any violation with respect to
such laws. Ms. Cheng has not, during the last five years, been a party of any
bankruptcy petition filed by or against any business of which he was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time.
Executive & Director Compensation
Our current and previous executive officer and director does not receive
any compensation and have not received any restricted shares awards, options, or
any other payouts. As such, we have not included a Summary Compensation Table.
There are no current employment agreements between the Registrant and its
executive officer or director. Our executive officer and director have agreed to
work without remuneration until such time as we receive sufficient revenues
necessary to provide proper salaries to the officer and compensate the director
for participation.
There are no annuity, pension or retirement benefits proposed to be paid
to officers, directors or employees of the corporation in the event of
retirement at normal retirement date pursuant to any presently existing plan
provided or contributed to by Registrant.
The Registrant currently does not have employment agreements with its
executive officers. The executive officer/director of the Registrant has agreed
to take no salary until the Registrant can generate enough revenues to support
salaries on a regular basis. The officer will not be compensated for services
previously provided. They will receive no accrued remuneration.
19
Compensation of Directors
No director receives any fee, salary or commission for service as a
director. In addition, no such arrangement is contemplated for the foreseeable
future.
Options
There are no options currently outstanding.
Certain Relationships and Related Transactions
Except as otherwise disclosed herein or incorporated herein by reference,
there have not been any transactions, or proposed transactions, during the last
two years, to which the Registrant was or is to be a party, in which any
director or executive officer of the Registrant, any nominee for election as a
director, any security holder owning beneficially more than five percent of the
common stock of the Registrant, or any member of the immediate family of the
aforementioned persons had or is to have a direct or indirect material interest.
Description of Securities
Each share of common stock is entitled to one vote on all matters upon
which such shares can vote. All shares of common stock are equal to each other
with respect to the election of directors and cumulative voting is not
permitted. There are no preemptive rights. In the event of liquidation or
dissolution, holders of common stock are entitled to receive, pro rata, the
assets remaining, after creditors, and holders of any class of stock having
liquidation rights senior to holders of shares of common stock, have been paid
in full. All shares of common stock are entitled to such dividends as the Board
of Directors may declare from time to time. There are no provisions in the
articles of incorporation or bylaws that would delay, defer or prevent a change
of control. The Registrant does not have any other classes of issued and
outstanding capital stock.
Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters
The Registrant's common stock is traded on the OTCBB under the symbol
"CARZ". As of October 26, 2007, the market price for the Registrant's common
stock was $0.75 per share. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. There is currently no trading volume.
As of October 26, 2007, there were approximately 47 holders of record of
the Registrant's common stock.
The Registrant has no plans to declare cash dividends on its common stock
in the future and has not declared any thus far during fiscal year 2007 or
during the last two completed fiscal years. There are no restrictions that limit
the ability of the Registrant to declare cash dividends on its common stock and
the Registrant does not believe that there are any that are likely to do so in
the future.
20
Legal Proceedings
The Registrant, its subsidiaries and its property are not a party to any
pending legal proceeding.
Changes in and Disagreements with Accountants
Not applicable.
Recent Sales of Unregistered Securities
Not applicable
Indemnification of Directors and Officers
The Registrant will indemnify its directors and officers to the fullest
extent permitted by the General Corporation Law of the State of Nevada.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The following financial statements are hereby included as part of this
Current Report.
Page No.
Hebei Baoding Orient Paper Milling Company Limtied
Report of Independent Registered Public Accounting Firm F-2
Balance Sheet at December 31, 2006 F-3
Statements of Operations for the Years Ended December 31, 2006 and 2005 F-4
Statements of Comprehensive Income for the Years Ended
December 31, 2006 and 2005 F-5
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2006 and 2005 F-6
Statements of Cash Flows for the Years Ended December 31, 2006 and 2005 F-7
Notes to Financial Statements F-8
Balance Sheet as of June 30, 2007 (unaudited) F-14
Statements of Operations for the Six Months Ended June 30,
2007 and 2006 (unaudited) F-15
Statements of Comprehensive Income for the Six Months
ended June 30, 2007 and 2006 (unaudited) F-16
21
Statements of Stockholders' Equity for the
Six Months Ended June 30, 2007 (unaudited) F-17
Statements of Cash Flow for the Six Months Ended
June 30, 2007 and 2006 (unaudited) F-18
Notes to Financial Statements F-19
(b) Pro forma financial information.
The following pro forma financial statements are hereby included as part
of this Current Report.
Carlateral, Inc.
Pro Forma Condensed Financial Statements (unaudited)
Introduction F-22
Pro Forma Condensed Consolidated Balance Sheet
at August 31, 2007 (unaudited) F-23
Pro Forma Condensed Consolidated Statement
of Operations for year ended February 28, 2007 (unaudited) F-24
Pro Forma Condensed Consolidated Statement of
Operations for Six Months Ended August 31, 2007 (unaudited) F-25
Notes to Pro Forma Condensed Financial Statements (unaudited) F-26
(c) Exhibits
10.1 Agreement and Plan of Merger, dated as of October 1, 2007, among the
Registrant, CARZ Merger Sub, Inc. ("SUB"), Dongfang Zhiye Holding
Limited ("DZHL") and each of DZHL shareholders, Zhenyong Liu,
Xiaodong Liu, Chen Li, Ning Liu, Jie Liu, Shenzhen Huayin Guaranty &
Investment Company Limited, Top Good International Limited, Total
Giant Group Limited, Total Shine Group Limited, Victory High
Investment Limited, Think Big Trading Limited, Huge Step Enterprises
Limited, and Sure Believe Enterprise Limited.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CARLATERAL, INC.
