Form 8-K/A Home System Group

[Amend] Events or Changes Between Quarterly Reports

What is Form 8-K/A?
  • Accession No.: 0001204459-07-001410 Act: 34 File No.: 000-49770 Film No.: 071109406
  • CIK: 0001172319
  • Submitted: 2007-09-10
  • Period of Report: 2007-09-10

FORM 8-K/A HTML

hsg091007f8ka.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):   September 10, 2007 (July 5, 2007)   

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
incorporation or organization)   No.)
 
No. 5A, Zuanshi Ge, Fuqiang Yi Tian Ming Yuan,
Fu Tian Qu, Shenzhen City
People’s Republic of China, 518000
(Address of principal executive offices)
   
086-755-83570142
(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):

£    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

£    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

£    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

£    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))


EXPLANATORY NOTE

This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by Home System Group, a Nevada corporation, on July 6, 2007, to provide, pursuant to Item 9.01 of Form 8-K, the financial statements and pro forma information of a business acquired.

Item 9.01 Financial Statement and Exhibits.

(a)   Financial Statements of Business Acquired.

The financial statements of Weihe Appliances Co., Ltd. required by Item 9.01 of Form 8-K are attached hereto as Annex A.

(b)   Pro Forma Financial Information.

The pro forma financial information required pursuant to Item 9.01 of Form 8-K and Article 11 of Regulation S-X are attached hereto as Annex B.

(d)   Exhibits.

Number

Description

 

 

10.1*

Share Exchange Agreement dated as of June 26, 2007, is entered into by and among Home System Group, Holy (HK) Limited, Oceanic Well Profit Inc, Weihe Appliances Co., Ltd., and the shareholders of Weihe Appliances Co., Ltd. (Incorporated by reference to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 26, 2007).

 

 

23.1

Consent of Morison Cogen, LLP, independent certified public accountants.

* Incorporated by reference


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

    HOME SYSTEM GROUP
       
       
Date: September 10, 2007   By: /s/ Weiqiu Li
      Weiqiu Li
      Chief Executive Officer
       

EXHIBIT INDEX

Number

Description

 

 

10.1*

Share Exchange Agreement dated as of June 26, 2007, is entered into by and among Home System Group, Holy (HK) Limited, Oceanic Well Profit Inc, Weihe Appliances Co., Ltd., and the shareholders of Weihe Appliances Co., Ltd. (Incorporated by reference to the Current Report on Form 8-K of the Company filed with the Securities and Exchange Commission on June 26, 2007).

 

 

23.1

Consent of Morison Cogen, LLP, independent certified public accountants.

 


ANNEX A

 

 

 ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.

FINANCIAL STATEMENTS

JUNE 30, 2007
(UNAUDITED)

 

 


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.

C O N T E N T S

   
  PAGE
   
   
BALANCE SHEETS 1
   
STATEMENTS OF OPERATIONS 2
   
STATEMENTS OF COMPREHENSIVE INCOME 3
   
STATEMENT OF STOCKHOLDERS’ EQUITY 4
   
STATEMENTS OF CASH FLOWS 5
   
NOTES TO FINANCIAL STATEMENTS 6 - 8

 


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
BALANCE SHEETS
JUNE 30, 2007 AND DECEMBER 31, 2006

      December 31,
    June 30, 2007   2006
    (Unaudited)   (Audited)

ASSETS

       
         
CURRENT ASSETS        

Cash

$ 2,007,705 $ 563,133

Restricted cash

  1,643,594   1,047,701

Trade receivables

  3,682,112   2,192,318

Inventories

  3,047,905   3,796,889

Other receivables and prepayments

  3,157,240   1,887,967

Prepaid land lease - current

  26,826   26,153

Loans receivable

  816,985   1,945,218

Amount due from a related company

  7,968,335   5,914,126
    22,350,702   17,373,505
         
PROPERTY, PLANT AND EQUIPMENT, Net   3,902,755   4,026,880
         
PREPAID LAND LEASE - Non-current   1,171,318   1,155,000
         
TOTAL ASSETS $ 27,424,775 $ 22,555,385
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

       
         
CURRENT LIABILITIES        

Trade payables

$ 3,754,869 $ 3,307,533

Bank advances

  4,473,288   3,168,373

Bank loans

  749,550   2,012,740

Other payables and accruals

  1,815,454   1,643,060

Tax payable

  343,396   186,174

Amount due to a related company

  136,694   -

Amount due to a director

  103,941   101,332

Deposits

  93,441   91,096
         
TOTAL LIABILITIES   11,470,633   10,510,308
         

STOCKHOLDERS’ EQUITY

       
Share capital   604,000   604,000
Statutory common revenue reserves   302,225   302,225
Accumulated other comprehensive income   867,407   508,364
Retained earnings   14,180,510   10,630,488
         

TOTAL STOCKHOLDERS’ EQUITY

  15,954,142 $ 12,045,077
         
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 27,424,775 $ 22,555,385
         

See accompanying notes to financial statements.

-1-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)

                 
   

Three Months Ended June 30,

 

Six Months Ended June 30,

   

2007

 

2006

 

2007

 

2006

   

 

 

 

 

 

 

 

NET SALES $

15,754,949

$

9,295,836

$

30,009,267

$

19,690,606

   

 

 

 

 

 

 

 

OPERATING EXPENSES  

 

 

 

 

 

 

 

Cost of net sales

 

12,210,500

 

7,483,258

 

23,304,325

 

15,963,490

General and administrative expenses

 

876,743

 

489,223

 

1,331,960

 

887,804

   

13,087,243

 

7,972,481

 

24,636,285

 

16,851,294

   

 

 

 

 

 

 

 

INCOME FROM OPERATIONS  

2,667,706

 

1,323,355

 

5,372,982

 

2,839,312

   

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)  

 

 

 

 

 

 

 

Finance costs

  (17,833)

 

3,625

 

(83,555)

 

(6,654)

Others

 

2,563

 

12,772

 

2,990

 

13,255

    (15,270)

 

16,397

 

(80,565)

 

6,601

   

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES  

2,652,436

 

1,339,752

 

5,292,417

 

2,845,913

   

 

 

 

 

 

 

 

INCOME TAXES   (877,465)

 

(442,118)

 

(1,742,395)

 

(939,151)
   

 

 

 

 

 

 

 

NET INCOME $

1,774,971

$

897,634

$

3,550,022

$

1,906,762

   

 

 

 

 

 

 

 

See accompanying notes to financial statements.

