Form 8-K/A Home System Group

[Amend] Events or Changes Between Quarterly Reports

What is Form 8-K/A?
  • Accession No.: 0001193805-10-003070 Act: 34 File No.: 000-49770 Film No.: 101250774
  • CIK: 0001172319
  • Submitted: 2010-12-14
  • Period of Report: 2010-10-01

8-K/A HTML

e607853_8ka-home.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
FORM 8-K/A
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of Earliest Event Reported): October 1, 2010

HOME SYSTEM GROUP
(Exact name of registrant as specified in its charter)

Nevada
 
000-49770
 
43-1954776
(State or other jurisdiction of
 
(Commission File Number)
 
(IRS Employer Identification No.)
incorporation or organization)
       

Oceanic Industry Park
Sha Gang Highway, Gang Kou Town, Zhongshan City
Guangdong Province, P.R. China
(Address of principal executive offices)

347-624-5699
(Registrant’s telephone number, including area code)
 
N/A
(Former name or former address, if changed since last report)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
o    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 
 

 
 
Explanatory Note

Home System Group is filing this current report on Form 8-K/A to amend its current report on Form 8-K dated October 1, 2010 to file the required financial statements and pro forma information required under Item 9.01.

Item 2.01 Completion of Acquisition of Assets.

Completion of Acquisition of  100% of Jinxinglong Electrical Appliances Co., Ltd.

Effective on October 1st, 2010, Home System Group (“HSG”), a Nevada corporation, completed its acquisition of 100% of the outstanding stock of Jinxinglong Electrical Appliances Co., Ltd. (“Jinxinglong”), a limited liability company organized under the laws of the People’s Republic of China (“PRC”) pursuant to the Equity Ownership Transfer Agreement, dated as of July 15, 2010 (the “Jinxinglong Exchange Agreement”), among Asia Forever Investment Limited (“Asia Forever”), a wholly-owned subsidiary of HSG  and Zhongshan City Weihe Appliances Co., Ltd. ("Weihe"), a limited liability company organized under the laws of the PRC and a wholly-owned subsidiary of Asia Forever  on the one hand, and Jinxinglong and all of the shareholders of Jinxinglong on the other hand (the "Shareholders").
 
Pursuant to the terms of the Jinxinglong Exchange Agreement, HSG has paid $3,000,000 (paid in Renminbi) for the first and second installments of the total purchase price of $15,000,000 to the Shareholders and effective October 1, 2010, the Shareholders have transferred 70% of their shares in Jinxinglong to Weihe and 30% of their shares of Jinxinglong to Asia Forever.  The transfer of the shares from the Shareholders to Weihe and Asia Forever has been registered with the appropriate PRC governmental agency, which has approved the share transfer.  The remaining $12,000,000 of purchase price will be paid in installments over the next 15 months in accordance with the terms of the Exchange Agreement, a copy of which was included as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on July 20, 2010 (File Number 10960377).
 
Completion of Acquisition of  90% of ZhongshanSanfan Electrical Appliances Co., Ltd.

Effective on October 1st, 2010, HSG completed its acquisition of ZhongshanSanfan Electrical Appliances Co., Ltd. (“Sanfan”), a limited liability company organized under the laws of the PRC,  pursuant to the Equity Transfer Agreement dated as of May 31, 2010 (the “Sanfan Exchange Agreement”), among Weihe, Sanfan, and all of the shareholders of Sanfan (the "SanfanShareholders").
 
Pursuant to the terms of the Sanfan Exchange Agreement, HSG has paid $2,400,000 for the first and second installments of the total purchase price of $12,000,000 to the Sanfan Shareholders and effective October 1, 2010. The Sanfan Shareholders transferred 90% of their shares in Sanfan to Weihe.  This transfer of the shares to Weihe has been registered with the appropriate PRC governmental agency.  The remaining purchase price of $9,600,000 will be paid in installments over the next 15 months in accordance with the terms of the Sanfan Exchange Agreement, a copy of which was included as an exhibit to the Company's Current Report on Form 8-K filed with the SEC on June 4, 2010 (File Number 10878661).

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired
 
(1) The audited balance sheets of Jinxinglong as of December 31, 2009 and December 31, 2008 and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for each of the two years ending December 31, 2009 and December 31, 2008; and the unaudited balance sheets of Jinxinglong as of September 30, 2010, and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for the nine months ending September 30, 2010; are attached as Exhibit 99.1 to this Current Report on Form 8-K/A.
 
 
 

 
 
(2) The audited balance sheets of Sanfan as of December 31, 2009 and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for the period from April 1, 2009 (date of inception) to December 31, 2009; and the unaudited balance sheets of Sanfan as of September 30, 2010 and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for the nine months ending September 30, 2010; are attached as 99.2 to this Current Report on Form 8-K/A.
 
(b) Pro Forma Financial Information
 
(1) The unaudited pro forma balance sheet of Home System Group as of September 30, 2010 and the unaudited pro forma statement of income of Home System Group for the nine months period ended September 30, 2010; and the unaudited pro forma balance sheet of Home System Group as of December 31, 2009 and the unaudited pro forma statement of income of Home System Group for the 12 months ending December 31, 2009; are attached as Exhibit 99.3 to this Current Report on Form 8-K/A.
 
(c) Exhibits

Exhibit Number
Description of Exhibit
   
99.1
Financial Statements of Jinxinglong Electrical Appliances Co., Ltd.
   
99.2
Financial Statements of Zhongshan Sanfan Electrical Appliances Co., Ltd.
   
99.3
Pro Forma Financial Statements of Home System Group
 
 
 

 
 
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 authorize
 
 
 
HOME SYSTEM GROUP
 
       
Date: December 14, 2010
By: 
/s/ Yu Lei
 
   
Yu Lei
 
   
Chief Executive Officer
 
 
 

EX-99.1 HTML

e607853_ex99-1.htm

 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.

FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS’ REPORT

DECEMBER 31, 2008
DECEMBER 31, 2009

AND SEPTEMBER 30, 2010
 
 
 

 
 
Table of Contents
 
Independent Auditor’s Report
1
Balance Sheets
2
Statements of Operation and Comprehensive Income
3
Statement of Stockholders’ Equity
4
Statements of Cash Flows
5
Notes to Financial Statements
6
 
 
 

 
 
INDEPENDENT AUDITORS' REPORT
 
 
To the Stockholders’ of Jinxinglong Electrical Appliances Co., LTD
 
 
We have audited the accompanying balance sheet of Jinxinglong Electrical Appliances Co., LTD(the "Company"), as of December 31, 2009 and 2008, and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for each of the two years in the period December 31, 2009.  These financial statements are the responsibility of the management of the Company.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jinxinglong Electrical Appliances Co., LTD.  as of December 31, 2009 and 2008, and the results of its operations and comprehensive income, cash flows, for each of the two years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.


Acquavella, Chiarelli, Shuster, Berkower& Co., LLP

Iselin, New Jersey
December 10, 2010
 
 
1

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
 BALANCE SHEETS

   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
   
(unaudited)
   
(audited)
   
(audited)
 
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
  $ 121,090     $ 55,507     $ 39,243  
Accounts receivable
    10,704,755       5,237,826       2,797,331  
Trade deposit
    344,448       -       107,421  
Inventories
    823,021       1,332,930       1,231,705  
TOTAL CURRENT ASSETS
    11,993,314       6,626,263       4,175,700  
Property, plant and equipment – net
    340,118       351,480       396,493  
TOTAL ASSETS
  $ 12,333,432     $ 6,977,743     $ 4,572,193  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
                         
CURRENT LIABILITIES
                       
Bank loans
  $ 1,417,678     $ 1,098,386     $ 365,786  
Accounts payable–trade
    2,717,973       625,185       1,472,971  
Accrued expenses and other payables
    81,961       71,228       72,093  
Income taxes payable
    138,989       88,619       78,497  
Other taxes payable
    323,103       91,580       48,520  
TOTAL CURRENT LIABILITIES
    4,679,704       1,974,998       2,037,867  
TOTAL LIABILITIES
    4,679,704       1,974,998       2,037,867  
                         
STOCKHOLDERS’ EQUITY
                       
   Registered capital
    388,014       388,014       388,014  
Additional paid in capital
    717,755       518,190       254,701  
   Retained earnings
   
6,147,112
     
3,814,612
     
1,637,324
 
   Statutory reserve
   
194,007
     
194,007
     
169,897
 
   Other comprehensive income
    206,840       87,922       84,390  
TOTAL STOCKHOLDERS’ EQUITY
    7,653,728       5,002,745       2,534,326  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 12,333,432     $ 6,977,743     $ 4,572,193  
 
The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME
 
         
Years Ended
 
   
Nine Months Ended September 30, 2010
(unaudited)
   
December 31, 2009
(audited)
   
December 31, 2008
(audited)
 
Net sales
  $ 17,028,721     $ 17,604,997     $ 12,153,880  
Cost of sales
    13,955,606       14,440,618       9,978,438  
GROSS PROFIT
    3,073,115       3,164,379       2,175,442  
                         
General, selling and administrative expenses
    327,547       513,430       443,909  
                         
INCOME FROM OPERATIONS
    2,745,568       2,650,949       1,731,533  
                         
OTHER INCOME
                       
Other income
    723       -       2,320  
Interest expense, net
    (58,952 )     (86,192 )     (110,754 )
                         
INCOME BEFORE INCOME TAXES
    2,687,339       2,564,757       1,623,099  
                         
INCOME TAXES
    354,839       363,359       234,725  
                         
NET  INCOME
    2,332,500       2,201,398       1,388,374  
OTHER COMPREHENSIVE INCOME
                       
Foreign currency translation adjustment
    118,918       3,532       109,109  
                         
COMPREHENSIVE INCOME
  $ 2,451,418     $ 2,204,930     $ 1,497,483  
 
The accompanying notes are an integral part of these financial statements 
 
 
3

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF CASH FLOWS

   
Nine Months Ended
   
Years Ended
 
   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
                 
Net income
  $ 2,332,500       2,201,398       1,388,374  
Adjustments to reconcile net income
                       
to net cash provided by (used in) operating activities:
                       
Non cash lease expense
    199,565       263,489       254,701  
Depreciation
    39,860       49,706       59,821  
       Change in assets and liabilities
                       
          (Increase) decrease in assets:
                       
Accounts receivable
    (5,466,929 )     (2,440,495 )     (1,779,531 )
Trade deposit
    (344,448 )     107,421       (107,421 )
Inventories
    509,909       (101,225 )     (203,790 )
           Increase (decrease) in liabilities:
                       
           Accounts payable
    2,092,788       (847,786 )     689,908  
           Accrued expenses and other payables
    10,733       (865 )     20,387  
           Income taxes payable
    50,370       10,122       78,497  
Other taxes payable
    231,523       43,060       24,315  
Net cash provided by (used in) Operating Activities
    (344,129 )     (715,175 )     425,261  
                         
CASH FLOWS USED IN INVESTING ACTIVITIES
                       
          Capital expenditures
    (28,498 )     (4,693 )     (61,258 )
Net cash used in Investing Activities
    (28,498 )     (4,693 )     (61,258 )
                         
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
                       
Proceeds from bank loans
    591,305       1,976,169       -  
Repayments of bank loans
    (272,013 )     (1,243,569 )     (1,141,146 )
       Net cash provided by (used in) Financing Activities
    319,292       732,600       (1,141,146 )
Exchange rate effect on cash
    118,918       3,532       109,109  
Net increase (decrease) in cash
    65,583       16,264       (668,034 )
Cash - begin of period
    55,507       39,243       707,277  
Cash - end of period
  $ 121,090     $ 55,507     $ 39,243  
                         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
                       
   Cash paid during the period for:
                       
Income taxes
  $ 306,607     $ 353,315     $ 158,811  
Interest expense
    60,333       87,240       105,686  

The accompanying notes are an integral part of these financial statements
 
 
4

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
STATEMENT OF STOCKHOLDERS’ EQUITY
 