Date: October 29, 2007 By: /s/ Hui Ping Cheng
-----------------------------
Hui Ping Cheng
Chairman of the Board &
Chief Executive Officer
23
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
FINANCIAL STATEMENTS
AS OF
DECEMBER 31, 2006
HURLEY & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS
F-1
[LETTERHEAD OF FARBER HASS HURLEY & McEWEN LLP]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Hebei Baoding Orient Paper Milling Co., Ltd.
Baoding, People's Republic of China
We have audited the accompanying balance sheet of Hebei Baoding Orient Paper
Milling Co. Ltd. as of December 31, 2006, and the related statements of
operations, comprehensive income, stockholders' equity, and cash flows for the
years ended December 31, 2006 and 2005. These financial statements are the
responsibility of Hebei Baoding Orient Paper Milling Co. Ltd.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 has determined that it
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
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hebei Baoding Orient Paper
Milling Co. Ltd. as of December 31, 2006, and the results of its operations and
its cash flows for the years ended December 31, 2006 and 2005, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Farber Hass Hurley & McEwen LLP
Farber Hass Hurley & McEwen LLP
Granada Hills, California
June 27, 2007
F-2
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
BALANCE SHEET
DECEMBER 31, 2006
2006
----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,970
Accounts receivable 1,625,862
Inventory 2,681,680
-----------
Total current assets 4,388,512
PROPERTY AND EQUIPMENT, Net
of accumulated depreciation 34,274,161
-----------
TOTAL ASSETS $38,662,673
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loan payable $ 5,356,939
Accounts payable and accrued expenses 1,668,186
Taxes payable 1,832,419
Related party note, current portion 2,564,000
-----------
Total current liabilities 11,421,544
-----------
Long-term related party note, net of current portion 9,209,190
-----------
Total liabilities 20,630,734
STOCKHOLDERS' EQUITY
Paid in capital, 7,503 shares issued and outstanding 9,078,630
Statutory earning reserve 1,153,628
Retained earnings 6,927,829
Accumulated other comprehensive income 871,852
-----------
TOTAL STOCKHOLDERS' EQUITY 18,031,939
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,662,673
===========
See accompanying notes.
F-3
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
---- ----
REVENUES:
Sales $ 30,561,249 $ 22,687,666
Other operating income -- 73,332
------------ ------------
Total Revenues 30,561,249 22,760,998
COST OF SALES:
Cost of sales 25,106,423 18,589,265
Business tax and surcharges 123,728 99,721
------------ ------------
Total cost of sales 25,230,151 18,688,986
------------ ------------
GROSS PROFIT 5,331,098 4,072,012
GENERAL AND ADMINISTRATIVE EXPENSES 292,833 162,281
------------ ------------
INCOME FROM OPERATIONS 5,038,265 3,909,731
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (275,225) (283,894)
Non-operating income -- 42,777
Non-operating expense (4,018) (1,222)
------------ ------------
Total other income (expense), net (279,243) (242,339)
------------ ------------
INCOME BEFORE INCOME TAXES 4,759,022 3,667,392
PROVISION FOR INCOME TAXES 1,565,952 1,210,239
------------ ------------
NET INCOME $ 3,193,070 $ 2,457,153
============ ============
Basic and fully diluted earnings per share $ 425.57 $ 327.49
============ ============
Weighted average number of shares outstanding, basic and diluted 7,503 7,503
============ ============
See accompanying notes.
F-4
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
---- ----
NET INCOME $3,193,070 $2,457,153
OTHER COMPREHENSIVE INCOME
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 550,826 321,151
---------- ----------
NET COMPREHENSIVE INCOME $3,743,896 $2,778,304
========== ==========
See accompanying notes.
F-5
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Accumulated
Statutory Other Total
Paid-In Earning Retained Comprehensive Stockholder
Shares Capital Reserve Earnings Income (Loss) Equity
----------- ----------- ----------- ----------- ------------- -----------
Balance, December 31, 2004 7,503 $ 9,078,630 $ 308,158 $ 2,123,076 $ (125) $11,509,739
Foreign currency
translation adjustment -- -- -- -- 321,151 321,151
Net income for the year
ended December 31, 2005 -- -- 368,573 2,088,580 -- 2,457,153
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2005 7,503 9,078,630 676,731 4,211,656 321,026 14,288,043
Foreign currency
translation adjustment -- -- -- -- 550,826 550,826
Net income for the year
ended December 31, 2006 -- -- 476,897 2,716,173 -- 3,193,070
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2006 7,503 $ 9,078,630 $ 1,153,628 $ 6,927,829 $ 871,852 $18,031,939
=========== =========== =========== =========== =========== ===========
See accompanying notes.
