Independent Auditors' Report
To the Board of Directors and Stockholders of Shenzhen Hengtaifeng Technology Co., Ltd.
We have audited the accompanying balance sheet of Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2003. 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 Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the results of their operations and cash flows for the years ended December 31, 2003in conformity with accounting principles generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 24, 2004
F-15
Shenzhen Hengtaifeng Technology Co., Ltd.
Balance Sheet
December 31, 2003
Assets
Current Assets
Cash and equivalents $ 378,711
Accounts receivable, net 475,299
Inventories 329,561
Loans receivable - employees 37,660
Loans receivable - other 9,147
Loan to officers 199,620
Other receivable 68,708
Deposits 326,702
Prepaid expenses 6,053
------------
Total Current Assets 1,831,461
------------
Property, plant and equipment, net 981,167
Security deposit 7,946
------------
Total Assets 2,820,574
============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 84,470
Notes payable 761,172
Current maturities of long-term debts 5,796
Loans payable - other 5,392
Customer deposits 30,055
Payroll payable 23,423
Welfare payable 66,172
Taxes payable 75,898
------------
Total Current Liabilities 1,052,378
------------
Long-term debt, net of current maturities 149,401
------------
Total Liabilities 1,201,779
------------
Stockholders' Equity
Common stock, $0.12 par value, 10,000,000 shares authorized, issued and
outstanding 1,200,000
Accumulated other comprehensive income 8,427
Retained earnings 410,368
------------
Total Stockholders' Equity 1,618,795
------------
Total Liabilities and Stockholders' Equity $ 2,820,574
============
See notes to the financial statements.
F-16
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Operations
Year Ended
December 31
2003
------------
Net Sales $ 2,206,757
Cost of Good Sold 891,938
------------
Gross Profit 1,314,819
------------
Selling Expenses 297,926
General and Administrative Expenses 288,526
Research and Development 125,266
------------
Total Operating Expenses 711,718
------------
Income (Loss) From Operations 603,101
------------
Other Income (Expense)
Interest income 1,677
Interest expenses (33,040)
Other income 138,099
Other expenses (2,184)
Loss on impairment of assets --
------------
Total Other Income (Expense) 104,552
------------
Income (Loss) Before Provision for Income Taxes 707,653
Provision for Income Taxes --
------------
Net Income (Loss) $ 707,653
============
See notes to the financial statements.
F-17
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 2003
Common Stock
---------------------------------
Accumulated
$0.12 Additional (Deficit)/
Par Value Paid-In Retained Earnings
Shares Stated Value Capital Income
-------------- -------------- -------------- --------------
Balance, December 31, 2002 10,000,000 1,200,000 -- (297,285)
Net Income -- -- -- 707,653
-------------- -------------- -------------- --------------
Foreign Currency Translation Adjustment -- -- -- --
-------------- -------------- -------------- --------------
Balance, December 31, 2003 10,000,000 $ 1,200,000 $ -- $ 410,368
============== ============== ============== ==============
Accumulated
Other
Comprehensive Total
Equity Stockholders'
-------------- --------------
Balance, December 31, 2002 7,742 910,457
Net Income -- 707,653
-------------- --------------
Foreign Currency Translation Adjustment 685 685
-------------- --------------
Balance, December 31, 2003 $ 8,427 $ 1,618,795
============== ==============
See notes to the financial statements.