-2-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)

    Three Months Ended June 30,   Six Months Ended June 30,
    2007   2006   2007   2006
                 
                 
NET INCOME $ 1,774,971 $ - $ - $ 3,550,022
                 
OTHER COMPREHENSIVE INCOME                

Foreign currency translation adjustment

  230,159   194,231   359,043   247,467
                 
COMPREHENSIVE INCOME $ 2,005,130 $ 194,231 $ 359,043 $ 3,797,489
                 

See accompanying notes to financial statements.

-3-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2007

        Statutory Accumulated        
        Common   Other        
    Share   Revenue Comprehensive   Retained    
    Capital   Reserves   Income   Earnings   Total
                     
BALANCE AT DECEMBER 31, 2006 $ 604,000 $ 302,225 $ 508,364 $ 10,630,488 $ 12,045,077
                     
Cumulative translation adjustment   -   -   359,043   -   359,043
                     
Net income for the year ended June 30, 2007   -   -   -   3,550,022   3,550,022
                     
BALANCE AT June 30, 2007 (UNAUDITED) $ 604,000 $ 302,225 $ 867,407 $ 14,180,510 $ 15,954,142
                     

See accompanying notes to financial statements.

-4-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(UNAUDITED)

 

 

2007

 

2006

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income

$

3,550,022

$

1,906,762

Adjustments to reconcile net income to net cash provided by

 

 

 

 

operating activities

 

 

 

 

Amortization of prepaid lease payments

 

13,230

 

12,711

Depreciation

 

287,021

 

284,186

(Increase) decrease in assets

 

 

 

 

Restricted cash

 

(561,180)

 

(214,994)

Trade receivables

 

(1,413,846)

 

(575,429)

Inventories

 

835,194

 

(1,316,540)

Other receivables and prepayments

 

(1,183,163)

 

2,503,032

Loan receivables

 

1,162,266

 

(134,066)

Amount due from a related company

 

(1,896,979)

 

(1,243,121)

Increase (decrease) in liabilities

 

 

 

 

Trade payables

 

357,267

 

135,494

Other payables and accruals

 

128,328

 

467,948

Tax payable

 

150,355

 

(49,285)

Amount due to a related company

 

134,834

 

-

Amount due to a director

 

-

 

28,490

 

 

 

 

 

Net cash provided by operating activities

 

1,563,349

 

1,805,188

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Purchases of property, plant & equipment

 

(62,341)   (67,709)
 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Repayment of bank loans

 

(1,297,100)   (508,932)

Bank advances, net

 

1,206,704

 

(1,310,524)
 

 

 

 

 
Net cash used in financing activities

 

(90,396)

 

(1,819,456)
 

 

 

 

 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

 

33,960

 

14,089

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

1,144,572

 

(67,888)
 

 

 

 

 

CASH - BEGINNING OF PERIOD

 

563,133

 

1,495,343

 

 

 

 

 

CASH - END OF PERIOD

$

2,007,705

$

1,427,455

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

83,555

$

6,654

Income taxes

$

1,592,040

$

988,436

See accompanying notes to financial statements.

-5-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed financial statements have been prepared by Zhongshan Weihe Electrical Appliances Co., Ltd. ("Weihe" or the "Company"). These statements include all adjustments (consisting only of its normal recurring adjustments) which management believes necessary for a fair presentation of the statements and have been prepared on a consistent basis using the accounting policies described in the Summary of Accounting Policies included in the 2006 Annual Report. Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company firmly believes that the accompanying disclosures are adequate to make the information presented not misleading. The Notes to Financial Statements included in the 2006 Annual Report should be read in conjunction with the accompanying interim financial statements. The interim operating results for the three and six months ended June 30, 2007 may not be indicative of operating results expected for the full year.

Nature of business

Zhongshan Weihe Electrical Appliances Co., Ltd. was incorporated with limited liability on August 3, 1998 in the People’s Republic of China. It manufactures ceiling fans and residential lighting for the international consumer market through various distributors.

Reporting Currency

The Company’s functional currency is Renminibi ("RMB"); however, the reporting currency is United States dollar ("USD").

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, the Company generally recognizes revenue at the time product is shipped to the customer.

Accounts Receivable

In the normal course of business, the Company provides credit to its customers and evaluates the status of outstanding balances on a regular basis. As amounts become uncollectible, they are charged to an allowance for doubtful accounts or operations in the period when a determination of uncollectibility is made. The allowance for doubtful accounts is adjusted periodically based upon a review of the outstanding receivables.

As of June 30, 2007 and December 31, 2006, the Company considers its accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts was recorded. Bad debt expense for the six months ended June 30, 2007 and 2006 was $-0-.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates based on management’s knowledge and experience. Accordingly, actual results could differ from those estimates.

Foreign Currency Translation

Assets and liabilities of the Company have been translated using the exchange rate at the balance sheet date. The average exchange rate for the period has been used to translate revenues and expenses. Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).

-6-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

Shipping and Handling Fees and Costs

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of the cost of goods sold. For the six months ended June 30, 2007 and 2006, shipping and handling costs were $ 432,733 and $ 364,324. For the three months ended June 30, 2007 and 2006, shipping and handling costs were $325,900 and $192,102.

Product Warranties

The Company does not offer warranties on its products.

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions under Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on their financial statements.

NOTE 2 – DUE FROM A RELATED PARTY

 

June 30,   December 31,

 

2006   2005

 

     

Trade

$ 4,855,293   $ 2,864,353

Non-trade

3,113,043   3,049,773

 

     

 

$ 7,968,336   $ 5,914,126

The related company is controlled by a director of the Company and is a major customer and supplier of the Company. Sales transactions with this related company amount to approximately 74% and 78% for six months ended June 30, 2007 and 2006. Purchase transactions with this related company amount to approximately 16% and 8% for six months ended June 30, 2007 and 2006.

