ARTCRAFT V, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AUGUST 31, 2005
Pro Forma
-------------------------------------------------------------------------------------
Assets SHENZHEN XIN
KAI YUAN
INFORMATION
CONSULTING CO.,
ARTCRAFT V, INC. LIMITED
-------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $0 $8,517 $8,517
Accounts receivable - - -
Inventory - - -
Due from related party - 247 247
Deposit - - -
Other receivables - 91,610 91,610
-------------------- -------------------- ------------------
Total Current Assets - 100,374 100,374
-------------------- -------------------- ------------------
Fixed assets, net - 24,440 24,440
-------------------- -------------------- ------------------
Total Assets $0 $124,814 $124,814
==================== ==================== ==================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $2,086 $3,079 (2) $30,000 $35,165
Due to related party 16,005 - 16,005
Current portion, obligation under lease - - -
Provision for value-added tax - - -
Provision for income tax - - -
-------------------- -------------------- ------------------
Total Current Liabilites 18,091 3,079 51,170
Employee welfare reserve - - -
-------------------- -------------------- ------------------
Total Liabilities 18,091 3,079 51,170
Stockholders' Equity
Common stock 250 - 250
Legal reserve/share capital - 121,000 (1) (121,000) -
Additional paid in capital 62,650 - 40,009 102,659
Subscription receivable (60,000) 60,000 -
Cumulative foreign currency translation - 3,731 3,731
Retained earnings (20,991) (2,996)(1) 20,991 (32,996)
(2) (30,000)
-------------------- -------------------- ----------------- ------------------
Total Stockholders' Equity (18,091) 121,735 73,644
-------------------- -------------------- ----------------- ------------------
Total Liabilities and
Stockholders' Equity $0 $124,814 $0 $124,814
==================== ==================== ================= ==================
ARTCRAFT V, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
For the Period January 1, 2005 through August 31, 2005
Pro Forma
-------------------------------------------------------------------------------------
Assets SHENZHEN XIN
KAI YUAN
INFORMATION
CONSULTING CO.,
ARTCRAFT V, INC. LIMITED
-------------------------------------------------------------------------------------
Sales revenue $0 $11,873 $11,873
------------------ ------------------- ------------------
- 11,873 11,873
Cost of goods sold - - -
------------------ ------------------- ------------------
- - -
Gross Profit - 11,873 11,873
------------------ ------------------- ------------------
General, selling and
administrative expenses 17,391 13,761 (2) 30,000 61,152
------------------ ------------------- ----------------- ------------------
Operating income ( loss ) (17,391) (1,888) (30,000) (49,279)
------------------ ------------------- ----------------- ------------------
Nonoperating (income) expense
Interest income - (114) (114)
Other income - - -
Interest expenses - - -
------------------ ------------------- ------------------
Total nonoperating income ( expenses ) - (114) (114)
------------------ ------------------- ------------------
Income ( loss ) before provision for income tax (17,391) (1,774) (49,165)
Provision for income taxes - - -
------------------ ------------------- ------------------
Net income ( loss ) ($17,391) ($1,774) ($30,000) ($49,165)
================== =================== ================= ==================
ARTCRAFT V, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2004
Pro Forma
-------------------------------------------------------------------------------------
Assets SHENZHEN XIN
KAI YUAN
INFORMATION
CONSULTING CO.,
ARTCRAFT V, INC. LIMITED Adjustments Pro Forma
-------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $0 $119,445 $119,445
Accounts receivable - - -
Inventory - - -
Due from related party - 242 242
Deposit - - -
Prepaid expenses - 109 109
-------------------- -------------------- ------------------
Total Current Assets - 119,796 119,796
-------------------- -------------------- ------------------
Fixed assets, net - 2,892 2,892
-------------------- -------------------- ------------------
Total Assets $0 $122,688 $122,688
==================== ==================== ==================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $0 $2,653 (2) $30,000 $32,653
Due to related party 2,500 - 2,500
Current portion, obligation under lease - - -
Deferred revenue - 257 257
Provision for income tax - - -
-------------------- -------------------- ------------------
Total Current Liabilites 2,500 2,910 35,410
Employee welfare reserve - - -