F-18
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Cash Flows
Year Ended
December 31
2003
------------
Cash Flows From Operating Activities
Net Income (Loss) $ 707,653
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization 55,532
Bad debt expenses 11,868
Loss on impairment of assets --
Decrease (Increase) in Assets
Accounts receivable (203,045)
Inventories (289,833)
Deposits (39,909)
Security deposit (7,608)
Other receivable (68,708)
Prepaid expenses (3,393)
Increase (Decrease) in Liabilities
Accounts payable (119,238)
Customer deposit 27,838
Payroll payable 11,416
Welfare payable 31,528
Taxes payable 74,593
Deferred assets --
------------
Net Cash Provided by (Used in) Operating Activities 188,694
------------
Cash Flow From Investing Activities
Cash paid for property, plant and equipment (555,016)
------------
Net Cash Used in Investing Activities (555,016)
------------
Cash Flow From Financing Activities
Proceeds from capital contribution --
Proceeds from loans receivable - employees --
Proceeds from loans to officers 74,394
Proceeds from loans receivable - other 3,950
Payment on loans receivable - employees (24,965)
Payment on loans receivable - others (7,606)
Proceeds from notes payable 634,360
Payment on borrowings - long-term debt (5,424)
------------
Net Cash Provided by Financing Activities 674,709
------------
Effect of Exchange Rate Changes on Cash and Equivalents 685
------------
Net Increase in Cash and Equivalents 309,072
Cash and Equivalent at Beginning of Year 69,639
------------
Cash and Equivalent at End of Year $ 378,711
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 33,040
============
Income taxes $ --
============
See notes to the financial statements.
F-19
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Shenzhen Hengtaifeng Technology Co., Ltd. (the Company) was founded in the People's Republic of China on July 5, 1995, under the name Shenzhen Guangba Trade Development Co., Ltd and amended its name on May 12, 2000. The Company is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People's Republic of China.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents include time deposits, and all highly liquid debt instruments with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables. The allowance for doubtful accounts as of December 31, 2003 was $17,874.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market.
Depreciation and Amortization
The cost of property, plant and equipment is depreciated for financial reporting purposes on a straight-line basis over the estimated useful lives of the assets: 39 years for commercial buildings and improvements, 5-10 years for machinery, equipment, and vehicles, 7-10 years for furniture and fixtures, and 3-5 years for software. Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred.
Revenue Recognition
The Company recognizes revenues when the following four situations have been met: (i) delivery has occurred or service has been rendered (ii) the delivery has been accepted by the customer and the product is satisfactorily tested (iii) collectibility is reasonably assured (iv) no other significant obligations of the Company exist, other than normal warranty support.
Advertising Costs
Advertising costs are expensed as incurred and amount to $65,647 in 2003
Shipping and Handling Costs
Shipping and handling costs are charged to costs of goods sold as incurred and amounted to $1,012 in 2003.
Research and Developments Costs
Research and development costs are charged to operations as incurred and amounted to $125,266 in 2003.
F-20
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -(Continued)
Translation of Foreign Currencies
The financial statements of the Company are measured in Chinese Yuan and then translated to U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of members' equity under accumulated other comprehensive income (loss).
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes for differences between the basis of financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are recognized for operating losses that are available to offset future income taxes.
According to the Provisional Regulation of the People's Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company is approved by Shenzhen local tax bureau, the Company is exempt from income tax in 2003 and 2004. The Company will also have half of it's income taxes exempt from 2005 to 2007.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
Major Customers:
The following summarizes sales to major customers (each 10% or more of sale):
Sales to Number of Percentage Year Ended Major Customers Customers of Total ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 524,922 1 23.8%
Major Suppliers:
The following summarizes purchases from major suppliers (each 10% or more of purchases):
Purchases from Number of Percentage Year Ended Major Suppliers Suppliers of Total ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 709,617 1 63.6%
F-21
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
INVENTORIES
Inventories at December 31, 2003 consist of the following:
Raw materials $ 217,604 Working in process 9,562 Finished goods 102,395 ------------ Total $ 329,561 ============
DEPOSITS
Deposits represent amounts paid to suppliers in advance
LOAN TO OFFICERS
Loan to officers are unsecured, non-interest bearing and due upon demand
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost, less accumulated depreciation and amortization at December 31, 2003 consists of the following:
Buildings and improvement $ 843,832 Machinery and equipment 175,836 Furniture and fixture 19,731 Software 87,468 ------------ Subtotal 1,126,867 Less accumulated depreciation and amortization 145,700 ------------ Total $ 981,167 ============
Depreciation and amortization expense charged to operations was $55,532 in 2003.