The amounts dues are unsecured with no stated interest or repayment terms.

-7-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)

NOTE 3 – INCOME TAXES

The Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. The Company’s effective tax rate of 33% is equivalent to the People’s Republic China statutory tax rate. No provision for deferred taxes has been made as there were no material temporary differences at June 30, 2007 and 2006.

NOTE 4 – DUE TO A RELATED COMPANY

Amount represents money advanced from a related company, which is unsecured with no stated interest or repayment terms.

NOTE 5 – SUBSEQUENT EVENT

The Company was acquired on July 5, 2007 by Oceanic Well Profit Inc., a wholly-owned subsidiary of Holy (HK) Limited ("Holy"). Holy is a wholly-owned subsidiary of Home System Group ("HSG"), a United States public company.

The acquisition was a stock and cash transaction valued at approximately $45,000,000. Under the terms of the Share Exchange Agreement (the "Agreement"), the consideration consists of 4,500,000 newly issued shares of HSG’s common stock, which were divided proportionally among the Company’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction. The cash consideration consists of $27,000,000 in cash, again divided proportionally among the Company’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction and payable as follows: $10,800,000 due on the first anniversary of the closing of the transaction, and $16,200,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between HSG and each of the Company stockholders.

-8-


 

ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.

FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

 

 


   

ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.

   
   

C O N T E N T S

   
  PAGE
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
   
BALANCE SHEETS 2
   
STATEMENTS OF OPERATIONS 3
   
STATEMENTS OF COMPREHENSIVE INCOME 4
   
STATEMENT OF STOCKHOLDERS’ EQUITY 5
   
STATEMENTS OF CASH FLOWS 6
   
NOTES TO FINANCIAL STATEMENTS 7 - 14
   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Zhongshan Weihe Electrical Appliances Co., Ltd.
Zhongshan, Guangdong

We have audited the accompanying balance sheets of Zhongshan Weihe Electrical Appliances Co., Ltd. as of December 31, 2006 and 2005, and the related statements of operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Zhongshan Weihe Electrical Appliances Co., Ltd. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

/s/ MORISON COGEN LLP

Bala Cynwyd, Pennsylvania
August 30, 2007


 
ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

Cash

$

563,133

$

1,495,343

Restricted cash

 

1,047,701

 

1,250,992

Trade receivables

 

2,192,318

 

2,019,590

Inventories

 

3,796,889

 

3,918,109

Other receivables and prepayments

 

1,887,967

 

4,831,873

Prepaid land lease - current

 

26,153

 

25,296

Loans receivable

 

1,945,218

 

2,407,774

Amount due from a related company

 

5,914,126

 

947,863

 

 

17,373,505

 

16,896,840

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, Net

 

4,026,880

 

4,284,163

 

 

 

 

 

PREPAID LAND LEASE - Non-current

 

1,155,000

 

1,142,457

 

 

 

 

 

TOTAL ASSETS

$

22,555,385

$

22,323,460

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

Trade payables

$

3,307,533

$

4,285,242

Bank advances

 

3,168,373

 

4,838,883

Bank loans

 

2,012,740

 

2,775,600

Other payables and accruals

 

1,643,060

 

2,520,228

Tax payable

 

186,174

 

119,244

Amount due to a director

 

101,332

 

99,040

Deposits

 

91,096

 

88,113

TOTAL LIABILITIES

 

10,510,308

 

14,726,350

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Share capital

 

604,000

 

604,000

Statutory common revenue reserves

 

302,225

 

302,225

Statutory public welfare fund

 

-

 

226,968

Accumulated other comprehensive income

 

508,364

 

165,072

Retained earnings

 

10,630,488

 

6,298,845

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

 

12,045,077

 

7,597,110

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

22,555,385

$

22,323,460

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

-2-


 
ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006 AND 2005
 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

NET SALES

$

 39,171,522

$

26,731,607

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

Cost of net sales

 

31,021,790

 

21,845,047

General and administrative expenses

 

2,009,843

 

1,413,837

 

 

33,031,633

 

23,258,884

 

 

 

 

 

INCOME FROM OPERATIONS

 

6,139,889

 

3,472,723

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

Finance costs

 

(35,705)

 

(67,137)

Other

 

14,966

 

2,542

 

 

(20,739)

 

(64,595)

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

6,119,150

 

3,408,128

 

 

 

 

 

INCOME TAXES

 

2,014,475

 

1,120,136

 

 

 

 

 

NET INCOME

$

4,104,675

$

2,287,992

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

-3-


 
ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006 AND 2005
         
   

2006

 

2005

         
NET INCOME $  4,104,675 $  2,287,992
         
OTHER COMPREHENSIVE INCOME        

Foreign currency translation adjustment

  343,292   160,963
         
COMPREHENSIVE INCOME $  4,447,967 $  2,448,955

 

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

-4-


 
ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENT OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2006 AND 2005
                         

 

 

 

 

Statutory

 

Statutory

Accumulated

 

 

 

 

 

 

Registered

 

Common

 

Public

 

Other

 

 

 

 

 

 

Share

 

Revenue

 

Welfare

Comprehensive

 

Retained

 

 

 

 

Capital

 

Reserves

 

Fund

 

Income

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT JANUARY 1, 2005

$

604,000

$

 302,225

$

226,968

$

3,810

$

4,010,853

$

5,148,156

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

-

 

-

 

-

 

160,962

 

-

 

160,962

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year ended December 31, 2005

 

-

 

-

 

-

 

-

 

2,287,992

 

2,287,992

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2005

 

604,000

 

302,225

 

226,968

 

164,772

 

6,298,845

 

7,597,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfer of reserves

 

-

 

-

 

(226,968)

 

-

 

226,968

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

-

 

-

 

-

 

343,292

 

-

 

343,292

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for the year ended December 31, 2006

 

-

 

-

 

-

 

-

 

4,104,675

 

4,104,675

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2006

$

604,000

$

302,225

$

-

$

508,064

$

10,630,488

$

12,045,077

 