-------------------- -------------------- ------------------
Total Liabilities 2,500 2,910 35,410
Stockholders' Equity
Common stock 100 - (1) 0 100
Legal reserve/share capital - 121,000 (121,000) -
Additional paid in capital 1,000 - 117,400 118,400
Cumulative foreign currency translation - - -
Retained earnings (3,600) (1,222)(1) 3,600 (31,222)
(2) (30,000)
-------------------- -------------------- ----------------- ------------------
Total Stockholders' Equity (2,500) 119,778 87,278
-------------------- -------------------- ----------------- ------------------
Total Liabilities and
Stockholders' Equity $0 $122,688 $0 $122,688
==================== ==================== ================= ==================
ARTCRAFT V, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
For the Period January 1, 2004 through December 31, 2004
Pro Forma
-------------------------------------------------------------------------------------
Assets SHENZHEN XIN
KAI YUAN
INFORMATION
CONSULTING CO.,
ARTCRAFT V, INC. LIMITED Adjustments Pro Forma
-------------------------------------------------------------------------------------
Sales revenue $0 $9,580 $9,580
------------------ ------------------- ------------------
- 9,580 9,580
Cost of goods sold - - -
------------------ ------------------- ------------------
- - -
Gross Profit - 9,580 9,580
------------------ ------------------- ------------------
General, selling and
administrative expenses 3,600 10,905 (2) 30,000 44,505
------------------ ------------------- ----------------- ------------------
Operating income ( loss ) (3,600) (1,325) (30,000) (34,925)
------------------ ------------------- ----------------- ------------------
Nonoperating (income) expense
Interest income - (103) (103)
Other income - - -
Interest expenses - - -
------------------ ------------------- ------------------
Total nonoperating income ( expenses ) - (103) (103)
------------------ ------------------- ------------------
Income ( loss ) before provision for income tax (3,600) (1,222) (34,822)
Provision for income taxes - - -
------------------ ------------------- ------------------
Net income ( loss ) ($3,600) ($1,222) ($30,000) ($34,822)
================== =================== ================= ==================
The accompanying condensed financial statements illustrate the effect of the
stock exchange agreement between Artcraft V, Inc. and Shenzhen Xin Kain Yuan
Information Consulting Co., Limited, on the Company's financial position and
results of operations. The pro forma condensed consolidated balance sheet as
August 31, 2005 is based on the historical balance sheets of Artcraft V, Inc.
and Shenzhen Xin Kain Yuan Information Consulting Co., Limited, as of that date.
The pro forma condensed combined balance sheet assumes the acquisition took
place on January 1, 2005. The pro forma condensed consolidated balance sheet as
December 31, 2004 is based on the historical balance sheets of Artcraft V, Inc.
and Shenzhen Xin Kain Yuan Information Consulting Co., Limited, as of that date.
The pro forma condensed combined balance sheet assumes the acquisition took
place on January 1, 2004.
The pro forma condensed combined statements of operations for the year ended
December 31, 2004 is based on the historical statements of operations of
Artcraft V, Inc. and Shenzhen Xin Kain Yuan Information Consulting Co., Limited,
and assumes the acquisition took place on January 1, 2004. The pro forma
condensed combined statement of operations for the eight months ended August 31,
2005 is based on the historical statements of operations of Artcraft V, Inc. and
Shenzhen Xin Kain Yuan Information Consulting Co., Limited and assumes the
acquisition took place on January 1, 2005. The pro forma condensed combined
financial statements may not be indicative of the actual results of the
acquisition and there can be no assurance that the foregoing results will be
obtained. In particular, the pro form condensed combined financial statements
are based on management's current estimates of the exchange agreement. The
actual may differ.
The accompanying pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements of Artcraft V, Inc.
and Shenzhen Xin Kain Yuan Information Consulting Co., Limited.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. Basis for Pro Forma Presentation
The unaudited pro forma combined condensed financial statements of Shenzhen Xin
Kain Yuan Information Consulting Co., Limited have been prepared on the basis of
assumptions relating to the stock exchange agreement between Artcraft V, Inc.
and Shenzhen Xin Kain Yuan Information Consulting Co., Limited and management's
best estimates.
