Attached files
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8-K/A - AMENDED CURRENT REPORT - Mondo Acquisition III, Inc. | f8k021210a1_mondo.htm |
Exhibit 99.1
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets
|
F-2
|
Statements
of Consolidated Income and Comprehensive Income
|
F-3
|
Consolidated
Statements of Stockholders’ Equity
|
F-4
|
Consolidated
Statements of Cash Flows
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6-F-22
|
Hong Kong Head Office
香港總公司
9th
Floor, Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong
Kong
香 港
灣 仔告 士打道 138 號 聯 合 鹿島 大 廈 9 樓
Tel
電話:852-2919
8988 Fax 傳真:852-2574
7287
Beijing
Office 北京辦事處
Suite
601, China View, C-2 Gongti East Road, Chaoyang District, Beijing 100027
北京朝陽區工體東路丙
2 號紅階大廈 3 號樓 601 室(郵編 100027)
Tel
電話:86-10-6585
0599 Fax 傳真:86-10-6585
0558
www.agcacpa.com.hk
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED:
We have
audited the accompanying consolidated balance sheets of Kobe Sport
(International) Company Limited and Subsidiaries (the “Company”) as of December
31, 2009 and 2008 and the related consolidated statements of income and
comprehensive income, stockholders’ equity, and cash flows for each of the two
years ended December 31, 2009 and 2008. These consolidated 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
consolidated 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. 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial positions of the Company as of December
31, 2009 and 2008, the results of its operations and its cash flows for each of
the two years ended December 31, 2009 and 2008 in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note 2 to the consolidated financial statements, in 2009 the
Company changed the manner in which it accounts for non-controlling interests in
subsidiaries. This change was made retrospectively to the Company’s consolidated
financial statements for the year ended December 31, 2008.
/s/ AGCA CPA Limited
AGCA CPA
Limited
Hong
Kong, April 9, 2010
F-1
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of December 31,
|
||||||||
|
2009 | 2008 | ||||||
ASSETS
CURRENT ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 17,387,929 | $ | 7,400,057 | ||||
Accounts
receivable, net of $nil allowance
|
22,125,979 | 13,442,066 | ||||||
Advances
to suppliers, net of $nil allowance
|
− | 1,347,087 | ||||||
Prepaid
land use right – current portion
|
17,473 | 17,457 | ||||||
Inventories
|
1,687,090 | 3,187,275 | ||||||
Loan
due from a related party
|
3,148,707 | - | ||||||
Total
current assets
|
44,367,178 | 25,393,942 | ||||||
OTHER
ASSETS
|
||||||||
Property,
plant and equipment, net
|
9,837,833 | 10,508,041 | ||||||
Prepaid
land use right – long-term portion
|
792,761 | 808,947 | ||||||
Total
non-current assets
|
10,630,594 | 11,316,988 | ||||||
Total
assets
|
$ | 54,997,772 | $ | 36,710,930 | ||||
LIABILITIES
AND EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
bank loans
|
$ | 1,354,676 | $ | 1,419,249 | ||||
Accounts
and notes payables
|
14,329,705 | 10,358,261 | ||||||
Other
payables and accruals
|
1,243,656 | 1,156,449 | ||||||
Income
taxes payable
|
1,360,954 | 920,357 | ||||||
Due
to related parties
|
− | 399,438 | ||||||
Total
current liabilities
|
18,288,991 | 14,253,754 | ||||||
Total
liabilities
|
18,288,991 | 14,253,754 | ||||||
Commitments
and Contingencies (Note 14)
|
||||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Common
stock, $1 par: 50,000 shares authorized, 20 shares issued and
outstanding
|
20 | 20 | ||||||
Additional
paid-in capital
|
2,407,983 | 2,407,983 | ||||||
Statutory
reserves
|
2,009,528 | 2,009,528 | ||||||
Retained
earnings
|
28,409,504 | 15,038,263 | ||||||
Accumulated
other comprehensive income
|
1,679,219 | 1,653,951 | ||||||
Total
Kobe Sport shareholders' equity
|
34,506,254 | 21,109,745 | ||||||
Noncontrolling
interests
|
2,202,527 | 1,347,431 | ||||||
Total
equity
|
36,708,781 | 22,457,176 | ||||||
Total
liabilities and shareholders' equity
|
$ | 54,997,772 | $ | 36,710,930 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS
EXPRESSED IN US DOLLAR)
|
||||||||
For
the Year Ended
December
31,
|
||||||||
2009 |
2008
|
|||||||
NET
REVENUE
|
$ | 81,187,591 | $ | 63,406,121 | ||||
Cost
of sales
|
(58,082,347 | ) | (45,463,469 | ) | ||||
GROSS
PROFIT
|
23,105,244 | 17,942,652 | ||||||
Selling
expenses
|
(2,315,635 | ) | (2,932,230 | ) | ||||
General
and administrative expenses
|
(1,990,451 | ) | (1,742,675 | ) | ||||
Income
from operations
|
18,799,158 | 13,267,747 | ||||||
Other
income (expenses):
|
||||||||
Interest
income
|
258,717 | 77,603 | ||||||
Interest
expenses
|
(81,999 | ) | (129,624 | ) | ||||
Total
other income (expenses)
|
176,718 | (52,021 | ) | |||||