                     
Accumulated
             
         
Additional
         
Other
             
   
Registered
   
Paid in
   
Statutory
   
Comprehensive
   
Retained
       
   
Capital
   
Capital
   
Reserve
   
Income
   
Earnings
   
Total Equity
 
Balance December 31, 2007
  $ 388,014     $ -     $ -     $ (24,719 )   $ 418,847     $ 782,142  
Comprehensive Income:
                                               
Net Income
    -       -       -        -       1,388,374       1,388,374  
Foreign currency translation
    -       -       -       109,109       -       109,109  
Contributed capital
    -       254,701       -       -       -       254,701  
Statutory reserves
    -       -       169,897       -       (169,897 )     -  
Balance December 31, 2008
    388,014       254,701       169,897       84,390       1,637,324       2,534,326  
Comprehensive Income:
                                            -  
Net income
    -       -       -       -       2,201,398       2,201,398  
Foreign currency translation
    -       -       -       3,532       -       3,532  
Contributed capital
    -       263,489       -       -       -       263,489  
Statutory reserves
    -       -       24,110       -       (24,110 )     -  
Balance December 31, 2009
    388,014       518,190       194,007       87,922       3,814,612       5,002,745  
Comprehensive Income:
                                               
Net income
    -       -       -       -       2,332,500       2,332,500  
Foreign currency translation
    -       -       -       118,918       -       118,918  
Contributed capital
    -       199,565       -       -       -       199,565  
                                              -  
Balance September 30, 2010
  $ 388,014     $ 717,755     $ 194,007     $ 206,840     $ 6,147,112     $ 7,653,728  
 
The accompanying notes are an integral part of these financial statements
 
 
5

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Jinxinglong Electrical Appliances Co.,Ltd.  (“Jinxinglong” or the “Company”) was incorporated in September, 2002 in Jiangmen City, China with registered capital of RMB 2.5 million. It mainly manufactures and distributes fans and lightings in one business segment.
 
NOTE 2 – BASIS OF PRESENTATION

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. These financial statements include the accounts of the Company.   In the opinion of management, the accompanying financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of for years ended December 31, 2008 and 2009, and for the nine months ended September 30, 2010.
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

Accounts receivable - trade

Accounts receivable - trade is stated net of reserves for doubtful accounts.  Management reviews the aging of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded in accordance with Company policy.  Management determined that no reserve for doubtful accounts was required as of atSeptember 30, 2010, December 31, 2009 and December 31, 2008, respectively.

Inventory

Raw material cost is determined by the weighted average method.  Most of the Company’s inventory consists of raw materials such as stainless steel plate, metal plate and plastics.The cost of work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process. Inventories are stated at the lower of cost or market utilizing the moving average method. Costs of work-in-progress and finished goods are composed of direct materials, direct labor and an attributable portion of manufacturing overhead. An allowance is established when management determines that the carrying value of certain inventories may not be realizable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. Any reserves recorded would be based on estimates and reflected in cost of sales. There were no allowances deemed necessary by management as of September 30, 2010, December 31, 2009 and December 31, 2008.

Property, plant and equipment

The Company accounts for property, plant and equipment in accordance with the FASB ASC Topic 360, “Property, plant and equipment”. Property, plant and equipment is stated at cost including the cost of improvements.  Maintenance and repairs are charged to expense as incurred.  Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Depreciation is provided on the straight-line methodbased on the estimated useful life of the assets

Revenue recognition

Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are shipped to customers, the price is fixed or determinable as stated on the sales contract, and collectability is reasonably assured.  Customers do not have a general right of return on products shipped. Product returns to the Company have been insignificant thus far.  There are no post-shipment obligations, price protection or bill and hold arrangements.
 
 
6

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
Income taxes

The Company is incorporated in the People’s Republic of China (“PRC”) and is subject to the income tax laws of PRC.  The statutory rate under the laws of the PRC is 25%.The Company was entitled to exemption was two years from PRC income tax, starting from its first profitable year,by a three-year 50% reduction in its tax rate (“Tax Holiday”). The dollar benefitsof this Tax Holiday areapproximately $354,839 for the nine months ended September 30, 2010 and $363,359 and $234,725 for the full years ended December 31, 2009 and 2008, respectively.
 
GAAP requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2010, December 31, 2009 and December 31, 2008, the Company had no deferred tax assets or liabilities.
 
Based on a review of our tax positions, the Company was not required to record a liability for unrecognized tax position. Further, there has been no change during 2010 thus far.Accordingly, we have not accrued any interest and penalties through September 30, 2010.
 
Foreign currency translation

The Company operations are based in the PRC with its currency, the Renminbi (“RMB”), as the functional currency. The Company’s accounts are translated from RMB into US dollars in accordance with FASB ASC Topic 830, “Foreign Currency Matters”.  Accordingly, all assets and liabilities are translated at the exchange rates prevailing at the balance sheet dates, the stockholders’ equity is translated at the historical rates and all income and expense items are translated at the average rate for each of the periods.  The resulting translation adjustments are reported under Other comprehensive income in accordance with GAAP as a component of stockholders’ equity.  Transaction gains and losses are reflected in the Statement of operations.

Use of estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Several areas require management’s estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management’s estimates related to the collectability of the accounts receivable, the realizability of inventory, the accrued liabilities and the useful lives for property, plant and equipment. Actual results could differ from those estimates. 

Risks and uncertainties
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, and rates and methods of taxation, among other things.
 
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 and foreign currency exchange rates.
 
Contingencies
 
Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessments inherently involve an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
 
 
7

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If theassessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
 
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
Statement of Cash Flows
 
In accordance with GAAP, cash flows from the Company’s operations are based upon RMB. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
 
Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company attempts to control risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts. As a consequence, the Company believes that its accounts receivable credit risk exposure is limited.

Recent accounting pronouncements

In the opinion of management, there are no recent accounting pronouncements that will have a material effect of the Company’s financial statements.
 