2. Pro Forma Adjustments
Certain adjustments have been made to the historical financial statements in
order to prepare the pro forma financial information as if the transaction had
occurred at the beginning of the fiscal period presented. The adjustments are as
follows:
(1) To eliminate the equity of Artcraft V, Inc.
(2) To accrue estimated costs to consummate the transaction.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
TABLE OF CONTENTS
Statements of Financial Position 2
Statements of Income 3
Statements of Cash Flow 4
Statements of Changes in Stockholders' Equity 5
Notes to Financial Statements 6
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENTS OF FINANCIAL POSITION
ASSETS
August 31, 2005
(Unaudited) December 31, 2004
----------------- ----------------
Current Assets
Cash and cash equivalents $8,517 $119,445
Receivables from related parties 247 242
Loan receivable 91,609 0
----------------- ----------------
Total Current Assets 100,373 119,687
----------------- ----------------
Fixed Assets, net 24,440 2,892
----------------- ----------------
Total Fixed Assets 24,440 2,892
----------------- ----------------
Other Assets
Prepaid expenses 0 109
----------------- ----------------
Total Other Assets 0 109
----------------- ----------------
Total Assets $124,814 $122,688
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $3,080 $2,653
Deferred revenue 0 257
----------------- ----------------
Total Current Liabilities 3,080 2,910
----------------- ----------------
Stockholders' Equity
Registered share capital 121,000 121,000
Other comprehensive income 3,731 0
Retained earnings (2,996) (1,222)
----------------- ----------------
Total Stockholders' Equity 121,735 119,778
----------------- ----------------
Total Liabilities and Stockholders' Equity $124,814 $122,688
================= ================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENTS OF INCOME
(UNAUDITED)
Eight Months Ended
-----------------------------------
August 31, August 31,
2005 2004
----------------- ----------------
Sales, net $11,873 $5,676
Cost of sales 0 0
----------------- ----------------
Gross profit 11,873 5,676
General and administrative expenses 13,761 3,921
----------------- ----------------
Income (loss) from operations (1,888) 1,755
----------------- ----------------
Other (Income) Expense
Interest income (114) (15)
Interest expense 0 0
----------------- ----------------
Total Other (Income) Expense (114) (15)
----------------- ----------------
Income (loss) before income taxes (1,774) 1,770
Provison for income taxes 0 0
----------------- ----------------
Net income (loss) ($1,774) $1,770
================= ================
Earnings Per Share, Basic and Diluted ($1.77) $5.90
================= ================
Weighted average shares outstanding, Basic and Diluted 1,000 300
================= ================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Eight Months Ended
-----------------------------------
August 31, August 31,
2005 2004
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) ($1,774) $1,770
Adjustments to reconcile net income (loss) to net
cash (used in) provided by
operating activities:
Depreciation 1,360 60
Translation adjustments 3,723 0
Decrease (Increase) in Receivable from related party (5) 0
Decrease (Increase) in prepaid expenses 109 (170)
(Decrease) Increase in accounts payable
and accrued expenses 427 503
(Decrease) Increase in deferred revenue (257) 0
----------------- ----------------
Total Adjustments 5,357 393
----------------- ----------------
Net cash provided by operations 3,583 2,163
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Issuance of loan receivable (91,609) 0
Purchase of furniture and equipment (22,904) (3,156)
----------------- ----------------
Net cash (used in) provided by investing activities (114,513) (3,156)
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from issuance of stock 0 18,150
----------------- ----------------
Net cash (used in) provided by financing activities 0 18,150
----------------- ----------------
Net change in cash and cash equivalents (110,929) 17,157
Cash and cash equivalents at beginning of year 119,446 0
----------------- ----------------
Cash and cash equivalents at end of period $8,517 $17,157
================= ================
Supplemental cash flows disclosures:
Income tax payments $0 $0
================= ================
Interest payments $0 $0
================= ================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
August 31, 2005
(Unaudited) December 31, 2004
----------------- ----------------
Registered share capital
Balance at beginning of year $121,000 $0
Common stock issued 0 121,000
----------------- ----------------
Balance at end of period 121,000 121,000
----------------- ----------------
Other comprehensive income
Balance at beginning of year 0 0
Translation adjustment 3,731 0
----------------- ----------------
Balance at end of period 3,731 0
----------------- ----------------
Retained earnings
Balance at beginning of year (1,222) 0
Net income (loss) (1,774) (1,222)
----------------- ----------------
Balance at end of period (2,996) (1,222)
----------------- ----------------
Total stockholders' equity at end of period $121,735 $119,778
================= ================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note A - ORGANIZATION
Shenzhen Xin Kai Yuan Consulting Co., Limited , was legally established
on February 24, 2004 under the laws of the Peoples' Republic of China.