Income
before income taxes
|
18,975,876 | 13,215,726 | ||||||
Provision
for income taxes
|
(4,751,151 | ) | (3,316,035 | ) | ||||
Net
income
|
14,224,725 | 9,899,691 | ||||||
Income
attributable to noncontrolling interests
|
(853,484 | ) | (593,981 | ) | ||||
Net
income attributable to Kobe Sport shareholders
|
$ | 13,371,241 | $ | 9,305,710 | ||||
Other
comprehensive income attributable to Kobe Sport shareholders Foreign
currency translation adjustments
|
25,268 | 1,000,295 | ||||||
Comprehensive
income attributable to Kobe Sport shareholders
|
13,396,509 | 10,306,005 | ||||||
Comprehensive
income attributable to noncontrolling interests
|
855,096 | 657,831 | ||||||
Comprehensive
income
|
$ | 14,251,605 | $ | 10,963,836 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(AMOUNTS
EXPRESSED IN US DOLLAR)
Attributable
to Kobe Sport shareholders
Common
Stock
|
Additional |
Accumulated
Other
|
Non- | |||||||||||||||||||||||||||||
Number
|
Amount
|
Paid-in
Capital
|
Statutory
Reserves
|
Retained
Earnings
|
Comprehensive
Income
|
controlling
interests
|
Total
|
|||||||||||||||||||||||||
At
January 1, 2008
|
20 | $ | 20 | $ | 2,407,983 | $ | 1,019,559 | $ | 8,752,701 | $ | 653,656 | $ | 819,186 | $ | 13,653,105 | |||||||||||||||||
Net
income
|
- | - | - | - | 9,305,710 | - | 593,981 | 9,899,691 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 1,000,295 | 63,850 | 1,064,145 | ||||||||||||||||||||||||
Appropriation
of statutory reserves
|
989,969 | (989,969 | ) | - | - | |||||||||||||||||||||||||||
Special
dividend paid
|
- | - | - | - | (2,030,179 | ) | - | (129,586 | ) | (2,159,765 | ) | |||||||||||||||||||||
At
December 31, 2008
|
20 | 20 | 2,407,983 | 2,009,528 | 15,038,263 | 1,653,951 | 1,347,431 | 22,457,176 | ||||||||||||||||||||||||
Net
income
|
- | - | - | - | 13,371,241 | - | 853,484 | 14,224,725 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 25,268 | 1,612 | 26,880 | ||||||||||||||||||||||||
At
December 31, 2009
|
20 | $ | 20 | $ | 2,407,983 | $ | 2,009,528 | $ | 28,409,504 | $ | 1,679,219 | $ | 2,202,527 | $ | 36,708,781 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(AMOUNTS
EXPRESSED IN US DOLLAR)
For
the Year Ended
December
31,
|
||||||||
2009 | 2008 | |||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 14,224,725 | $ | 9,899,691 | ||||
Adjustments
for:
|
||||||||
Interest
income receivable on loan to a related party
|
(219,587 | ) | - | |||||
Depreciation
and amortization
|
900,011 | 538,174 | ||||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(8,667,760 | ) | (2,958,968 | ) | ||||
Advances
to suppliers
|
1,347,797 | 460,462 | ||||||
Inventories
|
1,502,556 | (530,979 | ) | |||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
and notes payables
|
3,960,111 | (870,095 | ) | |||||
Other
payables and accruals
|
86,087 | (26,178 | ) | |||||
Income
taxes payable
|
439,553 | 323,397 | ||||||
Net
cash provided by operating activities
|
13,573,493 | 6,835,504 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Loan
to a related party
|
(2,929,030 | ) | - | |||||
Purchase
of property, plant and equipment
|
(203,294 | ) | (7,538,804 | ) | ||||
Net
cash used in investing activities
|
(3,132,324 | ) | (7,538,804 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Repayment
to a related company
|
(399,649 | ) | (138,945 | ) | ||||
New
short-term bank loans
|
1,419,997 | 2,185,682 | ||||||
Repayments
of short-term bank loans
|
(1,485,873 | ) | (1,537,753 | ) | ||||
Special
dividend paid to noncontrolling interests
|
- | (129,586 | ) | |||||
Special
dividend paid to Kobe Sport shareholders
|
- | (2,030,179 | ) | |||||
Net
cash used in financing activities
|
(465,525 | ) | (1,650,781 | ) | ||||
Effect
of exchange rate changes on cash
|
12,228 | 591,967 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
9,987,872 | (1,762,114 | ) | |||||
Cash
and cash equivalents, beginning of year
|
7,400,057 | 9,162,171 | ||||||
Cash
and cash equivalents, end of year
|
$ | 17,387,929 | $ | 7,400,057 | ||||
SUPPLEMENTAL
DISCLOSURE INFORMATION
|
||||||||
Cash
paid for interest
|
$ | 81,999 | $ | 129,624 | ||||
Cash
paid for income taxes
|
$ | 4,311,598 | $ | 2,992,639 | ||||
NONCASH
INVESTING AND FINANCING ACTIVITIES
|
||||||||
Interest
receivable on loan due from a related party
|
$ | 219,587 | $ | − |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
1 DESCRIPTION OF
BUSINESS AND ORGANIZATION
Nature
of operations
Kobe
Sport (International) Company Limited (“Kobe Sport”) is a holding company and,
through its subsidiaries, primarily engages in design, manufacturing and sales
of sports shoes, sportswear and related accessories. Kobe Sport together with
its subsidiaries are collectively referred to as the “Company”.