NOTE 4– INVENTORIES

Inventories consisted of the following:
 
   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Raw materials
  $ 36,142     $ 708,761     $ 982,078  
Work in process
    474,003       310,027       93,474  
Finished goods
    312,876       314,142       156,153  
Total
  $ 823,021     $ 1,332,930     $ 1,231,705  
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:
 
 
 
Useful Life
 
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Plant and machinery
5 to 10 years
  $ 530,475     $ 501,977     $ 498,926  
Furniture, fixtures and equipment
5 to 10 years
    45,880       45,880       44,238  
Motor vehicles
8 to 10 years
    37,544       37,544       37,544  
Total
      613,899       585,401       580,708  
Less: accumulated depreciation
      (273,781 )     (233,921     (184,215 )
Net book value
    $ 340,118     $ 351,480     $ 396,493  

During the periods ended September 30, 2010, December 31, 2009 and December 31, 2008, depreciation expenses were $39,860, $49,706, and $59,821, respectively.  Of these amounts, for the periods ended September 30, 2010, December 31, 2009 and December 31, 2008, $26,460, $36,333 and $37,174 respectively, were capitalized into inventory to be expensed through cost of goods sold.
 
 
8

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
NOTE 6 – SHORT TERM BANK LOAN

The short term bank loans, denominated in Chinese Renminbi, are as follows:

   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Loan from Huicheng Credit Union Co., Ltd, interest rate at 8.68%, due on October 20,2009, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
  $ -     $ -     $ 365,786  
Loan from Huicheng Credit Union Co., Ltd, interest rate at 6.37%, due on Septembr 20,2010, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
    -       292,903       -  
Loan from Huicheng Credit Union Co., Ltd, interest rate at 6.37%, due on October 20,2010, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
    439,354       439,354       -  
Loan from Huicheng Credit Union Co., Ltd, interest rate at 6.37%, due on November 20,2010, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
    366,129       366,129       -  
Loan from Huicheng Credit Union Co., Ltd, interest rate at 6.66%, due on April 20,2011, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
    306,098       -       -  
Loan from Huicheng Credit Union Co., Ltd, interest rate at 5.32%, due on August 20,2011, guaranteed by Jiangmen Jinhua Metal Surface Decoration Co., Ltd, a related party
    306,097       -       -  
Total Short term bank loans
  $ 1,417,678     $ 1,098,386     $ 365,786  
 
The owner of Jiangmen Jinhua Metal Surface Decoration Co., Ltd. is a family relative to the shareholder of Jinxinglong.
 
NOTE 7 – WARRANTY

The Company evaluates its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred.  The Company assesses its warranty liability annually and as ofSeptember 30, 2010, December 31, 2009 and December 31, 2008, the Company believed that it had no material warranty claimsliability. The warranty claims would be included in accrued expenses in the accompanying balance sheet.  
 
NOTE 8– INCOME TAXES

The Company is incorporated in the PRC and is subject to the income tax laws of PRC.  All of the tax provisions for the periods ended September 30, 2010, December 31, 2009 and December 31, 2008 pertain to PRC taxes.
 
NOTE 9– CONCENTRATIONS, RISK AND UNCERTAINTIES

The Company has the following concentrations of business with each customer constituting greater than 10% of the Company’s sales:

   
Nine months ended
   
Years ended
 
   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Jiangmen Pioneer Import&Export Co., Ltd
    100 %     100 %     -  
Jiangmen Xinqin Import &Export Co., Ltd
    -       -       100 %
 
 
9

 
 
JINXINGLONG ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
The Company has the following concentrations of accounts receivable constituting greater than 10% of the Company’s accounts receivable:
 
   
Nine months ended
   
Years ended
 
   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Jiangmen Pioneer Import &Export Co., Ltd
    86 %     71 %     -  
Jiangmen Xinqin Import & export Co., Ltd
    14 %     29 %     100 %

This concentration makes the Company vulnerable to a near-term severe impact should the relationships be impaired or terminated.

The Company has the following concentrations of business with each supplier constituting greater than 10% of the Company’s purchases:

   
Nine months ended
   
Years ended
 
   
September 30, 2010
   
December 31, 2009
   
December 31, 2008
 
Foshan Supply &Marketing Co., Ltd
    24 %     21 %     16 %
 
NOTE 10 – COMPENSATED ABSENCES

Regulation 45 of the local labor law of the PRC entitles employees to annual vacation leave after one year of service.  In general, all leave must be utilized annually with proper notification.  Any unutilized leave is cancelled.
 
NOTE 11 – STATUTORY RESERVE

In accordance with the laws and regulations of the PRC, the Company is required to allocate ten percent of net income after taxes, not to exceed fifty percent of registered capital to a statutory reserve. The balances at September 30, 2010, December 31, 2009 and December 31, 2008 were $194,007, $194,007 and $169,897, respectively.As of December 31, 2009, the balance of the statutory reserve reached 50% of the Company’s registered capital and thus no further reserves will be required. These reserves are not distributable as cash dividends. The board of directors of the Company has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.
 
NOTE 12 – LEASE PAYMENT WAIVE

In December, 2003, the Company entered into an agreement with a shareholder Mr. Juhong Liang, who owns 70% of the Company. Pursuant to the agreement, Mr. Liang agreed to waive the lease fees for buildings and the related land use right of approximately $263,489 (RMB1.8 million) per year from December 18th, 2003 to December 17th, 2013.  As a result, the Company has been recorded in the estimated value of this waive as a lease expense and a corresponding entry to additional paid in capital. These lease expenses for the nine months ended September 30, 2010, for the years ended December 31, 2009 and 2008 have been $199,565, $263,489 and $254,701, respectively.
 
NOTE 13 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through December 10, 2010 and has determined that there were no subsequent events to recognize or disclose in these financial statements.
 
On July 15th, 2010, the Company entered into an Equity Ownership Transfer Agreement (“Acquisition Agreement”) with Home System Group. As part of this Acquisition Agreement, all of the Company’s shareholders hadagreed to sell 100% of their equity interest in Company for total cash consideration of approximately $15,000,000. The closing of this acquisition occurred on October 1, 2010.
 
 
10

 
 

EX-99.2 HTML

e607853_ex99-2.htm


ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.

FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS’ REPORT

APRIL 1, 2009 (DATE OF INCEPTION) TO
DECEMBER 31, 2009

AND SEPTEMBER 30, 2010
 
 
 

 
 
Table of Contents
 
Independent Auditor’s Report
1
Balance Sheets
2
Statements of Operation and Comprehensive Income
3
Statement of Stockholders’ Equity
4
Statements of Cash Flows
5
Notes to Financial Statements
6
 
 
 

 
 
INDEPENDENT AUDITORS' REPORT

 
To the Stockholders’ of ZhongshanSanfan Electrical Appliances Co., Ltd.


We have audited the accompanying balance sheet of ZhongshanSanfan Electrical Appliances Co., Ltd. (the "Company"), as of December 31, 2009, and the related statement of operations and comprehensive income, cash flows, and stockholders’ equity for the period from April 1, 2009 (date of inception) to December 31, 2009.  These financial statements are the responsibility of the management of the Company.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ZhongshanSanfan Electrical Appliances Co., Ltd.  as of December 31, 2009, and the results of its operations and comprehensive income, cash flows, for the period from April 1, 2009 (date of inception) to December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.


Acquavella, Chiarelli, Shuster, Berkower& Co., LLP

Iselin, New Jersey
September 27, 2010
 
 
1

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
 BALANCE SHEETS

   
September 30, 2010
   
December 31, 2009
 
   
(unaudited)
   
(audited)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 556,982     $ 4,890  
Accounts receivable
    10,954,254       6,699,987  
Prepaid expenses
    750       988  
Inventories
    503,098       649,285  
TOTAL CURRENT ASSETS
    12,015,084       7,355,150  
Property, plant and equipment – net
    290,725       296,704  
TOTAL ASSETS
  $ 12,305,809     $ 7,651,854  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable–trade
  $ 7,390,723     $ 5,402,871  
Accrued expenses and other payables
    95,225       61,121  
Income taxes payable
    347,731       319,236  
Other taxes payable
    119,760       160,598  
TOTAL CURRENT LIABILITIES
    7,953,439       5,943,826  
TOTAL LIABILITIES
    7,953,439       5,943,826  
                 
STOCKHOLDERS’ EQUITY
               
Registered capital
    146,308       146,308  
Retained earnings
    4,075,038       1,487,648  
Statutory reserve
    73,154       73,154  
Other comprehensive income
    57,870       918  
TOTAL STOCKHOLDERS’ EQUITY
    4,352,370       1,708,028  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 12,305,809     $ 7,651,854  
 
The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
   
Nine Months Ended
September 30, 2010
(unaudited)
   
April 1, 2009 (inception of operation) to
December 31, 2009
(audited)
 
Net Sales
  $ 17,132,548     $ 11,003,719  
Cost of Sales
    13,455,112       8,770,567  
GROSS PROFIT
    3,677,436       2,233,152  
                 
General, selling and administrative expenses
    274,195       153,476  
                 
INCOMEFROM OPERATIONS
    3,403,241       2,079,676  
                 
OTHER INCOME
               
Other income
    45,125       22  
Interest income
    1,487       1,371  
                 
INCOME BEFORE INCOME TAXES
    3,449,853       2,081,069  
                 
INCOME TAXES
    862,463       520,267  
                 
NET  INCOME
    2,587,390       1,560,802  
OTHER COMPREHENSIVE INCOME
               
Foreign currency translation adjustment
    56,952       918  
                 
COMPREHENSIVE INCOME
  $ 2,644,342     $ 1,561,720  
 
The accompanying notes are an integral part of these financial statements 
 
 
3

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF CASH FLOWS

   
Nine months ended
September 30, 2010
   
Period From April 1, 2009
(Date of Inception) to
December 31, 2009
 
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
           
Net income
  $ 2,587,390     $ 1,560,802  
Adjustments to reconcile net income
               
to net cash provided by operating activities:
               
Depreciation
    29,201       12,278  
      Change in assets and liabilities
               
          (Increase) decrease in assets:
               
Accounts receivable
    (4,254,267 )     (6,699,987 )
Prepaid expenses
    238       (988 )
Inventories
    146,187       (649,285 )
           Increase (decrease) in liabilities:
               
           Accounts payable
    1,987,852       5,402,871  
           Accrued expenses and other payables
   
34,104
     
61,121
 
           Income taxes payable
   
28,495
     
319,236
 
Other taxes payable
    (40,838 )     160,598  
Net cash provided by Operating Activities
    518,362       166,646  
                 
CASH FLOWS USED IN INVESTING ACTIVITIES
               
          Capital expenditures
    (23,222 )     (308,982 )
Net cash used in Investing Activities
    (23,222 )     (308,982 )
                 
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
               
Contributed capital
    -       146,308  
Net cash provided by Financing Activities
    -       146,308  
Exchange rate effect on cash
    56,952       918  
Net increase in cash
    552,092       4,890  
Cash - begin of period
    4,890       -  
Cash - end of period
  $ 556,982     $ 4,890  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Income taxes
  $ 840,234     $ 201,189  

The accompanying notes are an integral part of these financial statements 
 
 
4

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
STATEMENT OF STOCKHOLDERS’ EQUITY
 
               
Accumulated
             
               
Other
             
   
Registered
   
Statutory
   
Comprehensive
   
Retained
   
Total
 
   
Capital
   
Reserves
   
Income
   
Earnings
   
Equity
 
Balance April 1, 2009
  $ -     $ -     $ -     $ -     $ -  
Comprehensive Income:
                                    -  
Net Income
    -       -       -       1,560,802       1,560,802  
Foreign currency translation
    -       -       918       -       918  
Registered Capital
    146,308       -       -       -       146,308  
Statutory reserves
    -       73,154       -       (73,154 )     -  
Balance December 31, 2009
    146,308       73,154       918       1,487,648       1,708,028  
Comprehensive Income:
                                    -  
Net Income
    -       -       -       2,587,390       2,587,390  
Foreign currency translation
    -       -       56,952       -       56,952  
                                         
Balance September 30, 2010
  $ 146,308     $ 73,154     $ 57,870     $ 4,075,038     $ 4,352,370  
 
The accompanying notes are an integral part of these financial statements
 
 
5

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Zhongshan Sanfan Electrical Appliances Co., Ltd.  (“Sanfan” or the “Company”) was incorporated in April, 2009 in Zhongshan City, China with registration capital RMB 1 million. It mainly manufactures and distributes fans and lightings. As of September 30, 2010, the Company consists of one operating unit,which commenced operation from June 30, 2009.
 