When used in these notes, the terms "Company," "we," "our," or "us"
mean Shenzhen Xin Kai Yuan Consulting Co., Limited .
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information -These financial statements are
unaudited and, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments and accruals) necessary for
a fair presentation of the statement of financial position, operations,
and cash flows for the periods presented. Operating results for the
eight months ended August 31, 2005 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2005,
or any future period, due to seasonal and other factors. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
policies have been omitted. These financial statements should be read
in conjunction with the December 31, 2004 audited financial statements
and accompanying notes.
Revenue Recognition
Revenue from marketing fees from customers are recognized when service
is provided to the customers based on the terms of the sale, and is
recorded net of returns, discounts and allowances.
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.
Contingencies
Certain conditions may exist as of the date the financial statements
are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur.
The Company's management and legal counsel assess such contingent
liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may
result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well
as the perceived merits of the amount of relief sought or expected to
be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the
Company's financial statements. If the assessment indicates that a
potential material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of
possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally
not disclosed unless they involve guarantees, in which case the
guarantee would be disclosed.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States ("GAAP") requires
management to make certain 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. Significant estimates
include collectibility of accounts receivable, accounts payable, sales
returns and recoverability of long-term assets.
Allowance for Doubtful Accounts
We have made an allowance for doubtful accounts for trade receivables
based on a combination of write-off history, aging analysis, and any
specific known troubled accounts.
Fixed Assets
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for major additions and improvements are
capitalized, and minor replacements, maintenance and repairs are
charged to expense as incurred. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, or
the remaining term of the lease, as follows:
Furniture and Fixtures 5 years
Automobile 5 years
Computer Hardware and Software 5 years
Fair Value of Financial Instruments
Our Company measures its financial assets and liabilities in accordance
with GAAP. For certain of the Company's financial instruments,
including accounts receivable (trade and related party), notes
receivable and accounts payable (trade and related party), and accrued
expenses, the carrying amounts approximate fair value due to their
short maturities. The amounts owed for long-term debt and revolving
credit facility also approximate fair value because interest rates and
terms offered to the Company are at current market rates.
Exchange Gain (Loss):
During the eight months ended August 31, 2005, the transactions of the
Company were denominated in foreign currency and were recorded in
Chinese Yuan Renminbi (CNY) at the rates of exchange in effect when the
transactions occur. Exchange gains and losses are recognized for the
different foreign exchange rates applied when the foreign currency
assets and liabilities are settled.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation Adjustment
As of August 31, 2005, the transactions of the Companys and its
financial statements were expressed, in Chinese Yuan Renminbi (CNY).
Such financial statements were translated into U.S. Dollars (USD) in
accordance with Statement of Financial Accounts Standards ("SFAS") No.
52, "Foreign Currency Translation," with the CNY as the functional
currency. According to the Statement, all assets and liabilities were
translated at the current exchange rate, stockholders' equity are
translated at the historical rates and income statement items are
translated at the average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive Income."
As of August 31, 2005 the exchange rates between CNY and the USD was
CNY$1=USD$0.1237. The weight-average rate of exchange between CNY and
USD was CNY$1 = USD$0.12142. Total translation adjustment recognized
for the period ended August 31, 2005 is $3,731.
Statement of Cash Flows
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows
from the Company's operations is based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash, accounts receivable and other
receivables arising from its normal business activities. The Company
places its cash in what it believes to be credit-worthy financial
institutions. The Company has a diversified customer base, most of
which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and
monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the
credit risk, establishes an allowance, if required, for uncollectible
accounts and, as a consequence, believes that its accounts receivable
credit risk exposure beyond such allowance is limited.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
initial maturities of three months or less to be cash equivalents.