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

-5-


 
ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 AND 2005
 

 

 

 

 

 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

Net income

$

4,104,675

$

2,287,992

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

Amortization of prepaid lease payments

 

25,616

 

24,933

Depreciation

 

554,232

 

533,163

(Increase) decrease in assets

 

 

 

 

Restricted cash

 

240,624

 

399,685

Trade receivables

 

248,721

 

(1,175,316)

Inventories

 

(102,182)

 

(695,752)

Other receivables and prepayments

 

71,154

 

271,492

Loan receivables

 

532,947

 

10,939

Amount due from a related company

 

(1,860,274)

 

(934,257)

Increase (decrease) in liabilities

 

 

 

 

Trade payables

 

(1,099,819)

 

1,852,068

Deposits

 

-

 

86,847

Other payables and accruals

 

(942,784)

 

(1,337,073)

Due to a related company

 

-

 

(27,942)

Due to a director

 

(1,040)

 

132,471

Tax payable

 

61,601

 

15,750

 

 

 

 

 

Net cash provided by operating activities

 

1,833,471

 

1,445,000

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

Purchase of property plant and equipment

 

(160,096)

 

(85,252)

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

Proceeds from bank loans

 

1,971,449

 

3,373,272

Repayment of bank loans

 

(2,674,641)

 

(4,998,798)

Bank advances, net

 

(1,796,775)

 

85,654

 

 

 

 

 

Net cash used in financing activities

 

(2,636,069)

 

(757,552)

 

 

 

 

 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

 

30,485

 

30,166

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

(932,210)

 

632,362

 

 

 

 

 

CASH - BEGINNING OF YEAR

 

1,495,343

 

862,981

 

 

 

 

 

CASH - END OF YEAR

$

563,133

$

1,495,343

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

Cash paid during the year for:

 

 

 

 

Interest

$

35,705

$

67,137

 

 

 

 

 

Income taxes

$

1,952,875

$

1,104,387

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

-6-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Zhongshan Weihe Electrical Appliances Co., Ltd. ("Weihe" or the "Company") was incorporated with limited liability on August 3, 1998 in the People’s Republic of China ("PRC"). The Company manufactures ceiling fans and residential lighting for the international consumer market through various distributors.

Reporting Currency

The Company’s functional currency is Renminbi ("RMB"); however, the reporting currency is in the United States dollar ("USD").

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates based on management’s knowledge and experience. Accordingly, actual results could differ from those estimates.

Restricted Cash

Restricted cash consists of certificate of deposits held by bank as collateral for letters of credit.

Comprehensive Income

The Company follows the Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company’s financial currency is RMB and its financial statements are presented in US dollars using year end exchange rates for balance sheet items and average exchange rate in effect during the year for sales and expense items. Translation adjustments are included as a component of accumulated other comprehensive income in stockholders’ equity.

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions to limit its credit exposure. There is a concentration of credit risk with respect to accounts receivable since the majority of the balance is with one customer (Note 4).

Accounts Receivable

In the normal course of business, the Company provides credit to its customers and evaluates the status of outstanding balances on a regular basis. As amounts become uncollectible, they are charged to an allowance for doubtful accounts or operations in the period when a determination of uncollectibility is made. The allowance for doubtful accounts is adjusted periodically based upon a review of the outstanding receivables.

As of December 31, 2006 and 2005, the Company considers its accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts was recorded. Bad debt expense for the years ended December 31, 2006 and 2005 was $-0-.

Inventories

Inventories are valued at the lower of cost or market using the weighted average method.

-7-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. The costs less residual value are depreciated using the straight-line method based on the following estimated useful lives:

Buildings 20 years
Plant and equipment 5 to 10 years
Office furniture and equipment 5 to 10 years
Motor vehicles 5 to 8 years

Prepaid Lease Payments

Cost of acquiring rights to use certain land for the Company’s operations over a certain period is recorded as prepaid lease payments. Prepaid lease payments are stated at cost and amortized over the period of the lease on the straight-line basis.

Revenue Recognition

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition, the Company recognizes revenue when persuasive evidence of a customer or distributor arrangement exists or acceptance occurs, receipt of goods by customer occurs, the price is fixed or determinable, and the sales revenues are considered collectible. Subject to these criteria, the Company generally recognizes revenue at the time product is shipped to the customer.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Under the liability method, deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future 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 tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Advertising Costs

Advertising costs are expensed as incurred.

Shipping and Handling Fees and Costs

The Company follows Emerging Issues Task Force ("EITF") No. 00-10, Accounting for Shipping and Handling Fees and Costs. The Company does not charge its customers for shipping and handling. The Company classifies shipping and handling costs as part of operating expense. For the periods ended December 31, 2006 and 2005, shipping and handling costs were $853,840 and $447,326.

Recoverability of Long-Lived Assets

The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company is not aware of any events or circumstances which indicate the existence of an impairment which would be material to the company’s annual financial statements.

Product Warranties

The Company does not offer warranties on its products.

-8-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign Currency Transactions and Translation

The Company maintains its accounts in its functional currency in RMB. Gains and losses from foreign currency transactions such as those resulting from settlement of foreign receivables or payables are included in the statements of operations.

Assets and liabilities of the Company have been translated using the exchange rate at the balance sheet date. The average exchange rate for the period has been used to translate revenue and expense. Translation adjustments are reported separately and accumulated in a separate component of equity (cumulative translation adjustment).

Recently Issued Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board ("FASB") issued interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions under Statement No. 109 upon initial adoption. The cumulative effect of applying the provisions of this interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company does not believe that the adoption of FIN 48 will have a material impact on their financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB No. 108"). SAB No. 108 addresses the process and diversity in practice of quantifying financial statement misstatements resulting in the potential build up of improper amounts on the balance sheet. The Company is required to adopt the provisions of SAB No. 108 in fiscal 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 and will become effective beginning with the first quarter of 2008. The Company has not yet determined the impact the adoption of SFAS No. 157 on their financial statements and footnote disclosures.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of 2008. The Company has not yet determined the impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.

