BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
INDEX
Page
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Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of December 31, 2005 and 2004 F-3
Statements of Operations and Other Comprehensive
Income (Loss) for the Years Ended December 31, 2005 and 2004 F-4
Statements of Shareholders' Equity for the Years Ended
December 31, 2005 and 2004 F-5
Statements of Cash Flows for the Years Ended December 31,
2005 and 2004 F-6
Notes to the Financial Statements F-7-F-16
Balance Sheets as of March 31, 2006 and December 31, 2005 F-17
Statements of Operations and Other Comprehensive Income (Loss)
for the Three Months Ended March 31, 2006 and 2005 F-18
Statements of Shareholders' Equity
for the Three Months Ended March 31, 2006 and 2005 F-19
Statements of Cash Flows
for the Three Months Ended March 31, 2006 and 2005 F-20
Notes to the Financial Statements F-21-F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Beijing Broadcasting and Television Media, Ltd.
We have audited the accompanying balance sheets of Beijing Broadcasting and
Television Media Co., Ltd. as of December 31, 2005 and 2004, and the related
statements of operations and other comprehensive income (loss), 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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Beijing Broadcasting and
Television Media Co., Ltd. as of December 31, 2005 and 2004, and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles general accepted in the United States of America.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
- -----------------------------------------------
Walnut, California
May 19, 2006
F-2
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
BALANCE SHEETS
AS OF DECEMBER 31, 2005 AND 2004
ASSETS
2005 2004
----------- -----------
CURRENT ASSETS:
Cash $ 135,816 $ 114,063
Accounts receivable, net of allowance for
doubtful accounts of $3,900 and $0 as of
December 31, 2005 and 2004, respectively 891,565 30,797
Accounts receivable - related party 252,374 --
Inventories - production cost 27,969 --
Other receivables 40,709 1,694
Other receivables - related parties 296,412 --
Other current assets 20,195 6,139
----------- -----------
Total current assets 1,665,040 152,693
----------- -----------
EQUIPMENT, net 790,970 912,843
----------- -----------
Total assets $ 2,456,010 $ 1,065,536
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 62,496 $ 18,150
Accrued Liabilities 22,851 16,695
Other payables 3,596 --
Taxes payable 304,062 15,378
Deferred revenue 123,380 --
----------- -----------
Total current liabilities 516,385 50,223
----------- -----------
SHAREHOLDERS' EQUITY:
Paid-in-capital 1,597,200 1,234,200
Retained earnings (deficits) 300,600 (218,887)
Accumulated other comprehensive income 41,825 --
----------- -----------
Total shareholders' equity 1,939,625 1,015,313
----------- -----------
Total liabilities and shareholders' equity $ 2,456,010 $ 1,065,536
=========== ===========
See report of independent registered public accounting firm.
The accompanying notes are an integral part of this statement.
F-3
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
---------- ----------
SALES REVENUE $1,277,659 $ 645,154
SALES REVENUE - RELATED PARTY 248,711 --
---------- ----------
Total revenues 1,526,370 645,154
COST OF SALES 446,955 344,382
---------- ----------
GROSS PROFIT 1,079,415 300,772
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 310,606 282,556
---------- ----------
INCOME FROM OPERATIONS 768,809 18,216
OTHER INCOME (EXPENSE), NET 1,151 (9,341)
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 769,960 8,875
PROVISION FOR INCOME TAXES 250,473 24,756
---------- ----------
NET INCOME (LOSS) 519,487 (15,881)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 41,825 --
---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 561,312 $ (15,881)
========== ==========
See report of independent registered public accounting firm.
The accompanying notes are an integral part of this statement.
F-4
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Accumulated other
Paid-in Retained comprehensive
capital earnings (deficit) income Totals
----------- ----------------- ----------------- -----------
BALANCE, January 1, 2004 $ 1,234,200 $ (203,006) $ -- $ 1,031,194
Net loss (15,881) (15,881)
----------- ----------------- ----------------- -----------
BALANCE, December 31, 2004 $ 1,234,200 $ (218,887) $ -- $ 1,015,313
Net income 519,487 519,487
Capital Contribution 363,000 363,000
Foreign currency translation gain 41,825 41,825
----------- ----------------- ----------------- -----------
BALANCE, December 31, 2005 $ 1,597,200 $ 300,600 $ 41,825 $ 1,939,625
=========== ================= ================= ===========
See report of independent registered public accounting firm.
The accompanying notes are an integral part of this statement.