Advertising
Advertising costs are expensed in the year incurred.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to
be realized or settled as prescribed in SFAS No. 109, "Accounting for
Income Taxes." As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for
income taxes.
Earnings Per Share
The Company uses SFAS No. 128, "Earnings Per Share," for calculating
the basic and diluted earnings (loss) per share. Basic earnings (loss)
per share are computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share are computed similar to basic
earnings per share except that the denominator is increased to include
common stock equivalents, if any, as if the potential common shares had
been issued.
New Accounting Pronouncements
In January 2003, The Financial Accounting Standards Board (FABB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN46"). This interpretation of Accounting Research
Bulletin No. 51, requires companies to consolidate the operations of
all variable interest entities ("VIE's") for which they are the primary
beneficiary. The term "primary beneficiary" is defined as the entity
that will absorb a majority of expected losses, receive a majority of
the expected residual returns, or both. This interpretation was later
revised by the issuance of Interpretation No. 46R ("FIN 46R"). The
revision was issued to address certain implementation issues that had
arisen since the issuance of the original interpretation and to provide
companies with the ability to defer the adoption of FIN46 to period
after March 15, 2004. The implementation of FIN No. 46 and FIN 46R, had
no material impact on the Company's financial statements.
In September 2004, the EITF Issue No. 04-08, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share." ("EITF
04-08") was issued stating that contingently convertible debt should be
included in diluted earnings per share computations regardless of
whether the market price trigger has been met. EITF 04-08 is effective
for reporting periods ending after December 15, 2004. The adopted EITF
04-08 will have no material impact on the Company's financial
statements.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements
based on their fair values, beginning with the first interim or annual
period after June 15, 2005. In April 2005, the Securities and Exchange
Commission adopted a new rule that amends the compliance date of SFAS
123R, requiring the Company to adopt SFAS 123R in the first quarter of
fiscal 2006. The new rule does not change the accounting required by
SFAS 123R, it only changes the date for compliace. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Under SFAS 123R, The
Company must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption. The
transition methods include prospective and retroactive adoption
options. Under the retroactive options, prior periods may be restated
either as of the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the
retroactive methods would record compensation expense for all unvested
stock options and restricted stock beginning with the first period
restated. The Company is evaluating the requirements of SFAS 123, and
it expects that the adoption of SFAS 123R will have no material impact
on the Company's financial statements.
In May 2005, FASB issued FASB Statement 154, "Accounting Changes and
Error Corrections -- a replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("FAS 154"). FAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. The
provisions of FAS 154 require, unless impracticable, retrospective
application to prior periods' financial statements of (1) all voluntary
changes in accounting principles and (2) changes required by a new
accounting pronouncement, if a specific transition is not provided. FAS
154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for
as a change in accounting estimate, which requires prospective
application of the new method. FAS 154 is effective for all accounting
changes made in fiscal years beginning after December 15, 2005.
Note C - CASH
The Company maintains its cash balances at various banks in China and.
As of August 31, 2005 there were no uninsured portions of the balances
held at these banks.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note D - FIXED ASSETS
Fixed assets consist of the following:
August 31, 2005 December 31, 2004
Office equipment $ 3,227 $ 3,227
Computer equipment and software 11,974 -
Automobile 10,934 -
--------------------------- ----------------------------
$ 26,135 $ 3,227
Accumulated depreciation (1,695) (335)
--------------------------- ----------------------------
$ 24,440 $ 2,892
=========================== ============================
Note E - INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC. Pursuant to
the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is at a
statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax. The Company qualified as a new technology
enterprise and under PRC Income Tax Laws, they are subject to a
preferential tax rate of 15%.
Income tax provision for the eight months ended August 31, 2005:
August 31, 2005
Provision for PRC Income and local taxes $ 0
------------
PRC income tax 15%
Note F - LOAN RECEIVABLE
At August 31, 2005 the Company had a non interest loan receivable to a
Company in the amount of $91,609 due on demand.
