================================================================================
Exhibit 99.2
JINAN YINQUAN TECHNOLOGY CO., LTD
FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2006 AND 2005
TABLE OF CONTENTS
Balance Sheets - Unaudited 1
Statements of Income - Unaudited 2
Statements of Cash Flows - Unaudited 3
Statements of Stockholders' Equity - Unaudited 4
Notes to Financial Statements - Unaudited 5-10
<page>
JINAN YINQUAN TECHNOLOGY CO., LTD.
BALANCE SHEETS
AS OF JUNE 30 2006 AND 2005
<table>
<caption>
2006 2005
(Unaudited) (Unaudited)
----------- -----------
<s> <c> <c>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 225,009 $ 89,324
Accounts receivable 424,390 143,527
Inventories 111,478 91,537
Advance to suppliers 132,484 86,347
Prepaid expenses and other assets 188,105 100,586
-------------------- ---------------------
Total Current Assets 1,081,466 511,321
Property & Equipment, net 344,209 48,660
Intangible Asset, net 32,147 47,995
-------------------- ---------------------
$ 1,457,822 $ 607,976
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Short term loan $ 125,069 $ -
Accounts payable 145,515 1,208
Advance from customers 12,945 12,185
Accrued expenses and other current liabilities 65,351 110,690
-------------------- ---------------------
Total Current Liabilities 348,880 124,083
Stockholders' Equity
Capital stock 414,154 241,642
Other comprehensive income 26,407 9
Retained earnings 668,381 242,242
-------------------- ---------------------
Total Stockholders' Equity 1,108,942 483,893
-------------------- ---------------------
$ 1,457,822 $ 607,976
==================== =====================
</table>
The accompanying notes are an integral part of these financial statements.
1
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JINAN YINQUAN TECHNOLOGY CO., LTD.
STATEMENT OF INCOME
FOR THE SIX MONTH PERIODS ENDED 30 JUNE 2006 AND 2005
<table>
<caption>
2006 2005
(Unaudited) (Unaudited)
----------- -----------
<s> <c> <c>
Net sales $ 737,273 $ 200,197
Cost of sales 484,995 111,911
------------------- -------------------
Gross profit 252,278 88,286
Operating expenses
Selling, general and administrative 75,929 69,383
------------------- -------------------
Income from operations 176,349 18,903
Other (income) expense
Interest income (271) (158)
Interest expenses 1,003 -
Other income (18,123) (20,378)
Other expenses 107 18
------------------- -------------------
Total other income (17,284) (20,518)
------------------- -------------------
Net income 193,633 39,421
Other comprehensive item
Foreign currency translation income 9,356 -
------------------- -------------------
Net comprehensive Income $ 202,989 $ 39,421
=================== ===================
</table>
The accompanying notes are an integral part of these financial statements.
2
<page>
JINAN YINQUAN TECHNOLOGY CO., LTD.
CASHFLOW STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2006 AND 2005
<table>
<caption>
2006 2005
(Unaudited) (Unaudited)
---------- ----------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 193,633 $ 39,421
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 11,011 11,704
Changes in operating assets and liabilities:
Accounts receivable (77,133) (50,212)
Inventories (134,927) (7,959)
Advances to suppliers (11,592) (41,447)
Prepaid expenses and other assets (24,467) (63,485)
Accounts payable 180 (42,605)
Deferred revenue 26,814 12,185
Accrued expenses and other current liabilities (119,695) 4,721
--------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (136,176) (137,677)
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (265,329) (2,700)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on short term loan 125,069 -
--------------- -----------------
Foreign currency translation 9,356 -
--------------- -----------------
NET DECREASE IN CASH & CASH EQUIVALENT (267,080) (140,377)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 492,089 229,701
--------------- -----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 225,009 $ 89,324
=============== =================
SUPPLEMENTARY DISCLOSURE:
- -------------------------
Interest paid $ - $ -
=============== =================
Income tax paid $ - $ -
=============== =================
</table>
The accompanying notes are an integral part of these financial statements.
3
<page>
JINAN QINQUAN TECHNOLOGY CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED 30 JUNE 2006, 2005
NOTE 1 GENERAL
Jinan YinQuan Technology Co., Ltd. ("the Company") is established in
JiNan in the People's Republic of China ("the PRC"). The Company
obtained the business license from State Administration of Industry
and Commerce of JiNan on 13 August 2001. The Company's registered
office is located in Hi-tech Develop Zone on the city of JiNan. The
registered capital is RMB 3,410,000 equivalent to $414,154 approximately.