F-6
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,193,070 $ 2,457,153
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,870,878 1,002,543
Changes in operating assets and liabilities:
Accounts receivables (699,793) 269,016
Advances to suppliers 3,151,179 (2,023,015)
Inventories 423,639 483,147
Accounts payable and accrued expenses 351,157 621,147
Advances from customers (876,331) 650,142
Taxes payable 448,198 342,034
------------ ------------
Net cash provided by operating activities 7,861,997 3,802,167
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,365,801) (3,141,989)
Construction in progress -- (4,642,359)
------------ ------------
Net cash (used by) investing activities (15,365,801) (7,784,348)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party 8,009,731 3,531,272
Payments to related party (2,246,269) (830,454)
Proceeds from borrowing on credit facility 1,517,000 --
Loans on equipment and building 3,838,308 3,712,560
Payments on loans on equipment and building (3,867,831) (2,612,580)
------------ ------------
Net cash provided by financing activities 7,250,939 3,800,798
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 5,814 9,747
------------ ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS $ (247,051) $ (171,636)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 328,021 499,657
------------ ------------
CASH AND CASH EQUIVALNETS, END OF YEAR $ 80,970 $ 328,021
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
CASH PAID FOR INTEREST $ 301,411 $ 284,173
============ ============
CASH PAID FOR TAXES $ 1,087,934 $ 868,206
============ ============
See accompanying notes.
F-7
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and History of Company - Hebei Baoding Orient Paper
Milling Co., Ltd. (hereinafter referred to as the "Company") was organized
March 3, 1996, under the laws of the People's Republic of China ("PRC").
The Company engages mainly in production and distribution of products such
as copy paper, uncoated and coated paper, digital photo paper, corrugated
paper, plastic paper, kraft paper, graphic design paper, antifraud thermal
security paper, and other paper and packaging related products. The
Company uses recycled paper as its raw materials. The Company has its
corporate offices in Baoding, PRC.
Basis of Presentation - The accompanying financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America. The Company's functional currency is the
Chinese Renminbi; however, the accompanying financial statements have been
translated and presented in United States dollars.
Foreign Currency Translation - As of December 31, 2006, the accounts of
the Company were maintained, and its financial statements were expressed,
in Chinese Yuan Renminbi (CNY). Such financial statements were translated
into U.S. dollars (USD) in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation", with
the CNY as the functional currency. According to the Statement, all assets
and liabilities of the Company are translated at the current exchange
rate, stockholders' equity are translated at the historical rates and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders' equity. Translation
gains and losses are reflected in the income statement.
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 the disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could vary from
those estimates.
Risks and Uncertainties - The Company is subject to substantial risks
from, among other things, intense competition associated with the industry
in general, other risks associated with financing, liquidity requirements,
rapidly changing customer requirements, limited operating history, foreign
currency exchange rates and operating in PRC under its various laws and
restrictions.
Cash and Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally
of cash. The Company places its temporary cash investments in reputable
financial institutions which are fully insured by the government.
Accounts Receivable - Trade accounts receivable are recorded on shipment
of products to customers and generally due net 30 days. The trade
receivables are not collateralized and interest is not accrued on past due
accounts. Periodically, management reviews the adequacy of its provision
for doubtful accounts based on historical bad debt expense results and
current economic conditions using factors based on the aging of its
accounts receivable. Additionally, the Company may identify additional
allowance requirements based on indications that a specific customer may
be experiencing financial difficulties. Actual bad debt results could
differ materially from these estimates. At December 31, 2006, management
set the bad debt reserve at $0.
F-8
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories - Inventories consist principally of raw materials (used
paper) and finished goods and are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment - Property and equipment are stated at cost. Major
renewals and improvements are charged to the asset accounts while
replacements, maintenance and repairs, which do not improve or extend the
lives of the respective assets, are expensed. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable amounts.
Gains or losses from retirements or sales are credited or charged to
income.
The Company depreciates property and equipment using the straight-line
method as follows:
Building and interior 30 years
Furniture and fixtures 15 years
Vehicles 15 years
Long-Lived Assets - The Company recognizes impairment losses on long-lived
assets used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. In such circumstances, those assets
are written down to estimated fair value. The Company recognized no
impairment charge in 2006 or 2005.
Fair Value Measurements - In September 2006, the FASB issued SFAS No.157,
"Fair Value Measurements." The Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements, and does
not require any new fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements. The Statement is effective for the fiscal years beginning
after November 15, 2007. The Company is assessing SFAS No. 157 and has not
determined the impact of the adoption of SFAS No. 157 will have its
results of operations or financial position
Statutory Reserves - The laws and regulations of the People's Republic of
China require that before an enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserve. The
statutory reserves include surplus reserve fund and common welfare fund.
These statutory reserves represent restricted retained earnings.
Surplus Reserve Fund - The Company is required to transfer 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve
balance reaches 50% of the Company's registered capital.