Corporate
organization
Kobe
Sport was incorporated with limited liability on September 25, 2009 under the
International Business Companies Act in the British Virgin Islands. Details of
its subsidiaries are as follows:
Place
and date of
|
Ownership
by
|
|||||
Subsidiaries’
names
|
incorporation
|
the
Company
|
Principal
activities
|
|||
Nam
Kwong Trading Company
|
Hong
Kong
|
100%
|
Intermediate
holding company
|
|||
Limited
(“Nam Kwong”)
|
October
8, 2009
|
|||||
Fujian
Jinjiang Hengfeng Shoes &
|
People’s
Republic of
|
94%
(through Nam
Kwong)
|
Design,
manufacturing and sales
|
|||
Garments
Co., Ltd. (“Hengfeng”)
|
China
(“PRC”) March 2, 1992
|
|
of
sports shoes, sportswear and related
accessories
|
Hengfeng
is a sino-foreign joint stock limited liability company established in the PRC.
On December 4, 2009, Hengfeng underwent a reorganization (“Reorganization”).
Before the Reorganization, Hengfeng had been owned as to 94% by Nam Kwong
Trading Co. (“Nam Kwong Unincorporated”, an unincorporated company registered in
Hong Kong) and 6% by another unrelated minority shareholder, which is a company
registered in the PRC, according to their respective capital contribution.
Pursuant to the Reorgnization, Nam Kwong Unincorporated transferred the 94%
interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong,
Kobe Sport owns 94% interest in Hengfeng.
Both
before and after the Reorganization, Nam Kwong Unincorporated, Nam Kwong and
Kobe Sport have all been beneficially owned and controlled by Mr. Anding Lin,
who is also the managing director of Hengfeng.
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of preparation and consolidation
These
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America.
The
Reorganization has been accounted for as a common control transaction and a
recapitalization of Hengfeng with retroactive effect in the accompanying
financial statements. The financial statements have been prepared as if the
existing corporate structure had been in existence throughout all periods and
the Reorganization had occurred as of the beginning of the earliest period
presented in the accompanying financial statements.
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions and
balances between the Company and its subsidiaries are eliminated upon
consolidation.
F-6
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Use
of estimates
The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the related disclosure of contingent assets and liabilities at the date of these
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Accordingly, actual results may differ from
these estimates under different assumptions or conditions.
Cash
and cash equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
an original maturity of three months or less. Because of the short maturity of
these investments, the carrying amounts approximate their fair value. Restricted
cash is excluded from cash and cash equivalents.
Accounts
receivable
Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company uses an allowance for doubtful accounts for any estimated losses
resulting from the failure of customers to make required payments. The Company
reviews the accounts receivable on a periodic basis and makes allowances where
there is doubt as to the collectibility of individual balances. In evaluating
the collectibility of individual receivable balances, the Company considers many
factors, including the age of the balance, the customer’s payment history, its
current credit-worthiness and current economic trends.
Inventories
Inventories
are stated at the lower of cost, determined on a weighted average basis, or
market. Costs of inventories include purchase and related costs incurred in
bringing the products to their present location and condition. Market value is
determined by reference to selling prices after the balance sheet date or to
management’s estimates based on prevailing market conditions. The management
will write down the inventories to market value if it is below cost. The
management also regularly evaluates the composition of its inventories to
identify slow-moving and obsolete inventories to determine if valuation
allowance is required.