Note G - RELATED PARTY TRANSACTION
Throughout the history of the Company, certain members of the Board of
Directors, stockholders and general management have made loans to the
Company to cover operating expenses or operating deficiencies. The
Company has also loaned money to relatives and associates of the major
stockholder of the Company. These amounts do not bear interest and are
not collateralized.
At August 31, 2005 the Company had a loan receivable from a shareholder
of the Company in the amount of $247.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
AUGUST 31, 2005
Note H - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
deposits and accounts payable approximate their fair value because of
the short maturity of those instruments.
The carrying amounts of the Company's long-term debt approximate their
fair value because of the short maturity and/or interest rates which
are comparable to those currently available to the Company on
obligations with similar terms.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 2004
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 2004
TABLE OF CONTENTS
Independent Auditor's Report 2
Statement of Financial Position 3
Statement of Income 4
Statement of Cash Flow 5
Statement of Changes in Stockholders' Equity 6
Notes to Financial Statements 7
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Shenzhen Xin Kai Yuan Information Consulting Co., Limited
Shenzhen, China
We have audited the accompanying statement of financial position of Shenzhen Xin
Kai Yuan Information Consulting Co., Limited ("the Company") as of December 31,
2004, and the related statement of income, change in stockholders' equity, and
cash flow for the period from inception (February 24, 2004) through December 31,
2004. 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 audits 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 Xin Kai Yuan
Consulting Co., Limited as of December 31, 2004, and the related statement of
income and cash flow for the period from inception (February 24, 2004) through
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
September 27, 2005
San Diego, California
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2004
ASSETS
Current Assets
Cash and cash equivalents $119,445
Receivables from related parties 242
-------------------
Total Current Assets 119,687
-------------------
Fixed Assets, net 2,892
-------------------
Total Fixed Assets 2,892
-------------------
Other Assets
Prepaid expenses 109
-------------------
Total Other Assets 109
-------------------
Total Assets $122,688
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $2,653
Deferred revenue 257
-------------------
Total Current Liabilities 2,910
-------------------
Stockholders' Equity
Registered share capital 121,000
Retained earnings (1,222)
-------------------
Total Stockholders' Equity 119,778
-------------------
Total Liabilities and Stockholders' Equity $122,688
===================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 2004) THROUGH DECEMBER 31, 2004
Sales, net $9,580
Cost of sales 0
-------------------
Gross profit 9,580
General and administrative expenses 10,905
-------------------
Income (loss) from operations (1,325)
-------------------
Other (Income) Expense
Interest income (103)
Interest expense 0
-------------------
Total Other (Income) Expense (103)
-------------------
Income (loss) before income taxes (1,222)
Provison for income taxes 0
-------------------
Net income (loss) ($1,222)
===================
Earnings Per Share, Basic and Diluted ($1.22)
===================
Weighted average number of shares outstanding, Basic and Diluted 1,000
===================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 2004) THROUGH DECEMBER 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) ($1,222)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 335
Decrease (Increase) in other receivables (242)
Decrease (Increase) in prepaid expenses (109)
(Decrease) Increase in accounts payable
and accrued expenses 2,653
(Decrease) Increase in deferred revenue 257
-------------------
Total Adjustments 2,894
-------------------
Net cash provided by operations 1,672
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (3,227)
-------------------
Net cash (used in) provided by investing activities (3,227)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock 121,000
-------------------
Net cash (used in) provided by financing activities 121,000
-------------------
Net change in cash and cash equivalents 119,445
Cash and cash equivalents at beginning of period 0
-------------------
Cash and cash equivalents at end of year $119,445
===================
Supplemental cash flows disclosures:
Income tax payments $0
===================
Interest payments $0
===================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 2004) THROUGH DECEMBER 31, 2004
Registered share capital
Balance at beginning of year $0
Common stock issued 121,000
-------------------
Balance at end of year 121,000
-------------------
Retained earnings
Balance at beginning of year 0
Net income (loss) (1,222)
-------------------
Balance at end of year (1,222)
-------------------
Total stockholders' equity at end of year $119,778
===================
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note A - ORGANIZATION
Shenzhen Xin Kai Yuan Consulting Co., Limited , was legally established
on February 24, 2004 under the laws of the Peoples' Republic of China.
When used in these notes, the terms "Company," "we," "our," or "us"
mean Shenzhen Xin Kai Yuan Consulting Co., Limited .