-9-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 2 – INVENTORIES

Inventories consist of the following:

  2006   2005
           
Raw materials

$

 3,535,948  

$

$ 1,941,051
Work in process   42,445     52,975
Finished goods   218,496     1,924,083
           
 

$

 3,796,889  

$

$ 3,918,109

NOTE 3 – OTHER RECEIVABLES AND PREPAYMENTS

  2006   2005
           
Amount due from a non-related company

$

-  

$

 2,935,493
VAT receivable (net of payable)   820,834     687,362
Trade deposits   814,684     990,105
Other   252,449     218,913
           
 

$

1,887,967  

$

4,831,873

NOTE 4 – LOANS RECEIVABLE

Amounts represent loans to non-related companies with no stated interest rates or repayment terms.

NOTE 5 – DUE FROM A RELATED PARTY

Amount represents trade receivables ($2,879,205 and $947,863 at December 31, 2006 and 2005) and non-trade receivables ($3,034,921 and $-0- at December 31, 2006 and 2005) from a company that is controlled by two stockholders of Weihe. One of the stockholders is the Executive Director of the Company. There are no stated interest or repayment terms.

During the years ended December 31, 2006 and 2005, the Company had the following transactions with a related company in the normal course of business.

  2006   2005
           
Sales to the related company $ 38,242,950   $ 23,383,668
           
Percentage of total net sales   97.6%     87.5%
           
Purchases from the related company $ 4,473,193   $ 1,537,789
           
Percentage of total purchases   16.3%     11.4%

-10-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 5 – DUE FROM A RELATED PARTY (Continued)

As of December 31, 2006, the related party’s outstanding accounts receivable balance was $2,864,353 or approximately 57% of total outstanding accounts receivable. The sales concentration with this related party makes the Company vulnerable to any changes in the business environment in which the related party operates. The Company may be adversely affected should orders decrease or the relationship terminate.

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT

 

  2006   2005
           
Buildings

$

 2,886,042  

$

2,791,491
Plant and machinery   4,304,756     4,022,444
Office furniture and equipment   46,788     45,255
Motor vehicles   150,037     128,311
    7,387,623     6,987,501
Less: Accumulated depreciation   3,360,743     2,703,338
           
 

$

4,026,880  

$

4,284,163

Depreciation for the years ended December 31, 2006 and 2005 was $554,232 and $533,163.

NOTE 7 – PREPAID LEASE

The prepaid land lease represents land use rights granted for the usage of certain land located in PRC for a term of 50 years for industrial and office use. Prepaid lease costs are amortized over the term of the lease. Amortization expense for the years ended December 31, 2006 and 2005 was $25,616 and $24,933.

NOTE 8 – BANK ADVANCES

Amount represents advances by a bank for raw material and other purchases, with maturity terms ranging from 60 days to 180 days and interest rate of London Interbank Offer Rate ("LIBOR") plus 0.7% (2.8% at December 31, 2006).

-11-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 9 – BANK LOANS

Bank loans consist of the following:

 

  2006   2005
           
Bank revolving line of credit secured by personal guarantee of Company’s director and prepaid lease payments of a related company, with interest rate of 5.58% per annum, maturing during November 2008.

$

1,282,000  

$

1,860,000
           
Bank loan, unsecured, with principal and accrued interest ranging between 5.58% to 6.732% per annum, due in a lump sum payment on January 5, 2008.   730,740     7,821,200
 

 

       
Bank loan collateralized by accounts receivable with no recourse, interest rate of LIBOR plus 1% (5.58% as of December 31, 2005).   -     134,400
           
 

$

2,012,740  

$

2,775,600

NOTE 10 – OTHER PAYABLES AND ACCRUALS

  2006   2005
           
Staff welfare payable

$

1,291,925  

$

1,026,676
Other   351,135     1,493,552
           
 

$

1,643,060  

$

2,520,228

The Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company accrues annual contributions of 14% of all employees’ salaries to employee welfare plan. The total expenses for the above plan were approximately $29,000 and $18,000 for the years ended December 31, 2006 and 2005.

NOTE 11 – DUE TO DIRECTOR

Amount represents payable to a director for advances made to the Company with no stated interest or repayment terms.

-12-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 12 – INCOME TAXES

As discussed in Note 1, the Company utilizes the asset and liability method of accounting for income taxes in accordance with SFAS No. 109. The effective tax rate of the Company for both 2006 and 2005 was approximated the statutory rate of 33%.

No provision for deferred taxes has been made as there were no material temporary differences at December 31, 2006 and 2005.

NOTE 13 – STOCKHOLDERS’ EQUITY

Pursuant to the new Corporate Law effective on January 1, 2006, only the common revenue reserve fund is required. 10% of annual net income is to be appropriated to this Fund up to a maximum of 50% of the Company’s registered capital.

Prior to January 1, 2006, the Company was required each year to transfer 5% of the profit after tax as reported under the PRC statutory financial statements to the statutory public welfare funds. This reserve was restricted to capital expenditure for employees’ collective welfare facilities that are owned by the Company.

Pursuant to a circular issued by the PRC’s Ministry of Finance on post implementation issues after the new Corporate Law came into effect on January 1, 2006, companies are required to transfer the balance of common welfare fund as of December 31, 2005 to common reserve fund. However, since the Company’s common revenue reserve fund is at the maximum of 50% of the Company’s registered capital, the Company transferred the $226,968 balance of the common welfare fund to retained earnings as of January 1, 2006.

The Company does not need to appropriate any income to the common revenue reserve fund for the years ended December 31, 2006 and 2005 as the fund has reached 50% of the Company’s registered capital as of January 1, 2005.

NOTE 14 – LEASE COMMITMENT

The Company leases employee living space under an operating lease expiring on November 1, 2008. Future annual minimum lease payments required under the above operating lease are as follows:

Years Ending      
December 31,   Amount
       
2007   $ 33,500
2008     27,900
       
    $ 61,400

The rental expenses for years ended December 31, 2006 and 2005 were $32,783 and $31,903.