The transfer to this reserve must be made before distribution of any
dividend to shareholders. For the years ended December 31, 2006 and 2005,
the Company transferred approximately $318,000 and $246,000, respectively,
representing 10% of the year's net income determined in accordance with
PRC accounting rules and regulations, to this reserve. The surplus reserve
fund is non-distributable other than during liquidation and can be used to
fund previous years' losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing
the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
F-9
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Common Welfare Fund - The Company is required to transfer 5% to 10% of its
net income, as determined in accordance with the PRC accounting rules and
regulations, to the statutory common welfare fund. For the years ended
December 31, 2006 and 2005, the Company transferred approximately $159,000
and $123,000, respectively, representing 5% of the year's net income
determined in accordance with PRC accounting rules and regulations, to
this reserve. This fund can only be utilized on capital items for the
collective benefit of the Company's employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities.
This fund is non-distributable other than upon liquidation. The transfer
to this fund must be made before distribution of any dividend to
shareholders.
Revenue Recognition Policy - The Company recognizes revenue when goods are
shipped, when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations
of the Company exist and collectibility is reasonably assured. The Company
is required to collect a 3% value- added-tax ("VAT") on each sale. Gross
revenues do not include this VAT which is remitted to the government
quarterly.
Advertising - The Company expenses all advertising as incurred.
Advertising expenses for the years ended December 31, 2006 and 2005 were
$1,168 and $220, respectively.
Income Taxes - The Company is governed by the Income Tax Laws of the PRC.
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is
at a statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax.
Foreign Currency Translation - These financial statements are presented in
United States of America dollars. The books and records of Company are
measured using the Chinese Yuan Renminbias the functional currency.
Assets, liabilities and equity accounts of the Company are translated at
exchange rates as of the balance sheet date. Revenues and expenses are
translated at average rates of exchange in effect during the year. The
resulting cumulative translation adjustments have been recorded as a
separate component of stockholders' equity.
Recent Accounting Pronouncements - In February 2007, the FASB issued SFAS
No. 159, which permits entities to choose to measure many financial
instruments and certain other items at fair value. SFAS No. 159 also
includes an amendment to SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" which applies to all entities with
available-for-sale and trading securities. This Statement is effective as
of the beginning of an entity's first fiscal year that begins after
November 15, 2007. The Company is assessing the impact of SFAS No. 159 and
has not determined whether it will have a material impact on the Company's
results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements." The Statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements, and does not require
any new fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements.
The Statement is effective for the fiscal years beginning after November
15, 2007. The Company is assessing SFAS No. 157 and has not determined the
impact the adoption of SFAS No. 157 will have its results of operations or
financial position.
F-10
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2006, the FASB issued FASB Interpretation No.48, "Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No.109"
(FIN 48). The interpretation clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements in accordance
with SFAS No.109, "Accounting for Income Taxes." Specifically, the
pronouncement prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation
also provides guidance on the related de-recognition, classification,
interest and penalties, accounting for interim periods, disclosure and
transition of uncertain tax positions. The interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is assessing
FIN 48 and has not determined the impact that the adoption of FIN 48 will
have on its consolidated financial statements.
2. INVENTORY
Inventory consists of the following at December 31, 2006:
Raw materials $1,403,486
Finished goods 1,278,194
----------
Total inventory $2,681,680
==========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2006:
Building and interior $ 8,629,172
Furniture and fixtures 31,272,834
Vehicles 9,335
-----------
Total property and equipment 39,911,341
Less accumulated depreciation 5,637,180
-----------
Property and equipment, net $34,274,161
===========
F-11
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
4. SHORT-TERM LOAN PAYABLE
The Company has the following short-term loan payables outstanding at
December 31, 2006:
Note payable, secured by equipment, payable at maturity,
including interest at 7.8% per annum. Matures 2007 $1,787,108
Credit facility payable, secured by building, payable at
maturity, including interest at 2% plus the bank's reference
interest rate. Matures 2007 1,517,000
Note payable, secured by equipment, payable at maturity,
including interest at 6.7% per annum. Matures 2007 1,283,631
Note payable, secured by equipment, payable at maturity,
including interest at 6.7% per annum. Matures 2007 769,200
----------
Total short-term loan payable $5,356,939
==========
At December 31, 2006, the Company's credit facility had a maximum
borrowing level of $2,000,000, which left $483,000 in borrowing capacity.
The average short-term borrowing rate for the year was approximately 7.9%.
5. COMMITMENTS AND CONTINGENCIES
Lease
The Company leases 133,200 metric acres of land at its location from a
local government through a real estate lease with a 30 year term and
expires on December 31, 2031. The lease requires an annual rental payment
of approximately $15,384. This operating lease is renewable at the end of
the 30 year term.
Future minimum lease payments are as follows:
December 31, 2007 $ 15,384
December 31, 2008 15,384
December 31, 2009 15,384
December 31, 2010 15,384
December 31, 2011 15,384
Thereafter 307,680
--------
Total lease payments $384,600
========
Environmental Remediation
In accordance with the ground lease, the Company will be obligated to
return the land to its condition prior to the lease. As such, the Company
will accrue the cost estimated to return the land to its prior condition
over the 30 year life of the lease. The Company has not obtained an
estimate for those costs, but management is confident that any such costs
that should be accrued in the year ended December 31, 2006 are not
material.