The Company's principal activities are developing and sales of computer
software and hardware, digital video pictures system; developing and
sales of computer network and network audio devices, parts, low value
consumables and etc (exclusive of the business not obtained the
license). Currently, the Company is focused on the Voice Over Internet
Phone ("VOIP") technology related business.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America. Our functional currency is the Chinese Renminbi; however the
accompanying financial statements have been translated and presented in
United States Dollars ($).
The accompanying unaudited interim financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for the presentation of interim financial
information, but do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
unaudited financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 2005.
Operating results for the six months ended June 30, 2006 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2006
Foreign Currency Translation
The Company uses the United States dollar ("U.S. dollars") for financial
reporting purposes. The Company maintains books and records in their
functional currency, being the primary currency of the economic
environment in which the operations are conducted. In general, the
Company translates the assets and liabilities into U.S. dollars using the
applicable exchange rates prevailing at the balance sheet date, and the
statement of income is translated at average exchange rates during the
reporting period. Gain or loss on foreign currency transactions are
reflected on the income statement. Gain or loss on financial statement
translation from foreign currency are recorded as a separate component in
the equity section of the balance sheet, as component of comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income"
as a component of shareholders' equity
4
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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.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things,
intense competition associated with the industry in general, other risks
associated with financing, liquidity requirements, rapidly changing
customer requirements, limited operating history, foreign currency
exchange rates and the volatility of public markets.
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with
original maturities of three months or less.
Fair Value of Financial Instruments
------------------------------------
Statement of Financial Accounting Standard No. 107, Disclosures about
fair value of financial instruments, requires that the Company disclose
estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Revenue Recognition
-------------------
Sale of goods
Revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as
advances from customers.
Rendering of services
---------------------
When the provision of services is started and completed within the same
accounting year, revenue is recognized at the time of completion of the
services.
When the provision of services is started and completed in different
accounting year, revenue is recognized using the percentage of completion
method.
Release of the Assets' Usufruct
-------------------------------
The revenue from releasing the usufruct of intangible assets (such as
trademark right, patent, franchise, software, copyright, etc.) and other
assets, is recognized in accordance with time and method prescribed in
the relevant contract or agreement, with the precondition that economic
profits involving transaction can be obtained by the company and the
amount of revenue can be measured reliably.
5
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Income Taxes
------------
As the Company is approved as hi-tech software company, the company is
completely exempt of income tax for the first 2 years and is 50% exempt
of income tax for the next 3 years pursuant to State Tax notice No.
[2003] 82.
Segment Reporting
-----------------
The Company has only one reportable segment (Voip technology services or
Voip phone bill income) for the 6 months ended June 30, 2006, as other
segment of business are not material to the financial statements of the
Company.
Accounts Receivable
---------------------
The Company maintains reserves for potential credit
losses on accounts receivable. Management reviews the composition of
accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these
reserves. The Company believes all the amounts of its accounts receivable
account are recoverable, so no provision for bad debts during 6 months
ended June 30, 2006 and 2005.
Inventories
------------
Inventories are valued at the lower of cost (determined on a weighted
average basis) or market. The Management compares the cost of inventories
with the market value and allowance is made for writing down the
inventories to their market value, if lower. As of June 30, 2006 and
2005, the management determined that there was no need of reserves for
inventories.
Recently Issued Accounting Standards
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133,
"Accounting for Derivative Instruments and Hedging Activities", and SFAF
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 155, permits fair value
remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies
which interest-only strips and principal-only strips are not subject to
the requirements of SFAS No. 133, establishes a requirement to evaluate
interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not
embedded derivatives, and amends SFAS No. 140 to eliminate the
prohibition on the qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This statement is
effective for all financial instruments acquired or issued after the
beginning of the Company's first fiscal year that begins after September
15, 2006. Management believes that this statement will not have a
significant impact on the financial statement.
In March 2006 FASB issued SFAS 156 `Accounting for Servicing of Financial
Assets' this Statement amends FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract.
2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose `Amortization method' or Fair value
measurement method' for each class of separately recognized servicing
assets and servicing liabilities:
4. At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided that
the available-for-sale securities are identified in some manner as
offsetting the entity's exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
6
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5. Requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately
recognized servicing assets and servicing liabilities.
An entity should adopt this Statement as of the beginning of its first
fiscal year that begins after September 15, 2006. Management believes
that this statement will not have a significant impact on the financial
statement.