-13-


ZHONGSHAN WEIHE ELECTRICAL APPLIANCES CO., LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006

NOTE 15 – SUBSEQUENT EVENT

The Company was acquired on July 5, 2007 by Oceanic Well Profit Inc., a wholly-owned subsidiary of Holy (HK) Limited ("Holy"). Holy is a wholly-owned subsidiary of Home System Group ("HSG"), a United States public company.

The acquisition was a stock and cash transaction valued at approximately $45,000,000. Under the terms of the Share Exchange Agreement (the "Agreement"), the consideration consists of 4,500,000 newly issued shares of HSG’s common stock, which were divided proportionally among the Company’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction. The cash consideration consists of $27,000,000 in cash, again divided proportionally among the Company’s stockholders in accordance with their respective ownership interests in the Company immediately before the closing of the transaction and payable as follows: $10,800,000 due on the first anniversary of the closing of the transaction, and $16,200,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between HSG and each of the Company stockholders.

 

 

-14-


ANNEX B

 

 

HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

 

-1-


HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The following unaudited pro forma financial statements for Home System Group Inc. ("HSYT" or "the Company") have been prepared to illustrate the acquisition of Holy (H.K.) Limited and Subsidiary ("Holy") in a merger transaction and the acquisition of Zhongshan Juxian Gas Oven Company Limited ("Juxian Gas") and Zhongshan Weihe Electrical Appliances Co., Limited ("Weihe").

The acquisition of Holy (H.K.) Limited and Subsidiary

Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination in the acquisition of Holy. That is, the share exchange is equivalent to the issuance of stock by Holy for the net monetary assets of HSYT, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, HSYT, are those of Holy, which are considered to be the accounting acquirer.

Under the terms of the merger agreement, as of January 31, 2007, the effective date of the merger, all shareholders of Holy (H.K.) Limited received a total amount of $3 million and 42,500,000 shares of voting common stock of HSYT in exchange for all shares of Holy common stock held by all shareholders.

The acquisition of Zhongshan Juxian Gas Oven Company Limited and Zhongshan Weihe Electrical Appliances Co., Limited.

The following pro forma consolidated condensed statements of operations for the six months ended June 30, 2007 and for the year ended December 31, 2006 reflects the financial results of Juxian Gas and Weihe as if the acquisition had occurred retroactively.

On July 2, 2007, the Company completed its acquisition of 100% of Juxian Gas in a stock and cash transaction valued at approximately $14,000,000. Under the terms of the Share Exchange Agreement (the "Agreement"), the consideration consists of 1,000,000 newly issued shares of the Company’s common stock, which were divided proportionally among the Juxian Gas stockholders in accordance with their respective ownership interests in Juxian Gas immediately before the closing of the transaction. The cash consideration consists of $10,000,000 in cash, again divided proportionally among the Juxian Gas stockholders in accordance with their respective ownership interests in Juxian Gas immediately before the closing of the transaction and payable as follows: $5,000,000 due on the first anniversary of the closing of the transaction, and $5,000,000 due on the second anniversary of closing of the transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Company and each of the Juxian Gas stockholders.

On July 5, 2007, the Company completed its acquisition of 100% of Weihe in a stock and cash transaction valued at approximately $45,000,000. Under the terms of the Share Exchange Agreement (the "Agreement"), the consideration consists of 4,500,000 newly issued shares of the Company’s common stock, which were divided proportionally among the Weihe stockholders in accordance with their respective ownership interests in Weihe immediately before the closing of the transaction. The cash consideration consists of $27,000,000 in cash, again divided proportionally among the Weihe stockholders in accordance with their respective ownership interests in Juxian Gas immediately before the closing of the transaction and payable as follows: $10,800,000 due on the first anniversary of the closing of the transaction, and $16,200,000 due on the second anniversary of closing of the transaction.

-2-


The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Company and each of the Weihe stockholders.

The unaudited pro forma financial information

The unaudited pro forma financial information combines the historical financial information of the Company, Holy, Juxian Gas and Weihe as of June 30, 2007 and for the six months ended June 30, 2007 and for the year ended December 31, 2006. The unaudited pro forma balance sheet assumes the acquisitions were completed on June 30, 2007. The unaudited pro forma statements of operations give effect to the merger and acquisitions as if the merger and acquisitions had been completed on January 1, 2006.

These unaudited pro forma financial statements are for information purposes only. They do not purport to indicate the results that would have actually been obtained had the merger and acquisitions been completed on the assumed dates or for the periods presented, or which may be realized in the future. The accounting adjustments reflected in these unaudited pro forma consolidated financial statements included herein are preliminary and are subject to change. The accompanying notes are an integral part of these pro forma consolidated financial statements.

 

 

-3-


HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2007

   

 

   

 

   

 

   

Zhongshan

 

 

 

   

 

   

 

   

 

   

Zhongshan

   

Weihe

 

 

 

   

 

   

Home

   

 

   

Juxian Gas

   

Electrical

 

 

 

   

 

   

System

   

Holy (HK)

   

Oven Co.,

   

Appliances

 

Pro Forma

   

Pro Forma

   

Group

   

Limited

   

Ltd.

   

Co., Ltd.

 

Adjustment

   

Total

   

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

NET SALES $

11,617,397

  $

13,750,432

  $

9,802,899

  $

30,009,267

 

$

-

  $

65,179,995

   

 

   

 

   

 

   

 

 

 

 

   

 

OPERATING EXPENSES  

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

Cost of net sales

 

9,649,994

   

12,278,051

   

8,263,466

   

23,304,325

 

 

-

   

53,495,836

General and

 

 

   

 

   

 

   

 

 

 

 

   

 

administrative expenses

 

257,568

   

1,132,864

   

233,935

   

1,331,960

 

 

-

   

2,956,327

   

 

   

 

   

 

   

 

 

 

 

   

 

   

9,907,562

   

13,410,915

   

8,497,401

   

24,636,285

 

 

-

   

56,452,163

   

 

   

 

   

 

   

 

 

 

 

   

 

INCOME FROM  

 

   

 

   

 

   

 

 

 

 

   

 

OPERATIONS  

1,709,835

   

339,517

   