F-12
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
6. RELATED PARTY TRANSACTIONS
The CEO of the Company loaned the Company $8,009,731 and $3,531,272 during
2006 and 2005, respectively. At December 31, 2006, the Company owed the
CEO $11,773,190. The loan terms call for payments of approximately
$2,564,000 (20,000,000 CNY) in December of each year until paid. If the
balance due the officer is less than $2,564,000, the entire balance is to
be paid at once. There are provisions for deferring payment if the
Company's cash flow is not sufficient to cover the obligation. The loan
will not accrue interest.
The obligation will mature as follows:
December 31, 2007 $ 2,564,000
December 31, 2008 2,564,000
December 31, 2009 2,564,000
December 31, 2010 2,564,000
December 31, 2011 1,517,190
-----------
Total payments $11,773,190
===========
F-13
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
BALANCE SHEETS
June 30, 2007
(Unaudited) December 31, 2006
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 66,416 $ 80,970
Accounts receivable 1,194,253 1,625,862
Inventory 2,616,966 2,681,680
----------- -----------
Total current assets 3,877,635 4,388,512
PROPERTY AND EQUIPMENT, Net
of accumulated depreciation 34,414,637 34,274,161
----------- -----------
TOTAL ASSETS $38,292,272 $38,662,673
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term loan payable $ 5,874,237 $ 5,356,939
Accounts payable and accrued expenses 1,799,520 1,668,186
Taxes payable 787,408 1,832,419
Related party note, current portion 2,590,000 2,564,000
----------- -----------
Total current liabilities 11,051,165 11,421,544
----------- -----------
Long-term related party note, net of current portion 6,856,244 9,209,190
----------- -----------
Total liabilities 17,907,409 20,630,734
STOCKHOLDERS' EQUITY
Paid in capital, 7,503 shares issued and outstanding 9,078,630 9,078,630
Statutory earning reserve 1,153,628 1,153,628
Retained earnings 8,790,882 6,927,829
Accumulated other comprehensive income 1,361,723 871,852
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 20,384,863 18,031,939
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $38,292,272 $38,662,673
=========== ===========
See accompanying notes.
F-14
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
2007 2006
------------ ------------
REVENUES:
Sales $ 17,371,280 $ 13,788,705
COST OF SALES:
Cost of sales 14,268,761 11,041,786
Business tax and surcharges 70,845 54,878
------------ ------------
Total cost of sales 14,339,606 11,096,664
------------ ------------
GROSS PROFIT 3,031,674 2,692,041
GENERAL AND ADMINISTRATIVE EXPENSES 123,343 124,735
------------ ------------
INCOME FROM OPERATIONS 2,908,331 2,567,306
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (127,655) (167,595)
Non-operating expense -- (3,988)
------------ ------------
Total other income (expense), net (127,655) (171,583)
------------ ------------
INCOME BEFORE INCOME TAXES 2,780,676 2,395,723
PROVISION FOR INCOME TAXES 917,623 --
------------ ------------
NET INCOME $ 1,863,053 $ 2,395,723
============ ============
Basic and fully diluted earnings per share $ 248.31 $ 319.30
============ ============
Weighted average number of shares outstanding, basic and diluted 7,503 7,503
============ ============
See accompanying notes.
F-15
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
2007 2006
---- ----
NET INCOME $ 1,863,053 $ 2,395,723
OTHER COMPREHENSIVE INCOME
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 489,871 149,421
----------- -----------
NET COMPREHENSIVE INCOME $ 2,352,924 $ 2,545,144
=========== ===========
See accompanying notes.
F-16
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007
UNAUDITED
Accumulated
Statutory Other Total
Paid-In Earning Retained Comprehensive Stockholder
Shares Capital Reserve Earnings Income (Loss) Equity
Balance, December 31, 2006 7,503 $ 9,078,630 $ 1,153,628 $ 6,927,829 $ 871,852 $18,031,939
Foreign currency
translation adjustment -- -- -- -- 489,871 489,871
Net income for the six months ended
June 30, 2007 -- -- -- 1,863,053 -- 1,863,053
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2007 7,503 $ 9,078,630 $ 1,153,628 $ 8,790,882 $ 1,361,723 $20,384,863
=========== =========== =========== =========== =========== ===========
See accompanying notes.
F-17
HEBEI BAODING ORIENT PAPER MILLING CO., LTD
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
UNAUDITED
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,863,053 $ 2,395,723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,205,791 703,300
Changes in operating assets and liabilities:
Accounts receivable 467,016 (581,023)
Advances to suppliers -- 3,127,339
Inventories 131,923 (427,082)
Accounts payable and accrued expenses 87,190 9,104,317
Advances from customers -- (869,700)
Taxes payable (1,077,313) (1,173,434)
------------ ------------
Net cash provided by operating activities 2,677,660 12,279,440
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (474,112) (19,983,072)
Construction in progress -- 4,733,520
------------ ------------
Net cash (used by) investing activities (474,112) (15,249,552)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party -- 3,057,701
Payments to related party (2,594,200) --
Proceeds from borrowing on credit facility 374,240 37,454
Loans on equipment and building XXX --
Payments on loans on equipment and building (XXX) --
------------ ------------
Net cash provided by financing activities (2,219,960) 3,095,155
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 1,858 2,297
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ (14,554) 127,340
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 80,970 328,021
------------ ------------
CASH AND CASH EQUIVALNETS, END OF PERIOD $ 66,416 $ 455,361
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
CASH PAID FOR INTEREST $ XXX $ XXX
============ ============
CASH PAID FOR TAXES $ 1,994,935 $ 1,173,434
============ ============
See accompanying notes.