LOANS RECEIVABLE - EMPLOYEES
Loans receivable - employee are unsecured, non-interest bearing and due on demand.
LOANS RECEIVABLE - OTHER
Loans receivable - other represent unsecured loans to non-related third parties, non-interest bearing and due upon demand.
F-22
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
OTHER RECEIVABLES
Other receivables represent a receivable from the ShenZhen local government of $4,650 for a rent subsidy and $64,058 for a Value Added Tax Refund from the state tax bureau in Guandong, China.
NOTES PAYABLE
The notes payable is comprised of the following:
Note to Huaxin Branch of Shenzhen Commercial Bank Interest at 5.841% due quarterly, and principal due April 4, 2004. Guaranteed by an unrelated third party. $ 362,463
Note to Zhenxing Branch of Construction Bank Interest at 4.8675% due quarterly, and principal due April 14, 2004. Guaranteed by an unrelated third party. 302,052
Note to Caitian Branch of Shenzhen Commercial Bank Interest at 6.372% due quarterly, and principal due December 8, 2004. Guaranteed by an unrelated third party. 96,657 ----------
Total Notes Payable $ 761,172 ==========
Guarantees
The note to Huaxin Branch of Shenzhen Commercial Bank is guaranteed by an unrelated third party with similar debt. Although the debt of the third party had been paid as of September 30, 2003, the Company's debt is still guaranteed by them as of December 31, 2003 with no cost.
The note to Zhenxing Branch of Construction Bank is guaranteed by payment to an unrelated third party at a cost of $9,062 annually.
The note to Caitian Branch of Shenzhen Commerical Bank is guaranteed by an unrelated third party and a shareholder of the Company. In exchange for the unrelated third party guarantee, the Company paid them $200.
F-23
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 2003
Mortgage Note $ 155,197 Interest at 5.04% due in equal monthly installments of $1,124, including interest through March 27, 202.The mortgage secured by the Company's building with a net book value of $268,062 Less Current Maturities 5,796 -------------- Long-Term Debt, Net of Current Maturities $ 149,401 ==============
Total maturities of long-term debt are as follows:
Year Ending December 31, 2004 $ 5,796 2005 6,095 2006 6,409 2007 6,745 2008 6,398 Thereafter 123,754 -------------- Total minimum payments required $ 155,197 ==============
LOANS PAYABLE - OTHER
Loans payable - other represents unsecured loans from non-related third parties, non-interest bearing and due upon demand.
TAXES PAYABLE
Taxes payable were $75,898 as of December 31, 2003, and consist of the following:
Value-added Tax $ 74,543 Education and surplus tax 1,037 City construction tax 318 -------------- Total taxes payable $ 75,898 ==============
F-24
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
EMPLOYEE WELFARE PLAN
The Company has established an employee welfare plan in accordance with Chinese law and regulations. The Company makes annual pre-tax contributions of 14% of all employees' salaries.
The total expense for the above plan amounted to $41,571 for the year ended December 31, 2003.
WARRANTIES
The Company warrants that all software developing and distributing by it will be free under normal use for a period of one year from the date of accepted by clients. The Company's experience for costs and expenses in connection with such warranties has been minimal and through December 31, 2003, no amount has been reserved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The current carrying amounts of the Company's cash and equivalents, accounts receivable, loan receivable, accounts payable and accrued expenses, and loan payable approximate their fair values on December 31,2003 due to the short term maturities of these financial instruments. For long-term investments, fair values are estimates based on quoted market value.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS Statement No.149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No.133,Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS Statement No.150", Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position.
F-25
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In November 2002, the FASB issued Interpretation No.45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements are effective for the Company during the third quarter ending March 31, 2003. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN 46"),Consolidation of Variable Interest Entities, an Interpretation of ARB No.51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position.
To the Board of Directors and Stockholders of Shenzhen Hengtaifeng Technology Co., Ltd.
