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CHINA HEALTHCARE ACQUISITION CORP.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2008
Note 2 Summary of Significant Accounting Policies (continued)
statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Like SFAS 141R discussed above, earlier adoption is prohibited. We have not completed our evaluation of the potential impact, if any, of the adoption of SFAS 160 on our
consolidated financial position, results of operations and cash flows.
Net Income (loss) per share
Net Income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the additional dilution for all potentially dilutive securities such as stock warrants and options.
The effect of the 19,503,110 outstanding warrants issued in connection with the Initial Public Offering and over-allotment, the 3,000,000 outstanding warrants issued in connection with the private placement and the 500,000 units included in the underwriters purchase option has not been considered in diluted income (loss) per share since the warrants and options are contingently exercisable.
Deferred Income Taxes
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.
Note 3 Notes Payable to Stockholder
The Company issued a $150,000 unsecured promissory note to its Initial Stockholder on April 25, 2007. This note replaced the original note of $150,000 executed by an initial stockholder on June 12, 2006. The note bears simple interest at 4% per annum and the principal and interest expense will be paid from interest earned on the Trust Account. The note is payable on earlier of April 25, 2008, or the consummation of a Business Combination. Due to the short-term nature of the note, the fair market value approximates the carrying amount. On April 25, 2008, the Company paid back the loan by issuing a check in the amount of $156,000, which includes the
principal and interest for the note.
Note 4 Stockholders Equity
The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preference as may be determined from time to time by the Board of Directors. At inception, China Healthcare Acquisition Corp. issued 2,500,000 shares of common stock to the Initial Stockholders for $25,000 in cash. In January 2007, the Initial Stockholders surrendered 375,000 shares for cancellation.
Note 5 Initial Public Offering
On April 25, 2007, the Company sold 8,500,000 Units at $6 per Unit. Additionally, 1,251,555 Units were sold on May 9, 2007 at $6.00 per Unit upon exercise of the underwriters over-allotment option. Each Unit consists of one share of common stock and two redeemable common stock purchase warrants. In connection with the initial public offering, the Company paid to the underwriters a fee equal to 3.25% ($1,657,500) of the gross proceeds of the initial public offering. Underwriting fees without non-accountable expenses from the over-allotment of $244,053 were paid to the underwriters on May 9, 2007. The underwriters have agreed to defer additional
fees equal to 4.00% of the gross proceeds of the initial public offering before the over-allotment option and 1.25% of the gross proceeds of the over-allotment option (approximately $2,133,867)
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CHINA HEALTHCARE ACQUISITION CORP.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2008
Note 5 Initial Public Offering (continued)
and deposit them into the Trust Account until the consummation of a Business Combination. Upon the consummation of a Business Combination, we will pay such deferred underwriting discount and non-accountable expense allowance to the underwriters out of the proceeds of the offering held in trust. The warrants separated from the units and began to trade separately on May 29, 2007.
After separation, each warrant entitled the holder to purchase one share of common stock at an exercise price of $5.00. The warrants have a life of five years after which they will expire. The Company has a right to redeem the warrants at $0.01 per warrant, provided the common stock has traded at a closing price of at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given. If the Company redeems the warrants, the holder will either have to exercise the warrants by purchasing the common stock from the Company for $5.00 or sell the warrants,
or the warrants will be redeemed. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holder of such warrant shall not be entitled to exercise such warrant and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle the warrant exercise. Consequently, the warrants may expire unexercised and unredeemed. The Company has determined that the warrants should be classified in stockholders equity upon their issuance in accordance with the guidance of EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock.
In addition, the Company has sold to the underwriters for $100, an option to purchase up to a total of 500,000 Units. This option was issued upon the closing of the Initial Public Offering. The units that would be issued upon exercise of this option are identical to those offered in the Initial Public Offering, except that each of the warrants underlying this option entitles the holder to purchase one share of our common stock at a price of $6.25. This option is exercisable at $7.50 per Unit commencing on the later of one year from the effective date or the consummation of a Business Combination and may be exercised on a cashless basis. The option
has a life of five years from the effective date. The Company has no obligation to net cash settle the exercise of the option or the warrants underlying the option. The holder of the option will not be entitled to exercise the option or the warrants underlying the option unless a registration statement covering the securities underlying the option is effective or an exemption from registration is available. If the holder is unable to exercise the option or underlying warrants, the option or warrants, as applicable, will expire worthless.