NOTE 2 – BASIS OF PRESENTATION

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America. These financial statements include the accounts of the Company.   In the opinion of management, the accompanying financial statements reflect the adjustments considered necessary for a fair presentation of the Company’s results as of September 30, 2010 and December 31, 2009, and for the periods then ended.
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit with a maturity of three months or less when purchased.

Accounts receivable - trade

Accounts receivable - trade is stated net of reserve for doubtful accounts.  Management reviews the composition and aging of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded in accordance with Company policy.  Management determined that no reserves for doubtful accounts were required as of September 30, 2010 and December 31, 2009, respectively.

Inventory

Raw material cost is determined by the weighted average method.  Most of the Company’s inventory consists of raw materials such as stainless steel plate, metal plate and plastics.The cost of work-in-progress and finished goods inventories consist of raw materials, direct labor and overhead associated with the manufacturing process. Inventories are stated at the lower of cost or market utilizing the moving average method. Costs of work-in-progress and finished goods are composed of direct materials, direct labor and an attributable portion of manufacturing overhead. An allowance is established when management determines that the carrying value of certain inventories may not be realizable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. Any reserves recorded would be based on estimates and reflected in cost of sales. There were no allowances deemed necessary by management as of September 30, 2010 and December 31, 2009.
 
Property, plant and equipment

The Company accounts for property, plant and equipment in accordance with the FASB ASC Topic 360, “Property, plant and equipment”. Property, plant and equipment is stated at cost including the cost of improvements.  Maintenance and repairs are charged to expense as incurred.  Assets under construction are not depreciated until construction is completed and the assets are ready for their intended use. Depreciation and amortization are provided on the straight-line methodbased on the estimated useful life of the assets

Revenue recognition

The Company’s revenue recognition policies are in compliance with FASB ASC Topic 605, “Revenue Recognition”.  Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are shipped to customers, the price is fixed or determinable as stated on the sales contract, and collectability is reasonably assured.  Customers do not have a general right of return on products shipped. Product returns to the Company have been insignificant thus far.  There are no post-shipment obligations, price protection or bill and hold arrangements.
 
 
6

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
Income taxes

The Company is incorporated in the People’s Republic of China (“PRC”) and is subject to the income tax laws of PRC.  The statutory rate under the laws of the PRC is 25%.
 
GAAP requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2010 and December 31, 2009, the Company had no deferred tax assets or liabilities.
 
Based on a review of our tax positions, the Company was not required to record a liability for unrecognized tax benefits. Further, there has been no change during 2010 thus far.Accordingly, we have not accrued any interest and penalties through September 30, 2010.
 
Foreign currency translation

The Company operations are based in the PRC with its currency, the Renminbi (“RMB”), as the functional currency. The Company’s accounts are translated from RMB into US dollars in accordance with FASB ASC Topic 830, “Foreign currency matters”.  Accordingly, all assets and liabilities are translated at the exchange rates prevailing at the balance sheet dates, the stockholder’s equity is translated at the historical rates and all income and expense items are translated at the average rates for each of the periods.  The resulting translation adjustments are reported under other comprehensive income in accordance with GAAP as a component of stockholder’s equity.  Transaction gains and losses are reflected in the statement of operations.

Use of estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Several areas require management’s estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to the collectability of the accounts receivable, the realizability of inventory, the accrued liabilities and the useful lives for amortization and depreciation. Actual results could differ from those estimates. 

Risks and Uncertainties
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
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.
 
Contingencies
 
Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
 
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If theassessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
 
 
7

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
Statement of Cash Flows
 
In accordance with GAAP, cash flows from the Company’s operations are based upon the RMB. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
 
Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company attempts to control risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts. As a consequence, the Company believes that its accounts receivable credit risk exposure is limited.

Recent Accounting Pronouncements

In the opinion of management, there are no recent accounting pronouncements that will have a material effect of the Company’s financial statements.
 
NOTE 4– INVENTORIES

Inventories consisted of the following:
 
   
September 30, 2010
   
December 31, 2009
 
Raw materials
  $ 200,274     $ 448,486  
Work in process
    61,339       5,992  
Finished goods
    241,485       194,807  
Total
  $ 503,098     $ 649,285  
 
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consisted of the following:
 
 
Useful Life
 
September 30, 2010
   
December 31, 2009
 
Plant and machinery
5 to 10 years
 
$
300,640
   
$
     278,746
 
Furniture, fixtures and equipment
5 to 10 years
   
  13,010
     
       11,784
 
Motor vehicles
8 to 10 years
   
  18,554
     
       18,452
 
Total
     
332,204
     
     308,983
 
Less: accumulated depreciation
     
41,479
     
       12,278
 
Net book value
   
$
290,725
   
$
     296,704
 

During the periods ended September 30, 2010 and December 31, 2009, depreciation expenses were $29,201 and 12,278, respectively.  Of these amounts, for the periods ended September 30, 2010 and December 31, 2009, $25,296 and $11,841, respectively, were capitalized into inventory to be expensed through cost of goods sold.
 
NOTE 6 – WARRANTY

The Company evaluates its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred.  The Company assesses its warranty liability annually and as ofSeptember 30, 2010 and December 31, 2009, the Company believed that it had no material warranty claimsliability. The warranty claims would be included in accrued expenses in the accompanying balance sheet.  
 
 
8

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
NOTE 7– INCOME TAXES

The Company is incorporated in the PRC and is subject to the income tax laws of PRC.  All of the tax provisions for the periods ended September 30, 2010 and December 31, 2009 pertain to PRC taxes.
 