We have audited the accompanying balance sheet of Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2003. 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 Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the results of their operations and cash flows for the years ended December 31, 2003in conformity with accounting principles generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 24, 2004
F-15
Shenzhen Hengtaifeng Technology Co., Ltd.
Balance Sheet
December 31, 2003
Assets
Current Assets
Cash and equivalents $ 378,711
Accounts receivable, net 475,299
Inventories 329,561
Loans receivable - employees 37,660
Loans receivable - other 9,147
Loan to officers 199,620
Other receivable 68,708
Deposits 326,702
Prepaid expenses 6,053
------------
Total Current Assets 1,831,461
------------
Property, plant and equipment, net 981,167
Security deposit 7,946
------------
Total Assets 2,820,574
============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 84,470
Notes payable 761,172
Current maturities of long-term debts 5,796
Loans payable - other 5,392
Customer deposits 30,055
Payroll payable 23,423
Welfare payable 66,172
Taxes payable 75,898
------------
Total Current Liabilities 1,052,378
------------
Long-term debt, net of current maturities 149,401
------------
Total Liabilities 1,201,779
------------
Stockholders' Equity
Common stock, $0.12 par value, 10,000,000 shares authorized, issued and
outstanding 1,200,000
Accumulated other comprehensive income 8,427
Retained earnings 410,368
------------
Total Stockholders' Equity 1,618,795
------------
Total Liabilities and Stockholders' Equity $ 2,820,574
============
See notes to the financial statements.
F-16
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Operations
Year Ended
December 31
2003
------------
Net Sales $ 2,206,757
Cost of Good Sold 891,938
------------
Gross Profit 1,314,819
------------
Selling Expenses 297,926
General and Administrative Expenses 288,526
Research and Development 125,266
------------
Total Operating Expenses 711,718
------------
Income (Loss) From Operations 603,101
------------
Other Income (Expense)
Interest income 1,677
Interest expenses (33,040)
Other income 138,099
Other expenses (2,184)
Loss on impairment of assets --
------------
Total Other Income (Expense) 104,552
------------
Income (Loss) Before Provision for Income Taxes 707,653
Provision for Income Taxes --
------------
Net Income (Loss) $ 707,653
============
See notes to the financial statements.
F-17
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 2003
Common Stock
---------------------------------
Accumulated
$0.12 Additional (Deficit)/
Par Value Paid-In Retained Earnings
Shares Stated Value Capital Income
-------------- -------------- -------------- --------------
Balance, December 31, 2002 10,000,000 1,200,000 -- (297,285)
Net Income -- -- -- 707,653
-------------- -------------- -------------- --------------
Foreign Currency Translation Adjustment -- -- -- --
-------------- -------------- -------------- --------------
Balance, December 31, 2003 10,000,000 $ 1,200,000 $ -- $ 410,368
============== ============== ============== ==============
Accumulated
Other
Comprehensive Total
Equity Stockholders'
-------------- --------------
Balance, December 31, 2002 7,742 910,457
Net Income -- 707,653
-------------- --------------
Foreign Currency Translation Adjustment 685 685
-------------- --------------
Balance, December 31, 2003 $ 8,427 $ 1,618,795
============== ==============
See notes to the financial statements.
F-18
Shenzhen Hengtaifeng Technology Co., Ltd.