The sale of the option has been accounted for as an equity transaction. Accordingly, there will be no net impact on the Companys financial position or results of operations, except for the recording of the $100 proceeds from the sale. The Company has determined, based upon a Black-Scholes model, that the fair value of the option on the date of sale was approximately $1,742,500 for the option to the underwriters, using an expected life of five years, volatility of 72.36% and a risk-free interest rate of 4.39%.
The volatility calculation of 72.36% for the option to the underwriters is based on the average volatility of a basket of similar companies with similar capitalization sizes that trade in the United States. Because China Healthcare Acquisition Corp. does not have a trading history, China Healthcare Acquisition Corp. needed to estimate the potential volatility of its common stock price, which will depend on a number of factors which cannot be ascertained at this time. China Healthcare Acquisition Corp.s management believes that this volatility is a reasonable benchmark to use in estimating the expected volatility for China Healthcare Acquisition
Corp.s common stock. Utilizing a higher volatility would have had the effect of increasing the implied value of the option.
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CHINA HEALTHCARE ACQUISITION CORP.
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2008
Note 6 Commitments
The Company presently occupies office space provided by an affiliate of one of the Companys executive officers. Such affiliate has agreed that until the Company consummates a Business Combination, it will make such office space, as well as certain office and secretarial services available to the Company, as may be required by the Company from time to time. The Company has agreed to pay such affiliate $5,000 per month commencing on April 19, 2007.
Included in the statement of operations for the period from January 1, 2008 through March 31, 2008 is $15,000 representing the management fees relating to such services.
Our Chairman has agreed to purchase, or cause its affiliate to purchase, up to $8 million of the Companys common stock in the open market, commencing on the later of (a) ten business days after the Company files a Current Report on Form 8-K announcing a definitive agreement for an initial Business Combination or (b) 60 calendar days after the end of the restricted period under Regulation M, and ending on the business day immediately preceding the record date for the meeting of stockholders at which time such Business Combination is to be voted upon by the Companys stockholders. Our chairman has agreed to vote all such shares of common
stock purchased in the open market in favor of the Companys initial Business Combination.
Note 7 Income Taxes
The components of the provision for income taxes are as follows:
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March 31, 2008
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March 31, 2007
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Current:
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Federal taxes
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$
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8,181
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$
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State taxes
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800
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Total provision for income taxes
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$
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8,981
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$
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes and schedules thereto included in this report.
We were formed on June 7, 2006, for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition or other similar business combination, an operating business with operations primarily in the Peoples Republic of China. Our initial business combination must be with a target business whose fair market value if at least equal to 80% of our net assets (excluding the deferred underwriting compensation held in trust) at the time of such acquisition. We intend to use cash derived from the proceeds of our recently completed offering and private placement, our capital stock, debt or a combination of cash, capital stock and debt,
to effect such business combination.
We are actively searching for a suitable business combination candidate. We currently have not selected any potential target businesses. We will meet with target companies, service professionals and other intermediaries to discuss our company, the background of our management and our combination preferences. We cannot assure investors that we will find a suitable business combination in the allotted time.
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Results of Operations
Net Income
No meaningful comparison to the quarter ended March 31, 2007 can be made because our initial public offering was not consummated until April 25, 2007. Net income for the quarter ended March 31, 2008 was $15,880 consisting of interest income totaling $297,841 which was primarily offset by operating costs of $257,293, Delaware franchise tax of $15,688 and provision for income taxes of $8,981. Operating costs include expenses incurred in connection with due diligence on several potential candidates, including travel expenses, professional fees and other expenses.