Financial
instruments
The
Company values its financial instruments as required by FASB ASC 320-12-65
(formerly SFAS No. 107, “Disclosures about Fair Value of Financial
Instruments”). The estimated fair value amounts have been determined by the
Company, using available market information or other appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Consequently, the estimates are not
necessarily indicative of the amounts that could be realized or would be paid in
a current market exchange.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
accounts receivables, advance to suppliers, accounts and notes payables, other
payables and accruals and due to related parties.
As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective year ends.
F-7
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Property,
plant and equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. The cost of improvements that
extend the life of buildings, machinery and equipment are capitalized. These
capitalized costs may include structural improvements, equipment and fixtures.
All ordinary repair and maintenance costs are expensed as incurred.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of the assets as follows:
Useful
Life
(In
years)
|
|
Buildings
|
50
|
Machinery
|
10
|
Office
equipment
|
5
|
Prepaid
land use right
Lease
prepayments represent lump sum payment for land use rights in the PRC. The
amount is expensed out on a straight-line basis over the period of land use
rights of 50 years.
Impairment
of long-lived assets
The
Company reviews and evaluates its long-lived assets for impairment when events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. An impairment is considered to exist if the total estimated
future cash flows on an undiscounted basis are less than the carrying amount of
the assets, including goodwill, if any. An impairment loss is measured and
recorded based on discounted estimated future cash flows. In estimating future
cash flows, assets are grouped at the lowest level for which there is
identifiable cash flows that are largely independent of future cash flows from
other asset groups.
Revenue
recognition
Revenue
is recognized when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectibility is reasonably assured. Revenue from
sale of goods is recognized when the significant risks and rewards of ownership
have pass to the buyer, provided that the Company maintains neither managerial
involvement to the degree usually associated with the ownership, nor effective
control over the goods sold, which generally occurs when the product is sold and
delivered to the buyers. Transportation and handling costs for delivery of
products are normally borne and paid directly by the buyers.
Sales
revenue is presented net of sales taxes, rebates, discounts and returns and is
recognized at the time when the title to goods passes to the customer. Based on
historical experience, management estimates that sales returns are immaterial
and has not made allowance for estimated sales returns.
Research
and development costs
Research
and development costs are expensed as incurred. During the years ended December
31, 2009 and 2008, research and development costs were $158,896 and $137,386,
respectively.
Advertising
costs
The
Company expenses all advertising costs as incurred. The total amount of
advertising costs charged to selling, general and administrative expense were
$2,123,965 and $1,759,254 for the years ended December 31, 2009 and 2008,
respectively.
F-8
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Shipping
and handling costs
Substantially
all costs of shipping and handling of products to customers are included in
selling, general and administrative expense. Shipping and handling costs for the
years ended December 31, 2009 and 2008 were $14,583 and $8,079,
respectively.
Income
taxes
The
Company is subject to income taxes in the United States and other foreign
jurisdictions where it operates. The Company accounts for income taxes in
accordance with FASB ASC Topic 740, “Income Taxes”). FASB ASC Topic 740 requires
an asset and liability approach for financial accounting and reporting for
income taxes and allows recognition and measurement of deferred tax assets based
upon the likelihood of realization of tax benefits in future years. Under the
asset and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the Company is able
to realize their benefits, or that future deductibility is
uncertain.
In July
2006, the FASB issued ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13
(formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — An interpretation of FASB Statement No. 109”) which became effective for
fiscal years beginning after December 15, 2006. The interpretation prescribes a
recognition threshold and a measurement attribute for the financial statements
recognition and measurement of tax positions taken or expected to be taken in a
tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater
than fifty percent likely of being realized upon ultimate settlement. The
Company’s adoption of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 did
not result in any adjustments to the opening balance of the Company’s retained
earnings as of January 1, 2008. The Company did not have any significant
unrecognized uncertain tax positions for the two years ended December 31, 2009
and 2008.
Fair
value measurements
ASC Topic
820, Fair Value Measurement
and Disclosures, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This topic also
establishes a fair value hierarchy which requires classification based on
observable and unobservable inputs when measuring fair value. There are three
levels of inputs that may be used to measure fair value:
Level 1 - | Quoted prices in active markets for identical assets or liabilities. |
Level 2 - | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The
carrying values of cash and cash equivalents, accounts receivables, advance to
suppliers, accounts and notes payables, other payables and accruals and due to
related parties approximate their fair values due to their short
maturities.
There
were no assets and liabilities measured at fair value on a nonrecurring basis as
of December 31, 2009 and 2008.
F-9
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Foreign
currency
The
Company uses the United States dollars (“U.S. Dollar” or “US$” or “$”) for
financial reporting purposes. The PRC
subsidiary within the Company maintain their books and records in their
functional currency, Chinese Renminbi(“RMB”),
being the lawful currency in the PRC. Assets and liabilities of the PRC
subsidiary are translated from RMB into US
Dollars using the applicable exchange rates prevailing at the balance sheet
date. Items on the statement of operations are translated at average exchange
rates during the reporting period. Equity accounts are translated at historical
rates. Adjustments resulting from the translation of the Company’s financial
statements are recorded as accumulated other comprehensive income.