F-5
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 519,487 $ (15,881)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation 142,408 139,931
(Increase) decrease in assets:
Accounts receivable (847,521) 79,484
Accounts receivable - related party (248,711) --
Other receivables (38,407) (1,539)
Other receivables - related parties (292,109) --
Inventories - production cost (27,563) --
Other current assets (13,702) 11,591
Increase (decrease) in liabilities:
Accounts payable 43,261 (54,451)
Accrued liabilities 5,658 6,424
Other payables 3,544 (2,742)
Customer deposit 121,589 --
Taxes payable 284,117 (3,942)
Deferred revenue -- (36,814)
--------- ---------
Net cash provided by operating activities (347,949) 122,061
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment -- (52,838)
--------- ---------
Net cash used in investing activities -- (52,838)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from shareholders 366,600 --
--------- ---------
Net cash provided by financing activities 366,600 --
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGE IN CASH 3,102 --
--------- ---------
INCREASE IN CASH 21,753 69,223
CASH, beginning of year 114,063 44,840
--------- ---------
CASH, end of year $ 135,816 $ 114,063
========= =========
See report of independent registered public accounting firm.
The accompanying notes are an integral part of this statement.
F-6
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 - ORGANIZATION AND NATURE OF OPERATIONS
Background
- ----------
Beijing Broadcasting and Television Media Co. Ltd. ("Beijing Media" or the
"Company") is a media content production and distribution company located in the
People's Republic of China ("PRC"). Beijing Media generates revenues through
producing television serials and movies for the PRC market, TV syndicated
programming production and other medial and broadcasting production and
management services.
Beijing Broadcasting and Television Media Co., Ltd. was established on July 21,
2005 in Beijing, PRC. The Company has a 20 year term as a privately owned
Chinese limited liability company to carry out the broadcasting and television
media business in the PRC. The Company is owned 100% through direct and indirect
ownership by Beijing Ruixing Shiji Investment Co., Ltd (Ruixing) which is 100%
owned by Mr. and Mrs. Yang Wenquan. China law and regulations prohibit or
restrict a private company or an individual to own a Chinese company that
provides broadcasting and television media service. In order to comply with
Chinese law on May 18, 2001, Ruixing helped establish Beijing Broadcasting and
Culture United Media Co., ("United Media") which the legal shareholders of
United Media are five individuals and a state government agency. Ruxing, on
behalf of the shareholders and state agency owners of United Media, contributed
fixed assets and cash in the amount of RMB 10,200,000 (approximately,
US$1,234,200) as the contributed capital of United Media. In connection with
this contribution United Media entered into an exclusive management agreement
with Ruixing to turn over all of the management control and profits of United
Media to Ruixing. The arrangements with the shareholders of United Media had
been undertaken solely to satisfy PRC regulations. Mr. Yang serves as the
general manager of both Beijing Media and Untied Media.
During 2005 the PRC released the restriction that a private individual could not
own a Chinese company to provide broadcasting and television services. This was
done in order for the PRC to be in compliance with the World Trade Organization
or WTO. Due to the lifting of this restriction Beijing Ruixing Shiji Investment
Co., Ltd established Beijing Media on July 21, 2005. The purpose of establishing
of Beijing Media was to assume control of the business and management operations
of United Media and that United Media would eventually be dissolved. In January
2006, the shareholders of United Media entered an agreement to transfer all of
United Media's assets and liabilities and business contracts to Beijing Media
effective January 1, 2006 as repayment of the original capital contribution paid
by Ruixing. In connection with this transfer United Media was dissolved.
See report of independent registered public accounting firm
F-7
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The reporting entity
- --------------------
The Company's financial statements represent the activities of both Beijing
Media and United Media as one entity due to the following reasons:
1) Common management control over both Beijing Media and United Media
2) Beijing Media taking over and will continue the business operations
United Media
The Company has treated the acquisition of Untied Media as if the transaction
happened January 1, 2004
Basis of Presentation
- ---------------------
All inter-company transactions have been eliminated in the consolidation.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). This
basis of accounting differs from that used in the statutory accounts of the
Company, which are prepared in accordance with the "Accounting Standards for
Business Enterprises" and "Accounting system for Business Enterprises" in the
PRC ("PRC GAAP"). Certain US Generally Accepted Accounting Principles ("GAAP")
are not applicable in the PRC. The difference between PRC GAAP accounts of the
Company and its US GAAP financial statements is immaterial.
Accounting Method
- -----------------
The Company uses the accrual method of accounting which recognizes revenues when
earned and expenses when incurred.
Cash and Cash Equivalents
- -------------------------
All highly liquid investments with original maturities of three months or less
are considered cash equivalents.
Cash and Concentration of Risk
- ------------------------------
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People's Republic of China. Total cash in these
banks at December 31, 2005 and 2004, amounted to $132,191 and $212,223,
respectively, of which no deposits are covered by insurance. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant risks on its cash in bank accounts.
See report of independent registered public accounting firm
F-8
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Accounts Receivable and Allowance for Doubtful Accounts
- -------------------------------------------------------
The Company presents accounts receivable, net of allowance for doubtful
accounts. The allowance is calculated based on review of individual customer
accounts.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results, when ultimately realized
could differ from those estimates.
Revenue Recognition
- -------------------
Revenue from the sales or licensing of proprietary content, third party
programming, imported TV and films, and sales and distribution of advertisement
programs are recognized upon meeting all recognition requirements of Statement
of Position (SOP) 00-2 "Accounting by Producers or Distributors of Films".