Changes In Financial Condition
Liquidity and Capital Resources
On April 16, 2007 we entered in to an agreement with the Chairman of our Board of Directors for the sale of 3,000,000 warrants in a private placement. Each warrant entitles the holder to purchase from us one share of our common stock at an exercise price of $5.00. The warrants were sold at a price of $0.50 per warrant, generating net proceeds of $1,500,000.
On April 25, 2007 we consummated our initial public offering of 8,500,000 units, and on May 9, 2007 sold an additional 1,251,555 units attributable to the exercise of the underwriters over-allotment option. Each unit consists of one share of common stock and two warrants. Each warrant entitles the holder to purchase from us one share of our common stock at an exercise price of $5.00. Our common stock and warrants commenced trading separately on May 29, 2007.
The net proceeds from the sale of the units in the initial public offering (including the over-allotment option) and the private placement were $57,307,802 after deducting offering expenses of approximately $800,000 but including the deferred non-accountable expense allowance and the deferred portion of the underwriting discounts of approximately $2,133,867. All of this amount will be held in trust. We will use substantially all of the net proceeds of this initial public offering and private placement proceeds (other than the deferred non-accountable expense allowance and the deferred portion of the underwriting discount) to acquire one or more
operating businesses. However, we may not use all of such proceeds in the trust in connection with a business combination, either because the consideration for the business combination is less than the proceeds in trust or because we finance a portion of the consideration with our capital stock or debt securities. In that event, the proceeds held in the trust account as well as any other net proceeds not expended will be used to finance the operations of the target business or businesses.
In the event that we consummate a business combination, the proceeds held in the trust account will be used for the following purposes:
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Payment of the purchase price for the business combination;
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Payment of the non-accountable expense allowance and the deferred portion of the underwriting discount due to the underwriters;
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Payment of any finders fees or professional fees and costs; and
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Payment of any fees and costs the Company may incur in connection with any equity or debt financing relating to the business combination.
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The Company does not currently have any agreement with any party with respect to the payment of finders or professional fees. If the Company agrees to pay such fees in the future, such fees shall be negotiated on an arms-length basis.
We have received $1,200,000 (net of taxes) from interest earned on the trust to finance our operations prior to consummating a business combination. As of March 31, 2008, we had spent $600,743 of these funds. We believe that the remaining funds will be sufficient to allow us to operate through at least April 19, 2009, assuming that a business combination is not consummated during that time. From the date of the closing of our initial public offering through April 19, 2009 we anticipate making the following expenditures:
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approximately $200,000 for legal, accounting and other expenses attendant to the structuring and negotiating of a business combination;
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approximately $300,000 for the due diligence and investigation of a target business;
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approximately $115,000 in legal and accounting fees relating to our SEC reporting obligations;
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approximately $120,000 in fees relating to our office space and certain general and administrative services;
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approximately $240,000 for travel, general working capital that will be used for miscellaneous expenses and reserves, including for director and officer liability insurance premiums, deposits, down payments and/or funding of a no shop provision in connection with a prospective business transaction and for international travel with respect to negotiating and finalizing a business combination;
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approximately $150,000 for repayment of the loan from our Chairman; and
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approximately $75,000 for a reserve for liquidation expenses.
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We are limited to $1,200,000, net of taxes, of interest earned on the trust account for these estimated expenditures. If the funds available to us are insufficient to cover these costs, our founders will have no obligation to provide additional funding.
We do not believe we will need additional financing following the initial public offering in order to meet the expenditures required for operating our business. However, we may need to obtain additional financing to the extent such financing is required to consummate a business combination, in which case we may issue additional securities or incur debt in connection with such business combination.
As of June 7, 2006, Mr. Kang lent a total of $150,000 to the Company for payment of offering expenses which was repaid without interest at closing out of offering proceeds. Upon the consummation of our initial public offering, Mr. Kang lent $150,000 to the Company which was deposited in our operating account and bears interest at a rate of 4% per year. On April 25, 2008, we paid back the loan, principal plus interest, by issuing a check in the amount of $156,000 payable to Mr. Kang.
We have agreed to pay NCIL, an affiliate of Alwin Tan, a monthly fee of $5,000 for general and administrative services including office space, utilities and secretarial support.