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from marketing fees from customers are recognized when service
is provided to the customers based on the terms of the sale, and is
recorded net of returns, discounts and allowances.
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.
Contingencies
Certain conditions may exist as of the date the financial statements
are issued, which may result in a loss to the Company but which will
only be resolved when one or more future events occur or fail to occur.
The Company's management and legal counsel assess such contingent
liabilities, and such assessment inherently involves an exercise of
judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may
result in such proceedings, the Company's legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well
as the perceived merits of the amount of relief sought or expected to
be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the
Company's financial statements. If the assessment indicates that a
potential material loss contingency is not probable but is reasonably
possible, or is probable but cannot be estimated, then the nature of
the contingent liability, together with an estimate of the range of
possible loss if determinable and material would be disclosed.
Loss contingencies considered to be remote by management are generally
not disclosed unless they involve guarantees, in which case the
guarantee would be disclosed.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States ("GAAP") requires
management to make certain 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. Significant estimates
include collectibility of accounts receivable, accounts payable, sales
returns and recoverability of long-term assets.
Allowance for Doubtful Accounts
We have made an allowance for doubtful accounts for trade receivables
based on a combination of write-off history, aging analysis, and any
specific known troubled accounts.
Fixed Assets
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for major additions and improvements are
capitalized, and minor replacements, maintenance and repairs are
charged to expense as incurred. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets, or
the remaining term of the lease, as follows:
Furniture and Fixtures 5 years
Equipment 5 years
Computer Hardware and Software 5 years
Fair Value of Financial Instruments
Our Company measures its financial assets and liabilities in accordance
with GAAP. For certain of the Company's financial instruments,
including accounts receivable (trade and related party), notes
receivable and accounts payable (trade and related party), and accrued
expenses, the carrying amounts approximate fair value due to their
short maturities. The amounts owed for long-term debt and revolving
credit facility also approximate fair value because interest rates and
terms offered to the Company are at current market rates.
Exchange Gain (Loss):
During the year ended December 31, 2004, the transactions of the
Company were denominated in foreign currency and were recorded in
Chinese Yuan Renminbi (CNY) at the rates of exchange in effect when the
transactions occur. Exchange gains and losses are recognized for the
different foreign exchange rates applied when the foreign currency
assets and liabilities are settled.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Translation Adjustment
As of December 31, 2004, the transactions of the Company and its
financial statements were expressed in Chinese Yuan Renminbi (CNY).
Such financial statements were translated into U.S. Dollars (USD) in
accordance with Statement of Financial Accounts Standards ("SFAS") No.
52, "Foreign Currency Translation," with the CNY as the functional
currency. According to the Statement, all assets and liabilities were
translated at the current exchange rate, stockholders' equity are
translated at the historical rates and income statement items are
translated at the average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive Income."
As of December 31, 2004 the exchange rates between CNY and the USD was
CNY$1=USD$0.1210. The weight-average rate of exchange between CNY and
USD was CNY$1 = USD$0.1210.
Statement of Cash Flows
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows
from the Company's operations is based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the
statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash, accounts receivable and other
receivables arising from its normal business activities. The Company
places its cash in what it believes to be credit-worthy financial
institutions. The Company has a diversified customer base, most of
which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and
monitoring procedures. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the
credit risk, establishes an allowance, if required, for uncollectible
accounts and, as a consequence, believes that its accounts receivable
credit risk exposure beyond such allowance is limited.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
initial maturities of three months or less to be cash equivalents.
Advertising
Advertising costs are expensed in the year incurred.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences
between the amount of taxable income and pretax financial income and
between the tax bases of assets and liabilities and their reported
amounts in the financial statements.
Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to
be realized or settled as prescribed in SFAS No. 109, "Accounting for
Income Taxes." As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for
income taxes.
Earnings Per Share
The Company uses SFAS No. 128, "Earnings Per Share," for calculating
the basic and diluted earnings (loss) per share. Basic earnings (loss)
per share are computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares
outstanding. Diluted earnings per share are computed similar to basic
earnings per share except that the denominator is increased to include
common stock equivalents, if any, as if the potential common shares had
been issued.