NOTE 8– CONCENTRATIONS, RISK AND UNCERTAINTIES

The Company has the following concentrations of business with each customer constituting greater than 10% of the Company’s sales:

   
Nine months ended
September 30, 2010
   
Year ended
December 31, 2009
 
Guangdong Zhongshan Food & Aquatic Products Co., Ltd.
    100 %     100 %

The Company has the following concentrations of accounts receivable constituting greater than 10% of the Company’s accounts receivable:
 
   
Nine months ended
September 30, 2010
   
Year ended
December 31, 2009
 
Guangdong Zhongshan Food & Aquatic Products Co., Ltd.
    100 %     100 %

This concentration makes the Company vulnerable to a near-term severe impact should the relationships be impaired or terminated.

The Company has the following concentrations of business with each supplier constituting greater than 10% of the Company’s purchases:

   
Nine months ended
September 30, 2010
   
Year ended
December 31, 2009
 
Changdashun Electric Co., Ltd
    41 %     42 %
Kaide Metals Co., Ltd
    18 %     32 %
 
NOTE 9 – COMPENSATED ABSENCES

Regulation 45 of the local labor law of the PRC entitles employees to annual vacation leave after one year of service.  In general, all leave must be utilized annually with proper notification.  Any unutilized leave is cancelled.
 
NOTE 10 – STATUTORY RESERVE

In accordance with the laws and regulations of the PRC the Company is required to allocate 10%of its annual net income after taxes, not to exceed 50% of registered capital, to the a statutory reserve. The balance at September 30, 2010 and December 31, 2009 was $73,154. As of December 31, 2009, the balance of the statutory reserve reached 50% of the Company’s registered capital and thus no further reserves will be required.
 
 
9

 
 
ZHONGSHAN SANFAN ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
 
NOTE 11 – COMMITMENTS AND CONTINGENCIES
 
Operating Leases

In the normal course of business, the Company leases office and factory space under operating lease agreements. The operating lease agreements generally contain renewal options that may be exercised at the Company’s discretion after the completion of the base rental terms. In addition, many of the lease agreements provide for regular increases to the base lease rate at specified intervals, which usually occur on an annual basis. The Company was obligated under operating leases requiring minimum payments as follows:

Year
     
2010
 
$
17,739
 
2011
   
17,739
 
2012
   
17,739
 
2013
   
10,348
 
Total
 
$
63,565
 

Rental expense was $13,305and $13,252for the ninemonths ended September 30, 2010 and the period ended December 31, 2009, respectively.
 
NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through December 10, 2010, and has determined that there were no subsequent events to recognize or disclose in these financial statements.
 
On May 31, 2010, the Company entered into an Equity Ownership Transfer Agreement (“Acquisition Agreement”) with Home System Group. As part of this Acquisition Agreement, all of the Company’s shareholders had agreed to sell 90% of their equity interest in Company for total cash consideration of approximately $12,000,000. The closing of this acquisition occurred on October 1, 2010.
 
 
10

 
 

EX-99.3 HTML

e607853_ex99-3.htm

 
HOME SYSTEM GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Completion of Acquisition of  90% of Zhongshan Sanfan Electrical Appliances Co., Ltd.

On May 31, 2010, the Company, through its wholly-owned subsidiary, Weihe, entered into an Equity Ownership Transfer Agreement (the “Acquisition Agreement”) with Zhongshan Sanfan Electrical Appliance Co., Ltd. (“Sanfan”) and all the shareholders of Sanfan (the “Sellers”), pursuant to which the Company agreed to acquire and Sellers have agreed to sell 90% of the Sellers’ equity interest in Sanfan for cash consideration of approximately $12,000,000. The Company closed this acquisition on October 1, 2010.  As of September 30th, 2010, the Company paid a total of $4,835,027 to the shareholders of Sanfan, with the remaining portion of the purchase price to be paid by the end of 2011.

Completion of Acquisition of  100% of Jinxinglong Electrical Appliances Co., Ltd.

On July 15, 2010, the Company, through its wholly-owned subsidiaries, Weihe and Asia Forever, entered into an Equity Ownership Transfer Agreement with Jiangmen City Jinxinglong Electrical Appliance Co., Ltd. (“Jinxinglong”) and all the shareholders of Jinxinglong (the “Sellers”), pursuant to which Weihe and Asia Forever have agreed to acquire and Sellers have agreed to sell 100% of the Sellers’ equity interest in Jinxinglong for a cash consideration of approximately $15,000,000. The Company closed the acquisition on October 1, 2010. As of November 8, 2010, the Company paid a total of $3,021,892 to the shareholders of Jinxinglong, with the remaining portion of the purchase price to be paid by the end of 2011.
  
The following pro forma consolidated condensed statements of operations and balance sheets for the nine months ended September 30, 2010 and year ended December 31, 2009 reflect the financial results of Sanfan and Jinxinglong as if the acquisitions had occurred retroactively.

There was no significant accounting policy differences or other items which required adjustment in the accompanying unaudited pro forma condensed consolidated financial statements.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of Sanfan and Jinxinglong as well as those of the Company. The unaudited pro forma condensed consolidated financial statements do not purport to be indicative of the financial position or results of operations that would have actually been obtained had such transactions been completed as of the assumed dates and for the periods presented, or which may be obtained in the future. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that the Company believes are reasonable.
 
 
1

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2010

   
In USD
 
   
Sanfan
   
Jinxinglong
   
HSG
   
Adjustment
   
HSYT
(Pro forma)
 
ASSETS
 
30-Sep-10
   
30-Sep-10
   
30-Sep-10
         
30-Sep-10
 
CURRENT ASSET
                             
Cash and cash equivalents
  $ 556,982     $ 121,090     $ 657,127     $ -     $ 1,335,199  
Accounts receivable – trade, net of  allowance
    10,954,254       10,704,755       39,527,768       -       61,186,777  
Notes receivable - short term
    -               8,126,205       -       8,126,205  
Deposits and advances
    -       21,808       1,947,901       -       1,969,709  
Inventories
    503,098       823,021       14,239,186       -       15,565,305  
    Other assets
    750       322,640       1,722,845       -       2,046,235  
 TOTAL CURRENT ASSET
    12,015,084       11,993,314       66,221,032       -       90,229,430  
    Notes receivable - long-term
    -       -       1,302,802       -       1,302,802  
Acquisition deposit
    -       -       7,856,919       (7,856,919 )     -  
Property, plant and equipment – net
    290,725       340,118       8,552,156       -       9,182,999  
Goodwill and  intangible assets
    -       -       26,522,325       16,406,740       42,441,670  
TOTAL ASSETS
  $ 12,305,809     $ 12,333,432     $ 110,455,234     $ 8,549,821     $ 143,644,296  
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                       
                                         