Off-Balance Sheet Arrangements
Options and warrants issued in conjunction with our initial public offering are equity linked derivatives and accordingly represent off balance sheet arrangements. The options and warrants meet the scope exception in paragraph 11(a) of FAS 133 and are accordingly not accounted for as derivatives for purposes of FAS 133, but instead are accounted for as equity.
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity.
Contractual Obligations
In connection with our initial public offering, we agreed to pay the underwriters a deferred non-accountable expense allowance and deferred portion of the underwriting discount of $2,133,867 upon the consummation of our initial business combination. We expect that such allowance will be paid out of the proceeds in the trust account. Other than the contractual obligations incurred in the ordinary course of business, we do not have any other long-term contractual obligations.
Forward Looking Statements
This Quarterly Report on From 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). We have based these forward-looking statements on our current expectations and projections about future events, and we assume no obligation to update any
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such forward-looking statements. The forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual result to be materially different from any future results expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as may, should, could, would, expect, plan, anticipate, believe, estimate, continue, or the negative of such terms or other similar expressions. Factors that might cause our
future results to differ from those statements include, but are not limited to, those described in the section entitled Risk Factors of the prospectus filed with the Securities and Exchange Commission (the SEC) in connection with our initial public offering. The following discussion should read in conjunction with our condensed financial statements and related notes thereto included elsewhere in this report and with the section entitled Risk Factors of the prospectus filed with the SEC in connection with our public offering and in our 10-K Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This item is not required for a smaller reporting company.
Item 4. Controls and Procedures
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial and accounting officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report.
We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and our chief financial officer have concluded that these controls and procedures are effective at the reasonable assurance level.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to affect, our financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently subject to any material legal proceedings, nor to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
This item is not required for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of the Security Holders
Not applicable.
Item 5. Other Information
Not applicable
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Item 6. Exhibits
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Number
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Description
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3.1
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Amended and Restated Certificate of Incorporation**
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3.2
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Amended and Restated Bylaws**
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4.1
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Specimen Unit Certificate**
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4.2
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Specimen Common Stock Certificate**
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4.3
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Specimen Warrant Certificate**
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4.5
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Form of Warrant Agreement between American Stock Transfer & Trust Company and the Registrant**
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4.6
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Form of Underwriters Purchase Option**
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10.1(a)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Jack Kang**
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10.1(b)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Alwin Tan**
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10.1(c)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Steven Wang**
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10.1(d)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Mark Tan**
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10.1(e)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Larry Liou**
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10.1(f)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and James Ma**
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10.1(g)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Stanley Chang**
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10.1(h)
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Letter Agreement among the Registrant, Ferris, Baker Watts, Incorporated and Ron Harrod**
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10.2
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Form of Investment Management Trust Agreement between American Stock Transfer & Trust Company and the Registrant**
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10.3
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Form of Stock Escrow Agreement between the Registrant, American Stock Transfer & Trust Company and the Initial Stockholders**
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10.4
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Form of Letter Agreement between NCIL and the Registrant regarding administrative support**
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10.5
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Advance Agreement between the Registrant and Jack Kang**
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10.6
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Form of Registration Rights Agreement among the Registrant, the Initial Stockholders and Ferris, Baker Watts, Incorporated**
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10.7
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Warrants Placement Agreement**
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10.8
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Form of Letter Agreement between the Registrant, Jack Kang and Ferris, Baker Watts, Incorporated**
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31.1
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Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
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31.2
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Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
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32.1
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Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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32.2
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Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
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**
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Incorporated by reference to the exhibits of the same number filed with the Registrants Registration Statement on Form S-1 or amendments thereto (File No. 333-135705)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CHINA HEALTHCARE ACQUISITION CORP.
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Date: May 14, 2008
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By:
/s/ Alwin Tan
Alwin Tan
Chief Executive Officer and
President
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By:
/s/ Steven Wang
Steven Wang
Vice President and Treasurer
Chief Financial Officer
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INDEX TO EXHIBITS
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Number
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Description
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31.1
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Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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