The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements are based on the
rates as published on the website of People’s Bank of China and are as
follows:-
December 31, 2009 | December 31, 2008 | ||
Balance sheet items, except for equity accounts | US$1=RMB6.8282 | US$1=RMB6.8346 | |
Items in the statements of income and cash flows | US$1=RMB6.8310 | US$1=RMB6.9452 |
No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the above rates.
The value
of RMB against U.S. dollars and other currencies may fluctuate and is affected
by, among other things, changes in China’s political and economic conditions.
Any significant revaluation of RMB may materially affect the Company’s financial
condition in terms of U.S. dollar reporting.
Comprehensive
income
FASB ASC
Topic 220, “Comprehensive Income”, establishes standards for reporting and
displaying comprehensive income and its components in the consolidated financial
statements. Accumulated other comprehensive income includes foreign currency
translation adjustments.
Commitments
and contingencies
The
Company follows ASC Subtopic 450-20, Loss Contingencies in
determining its accruals and disclosures with respect to loss contingencies.
Accordingly, estimated losses from loss contingencies are accrued by a charge to
income when information available prior to issuance of the financial statements
indicates that it is probable that a liability could be been incurred and the
amount of the loss can be reasonably estimated. Legal expenses associated with
the contingency are expensed as incurred. If a loss contingency is not probable
or reasonably estimable, disclosure of the loss contingency is made in the
financial statements when it is at least reasonably possible that a material
loss could be incurred.
Recent
accounting pronouncements
In June
2009, the FASB established the FASB Accounting Standards CodificationTM
(ASC) as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did not change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC is effective for
interim and annual periods ending after September 15, 2009. Adoption of the ASC
did not have a material impact on the Company’s Consolidated Financial
Statements, but references in the Company’s Notes to Consolidated Financial
Statements to former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as references to the
corresponding Topic in the ASC.
F-10
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Recent
accounting pronouncements (continued)
Effective
January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, Determination
of the Useful Life of Intangible Assets), which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible
Assets. The Company will apply ASC 350-30 and ASC 275-10-50 prospectively
to intangible assets acquired subsequent to the adoption date. The adoption of
these revised provisions had no impact on the Company’s Consolidated Financial
Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
Disclosures about Derivative Instruments and Hedging
Activities), which amends and expands previously existing guidance on
derivative instruments to require tabular disclosure of the fair value of
derivative instruments and their gains and losses., This ASC also requires
disclosure regarding the credit-risk related contingent features in derivative
agreements, counterparty credit risk, and strategies and objectives for using
derivative instruments. The adoption of this ASC did not have a material impact
on the Company’s Consolidated Financial Statements.
Upon
initial adoption of SFAS 157 on January 1, 2008, the Company adopted FASB ASC
820-10 (formerly FSP FAS 157-2, Effective Date of FASB Statement
157), which deferred the provisions of previously issued fair value
guidance for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. Deferred nonfinancial assets and liabilities
include items such as goodwill and other non-amortizable intangibles. Effective
April 1, 2009, the Company adopted the fair value guidance for nonfinancial
assets and liabilities. The adoption of FASB ASC 820-10 did not have a material
impact on the Company’s Consolidated Financial Statements.
Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160,
Non-controlling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51), which amends previously issued
guidance to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated
entity that should be reported as equity. Among other requirements, this
Statement requires that the consolidated net income attributable to the parent
and the non-controlling interest be clearly identified and presented on the face
of the consolidated income statement. The presentation and disclosure
requirements of the ASC Topics have been applied retrospectively for all periods
presented in the accompanying consolidated balance sheets, statements of
operations and statements of cash flows. The adoption of this pronouncement
resulted in a change in the description and presentation of “minority interest”
to “non-controlling interest”. However there was no impact on the Company’s
financial position or net income attributable to stockholders for any periods
presented.
Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in an acquiree and the
goodwill acquired. In addition, the provisions in this ASC require that any
additional reversal of deferred tax asset valuation allowance established in
connection with fresh start reporting on January 7, 1998 be recorded as a
component of income tax expense rather than as a reduction to the goodwill
established in connection with the fresh start reporting. The Company will apply
ASC 805-10 to any business combinations subsequent to adoption.
Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies), which
amends ASC 805-10 to require that an acquirer recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period. If the
acquisition-date fair value of such an asset acquired or liability assumed
cannot be determined, the acquirer should apply the provisions of ASC Topic 450,
Contingences, to
determine whether the contingency should be recognized at the acquisition date
or after such date. The adoption of ASC 805-20 did not have a material impact on
the Company’s Consolidated Financial Statements.
