REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Heng Xing Technology Group Development Limited
We have audited the accompanying consolidated balance sheet of Heng Xing Technology Group Development Limited (a British Virgin Islands Corporation) and subsidiary as of December 31, 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit of these statements 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 audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Heng Xing Technology Group Development Limited and subsidiary as of December 31, 2004, and the results of its consolidated operations and its cash flows for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
/s/ Kabani & Company, Inc.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Huntington Beach, California
January 31, 2005
F-1
HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 191,165
Accounts receivable, net 255,290
Inventory 312,046
Other receivable 236,352
Advances to suppliers 303,446
Prepaid expense 1,635
-----------
Total current assets 1,299,934
PROPERTY AND EQUIPMENT, NET 654,350
DEPOSITS 9,316
-----------
$ 1,963,600
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable & accrued expense $ 17,650 Payroll payable 21,580 Welfare payable 10,728 Taxes payable 77,288 Short term loan 121,000 Customer deposits 48,382 Total current liabilities 296,628
STOCKHOLDERS' EQUITY
Common stock, $1 per share; authorized shares 50,000; issued and outstanding 50,000 shares 100 Additional paid in capital 1,199,900 Statutory reserve 6,867 Accumulated other comprehensive income 10,821 Retained earnings 449,284 Total stockholders' equity 1,666,972
$ 1,963,600
(0)
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
NET REVENUE $ 1,373,079 $ 2,206,757
COST OF REVENUE 377,676 891,938
------------ ------------
GROSS PROFIT 995,403 1,314,819
Operating expenses
Selling expenses 313,192 297,926
General and administrative expenses 634,321 288,526
Research & development 179,601 125,266
------------ ------------
Total operating expenses 1,127,114 711,718
------------ ------------
INCOME FROM OPERATIONS (131,711) 603,101
Non-operating Income (expense):
Interest income 1,207 1,677
Interest expense (26,192) (33,040)
Gain on sale of property 7,289 --
Technology subsidy 60,500
Value added tax refund 92,065 --
Other income 49,941 138,099
Other expense (7,316) (2,184)
------------ ------------
Total non-operating income (expense) 177,494 104,552
------------ ------------
NET INCOME $ 45,783 $ 707,653
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 10,000,000 10,000,000
============ ============
BASIC AND DILUTED NET EARNING PER SHARE $ 0.00 $ 0.07
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
COMMON STOCK
--------------------------- ADDITIONAL
NUMBER OF PAID IN STATUTORY
SHARES AMOUNT CAPITAL RESERVE
---------- ----------- ----------- -----------
Balance, December 31, 2002 100 $ 1,200,000 $ $ --
Recapitalization on reverse acquisition -- (1,199,900) 1,199,900 --
Net income for the year ended December 31, 2003 -- -- -- --
Foreign currency translation adjustment -- -- -- --
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2003 100 100 1,199,900 --
Net income for the year ended December 31, 2004 -- -- -- --
Allocation to statutory reserve -- -- -- 6,867
Foreign currency translation adjustment -- -- -- --
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2004 100 $ 100 $ 1,199,900 $ 6,867
========== =========== =========== ===========
ACCUMULATED
OTHER RETAINED TOTAL
COMPREHENSIVE EARNINGS STOCKHOLDERS'
INCOME (DEFICIT) EQUITY
----------- ----------- -----------
Balance, December 31, 2002 $ 7,742 $ (297,285) $ 910,457
Recapitalization on reverse acquisition -- -- --
Net income for the year ended December 31, 2003 -- 707,653 707,653
Foreign currency translation adjustment 685 685.00
----------- ----------- -----------
BALANCE, DECEMBER 31, 2003 8,427 410,368 1,618,795
Net income for the year ended December 31, 2004 -- 45,783 45,783
Allocation to statutory reserve -- (6,867) --
Foreign currency translation adjustment 2,394 2,394.00
----------- ----------- -----------
BALANCE, DECEMBER 31, 2004 $ 10,821 $ 449,284 $ 1,666,972
=========== =========== ===========
F-4
HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 45,783 $ 707,653
Adjustments to reconcile net income to net cash
provided in operating activities:
Depreciation and amortization 56,944 55,532
Bad debt expense 170,323 11,868
Gain on sale of property (7,289) --
(Increase) / decrease in current assets:
Accounts receivable 49,686 (203,045)
Inventory 17,515 (289,833)
Other receivable (41,320) (68,708)
Deposits (1,370) (47,517)
Advances to suppliers 23,256 --
Prepaid expense 4,418 (3,393)
Increase / (decrease) in current liabilities:
Accounts payable (66,820) (119,238)
Customer deposits 18,327 27,838
Payroll payable (1,843) 11,416
Welfare payable (55,444) 31,528
Taxes payable 1,390 74,593
--------- ---------
Net cash provided by operating activities 213,556 188,694
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Receipt of cash on disposal of property 158,399 --
Acquisition of property & equipment (7,561) (555,016)
--------- ---------
Net cash provided by (used in) investing activities 150,838 (555,016)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan - officers/shareholders 199,620 74,394
Proceeds from loans 46,807 3,950
Payment on loan receivable -- (32,571)
Proceeds from note payable 109,812 634,360
Payments on note payable (910,573) (5,424.00)
--------- ---------
Net cash provided by (used in) financing activities (554,334) 674,709
--------- ---------
Effect exchange rate changes on cash and cash equivalents 2,394 685
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS (187,546) 309,072
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 378,711 69,639
--------- ---------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 191,165 $ 378,711
========= =========
F-5
HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED
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