Revenue are recognized when all of the following have occurred: an agreement is
execute, the film is available for exhibition by the licensee, the license fee
is fixed or determinable, collectibility is reasonably assured and the cost of
each film is known or reasonably determinable.
Cash payments received are recorded as deferred revenue until all the conditions
of revenue recognition have been met.
Recently issued accounting pronouncements
- -----------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the
exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for all interim periods beginning after June 15,
2005. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ended December 31, 2005. The Company believes that
the impact of SFAS 153 on its consolidated financial statements is immaterial.
See report of independent registered public accounting firm
F-9
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recently issued accounting pronouncements, (continued)
- ------------------------------------------------------
In March 2005, the Financial Accounting Standards Board ("FASB") published FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarifies that the term, conditional asset retirement
obligations, as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity.
The uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. The interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. This interpretation is effective no
later than the end of the Company's fiscal 2006. The adoption of this
Interpretation is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable. SFAS No.
154 enhances the consistency of financial information between periods. SFAS No.
154 will be effective beginning with the Company's first quarter of fiscal year
2006. The Company does not expect that the adoption of SFAS No. 154 will have a
material impact on its results of operations, financial position or cash flows.
In June 2005, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 05-06, "Determining the Amortization Period for Leasehold
Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business
combination or purchased after the inception of a lease, collectively referred
to as subsequently acquired leasehold improvements. EITF 05-06 provides that the
amortization period used for the subsequently acquired leasehold improvements to
be the lesser of (a) the subsequently acquired leasehold improvements' useful
lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in
periods beginning after the date of the FASB's ratification, which was on June
29, 2005. The Company does not anticipate that EITF 05-06 will have a material
impact on its consolidated results of operations.
See report of independent registered public accounting firm
F-10
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recently issued accounting pronouncements, (continued)
- ------------------------------------------------------
In July 2005, the FASB issued an Exposure Draft of a proposed Interpretation
"Accounting for Uncertain Tax Positions--an interpretation of FASB Statement No.
109." Under the proposed Interpretation, a company would recognize in its
financial statements its best estimate of the benefit of a tax position, only if
the tax position is considered probable of being sustained on audit based solely
on the technical merits of the tax position. In evaluating whether the probable
recognition threshold has been met, the proposed Interpretation would require
the presumption that the tax position will be evaluated during an audit by
taxing authorities. The proposed Interpretation would be effective as of the end
of the first fiscal year ending after December 15, 2005, with a cumulative
effect of a change in accounting principle to be recorded upon the initial
adoption. The proposed Interpretation would apply to all tax positions and only
benefits from tax positions that meet the probable recognition threshold at or
after the effective date would be recognized. The Company is currently analyzing
the proposed Interpretation and has not determined its potential impact on our
Consolidated Financial Statements. While we cannot predict with certainty the
rules in the final Interpretation, there is risk that the final Interpretation
could result in a cumulative effect charge to earnings upon adoption, increases
in future effective tax rates, and/or increases in future interperiod effective
tax rate volatility.
In October 2005, FASB Staff Position (FSP) FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" was issued. This FSP concluded that
rental costs associated with ground or building operating leases that are
incurred during a construction period should be expensed. The guidance in the
FSP is required to be applied to the first reporting period beginning after
December 15, 2005. The Company's adoption of this pronouncement is not expected
to have a material impact on the Company's financial position or results of
operations.
Concentration of Credit Risk
- ----------------------------
Financial instruments which subject the Company to concentrations of credit risk
consist principally of accounts receivable. Exposure to losses on receivables is
dependent on each customer's financial condition. The Company controls its
exposure to credit risk through a process of credit approvals, credit limits and
monitoring procedures, establishing allowances for anticipated losses.
See report of independent registered public accounting firm
F-11
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Fair Value of Financial Instruments
- -----------------------------------
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
About Fair Value of Financial Instruments" requires disclosure of the fair value
of financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties.
The carrying amount of accounts receivable, accounts payable, and other items
included on the accompanying balance sheets approximate their fair value due to
their short-term nature.
Income Taxes
- ------------
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. There are no deferred taxes at December
31, 2005 and 2004.
The charge for taxation is based on the results for the year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settles. Deferred tax is
charges or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
related to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
See report of independent registered public accounting firm
F-12
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes, (continued)
- -------------------------
Beijing Media is governed by the Income Tax Law of the People's Republic of
China (PRC) and various local income tax laws (the Income Tax Laws). Under the
local Income Tax laws, the Company generally are subject to an income tax at an
effective rate of 33% (3.3% state income taxes plus 0.33% local income taxes) on
income as reported in their statutory financial statements after appropriate tax
adjustments. Since the Company is engaged in broadcasting and media service
business, the Company is subject to an income tax at an effective rate of 33%
based upon 11% of the gross revenue.