CURRENT LIABILITIES
                                       
Accounts payable  trade
  $ 7,390,723     $ 2,717,973     $ 16,854,036     $ -     $ 26,962,732  
Bills payable
    -       -       5,564,111       -       5,564,111  
Accrued expenses and other payables
    95,225       81,961       7,481,164       -       7,658,350  
Short term bank loans
    -       1,417,678       17,341,340       -       18,759,018  
Income taxes and other taxes payable
    467,491       462,092       2,788,787       -       3,718,370  
Notes payable  current portion
    -       -       2,779,109       -       2,779,109  
Due to stockholder & related parties – current portion
    -       -       3,203,702       -       3,203,702  
Acquisition costs payables
    -       -       -       19,143,081       19,143,081  
TOTAL CURRENT LIABILITIES
    7,953,439       4,679,704       56,012,249       19,143,081       87,788,473  
                                         
NON-CURRENT LIABILITIES
                                       
Due to stockholder – long term portion
    -       -       1,605,414       -       1,605,414  
Long term bank loan
    -       -       1,641,522       -       1,641,522  
TOTAL LIABILITIES
    7,953,439       4,679,704       59,259,185       19,143,081       91,035,409  
                                         
STOCKHOLDERS' EQUITY
                                       
Share capital
    146,308       388,014       67,490       (534,322 )     67,490  
Additional paid-in capital
    -       717,755       25,942,241       -       26,659,996  
Statutory reserve
    73,154       194,007       681,914               949,075  
Retained earnings
    4,075,038       6,147,112       22,321,807       (10,222,150 )     22,321,807  
Other comprehensive income
    57,870       206,840       2,182,597       (264,710 )     2,182,597  
Non-controlling interests
    -       -       -       427,922       427,922  
TOTAL STOCKHOLDERS' EQUITY
    4,352,370       7,653,728       51,196,049       (11,080,655 )     52,608,807  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 12,305,809     $ 12,333,432     $ 110,455,234     $ 8,062,426     $ 143,644,296  
 
 
2

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 
   
In USD
 
Items
 
Sanfan
   
Jinxinglong
   
HSG
   
Adjustment
   
HSYT
(Pro forma)
 
   
30-Sep-10
   
30-Sep-10
   
30-Sep-10
         
30-Sep-10
 
Net Sales
  $ 17,132,548     $ 17,028,721     $ 86,607,478     $ -     $ 120,768,747  
Cost of Sales
    (13,455,112 )     (13,955,606 )     (66,877,268 )     -       (94,287,986 )
GROSS PROFIT
    3,677,436       3,073,115       19,730,210       -       26,480,761  
                                         
General, selling and administrative expenses
    (274,195 )     (327,547 )     (5,314,898 )     -       (5,916,640 )
                                         
INCOME FROM OPERATIONS
    3,403,241       2,745,568       14,415,312               20,564,121  
                                         
OTHER (EXPENSE) INCOME
                                       
Loss on debt conversion
    -       -       (1,747,762 )     -       (1,747,762 )
Other income (expense)
    45,125       723       815,951       -       861,799  
Interest expense, net
    1,487       (58,952 )     (1,007,428 )     -       (1,064,902 )
                                         
INCOME BEFORE INCOME TAXES
  $ 3,449,853     $ 2,687,339     $ 12,476,073     $ -     $ 18,613,265  
                                         
INCOME TAXES
    (862,463 )     (354,839 )     (3,045,826 )     -       (4,263,128 )
                                         
NET  INCOME
  $ 2,587,390     $ 2,332,500     $ 9,430,247     $ -     $ 14,350,137  
                                         
Less: income attributable to non controlling interest
    -       -       -       (258,739 )     (258,739 )
                                         
Net income attributable to HSYT shareholders
    2,587,390       2,332,500       9,430,247       (258,379 )     14,091,398  
Basic & Diluted Weighted Average Shares
    65,837,787       65,837,787       65,837,787       -       65,837,787  
Basic & Diluted Earnings per Share
    0.04       0.03       0.14       -       0.21  
 
 
3

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

The following adjustments to the unaudited pro forma financial statements are based on the assumption that the acquisitions of subsidiaries were consummated as of September 30, 2010.
 
To recognize the 90% interests in Sanfan and recognize the goodwill occurred during the acquisition of Sanfan and eliminate the long term equity investments
 
Dr
   
Cr
 
             
Paid in capital
    131,677        
Retained earnings
    3,667,534        
Other comprehensive income
    52,083        
Acquisition deposit
            (4,835,027 )
Goodwill and Intangible assets*
    8,148,706          
Acquisition costs payable
            (7,164,973 )
                 
To recognize the 10% minority interests of the equity in Sanfan.
 
Minority  interest
            (427,922 )
Paid in capital
    14,631          
Retained earnings
    407,504          
Other comprehensive income
    5,787          
                 
To recognize the goodwill occurred during the acquisition of Jinxinglong and eliminate the long term equity investments
 
Acquisition deposit
            (3,021,892 )
Goodwill and intangible assets*
    8,258,034          
Acquisition costs payable
            (11,978,108 )
Paid in capital
    388,014          
Retained earnings
    6,634,507          
Other comprehensive income
    206,840          
 
* Adjustment subject to finalization to valuation and possible adjusts to recognize intangible assets.
 
 
4

 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2009
 
   
In USD
 
ASSETS
 
Sanfan April 1, 2009 (Date of Inception) to December 31, 2009)
   
Jinxinglong
31-Dec-09
   
HSG
31-Dec-09
   
Adjustment
   
HSYT
(Pro forma)
31-Dec-09
 
CURRENT ASSET
                             
Cash and cash equivalents
  $ 4,890     $ 55,507     $ 3,985,782     $ -