Statement of Cash Flows
Year Ended
December 31
2003
------------
Cash Flows From Operating Activities
Net Income (Loss) $ 707,653
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Depreciation and amortization 55,532
Bad debt expenses 11,868
Loss on impairment of assets --
Decrease (Increase) in Assets
Accounts receivable (203,045)
Inventories (289,833)
Deposits (39,909)
Security deposit (7,608)
Other receivable (68,708)
Prepaid expenses (3,393)
Increase (Decrease) in Liabilities
Accounts payable (119,238)
Customer deposit 27,838
Payroll payable 11,416
Welfare payable 31,528
Taxes payable 74,593
Deferred assets --
------------
Net Cash Provided by (Used in) Operating Activities 188,694
------------
Cash Flow From Investing Activities
Cash paid for property, plant and equipment (555,016)
------------
Net Cash Used in Investing Activities (555,016)
------------
Cash Flow From Financing Activities
Proceeds from capital contribution --
Proceeds from loans receivable - employees --
Proceeds from loans to officers 74,394
Proceeds from loans receivable - other 3,950
Payment on loans receivable - employees (24,965)
Payment on loans receivable - others (7,606)
Proceeds from notes payable 634,360
Payment on borrowings - long-term debt (5,424)
------------
Net Cash Provided by Financing Activities 674,709
------------
Effect of Exchange Rate Changes on Cash and Equivalents 685
------------
Net Increase in Cash and Equivalents 309,072
Cash and Equivalent at Beginning of Year 69,639
------------
Cash and Equivalent at End of Year $ 378,711
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 33,040
============
Income taxes $ --
============
See notes to the financial statements.
F-19
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Shenzhen Hengtaifeng Technology Co., Ltd. (the Company) was founded in the People's Republic of China on July 5, 1995, under the name Shenzhen Guangba Trade Development Co., Ltd and amended its name on May 12, 2000. The Company is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People's Republic of China.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents include time deposits, and all highly liquid debt instruments with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables. The allowance for doubtful accounts as of December 31, 2003 was $17,874.
Inventories
Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market.
Depreciation and Amortization
The cost of property, plant and equipment is depreciated for financial reporting purposes on a straight-line basis over the estimated useful lives of the assets: 39 years for commercial buildings and improvements, 5-10 years for machinery, equipment, and vehicles, 7-10 years for furniture and fixtures, and 3-5 years for software. Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred.
Revenue Recognition
The Company recognizes revenues when the following four situations have been met: (i) delivery has occurred or service has been rendered (ii) the delivery has been accepted by the customer and the product is satisfactorily tested (iii) collectibility is reasonably assured (iv) no other significant obligations of the Company exist, other than normal warranty support.
Advertising Costs
Advertising costs are expensed as incurred and amount to $65,647 in 2003
Shipping and Handling Costs
Shipping and handling costs are charged to costs of goods sold as incurred and amounted to $1,012 in 2003.
Research and Developments Costs
Research and development costs are charged to operations as incurred and amounted to $125,266 in 2003.
F-20
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -(Continued)
Translation of Foreign Currencies
The financial statements of the Company are measured in Chinese Yuan and then translated to U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of members' equity under accumulated other comprehensive income (loss).
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes for differences between the basis of financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are recognized for operating losses that are available to offset future income taxes.
According to the Provisional Regulation of the People's Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company is approved by Shenzhen local tax bureau, the Company is exempt from income tax in 2003 and 2004. The Company will also have half of it's income taxes exempt from 2005 to 2007.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.
Major Customers:
The following summarizes sales to major customers (each 10% or more of sale):
Sales to Number of Percentage Year Ended Major Customers Customers of Total ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 524,922 1 23.8%
Major Suppliers:
The following summarizes purchases from major suppliers (each 10% or more of purchases):
Purchases from Number of Percentage Year Ended Major Suppliers Suppliers of Total ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 709,617 1 63.6%
F-21
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
INVENTORIES
Inventories at December 31, 2003 consist of the following:
Raw materials $ 217,604 Working in process 9,562 Finished goods 102,395 ------------ Total $ 329,561 ============
DEPOSITS
Deposits represent amounts paid to suppliers in advance
LOAN TO OFFICERS
Loan to officers are unsecured, non-interest bearing and due upon demand
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost, less accumulated depreciation and amortization at December 31, 2003 consists of the following:
Buildings and improvement $ 843,832 Machinery and equipment 175,836 Furniture and fixture 19,731 Software 87,468 ------------ Subtotal 1,126,867 Less accumulated depreciation and amortization 145,700 ------------ Total $ 981,167 ============
Depreciation and amortization expense charged to operations was $55,532 in 2003.