Beijing Media is also subject to business taxes of 5% of its total gross sales.
The Company's business taxes are accounted-for-as a reduction of revenues.
The provision for income taxes for the year ended December 31 consisted of the
following:
2005 2004
----------- ------------
Provision for US income tax $ -- $ --
Provision for China income tax 227,700 22,505
Provision for China local tax 22,773 2,251
----------- ------------
Total provision for income taxes $ 250,473 $ 24,756
=========== ============
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
2005 2004
----------- ------------
U.S. Statutory rate 34.00% 34.00%
Foreign income not recognized in USA (34.00) (34.00)
China income taxes 3.63 3.63
----------- ------------
Effective income tax rate 3.63% 3.63%
=========== ============
Foreign Currency Translation
- ----------------------------
The reporting currency of the Company is US dollar. The Company uses their local
currency, Renminbi, as their functional currency. Results of operations and cash
flow are translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rate as quoted by the
People's Bank of China at the end of each reporting period. This quotation of
the exchange rates does not imply free convertibility of RMB to other foreign
currencies.
See report of independent registered public accounting firm
F-13
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation, (continued)
- ----------------------------------------
All foreign exchange transactions continue to take place either through the
People's Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rate quoted by the People's Bank of China. Approval
of foreign currency payments by the Bank of China or other institutions requires
submitting a payment application form together with invoices, shipping documents
and signed contracts.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the consolidated statement of shareholders'
equity and amounted to $ 41,825 and $ 0 as of December 31, 2005 and 2004,
respectively. The balance sheet amounts with the exception of equity at December
31, 2005 were translated at 8.065 RMB to $1.00 USD as compared to 8.28 RMB at
December 31, 2004. The equity accounts were stated at their historical rate. The
average translation rate of 8.18 RMB for the year ended December 31, 2005 was
applied to income statement accounts.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. These amounts are not
material to the consolidated financial statements.
Equipment
- ---------
Equipment is carried at cost less accumulated depreciation. The costs of repairs
and maintenance are expensed as incurred; major replacements and improvements
are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
the income statement in the year of disposition. Depreciation is calculated on a
straight-line basis over the estimated useful life of the assets. Estimated
useful lives of the assets are as follows:
Estimated
Useful life
-----------
Machinery and equipment 5 years
Office equipment 5 years
See report of independent registered public accounting firm
F-14
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Valuation of Long-Lived assets
- ------------------------------
The Company annually analyzes its long-lived assets for potential impairment,
assessing the appropriateness of lives and recoverability of unamortized
balances through measurement of undiscounted operating cash flows on a basis
consistent with US GAAP. The Company also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of December 31, 2005, the Company expects
these assets to be fully recoverable.
Earnings (Loss) Per Share
- -------------------------
The Company was incorporated in PRC and required to register capital. The
registered capital was denominated in monetary amounts. Units of ownership are
not represented by common stocks or any other similar instruments. As a result,
no earnings per share were calculated for the years ended December 31, 2005 and
2004.
Note 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
No payments for interest expense were made during the years ended December 31,
2005 and 2004, respectively. Income tax payments amounted to $ 26,942 and
$34,900 for the years ended December 31, 2005 and 2004, respectively.
Note 4 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
2005 2004
----------- ------------
Accounts receivable $ 895,465 $ 30,797
Less: allowance for doubtful accounts 3,900 --
----------- ------------
Total $ 891,565 $ 30,797
=========== ============
Note 5 - ACCOUNTS RECEIVABLE AND SALES - RELATED PARTY
Accounts receivable - related party represents the receivable from the Company's
shareholder, who had used the Company's equipment rental services. Total
sales-related party amounted to $248,711 for the year ended December 31, 2005
and related party receivable amounted to $252,374 as of December 31, 2005
See report of independent registered public accounting firm
F-15
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 6 - EQUIPMENT
Equipment consists of the following at December 31:
2005 2004
----------- ------------
Machinery and equipment $ 1,408,963 $ 1,374,875
Office equipment 1,252 1,222
----------- ------------
Total equipment 1,410,215 1,376,097
Less: accumulated depreciation 619,245 463,254
----------- ------------
Equipment, net $ 790,970 $ 912,843
=========== ============
Depreciation expense for the years ended December 31, 2005 and 2004 was $142,408
and $139,931, respectively.
Note 7 - SUBSEQUENT EVENT
On March 11, 2006, the Company entered into an Agreement with the shareholders
of Navstar Media Holdings, Inc. ("Navstar") in which Navstar was to acquire
operational control of Beijing Media. Operational control allows Navstar to
exercise full authority over the operations, governance and employees of Beijing
Media. Pursuant to the Agreement, Navstar agreed to issue up to 2,400,000 shares
of its common stock to existing shareholders of Beijing Media and to invest an
unspecified amount of funds into the operations of Beijing Media. Upon
completion of the share issuance and investment, Navstar will have acquired a
70% ownership interest in Beijing Media.