New Accounting Pronouncements
In January 2003, The Financial Accounting Standards Board (FABB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN46"). This interpretation of Accounting Research
Bulletin No. 51, requires companies to consolidate the operations of
all variable interest entities ("VIE's") for which they are the primary
beneficiary. The term "primary beneficiary" is defined as the entity
that will absorb a majority of expected losses, receive a majority of
the expected residual returns, or both. This interpretation was later
revised by the issuance of Interpretation No. 46R ("FIN 46R"). The
revision was issued to address certain implementation issues that had
arisen since the issuance of the original interpretation and to provide
companies with the ability to defer the adoption of FIN46 to period
after March 15, 2004. The implementation of FIN No. 46 and FIN 46R, had
no material impact on the Company's financial statements.
In September 2004, the EITF Issue No. 04-08, "The Effect of
Contingently Convertible Debt on Diluted Earnings per Share." ("EITF
04-08") was issued stating that contingently convertible debt should be
included in diluted earnings per share computations regardless of
whether the market price trigger has been met. EITF 04-08 is effective
for reporting periods ending after December 15, 2004. The adopted EITF
04-08 will have no material impact on the Company's financial
statements.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements
based on their fair values, beginning with the first interim or annual
period after June 15, 2005. In April 2005, the Securities and Exchange
Commission adopted a new rule that amends the compliance date of SFAS
123R, requiring the Company to adopt SFAS 123R in the first quarter of
fiscal 2006. The new rule does not change the accounting required by
SFAS 123R, it only changes the date for compliace. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Under SFAS 123R, The
Company must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption. The
transition methods include prospective and retroactive adoption
options. Under the retroactive options, prior periods may be restated
either as of the beginning of the year of adoption or for all periods
presented. The prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the
retroactive methods would record compensation expense for all unvested
stock options and restricted stock beginning with the first period
restated. The Company is evaluating the requirements of SFAS 123, and
it expects that the adoption of SFAS 123R will have no material impact
on the Company's financial statements.
In May 2005, FASB issued FASB Statement 154, "Accounting Changes and
Error Corrections -- a replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("FAS 154"). FAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. The
provisions of FAS 154 require, unless impracticable, retrospective
application to prior periods' financial statements of (1) all voluntary
changes in accounting principles and (2) changes required by a new
accounting pronouncement, if a specific transition is not provided. FAS
154 also requires that a change in depreciation, amortization, or
depletion method for long-lived, non-financial assets be accounted for
as a change in accounting estimate, which requires prospective
application of the new method. FAS 154 is effective for all accounting
changes made in fiscal years beginning after December 15, 2005.
Note C - CASH
The Company maintains its cash balances at various banks in China and.
As of December 31, 2004 there were no uninsured portions of the
balances held at these banks.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note D - FIXED ASSETS
Fixed assets consist of the following:
2004
------------------
Office equipment $ 3,227
------------------
$ 3,227
Accumulated depreciation (335)
------------------
$ 2,892
==================
Note E - INCOME TAXES
The Company is governed by the Income Tax Laws of the PRC. Pursuant to
the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is at a
statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax. The Company qualified as a new technology
enterprise and under PRC Income Tax Laws, they are subject to a
preferential tax rate of 15%.
Income tax provision for the year ended December 31, 2004:
December 31, 2004
Provision for PRC Income and local taxes $ 0
----------
PRC income tax 15%
Note F - RELATED PARTY TRANSACTION
Throughout the history of the Company, certain members of the Board of
Directors, stockholders and general management have made loans to the
Company to cover operating expenses or operating deficiencies. The
Company has also loaned money to relatives and associates of the major
stockholder of the Company. These amounts do not bear interest and are
not collateralized.
At December 31, 2004 the Company had a loan receivable from a
shareholder of the Company in the amount of $242.
SHENZHEN XIN KAI YUAN INFORMATION CONSULTING CO., LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
Note G - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
deposits and accounts payable approximate their fair value because of
the short maturity of those instruments.
The carrying amounts of the Company's long-term debt approximate their
fair value because of the short maturity and/or interest rates which
are comparable to those currently available to the Company on
obligations with similar terms.