F-18
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The interim consolidated financial statements of
Hebei Baoding Orient Paper Milling Co., Ltd. (hereinafter referred to as
the "Company") are condensed and do not include some of the information
necessary to obtain a complete understanding of the financial data.
Management believes that all adjustments, consisting of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation of results have been included in the unaudited consolidated
financial statements for the interim period presented. Operating results
for the six months ended June 30, 2007 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2007.
Accordingly, your attention is directed to footnote disclosures found in
the December 31, 2006 Annual Report and particularly to Note 1, which
includes a summary of significant accounting policies.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. The Company's functional currency is the Chinese Renminbi;
however, the accompanying financial statements have been translated and
presented in United States dollars.
Nature of Business and History of Company - The Company was organized
March 3, 1996, under the laws of the People's Republic of China ("PRC").
The Company engages mainly in production and distribution of products such
as copy paper, uncoated and coated paper, digital photo paper, corrugated
paper, plastic paper, kraft paper, graphic design paper, antifraud thermal
security paper, and other paper and packaging related products. The
Company uses recycled paper as its raw materials. The Company has its
corporate offices in Baoding, PRC.
Foreign Currency Translation - As of June 30, 2007, the accounts of the
Company were maintained, and its financial statements were expressed, in
Chinese Yuan Renminbi (CNY). Such financial statements were translated
into U.S. dollars (USD) in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation", with
the CNY as the functional currency. According to the Statement, all assets
and liabilities of the Company are translated at the current exchange
rate, stockholders' equity are translated at the historical rates and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders' equity. Translation
gains and losses are reflected in the income statement.
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 the disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could vary from
those estimates.
Risks and Uncertainties - The Company is subject to substantial risks
from, among other things, intense competition associated with the industry
in general, other risks associated with financing, liquidity requirements,
rapidly changing customer requirements, limited operating history, foreign
currency exchange rates and operating in PRC under its various laws and
restrictions.
Concentration of Credit Risk - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally
of cash. The Company places its temporary cash investments in reputable
financial institutions which are fully insured by the government.
F-19
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value Measurements - In September 2006, the FASB issued SFAS No.157,
"Fair Value Measurements." The Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements, and does
not require any new fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements. The Statement is effective for the fiscal years beginning
after November 15, 2007. The Company is assessing SFAS No. 157 and has not
determined the impact of the adoption of SFAS No. 157 will have its
results of operations or financial position
Statutory Reserves - The laws and regulations of the People's Republic of
China require that before an enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserve. The
statutory reserves include surplus reserve fund and common welfare fund.
These statutory reserves represent restricted retained earnings.
Surplus Reserve Fund - The Company is required to transfer 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve
balance reaches 50% of the Company's registered capital.
The transfer to this reserve must be made before distribution of any
dividend to shareholders. For the six months ended June 30, 2007 and 2006,
the Company transferred approximately $XXX and $XXX, respectively,
representing 10% of the year's net income determined in accordance with
PRC accounting rules and regulations, to this reserve. The surplus reserve
fund is non-distributable other than during liquidation and can be used to
fund previous years' losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing
the par value of the shares currently held by them, provided that the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
Common Welfare Fund - The Company is required to transfer 5% to 10% of its
net income, as determined in accordance with the PRC accounting rules and
regulations, to the statutory common welfare fund. For the six months
ended June 30, 2007 and 2006, the Company transferred approximately $XXX
and $XXX, respectively, representing 5% of the year's net income
determined in accordance with PRC accounting rules and regulations, to
this reserve. This fund can only be utilized on capital items for the
collective benefit of the Company's employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities.
This fund is non-distributable other than upon liquidation. The transfer
to this fund must be made before distribution of any dividend to
shareholders.
Income Taxes - The Company is governed by the Income Tax Laws of the PRC.
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is
at a statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax.
F-20
HEBEI BAODING ORIENT PAPER MILLING CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
UNAUDITED
2. INVENTORY
Inventory consists of the following at June 30, 2007:
Raw materials $ XXX
Finished goods XXX
----------
Total inventory $1,194,253
==========
3. SHORT-TERM LOAN PAYABLE
The Company has the following short-term loan payables outstanding at June
30, 2007:
Note payable, secured by equipment, payable at maturity,
including interest at 7.8% per annum. Matures 2007 $ XXX
Credit facility payable, secured by building, payable at
maturity, including interest at 2% plus the bank's reference
interest rate. Matures 2007 XXX
Note payable, secured by equipment, payable at maturity,
including interest at 6.7% per annum. Matures 2007 XXX
Note payable, secured by equipment, payable at maturity,
including interest at 6.7% per annum. Matures 2007 XXX
----------
Total short-term loan payable $5,874,237
==========
At June 30, 2007, the Company's credit facility had a maximum borrowing
level of $2,000,000, which left $XXX in borrowing capacity. The average
short-term borrowing rate for the year was approximately 7.9%.