Of the 2,400,000 shares to be issued, 900,000 shares are to be held in escrow,
contingent upon Beijing Media securing the license to produce a mini-series
featuring top Chinese athletes, to be aired during the period leading up to the
2008 Beijing Olympic Games. The 900,000 shares shall be returned to Navstar and
cancelled if the right to produce the show cannot be secured.
See report of independent registered public accounting firm
F-16
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
BALANCE SHEETS
AS OF MARCH 31, 2006 AND DECEMBER 31, 2005
ASSETS
March 31, December 31,
2006 2005
---------- ---------
Unaudited Audited
---------- ----------
CURRENT ASSETS:
Cash $ 201,329 $ 135,816
Accounts receivable, net of allowance for doubtful
accounts of $3,900 and $3,900 as of March 31, 2006
and December 31, 2005, respectively 907,757 891,565
Accounts receivable - related party 254,002 252,374
Inventories - production cost -- 27,969
Other receivables 16,012 40,709
Other receivables - related parties 70,839 296,412
Other current assets 8,665 20,195
---------- ----------
Total current assets 1,458,604 1,665,040
---------- ----------
EQUIPMENT, net 1,263,150 790,970
---------- ----------
Total assets $2,721,754 $2,456,010
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 115,773 $ 85,347
Other payables 12,375 3,596
Other payables - related party 202,320 --
Taxes payable 319,565 304,062
Customer deposit 64,147 123,380
---------- ----------
Total current liabilities 714,180 516,385
---------- ----------
SHAREHOLDERS' EQUITY:
Paid-in-capital 1,597,200 1,597,200
Retained earnings 355,804 300,600
Accumulated other comprehensive income 54,570 41,825
---------- ----------
Total shareholders' equity 2,007,574 1,939,625
---------- ----------
Total liabilities and shareholders' equity $2,721,754 $2,456,010
========== ==========
The accompanying notes are an integral part of this statement.
F-17
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
--------- ---------
Unaudited Unaudited
--------- ---------
SALES REVENUE $ 302,877 $ 129,126
COST OF SALES 193,157 131,690
--------- ---------
GROSS PROFIT 109,720 (2,564)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 42,923 68,869
--------- ---------
INCOME (LOSS) FROM OPERATIONS 66,797 (71,433)
OTHER INCOME (EXPENSE), NET 47 (6,748)
--------- ---------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 66,844 (78,181)
PROVISION FOR INCOME TAXES 11,640 4,263
--------- ---------
NET INCOME (LOSS) 55,204 (82,444)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 12,745 --
--------- ---------
COMPREHENSIVE INCOME (LOSS) $ 67,949 $ (82,444)
========= =========
The accompanying notes are an integral part of this statement.
F-18
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
Retained Accumulated other
Paid-in earnings comprehensive
capital (deficits) income Totals
----------- ------------ ------------ -----------
BALANCE, December 31, 2004 $ 1,234,200 $ (218,887) $ -- $ 1,015,313
Net income (82,444) (82,444)
----------- ----------- ----------- ------------
BALANCE, March 31, 2005 (unaudited) 1,234,200 (301,331) -- 932,869
Net income 601,931 601,931
Capital Contribution 363,000 363,000
Foreign currency translation gain 41,825 41,825
----------- ----------- ----------- ------------
BALANCE, December 31, 2005 $ 1,597,200 $ 300,600 $ 41,825 $ 1,939,625
Net income 55,204 55,204
Foreign currency translation gain 12,745 12,745
----------- ----------- ----------- ------------
BALANCE, March 31, 2006 (unaudited) $ 1,597,200 $ 355,804 $ 54,570 $ 2,007,574
=========== =========== =========== ============
The accompanying notes are an integral part of this statement.
F-19
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
2006 2005
---------- ----------
Unaudited Unaudited
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 55,204 $ (82,444)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation 33,026 68,804
(Increase) decrease in assets:
Accounts receivable (10,396) --
Other receivables 24,856 605
Other receivables - related parties 226,538 --
Inventories - production cost 28,032 --
Other current assets 11,612 (15,621)
Increase (decrease) in liabilities:
Accounts payable 52,715 --
Accrued liabilities (22,964) --
Other payables 8,719 7,263
Other payables - related parties 201,477 --
Customer deposit (59,779) 605
Taxes payable 13,486 (7,425)
--------- ---------
Net cash provided by (used in) operating activities 562,526 (28,213)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment (498,158) --
--------- ---------
Net cash used in investing activities (498,158) --
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGE IN CASH 1,145 --
--------- ---------
INCREASE (DECREASE) IN CASH 65,513 (28,213)
CASH, beginning of period 135,816 114,063
--------- ---------
CASH, end of year $ 201,329 $ 85,850
========= =========
The accompanying notes are an integral part of this statement.