F-11
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Recent
accounting pronouncements (continued)
Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair
Value of Financial Instruments), which amends previous guidance to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. The adoption of FASB ASC 825-10-65 did not have a material impact on
the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments). Under ASC 320-10-65,
another-thantemporary impairment must be recognized if the Company has the
intent to sell the debt security or the Company is more likely than not will be
required to sell the debt security before its anticipated recovery. In addition,
ASC 320-10- 65 requires impairments related to credit loss, which is the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis for each security, to be recognized in earnings
while impairments related to all other factors to be recognized in other
comprehensive income. The adoption of ASC 320-10-65 did not have a material
impact on the Company’s Consolidated Financial Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are
Not Orderly), which provides guidance on how to determine the fair value
of assets and liabilities when the volume and level of activity for the asset or
liability has significantly decreased when compared with normal market activity
for the asset or liability as well as guidance on identifying circumstances that
indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.
Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165, Subsequent Events), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date, but before financial statements are issued
or are available to be issued. Adoption of ASC 855-10 did not have a material
impact on the Company’s Consolidated Financial Statements.
In the
fourth quarter of fiscal 2009, the Company adopted ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets), which expands the disclosure
requirements about plan assets for defined benefit pension plans and
postretirement plans. The adoption of these disclosure requirements has had no
material effect on the Company’s Consolidated Financial Statements.
In the
quarter ended December 31, 2009, the Company adopted ASC Update No. 2009-05,
which provides guidance on measuring the fair value of liabilities under FASB
ASC 820 (formerly SFAS 157, Fair Value Measurements). .
The adoption of this Update has had no material effect on the Company’s
Consolidated Financial Statements.
In
January 2010, the FASB issued ASU No. 2010-05—Compensation—Stock Compensation
(Topic 718): Escrowed Share Arrangements and the
Presumption of Compensation. This Update simply codifies EITF Topic No.
D-110, “Escrowed Share Arrangements and the Presumption of Compensation” dated
June 18, 2009. ASU No. 2010-05 includes the SEC staff announcement at the EITF
meeting that clarified SEC staff views on overcoming the presumption that for
certain shareholders escrowed share arrangements represent compensation.
Historically, the SEC staff has expressed the view that an escrowed share
arrangement involving the release of shares to certain shareholders based on
performance-related criteria is presumed to be compensatory. The SEC staff
clarified that entities should consider the substance of the transaction in
evaluating whether the presumption of compensation may be overcome, including
whether the transaction was entered into for a reason unrelated to employment,
such as to facilitate a financing transaction. In that situation, the staff
generally believes that the escrowed shares should be reflected as a discount in
the allocation of proceeds. The Company has applied the SEC staff announcement
to any escrowed share arrangement effective from June 18, 2009.
F-12
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
New
accounting pronouncement to be adopted
In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets – an amendment of FASB Statement No. 140, (codified
by ASU No. 2009-16 issued in December 2009). SFAS No. 166 limits the
circumstances in which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,” along with the exception from applying FIN 46(R), Consolidation of Variable Interest
Entities. The
standard is effective for the first annual reporting period that begins after
November 15, 2009 (i.e. the Company’s fiscal 2010). Earlier application is
prohibited. It is expected the adoption of this Statement will have no material
effect on the Company’s Consolidated Financial Statements.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009). The
standard amends FIN No. 46(R) to require a company to analyze whether its
interest in a variable interest entity (“VIE”) gives it a controlling financial
interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167 amends
the criteria to qualify as a primary beneficiary as well as how to determine the
existence of a VIE. The standard also eliminates certain exceptions that were
available under FIN No. 46(R). This Statement will be effective as of the
beginning of the first annual reporting period that begins after November 15,
2009 (i.e. the Company’s fiscal 2010). Earlier application is prohibited. It is
expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.
In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157,
Fair Value
Measurements). The Company is required to adopt Update 2009-05 in the
quarter ended December 31, 2009. It is expected the adoption of this Update will
have no material effect on the Company’s Consolidated Financial
Statements.
In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):
· ASU No.
2009-13—Revenue Recognition
(ASC Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF
Issue No. 08-1). ASU No. 2009-13 modifies the revenue recognition guidance for
arrangements that involve the delivery of multiple elements, such as product,
software, services or support, to a customer at different times as part of a
single revenue generating transaction. This standard provides principles and
application guidance to determine whether multiple deliverables exist, how the
individual deliverables should be separated and how to allocate the revenue in
the arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.
· ASU No.
2009-14—Software (ASC Topic
985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue
No. 09-3). ASU No.
2009-14 removes tangible products from the scope of software revenue recognition
guidance and also provides guidance on determining whether software deliverables
in an arrangement that includes a tangible product, such as embedded software,
are within the scope of the software revenue guidance.
ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. The Company expects to apply these ASU Updates on a prospective basis
for revenue arrangements entered into or materially modified beginning January
1, 2011. The Company is currently evaluating the potential impact these ASC
Updates may have on its financial position and results of
operations.
F-13
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
2 SUMMARIES OF
SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
New
accounting pronouncement to be adopted (continued)
In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.
ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other Options,
to provide accounting and reporting guidance for own-share lending arrangements
issued in contemplation of convertible debt issuance. ASU 2009-15 is effective
for fiscal years beginning on or after December 15, 2009 with retrospective
application required.
In
January 2010, the FASB issued the following ASC Updates:
· ASU No.
2010-01—Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update
clarifies that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this Update are effective for interim and annual
periods ending on or after December 15, 2009 with retrospective
application.
· ASU No.
2010-02—Consolidation (Topic
810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update
amends Subtopic 810-10 and related guidance to clarify that the scope of the
decrease in ownership provisions of the Subtopic and related guidance applies to
(i) a subsidiary or group of assets that is a business or nonprofit activity;
(ii) a subsidiary that is a business or nonprofit activity that is transferred
to an equity method investee or joint venture; and (iii) an exchange of a group
of assets that constitutes a business or nonprofit activity for a
non-controlling interest in an entity, but does not apply to: (i) sales of in
substance real estate; and (ii) conveyances of petroleum and gas mineral rights.
The amendments in this Update are effective beginning in the period that an
entity adopts FAS 160 (now included in Subtopic 810-10).
· ASU No.
2010-05—Compensation—Stock
Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of
Compensation. This Update simply codifies EITF Topic D-110, “Escrowed
Share Arrangements and the Presumption of Compensation and does not change any
existing accounting standards.
· ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. This Update amends Subtopic 820-10
that requires new disclosures about transfers in and out of Levels 1 and 2 and
activity in Level 3 fair value measurements. This Update also amends Subtopic
820-10 to clarify certain existing disclosures. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.
The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
F-14
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
3 ACCOUNTS RECEIVABLE,
NET
Accounts
receivable consisted of the following:
As of December 31, | ||||||||
2009 | 2008 | |||||||
Accounts receivable | $ | 22,125,979 | $ | 13,442,066 | ||||
Less: Allowance for doubtful debts | - | - | ||||||
Accounts receivable, net | $ | 22,125,97 | $ | 13,442,066 |
Based on
the Company’s assessment of collectibility, there has been no allowance for
doubtful accounts recognized for the two years ended December 31, 2009 and
2008.
NOTE
4 INVENTORIES
Inventories
by major categories are summarized as follows:
As
of December 31,
|
||||||||
2009 |
2008
|
|||||||
Raw
materials
|
$ | 558,990 | $ | 1,417,307 | ||||
Work
in progress
|
317,072 | 445,780 | ||||||
Finished
goods
|
811,028 | 1,324,188 | ||||||
$ | 1,687,090 | $ | 3,187,275 |
Included
in work in progress were inventories of $126,649 and $212,659 as of December 31,
2009 and 2008, respectively, which were at subcontractors’
locations.
NOTE
5 PREPAID LAND USE
RIGHTS
The
Company has recorded as prepaid land use rights the lump sum payments paid to
acquire long-term interest to utilize the land underlying the Company’s
buildings and production facility. This type of arrangement is common for the
use of land in the PRC. The prepaid land use rights are expensed on the
straight-line basis over the term of the land use rights of 50
years.
The
amount expensed on prepaid land use right for the years ended December 31, 2009
and 2008 were $16,938 and $20,045, respectively. As of December 31, 2009, the
estimated expense of the prepaid land use rights over each of the next five
years will be $17,473.
Land use
right with net carrying value of $175,632 and $178,531 as of December 31, 2009
and 2008, respectively, has been pledged as collateral against the short-term
bank loans (see Note 8 below).
F-15
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
6 PROPERTY, PLANT AND
EQUIPMENT, NET
|
As
of December 31,
|
|||||||
2009 |
2008
|
|||||||
Cost:
|
||||||||
Buildings
|
$ | 2,993,322 | $ | 2,990,518 | ||||
Machinery
|
8,825,821 | 8,633,932 | ||||||
Office
equipment
|
368,724 | 348,817 | ||||||
Total
cost
|
12,187,867 | 11,973,267 | ||||||
Less:
Accumulated depreciation
|
(2,350,034 | ) | (1,465,226 | ) | ||||
Net
book value
|
$ | 9,837,833 | $ | 10,508,041 |
Depreciation
expenses for the years ended December 31, 2009 and 2008 were $883,073 and
$518,129, respectively.
Buildings
with net book value of $998,675 and $1,014,472 as of December 31, 2009 and 2008,
respectively, have been pledged as collateral against the short-term bank loans
(see Note 8 below).