1,305,498

   

5,372,982

 

 

-

   

8,727,832

   

 

   

 

   

 

   

 

 

 

 

   

 

OTHER INCOME  

 

   

 

   

 

   

 

 

 

 

   

 

(EXPENSE)  

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

Finance costs

 

-

   

(577)

   

-

   

(83,555)

 

 

-

    (84,132)
   

 

   

 

   

 

   

 

 

 

 

   

 

Interest income

 

6,439

   

1,573

   

69,477

   

2,990

 

 

-

   

80,479

   

 

   

 

   

 

   

 

 

 

 

   

 

   

6,439

   

996

   

69,477

   

(80,565)

 

 

-

    (3,653)
INCOME BEFORE  

 

   

 

   

 

   

 

 

 

 

   

 

INCOME TAXES  

1,716,274

   

340,513

   

1,374,975

   

5,292,417

 

 

-

   

8,724,179

   

 

   

 

   

 

   

 

 

 

 

   

 

INCOME TAXES -  

 

   

 

   

 

   

 

 

 

 

   

 

CURRENT  

-

    (72,483)     (446,165)     (1,742,395)  

 

-

    (2,261,043)
   

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

NET INCOME $

1,716,274

  $

268,030

  $

928,810

  $

3,550,022

 

$

-

  $

6,463,136

   

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

BASIC AND DILUTED  

 

   

 

   

 

   

 

 

 

 

   

 

EARNINGS PER SHARE  

 

   

 

   

 

   

 

 

 

 

  $

 0.095

   

 

   

 

   

 

   

 

 

 

 

   

 

   

 

   

 

   

 

   

 

 

 

 

   

 

BASIC AND DILUTED  

 

   

 

   

 

   

 

 

 

 

   

 

WEIGHTED AVERAGE  

 

   

 

   

 

   

 

 

 

 

   

 

PER SHARE  

 

   

 

   

 

   

 

 

 

 

   

67,888,280

-4-


HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 2007

   

 

   

 

   

 

   

 

     
   

Home

   

 

  Zhongshan    

Pro Forma

     
   

System Group

   

 

   

Weihe

   

Adjustment

     
   

and

 

Zhongshan

   

Electrical

   

 

     
   

Holy (HK)

 

Juxian Gas

  Appliances    

 

    Pro Forma
   

Limited

 

Oven Co., Ltd.

   

Co., Ltd.

   

 

    Total
ASSETS  

 

   

 

   

 

   

 

     
   

 

   

 

   

 

   

 

     
CURRENT ASSETS  

 

   

 

   

 

   

 

     
Cash $

1,851,061

  $

319,849

  $

2,007,705

  $

-

  $ $ 4,178,615
Restricted cash  

-

   

-

   

1,643,594

   

-

    1,643,594
Accounts receivable  

1,964,779

   

2,993,457

   

3,682,112

   

-

    8,640,348
Prepaid expense and  

 

   

 

   

 

   

 

     
other receivable  

1,153,440

   

51,020

   

3,157,240

   

-

    4,361,700
Inventory  

629,566

   

728,539

   

3,047,905

   

-

    4,406,010
Trade deposits  

824,226

   

306,040

   

-

   

-

    1,130,266
Acquisition deposits  

6,575,000

   

 

   

 

(2)   (6,575,000)     -
Due from stockholder  

-

   

13,019

   

-

   

-

    13,019
Prepaid land lease-current  

-

   

-

   

26,826

   

-

    26,826
Loans receivable  

-

   

-

   

816,985

   

-

    816,985
Due from related party  

1,676,735

   

6,575

   

7,968,335

   

-

    9,651,645
Goodwill  

-

   

-

   

-

(1)  

40,825,979

    40,825,979
   

14,674,807

   

4,418,499

   

22,350,702

   

34,250,979

    75,694,987
   

 

   

 

   

 

   

 

     
PROPERTY AND  

 

   

 

   

 

   

 

     
EQUIPMENT - Net  

5,421,843

   

463,524

   

3,902,755

   

-

    9,788,122
   

 

   

 

   

 

   

 

     
PREPAID LAND  

 

   

 

   

 

   

 

     
LEASE-Non-current  

-

   

-

   

1,171,318

   

-

    1,171,318
   

 

   

 

   

 

   

 

     
TOTAL ASSETS $

 20,096,650

  $

4,882,023

  $

 27,424,775

  $

34,250,979

  $ 86,654,427
   

 

   

 

   

 

   

 

     
LIABILITIES AND  

 

   

 

   

 

   

 

     
STOCKHOLDERS’ EQUITY  

 

   

 

   

 

   

 

     
   

 

   

 

   

 

   

 

     
CURRENT LIABILITIES  

 

   

 

   

 

   

 

     
Accounts payable and  

 

   

 

   

 

   

 

     
accrued expenses $

4,694,924

  $

1,785,732

  $

3,754,869

  $

-

  $ 10,235,525
Bank advances  

-

   

-

   

4,473,288

   

-

    4,473,288
Bank loans  

-

   

-

   

749,550

   

-

    749,550
Other payables and  

 

   

 

   

 

   

 

     
accruals  

637,836

   

-

   

1,815,454

   

-

    2,453,290
Taxes payable  

579,076

   

218,912

   

343,396

   

-

    1,141,384
Due to directors  

1,280

   

-

   

-

   

-

    1,280
Due to related party  

4,000

   

-

   

136,694

   

-

    140,694
Due to stockholder  

155,980

   

-

   

-

   

-

    155,980
Due to a director  

-

   

-

   

103,941

   

-

    103,941
Deposits  

-

   

-

   

93,441

   

-

    93,441
Dividend payable  

-

   

657,500

   

-

   

-

    657,500
   

 

   

 

   

 

(1) &  

 

     
Acquisition payable  

-

   

-

   

-

(2)  

30,425,000

    30,425,000
   

 

   

 

   

 

   

 

     
TOTAL LIABILITIES  

6,073,096

   

2,662,144

   

11,470,633

   

30,425,000

    50,630,873
   

 

   

 

   

 

   

 

     
STOCKHOLDERS’ EQUITY  

 