F-20
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 1 - ORGANIZATION AND NATURE OF OPERATIONS
Background
- ----------
Beijing Broadcasting and Television Media Co. Ltd. ("Beijing Media" or the
"Company") is a media content production and distribution company located in the
People's Republic of China ("PRC"). Beijing Media generates revenues through
producing television serials and movies for the PRC market, TV syndicated
programming production and other medial and broadcasting production and
management services.
Beijing Broadcasting and Television Media Co., Ltd. was established on July 21,
2005 in Beijing, PRC. The Company has a 20 year term as a privately owned
Chinese limited liability company to carry out the broadcasting and television
media business in the PRC. The Company is owned 100% through direct and indirect
ownership by Beijing Ruixing Shiji Investment Co., Ltd (Ruixing) which is 100%
owned by Mr. and Mrs. Yang Wenquan.
China law and regulations prohibit or restrict a private company or an
individual to own a Chinese company that provides broadcasting and television
media service. In order to comply with Chinese law on May 18, 2001, Ruixing
helped establish Beijing Broadcasting and Culture United Media Co., ("United
Media") which the legal shareholders of United Media are five individuals and a
state government agency. Ruxing, on behalf of the shareholders and state agency
owners of United Media, contributed fixed assets and cash in the amount of RMB
10,200,000 (approximately, US$1,234,200) as the contributed capital of United
Media. In connection with this contribution United Media entered into an
exclusive management agreement with Ruixing to turn over all of the management
control and profits of United Media to Ruixing. The arrangements with the
shareholders of United Media had been undertaken solely to satisfy PRC
regulations. Mr. Yang serves as the general manager of both Beijing Media and
Untied Media.
During 2005 the PRC released the restriction that a private individual could not
own a Chinese company to provide broadcasting and television services. This was
done in order for the PRC to be in compliance with the World Trade Organization
or WTO. Due to the lifting of this restriction Beijing Ruixing Shiji Investment
Co., Ltd established Beijing Media on July 21, 2005. The purpose of establishing
of Beijing Media was to assume control of the business and management operations
of United Media and that United Media would eventually be dissolved. In January
2006, the shareholders of United Media entered an agreement to transfer all of
United Media's assets and liabilities and business contracts to Beijing Media
effective January 1, 2006 as repayment of the original capital contribution paid
by Ruixing. In connection with this transfer United Media was dissolved.
F-21
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The reporting entity
- --------------------
The Company's financial statements represent the activities of both Beijing
Media and United Media as one entity due to the following reasons:
1) Common management control over both Beijing Media and United Media
2) Beijing Media taking over and will continue the business operations
United Media
3) The Company has treated the acquisition of Untied Media as if the
transaction happened January 1, 2004
Basis of Presentation
- ---------------------
All inter-company transactions have been eliminated in the consolidation.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). This
basis of accounting differs from that used in the statutory accounts of the
Company, which are prepared in accordance with the "Accounting Standards for
Business Enterprises" and "Accounting system for Business Enterprises" in the
PRC ("PRC GAAP").
Certain US Generally Accepted Accounting Principles ("GAAP") are not applicable
in the PRC. The difference between PRC GAAP accounts of the Company and its US
GAAP financial statements is immaterial.
Accounting Method
- -----------------
The Company uses the accrual method of accounting which recognizes revenues when
earned and expenses when incurred.
Cash and Cash Equivalents
- -------------------------
All highly liquid investments with original maturities of three months or less
are considered cash equivalents.
Cash and Concentration of Risk
- ------------------------------
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People's Republic of China. Total cash in these
banks at March 31, 2006 and December 31, 2005, amounted to $ 38,613 and
$132,191, respectively, of which no deposits are covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.
F-22
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Accounts Receivable and Allowance for Doubtful Accounts
- -------------------------------------------------------
The Company presents accounts receivable, net of allowance for doubtful
accounts. The allowance is calculated based on review of individual customer
accounts.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results, when ultimately realized
could differ from those estimates.
Revenue Recognition
- -------------------
Revenue from the sales or licensing of proprietary content, third party
programming, imported TV and films, and sales and distribution of advertisement
programs are recognized upon meeting all recognition requirements of Statement
of Position (SOP) 00-2 "Accounting by Producers or Distributors of Films".
Revenue are recognized when all of the following have occurred: an agreement is
execute, the film is available for exhibition by the licensee, the license fee
is fixed or determinable, collectibility is reasonably assured and the cost of
each film is known or reasonably determinable.
Cash payments received are recorded as deferred revenue until all the conditions
of revenue recognition have been met.
Recently issued accounting pronouncements
- -----------------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the
exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for all interim periods beginning after June 15,
2005. As such, the Company is required to adopt these provisions at the
beginning of the fiscal year ended December 31, 2005. The Company believes that
the impact of SFAS 153 on its consolidated financial statements is immaterial.
F-23
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recently issued accounting pronouncements, (continued)
- ------------------------------------------------------
In March 2005, the Financial Accounting Standards Board ("FASB") published FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarifies that the term, conditional asset retirement
obligations, as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity.
The uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. The interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. This interpretation is effective no
later than the end of the Company's fiscal 2006. The adoption of this
Interpretation is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable. SFAS No.
154 enhances the consistency of financial information between periods. SFAS No.
154 will be effective beginning with the Company's first quarter of fiscal year
2006. The Company does not expect that the adoption of SFAS No. 154 will have a
material impact on its results of operations, financial position or cash flows.
In June 2005, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 05-06, "Determining the Amortization Period for Leasehold
Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business
combination or purchased after the inception of a lease, collectively referred
to as subsequently acquired leasehold improvements. EITF 05-06 provides that the
amortization period used for the subsequently acquired leasehold improvements to
be the lesser of (a) the subsequently acquired leasehold improvements' useful
lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in
periods beginning after the date of the FASB's ratification, which was on June
29, 2005. The Company does not anticipate that EITF 05-06 will have a material
impact on its consolidated results of operations.
F-24
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Recently issued accounting pronouncements, (continued)
- ------------------------------------------------------
In July 2005, the FASB issued an Exposure Draft of a proposed Interpretation
"Accounting for Uncertain Tax Positions--an interpretation of FASB Statement No.
109." Under the proposed Interpretation, a company would recognize in its
financial statements its best estimate of the benefit of a tax position, only if
the tax position is considered probable of being sustained on audit based solely
on the technical merits of the tax position. In evaluating whether the probable
recognition threshold has been met, the proposed Interpretation would require
the presumption that the tax position will be evaluated during an audit by
taxing authorities. The proposed Interpretation would be effective as of the end
of the first fiscal year ending after December 15, 2005, with a cumulative
effect of a change in accounting principle to be recorded upon the initial
adoption. The proposed Interpretation would apply to all tax positions and only
benefits from tax positions that meet the probable recognition threshold at or
after the effective date would be recognized. The Company is currently analyzing
the proposed Interpretation and has not determined its potential impact on our
Consolidated Financial Statements. While we cannot predict with certainty the
rules in the final Interpretation, there is risk that the final Interpretation
could result in a cumulative effect charge to earnings upon adoption, increases
in future effective tax rates, and/or increases in future interperiod effective
tax rate volatility.
In October 2005, FASB Staff Position (FSP) FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" was issued. This FSP concluded that
rental costs associated with ground or building operating leases that are
incurred during a construction period should be expensed. The guidance in the
FSP is required to be applied to the first reporting period beginning after
December 15, 2005. The Company's adoption of this pronouncement is not expected
to have a material impact on the Company's financial position or results of
operations.
Concentration of Credit Risk
- ----------------------------
Financial instruments which subject the Company to concentrations of credit risk
consist principally of accounts receivable. Exposure to losses on receivables is
dependent on each customer's financial condition. The Company controls its
exposure to credit risk through a process of credit approvals, credit limits and
monitoring procedures, establishing allowances for anticipated losses.
F-25
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES, (continued)
Fair Value of Financial Instruments
- -----------------------------------
Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures
About Fair Value of Financial Instruments" requires disclosure of the fair value
of financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties.
The carrying amount of accounts receivable, accounts payable, and other items
included on the accompanying balance sheets approximate their fair value due to
their short-term nature.
Income Taxes
- ------------
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. There are no deferred taxes as of March
31, 2006 and December 31, 2005.
The charge for taxation is based on the results for the year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit. In
principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
Deferred tax is calculated at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settles. Deferred tax is
charges or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity.
Deferred tax assets and liabilities are offset when they related to income taxes
levied by the same taxation authority and the Company intends to settle its
current tax assets and liabilities on a net basis.
F-26
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes, (continued)
- -------------------------
Beijing Media is governed by the Income Tax Law of the People's Republic of
China (PRC) and various local income tax laws (the Income Tax Laws). Under the
local Income Tax laws, the Company generally are subject to an income tax at an
effective rate of 33% (3.3% state income taxes plus 0.33% local income taxes) on
income as reported in their statutory financial statements after appropriate tax
adjustments. Since the Company is engaged in broadcasting and media service
business, the Company is subject to an income tax at an effective rate of 33%
based upon 11% of the gross revenue.
Beijing Media is also subject to business taxes of 5% of its total gross sales.
The Company's business taxes are accounted-for-as a reduction of revenues.
The provision for income taxes for the three months ended March 31, 2006 and
2005 consisted of the following:
2006 2005
----------- ------------
Unaudited Audited
----------- ------------
Provision for US income tax $ -- $ --
Provision for China income tax 10,582 3,875
Provision for China local tax 1,058 388
----------- ------------
Total provision for income taxes $ 11,640 $ 4,263
=========== ============
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate for the three months ended March 31, 2006 and 2005:
2006 2005
----------- ------------
Unaudited Audited
----------- ------------
U.S. Statutory rate 34.00% 34.00%
Foreign income not recognized in USA (34.00) (34.00)
China income taxes 3.63 3.63
----------- ------------
Effective income tax rate 3.63% 3.63%
=========== ============
Foreign Currency Translation
- ----------------------------
The reporting currency of the Company is US dollar. The Company uses their local
currency, Renminbi, as their functional currency. Results of operations and cash
flow are translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rate as quoted by the
People's Bank of China at the end of each reporting period. This quotation of
the exchange rates does not imply free convertibility of RMB to other foreign
currencies.