4. RELATED PARTY TRANSACTIONS
The CEO of the Company loaned the Company $0 and $3,057,701 during the six
months ended June 30, 2007 and 2006, respectively. During the six months
ended June 30, 2007, the Company repaid $2,594,200 of this loan. At June
30, 2007, the Company owed the CEO $9,446,244. The loan terms call for
payments of approximately $2,590,000 (20,000,000 CNY) in December of each
year until paid. If the balance due the officer is less than $2,590,000,
the entire balance is to be paid at once. There are provisions for
deferring payment if the Company's cash flow is not sufficient to cover
the obligation. The loan will not accrue interest.
F-21
CARLATERAL, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
On October 29, 2007, Carlateral, Inc., (the "Company), entered into a Letter of
Agreement and Plan of Merger with Dongfang Zhiye Holding Limited, a British
Virgin Islands corporation., ("DZHL"). DZHL is the parent company and 100% owner
of Hebei Baoding Orient Paper Milling Co., Ltd., a China Corporation, ("HBOPM").
Under the Letter of Agreement and Plan of Merger, in exchange for surrendering
their shares in DZHL, the DZHL Shareholders received stock consideration. The
stock consideration consisted of 29,801,987 newly issued shares of the Company's
common stock, which were divided proportionally among the DZHL Shareholders in
accordance with their respective ownership interests in DZHL immediately before
the completion Merger Transaction.
The acquisition will be accounted for as a purchase, with the assets acquired
and liabilities assumed recorded at fair value, and the results of DZHL's
operations included in the Company's condensed financial statements from the
date of acquisition.
The unaudited pro forma condensed balance sheet shows the effect to the
financial position at August 31, 2007 as if the acquisition occurred at March 1,
2007. Such financial position of the Company is not necessarily indicative of
the financial position as it may be in the future, or as it may have been had
these events been effective March 1, 2007. The unaudited pro forma condensed
statement of operations for the year ended February 28, 2007 gives effect to the
results of operations as if the acquisition occurred at March 1, 2006. The
unaudited pro forma condensed statement of operations for the six months ended
August 31, 2007 gives effect to the results of operations as if the acquisition
occurred at March 1, 2007.
The pro forma condensed financial statements may not be indicative of the actual
results of the acquisition. In particular, the pro forma condensed financial
statements are based on management's current estimate of the allocation of the
purchase price, the actual allocation of which may differ.
The accompanying condensed pro forma financial statements should be read in
connection with the historical financial statements of the Company and DZHL.
F-22
CARLATERAL, INC.
Unaudited Pro Forma
Condensed Consolidated Balance Sheets
At August 31, 2007
Hebei Baoding Orient
Paper Milling Co.,
Ltd., a wholly-owned
Subsidiary of
Dongfang Zhiye Carlateral, Inc.
Holding, Ltd. As of August 31,
As of June 30, 2007 2007 Adjustments Pro Forma
ASSETS
Cash and equivalents $ 66,416 $ 2,690 -- $ 69,106
Accounts receivable, net 1,194,253 -- -- 1,194,253
Inventories 2,616,966 -- -- 2,616,966
Property and equipment 34,414,637 -- -- 34,414,637
Prepaid expenses -- -- -- --
---------------------------------------------------------------------------------------------------------------- ------------
TOTAL ASSETS $ 38,292,272 $ 2,690 -- $ 38,294,962
================================================================================================================ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Short term loan $ 5,874,237 $ -- -- $ 5,874,237
Accounts payable and accrued expenses 1,799,520 4,441 -- 1,803,961
Other payables -- related party 9,446,244 6,338 -- 9,452,582
Income taxes payable 787,408 -- -- 787,408
------------------------------------------------------------------------------------------- ------------
Total liabilities 17,907,409 10,779 17,918,188
------------------------------------------------------------------------------------------- ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock 10,300 29,802 (1) 40,102
Paid in capital 9,078,630 13,200 22,321,688 (1) 20,368,261
(22,351,490) (1)
(9,078,360) (2)
20,384,593 (2)
Statutory earnings reserve 1,153,628 -- (1,153,628) (2) --
Retained earnings 8,790,882 -- (8,790,882) (2) --
Deficit accumulated during the
development stage -- (31,589) (31,589)
Foreign currency translation 1,361,723 -- (1,361,723) (2) --
------------------------------------------------------------------------------------------- ------------
Total shareholders' equity (deficit) 20,384,863 (8,089) 20,376,774
------------------------------------------------------------------------------------------- ------------
---------------------------------------------------------------------------------------------------------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT) $ 38,292,272 $ 2,690 -- $ 38,294,962
================================================================================================================ ============
-- -- -- --
F-23
CARLATERAL, INC.
Unaudited Pro Forma
Condensed Consolidated Statement of Operations
Year Ended February 28, 2007
Hebei Baoding
Orient Paper Milling
Co., Ltd., a
wholly-owned
Subsidiary of
Dongfang Zhiye Carlateral, Inc.