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The management is
currently evaluating the effect of this pronouncement on financial
statements.
In September 2006, FASB issued SFAS 158 `Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of
FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves
financial reporting by requiring an employer to recognize the over funded
or under funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the
date of its year-end statement of financial position, with limited
exceptions. An employer with publicly traded equity securities is
required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end
of the fiscal year ending after December 15, 2006. An employer without
publicly traded equity securities is required to recognize the funded
status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of the fiscal year ending after June
15, 2007. However, an employer without publicly traded equity securities
is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006,
but before June 16, 2007, unless it has applied the recognition
provisions of this Statement in preparing those financial statements:
d. A brief description of the provisions of this Statement
e. The date that adoption is required
f. The date the employer plans to adopt the recognition provisions
of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The management
is currently evaluating the effect of this pronouncement on financial
statements.
7
<page>
NOTE 3 ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory. This
amount represents the advances paid by the Company to suppliers of
$132,484 and 86,347 at June 30, 2006 and 2005 respectively.
NOTE 4 PREPAID EXPENSES AND OTHER CURRENT ASSETS
The balances of Company prepaid expenses and other current assets as of
June 30, 2006 and 2005 are summarized as follows:
2006 2005
---- ----
Security deposits $17,119 $13,170
Receivable from employees 1,005 510
Prepayments 26,420 9,948
Receivables 'from officers 93,533 76,958
Loan advances 50,028 -
-------------------- ------------------
Total $188,105 $100,586
==================== ==================
The loan advance is interest free without due date and securities.
NOTE 5 PROPERTIES AND EOUIPMENT
The balances of Company property and equipment as of June 30, 2006 and
2005 are summarized as follows:
2006 2005
----- ----
Electronic Equipment $5,988 $5,316
Vehicles 50,119 48,418
Office Equipment 6,301 6,086
Construction in progress 300,206 -
Less: Accumulated depreciation (18,405) (11,160)
--------------- ---------------
Property and equipment, net $344,209 $48,660
=============== ===============
NOTE 6 INTANGIBLE ASSET
Intangible asset is one set of software acquired from third parties.
This set of software is used for the core technology of the Company's
VOIP business. The intangible asset is being amortized over 5 year
period. Accumulated amortization at June 30, 2006 and 2005 amounted to
$55,526 and $37,640 respectively. The annual amortization for next
twenty two months will be at 17,373 per twelve month.
NOTE 7 SHORT TERM LOAN
Interest rate
Principal (Per annum) Due Date Secured by
Li Kunwu and Dalu Machinery Co.,
$ 125,069 7.254% Apr 2007 Ltd.
The loan was borrowed from JiNan City Commercial Bank Zhangzhuang Branch.
8
<page>
NOTE 8 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of June 30, 2006 and
2005 are summarized as follows:
2006 2005
---- ----
Security deposit $25,009 $99,454
Staff payables 9,811 1,818
Tax Payables 30,531 9,418
------------------ ---------------
Total $65,351 $110,690
================== ===============
NOTE 9 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term,
non-cancelable lease agreements expiring at various dates through June
30, 2006. The non-cancelable operating lease agreements provide that the
Company pays certain operating expenses applicable to the leased
premises according to the Chinese Law.
The future minimum annual lease payments required under the operating
leases are as follows:
Year Ending December Payments
2006 $ 7,435
=========================
NOTE 10 SHAREHOLDERS' EQUITY
a) Registered capital and paid in capital:
The registered and paid in capital of the Company as June 30, 2006 and
2005 are as follows:
2006 2005
----- ----
Wang Qinghua $85,016 $99,680
Li Kunwu 85,016 75,515
Yu Liang 39,472 12,083
Xu Yinji 36,436 18,118
Li Zhengying 36,436 12,082
Gao Yao - 12,082
Yan Fang 36,436 12,082
Ping Lixin 15,182 -
Zhang Haiyan 15,182 -
Zhao Furong 15,182 -
Chen Guohua 12,145 -
Yu Ping 12,145 -
Xiong Zhiming 3,644 -
Kong Qingfeng 3,644 -
Liu Bing 14,574 -
Cui Zhenhua 3,644 -
------------------- -------------------
Total $414,154 $241,642
==================== ===================
9
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Zhonghezhengxing Certified Public Accountants have verified the above
capital contributions, and issued related capital verification reports.
NOTE 11 CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC,
by the general state of the PRC's economy. The Company's business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other
things.
10