F-27
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation, (continued)
- -----------------------------------------
All foreign exchange transactions continue to take place either through the
People's Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rate quoted by the People's Bank of China. Approval
of foreign currency payments by the Bank of China or other institutions requires
submitting a payment application form together with invoices, shipping documents
and signed contracts.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income (loss) in the consolidated statement of shareholders'
equity and amounted to $ 54,570 and $ 41,825 as of March 31, 2006 and December
31, 2005, respectively. The balance sheet amounts with the exception of equity
at March 31, 2006 were translated at 8.012 RMB to $1.00 USD as compared to 8.06
RMB at December 31, 2005. The equity accounts were stated at their historical
rate. The average translation rate of 8.046 RMB and 8.264 RMB for the three
months ended March 31, 2006 and 2005 was applied to income statement accounts.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. These amounts are not
material to the consolidated financial statements.
Equipment
- ---------
Equipment is carried at cost less accumulated depreciation. The costs of repairs
and maintenance are expensed as incurred; major replacements and improvements
are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in
the income statement in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated useful
life of the assets. Estimated useful lives of the assets are as follows:
Estimated
Useful life
-----------
Machinery and equipment 5 years
Office equipment 5 years
F-28
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Valuation of Long-Lived assets
- ------------------------------
The Company annually analyzes its long-lived assets for potential impairment,
assessing the appropriateness of lives and recoverability of unamortized
balances through measurement of undiscounted operating cash flows on a basis
consistent with US GAAP. The Company also re-evaluates the periods of
amortization to determine whether subsequent events and circumstances warrant
revised estimates of useful lives. As of March 31, 2006, the Company expects
these assets to be fully recoverable.
Earnings (Loss) Per Share
- -------------------------
The Company was incorporated in PRC and required to register capital. The
registered capital was denominated in monetary amounts. Units of ownership are
not represented by common stocks or any other similar instruments. As a result,
no earnings per share were calculated for the three months ended March 31, 2006
and 2005.
Note 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
No payments for interest expense were made for the three months ended March 31,
2006 and 2005, respectively. Income tax payments amounted to $ 27,116 and $0 for
the three months ended March 31, 2006 and 2005, respectively.
Note 4 - ACCOUNTS RECEIVABLE
Accounts receivable consist of the following :
March 31, December 31,
2006 2005
----------- ------------
Unaudited Audited
----------- ------------
Accounts receivable $ 911,657 $ 895,465
Less: allowance for doubtful accounts 3,900 3,900
----------- ------------
Total $ 907,757 $ 891,565
=========== ============
Note 5 - ACCOUNTS RECEIVABLE - RELATED PARTY
Accounts receivable - related party represents the receivable from the Company's
shareholder, who had used the Company's equipment rental services. As of March
31, 2006 and December 31, 2005, accounts receivable - related party amounted to
$254,002 and $252,374, respectively.
F-29
BEIJING BROADCASTING AND TELEVISION MEDIA CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
Note 6 - EQUIPMENT
Equipment consists of the following:
March 31, December 31,
2006 2005
----------- ------------
Unaudited Audited
----------- ------------
Machinery and equipment $ 1,408,963 $ 1,374,875
Office equipment 1,252 1,222
----------- ------------
Total equipment 1,410,215 1,376,097
Less: accumulated depreciation 619,245 463,254
----------- ------------
Equipment, net $ 790,970 $ 912,843
=========== ============
Depreciation expense for the three months ended March 31, 2006 and 2005 was
$33,026 and $68,804, respectively.
Note 7 - Business combination
On March 11, 2006, the Company entered into an Agreement with the shareholders
of Navstar Media Holdings, Inc. ("Navstar") in which Navstar was to acquire
operational control of Beijing Media. Operational control allows Navstar to
exercise full authority over the operations, governance and employees of Beijing
Media. Pursuant to the Agreement, Navstar agreed to issue up to 2,400,000 shares
of its common stock to existing shareholders of Beijing Media and to invest an
unspecified amount of funds into the operations of Beijing Media. Upon
completion of the share issuance and investment, Navstar will have acquired a
70% ownership interest in Beijing Media.
Of the 2,400,000 shares to be issued, 900,000 shares are to be held in escrow,
contingent upon Beijing Media securing the license to produce a mini-series
featuring top Chinese athletes, to be aired during the period leading up to the
2008 Beijing Olympic Games. The 900,000 shares shall be returned to Navstar and
cancelled if the right to produce the show cannot be secured.
F-30