Holding, Ltd. For the Year
For the Year Ending Ending February
December 31, 2006 28, 2007 Adjustments Pro Forma
REVENUES
Sales, net $ 30,561,249 $ 886 $ 30,562,135
------------------------------------------------------------------------------------------- ------------
TOTAL REVENUES 30,561,249 886 30,562,135
------------------------------------------------------------------------------------------- ------------
COST OF SALES
Cost of sales 25,230,151 -- 25,230,151
------------------------------------------------------------------------------------------- ------------
TOTAL COST OF SALES 25,230,151 -- 25,230,151
------------------------------------------------------------------------------------------- ------------
GROSS PROFIT 5,331,098 886 5,331,984
GENERAL AND ADMINISTRATIVE EXPENSES (292,833) (21,941) (314,774)
------------------------------------------------------------------------------------------- ------------
INCOME FROM OPERATIONS 5,038,265 (21,055) 5,017,210
------------------------------------------------------------------------------------------- ------------
OTHER INCOME (EXPENSE):
Interest expense (275,225) -- (275,225)
Non-operating expense (4,018) -- (4,018)
------------------------------------------------------------------------------------------- ------------
TOTAL OTHER INCOME, NET (279,243) -- (279,243)
------------------------------------------------------------------------------------------- ------------
INCOME BEFORE INCOME TAXES 4,759,022 (21,055) 4,737,967
INCOME TAXES 1,565,952 -- 1,565,952
------------------------------------------------------------------------------------------- ------------
NET INCOME $ 3,193,070 $ (21,055) $ 3,172,015
=========================================================================================== ============
OTHER COMPREHENSIVE INCOME
Foreign currency translation 550,826 -- 550,826
------------------------------------------------------------------------------------------- ------------
COMPREHENSIVE LOSS $ 3,743,896 $ (21,055) $ 3,722,841
=========================================================================================== ============
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ 0.09
---------------------------------------------------------------------------------------------------------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,300,000 29,801,987 (1) 40,101,987
================================================================================================================ ============
F-24
CARLATERAL, INC.
Unaudited Pro Forma
Condensed Consolidated Statement of Operations
Six Months Ended August 31, 2007
Hebei Baoding
Orient Paper Milling
Co., Ltd., a
wholly-owned
Subsidiary of
Dongfang Zhiye
Holding, Ltd. Carlateral, Inc.
For the Six Months For the Six Months
Ending June 30, 2007 Ending August 31, 2007 Adjustments Pro Forma
REVENUES
Sales, net $ 17,371,280 $ -- $ 17,371,280
-- --
------------------------------------------------------------------------------------------- ------------
TOTAL REVENUES 17,371,280 -- 17,371,280
------------------------------------------------------------------------------------------- ------------
COST OF SALES
Cost of sales 14,339,606 -- 14,339,606
-- --
------------------------------------------------------------------------------------------- ------------
TOTAL COST OF SALES 14,339,606 -- 14,339,606
------------------------------------------------------------------------------------------- ------------
GROSS PROFIT 3,031,674 -- 3,031,674
GENERAL AND ADMINISTRATIVE EXPENSES (123,343) (4,412) (127,755)
------------------------------------------------------------------------------------------- ------------
INCOME FROM OPERATIONS 2,908,331 (4,412) 2,903,919
------------------------------------------------------------------------------------------- ------------
OTHER INCOME (EXPENSE):
Interest expense (127,655) -- (127,655)
------------------------------------------------------------------------------------------- ------------
TOTAL OTHER INCOME, NET (127,655) -- (127,655)
------------------------------------------------------------------------------------------- ------------
INCOME BEFORE INCOME TAXES 2,780,676 (4,412) 2,776,264
INCOME TAXES 917,623 -- 917,623
------------------------------------------------------------------------------------------- ------------
NET INCOME $ 1,863,053 $ (4,412) 1,858,641
=========================================================================================== ============
OTHER COMPREHENSIVE INCOME
Foreign currency translation 489,871 -- 489,871
------------------------------------------------------------------------------------------- ------------
COMPREHENSIVE LOSS $ 2,352,924 $ (4,412) $ 2,348,512
=========================================================================================== ============
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ 0.06
---------------------------------------------------------------------------------------------------------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,300,000 29,801,987 (1) 40,101,987
================================================================================================================ ============
F-25
CARLATERAL, INC.
NOTES TO PRO FORMA CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A: The pro forma adjustments to the condensed balance sheet at August 31,
2007 are as follows:
(1) Reflects the final issuance of the Company's common stock,
29,801,987 shares in exchange for 100% ownership interest in DZHL.
(2) Reflects the allocation of the equity of DZHL to the appropriate
accounts of the Company.
The Company is still in the process of evaluating the fair value of the assets
acquired and the liabilities assumed in order to make a final determination of
the cost in excess of net assets acquired. Accordingly, the purchase accounting
information is preliminary and has been made sole for the purpose of developing
such pro forma condensed financial information. Based on current information,
the preliminary determination of the cost in excess of net assets acquired
should not materially differ from the final determination.
F-26