LOANS RECEIVABLE - EMPLOYEES
Loans receivable - employee are unsecured, non-interest bearing and due on demand.
LOANS RECEIVABLE - OTHER
Loans receivable - other represent unsecured loans to non-related third parties, non-interest bearing and due upon demand.
F-22
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
OTHER RECEIVABLES
Other receivables represent a receivable from the ShenZhen local government of $4,650 for a rent subsidy and $64,058 for a Value Added Tax Refund from the state tax bureau in Guandong, China.
NOTES PAYABLE
The notes payable is comprised of the following:
Note to Huaxin Branch of Shenzhen Commercial Bank Interest at 5.841% due quarterly, and principal due April 4, 2004. Guaranteed by an unrelated third party. $ 362,463
Note to Zhenxing Branch of Construction Bank Interest at 4.8675% due quarterly, and principal due April 14, 2004. Guaranteed by an unrelated third party. 302,052
Note to Caitian Branch of Shenzhen Commercial Bank Interest at 6.372% due quarterly, and principal due December 8, 2004. Guaranteed by an unrelated third party. 96,657 ----------
Total Notes Payable $ 761,172 ==========
Guarantees
The note to Huaxin Branch of Shenzhen Commercial Bank is guaranteed by an unrelated third party with similar debt. Although the debt of the third party had been paid as of September 30, 2003, the Company's debt is still guaranteed by them as of December 31, 2003 with no cost.
The note to Zhenxing Branch of Construction Bank is guaranteed by payment to an unrelated third party at a cost of $9,062 annually.
The note to Caitian Branch of Shenzhen Commerical Bank is guaranteed by an unrelated third party and a shareholder of the Company. In exchange for the unrelated third party guarantee, the Company paid them $200.
F-23
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 2003
Mortgage Note $ 155,197 Interest at 5.04% due in equal monthly installments of $1,124, including interest through March 27, 202.The mortgage secured by the Company's building with a net book value of $268,062 Less Current Maturities 5,796 -------------- Long-Term Debt, Net of Current Maturities $ 149,401 ==============
Total maturities of long-term debt are as follows:
Year Ending December 31, 2004 $ 5,796 2005 6,095 2006 6,409 2007 6,745 2008 6,398 Thereafter 123,754 -------------- Total minimum payments required $ 155,197 ==============
LOANS PAYABLE - OTHER
Loans payable - other represents unsecured loans from non-related third parties, non-interest bearing and due upon demand.
TAXES PAYABLE
Taxes payable were $75,898 as of December 31, 2003, and consist of the following:
Value-added Tax $ 74,543 Education and surplus tax 1,037 City construction tax 318 -------------- Total taxes payable $ 75,898 ==============
F-24
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
EMPLOYEE WELFARE PLAN
The Company has established an employee welfare plan in accordance with Chinese law and regulations. The Company makes annual pre-tax contributions of 14% of all employees' salaries.
The total expense for the above plan amounted to $41,571 for the year ended December 31, 2003.
WARRANTIES
The Company warrants that all software developing and distributing by it will be free under normal use for a period of one year from the date of accepted by clients. The Company's experience for costs and expenses in connection with such warranties has been minimal and through December 31, 2003, no amount has been reserved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The current carrying amounts of the Company's cash and equivalents, accounts receivable, loan receivable, accounts payable and accrued expenses, and loan payable approximate their fair values on December 31,2003 due to the short term maturities of these financial instruments. For long-term investments, fair values are estimates based on quoted market value.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS Statement No.149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No.133,Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS Statement No.150", Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position.
F-25
Shenzhen Hengtaifeng Technology Co., Ltd.
Notes to the Financial Statements
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In November 2002, the FASB issued Interpretation No.45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements are effective for the Company during the third quarter ending March 31, 2003. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN 46"),Consolidation of Variable Interest Entities, an Interpretation of ARB No.51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position.
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