   

 

   

 

   

 

     
   

 

   

 

   

 

   

 

     
COMMON STOCK - $0.001  

 

   

 

   

 

   

 

     
par value; 200,000,000  

 

   

 

   

 

   

 

     
shares authorized,  

 

   

 

   

 

   

 

     
67,947,949 shares and  

 

   

 

   

 

   

 

     
42,500,000 shares issued  

 

   

 

   

 

   

 

     
and outstanding  

62,448

   

60,500

   

604,000

(1)   (659,000)     67,948

- 5 -


PAID-IN CAPITAL  

6,667,979

   

-

   

-

   

21,994,500

   

28,662,479

NOTE RECEIVABLE FOR  

 

   

 

   

 

   

 

   

 

STOCK ISSUANCE   (900,000)    

-

   

-

   

-

    (900,000)
COMMON STOCK  

 

   

 

   

 

   

 

   

 

SUBSCRIBED  

40,000,000

   

-

   

-

   

-

   

40,000,000

SUBSCRIPTION  

 

   

 

   

 

   

 

   

 

RECEIVABLE   (33,425,000)    

-

   

-

   

-

    (33,425,000)
RETAINED EARNINGS  

1,410,293

   

2,000,446

   

14,482,735

(1)   (16,483,181)    

1,410,293

CUMULATIVE  

 

   

 

   

 

   

 

   

 

TRANSLATION  

 

   

 

   

 

   

 

   

 

ADJUSTMENT  

207,834

   

158,933

   

867,407

    (1,026,340)    

207,834

   

 

   

 

   

 

   

 

   

 

TOTAL STOCKHOLDERS’  

 

   

 

   

 

   

 

   

 

EQUITY  

14,023,554

   

2,219,879

   

15,954,142

   

3,825,979

   

36,023,554

   

 

   

 

   

 

   

 

   

 

TOTAL LIABILITIES AND  

 

   

 

   

 

   

 

   

 

STOCKHOLDERS’ EQUITY $

 20,096,650

  $

4,882,023

  $

27,424,775

 

$

34,250,979

  $

86,654,427

-6-


The following adjustments to the unaudited pro financial statements are based on the assumption that the acquisition was consummated as at June 30, 2007:

(1) To record the acquisition of Juxian Gas and Weihe as follows:

(a)    Issuance of 1,000,000 shares of the Company’s Common Stock and an acquisition payable of $10,000,000 for 100% of Juxian Gas; (b) Issuance of 4,500,000 shares of the  Company’s Common Stock and an acquisition payable of $27,000,000 for 100% of Weihe;

and

(2) To apply the $6,575,000 Weihe acquisition deposit against the acquisition payable.

-7-


HOME SYSTEM GROUP, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006

    Home
System
Group
    Holy (HK)
Limited
    Zhongshan
Juxian Gas
Oven Co.,
Ltd.
    Zhongshan
Weihe
Electrical
Appliances
Co., Ltd.
    Pro Forma
Adjustment
    Pro Forma
Total
   

 

   

 

   

 

   

 

   

 

     
   

 

   

 

   

 

   

 

   

 

     
NET SALES $

26,391,044

  $

3,938,562

  $

18,286,648

  $

39,171,522

  $

-

  $

87,787,776

   

 

   

 

   

 

   

 

   

 

   

 

OPERATING EXPENSES  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Cost of net sales

 

23,736,261

   

3,507,759

   

15,480,842

   

31,021,790

   

-

   

73,746,652

General and

 

 

   

 

   

 

   

 

   

 

   

 

administrative expenses

 

992,379

   

253,458

   

476,169

   

2,009,843

   

-

   

3,731,849

   

 

   

 

   

 

   

 

   

 

   

 

   

24,728,640

   

3,761,217

   

15,957,011

   

33,031,633

   

-

   

77,478,501

   

 

   

 

   

 

   

 

   

 

   

 

INCOME FROM  

 

   

 

   

 

   

 

   

 

   

 

OPERATIONS

1,662,404

 

177,345

 

2,329,637

 

6,139,889

 

-

 

10,309,275

   

 

   

 

   

 

   

 

   

 

   

 

OTHER INCOME  

 

   

 

   

 

   

 

   

 

   

 

(EXPENSE)  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

Finance costs

  (313,784)    

-

    (597)     (35,705)    

-

    (350,086)
   

 

   

 

   

 

   

 

   

 

   

 

Interest income

 

5,183

   

244

   

32,293

   

14,966

   

-

   

52,686

   

 

   

 

   

 

   

 

   

 

   

 

    (308,601)    

244

   

31,696

    (20,739)    

-

    (297,400)
INCOME BEFORE  

 

   

 

   

 

   

 

   

 

   

 

INCOME TAXES  

1,353,803

   

177,589

   

2,361,333

   

6,119,150

   

-

   

10,011,875

   

 

   

 

   

 

   

 

   

 

   

 

INCOME TAXES -  

 

   

 

   

 

   

 

   

 

   

 

CURRENT  

-

    (59,340)     (771,792)     (2,014,475)    

-

    (2,845,607)
   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

NET INCOME  $

1,353,803

   

118,249

   $

1,589,541

   $

4,104,675

   

-

   $

7,166,268

   

 

   

 

   

 

   

 

   

 

   

 

BASIC AND DILUTED  

 

   

 

   

 

   

 

   

 

   

 

EARNINGS PER SHARE                               $

0.112

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

BASIC AND DILUTED  

 

   

 

   

 

   

 

   

 

   

 

WEIGHTED AVERAGE  

 

   

 

   

 

   

 

   

 

   

 

PER SHARE  

 

   

 

   

 

   

 

   

 

   

63,989,730

-8-



EXHIBIT 23.1 HTML

hsg091007exh231.htm


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the inclusion in the Current Report on Form 8-K/A of Home System Group (the "Company"), of our report, dated August 30, 2007, relating to the financial statements of Weihe Appliances Co., Ltd. for the years ended December 31, 2006 and 2005.

/s/ MORISON COGEN, LLP

Bala Cynwyd, PA
September 10, 2007