NOTE
7 OTHER
PAYABLES AND ACCRUALS
|
||||||||
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
staff costs
|
$ | 280,126 | $ | 280,210 | ||||
Value
added tax and other taxes payable
|
963,530 | 876,239 | ||||||
$ | 1,243,656 | $ | 1,156,449 |
F-16
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
8 SHORT-TERM BANK
LOANS
Short-term
bank loans consisted of the following loans granted by Industrial Bank Co.,
Ltd.:
Annualized interest rate | As of December 31, | |||||||||
Maturity date | December
31,
2009
|
December
31,
2008
|
Collaterals | 2009 | 2008 | |||||
February 25, 2010, | 5.31% | 9.711% | Guaranteed by a minority | $ | 109,838 | $ | 175,578 | |||
extended to | shareholder of Hengfeng | |||||||||
February 23, 2011 | ||||||||||
March 5, 2010, | 5.31% | 10.458% | Guaranteed by a third | 366,129 | 365,785 | |||||
extended to | party entity | |||||||||
March 4, 2011 | ||||||||||
April 2, 2009, | 5.31% | 9.711% | The Company’s land use | 183,064 | 182,893 | |||||
extended to | right and buildings | |||||||||
April 2, 2010 | ||||||||||
April 10, 2009, | 5.31% | 9.711% | The Company’s land use | 183,064 | 182,893 | |||||
extended to | right and buildings | |||||||||
April 6, 2010 | ||||||||||
April 22, 2009, | 5.31% | 9.711% | The Company’s land use | 190,387 | 190,209 | |||||
extended to | right and buildings | |||||||||
April 22, 2010 | ||||||||||
August 30, 2009 | 5.31% | 9.36% | The Company’s land use | 102,516 | 102,419 | |||||
extended to | right and buildings | |||||||||
August 26, 2010 | ||||||||||
September 26, 2009, | 5.31% | 9.36% | Guaranteed by a third | 109,839 | 109,736 | |||||
extended to | party entity | |||||||||
September 25, 2010 | ||||||||||
September 26, 2009, | 5.31% | 9.36% | Guaranteed by a third | 109,839 | 109,736 | |||||
extended to | party entity | |||||||||
September 25, 2010 | ||||||||||
$ | 1,354,676 | $ | 1,419,249 |
NOTE
9 STATUTORY
RESERVES
In
accordance with the PRC Companies Law, Hengfeng, the PRC subsidiary, is required
to transfer 10% of its profits after tax, as determined in accordance with
accounting standards and regulations of the PRC, to the statutory surplus
reserve and had been required to transfer not less than 5%, as determined by
management, of the profits after tax to the public welfare fund. However, the
PRC subsidiary is not required to transfer any profit after tax to the statutory
surplus reserve only after the accumulated statutory surplus reserves reached
50% of registered capital of the Company’s PRC subsidiaries. With the amendment
of the PRC Companies Law which was effective from January 1, 2006, enterprises
in the PRC have no longer been required to transfer any profit to the public
welfare fund. Any balance of public welfare fund brought forward from December
31, 2005 should be transferred to the statutory surplus reserve. The statutory
surplus reserve is non-distributable.
F-17
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
10 EMPLOYEE
BENEFITS
The
full-time employees of the Company’s PRC subsidiary are entitled to staff
welfare benefits, including medical care, welfare subsidies, unemployment
insurance and pension benefits. The Company’s PRC subsidiary is required to
accrue for these benefits based on certain fixed percentages of the employees’
salaries in accordance with the relevant regulations and to make contributions
to the state-sponsored pension and medical plans out of the amounts accrued for
medical and pension benefits. The total amounts charged to the statements of
income for such employee benefits amounted to $195,252 and $169,579 for the
years ended December 31, 2009 and 2008, respectively.
NOTE
11 INCOME
TAXES
British
Virgin Islands
Kobe
Sport, being incorporated in the British Virgin Islands (“BVI”), is not subject
to any income tax in the BVI.
Hong
Kong
Nam Kwong
is subject to Hong Kong income tax on its taxable income derived from trade or
businesses carried out in Hong Kong at 16.5% for the years ended December 31,
2009 and 2008.
PRC
Hengfeng
is subject to PRC income taxes. On March 16, 2007, the PRC government
promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT
Law”), which took effect from January 1, 2008. Under the New EIT Law,
foreign-owned enterprises as well as domestic companies are subject to a uniform
tax rate of 25%. Therefore, Hengfeng has been subject to an EIT rate of 25% on
its taxable income for the years ended December 31, 2009 and 2008.
The
Company’s provision for income taxes consisted of:
For
the Year Ended
December
31,
|
||||||||
2009
|
2008
|
|||||||
Current
– PRC EIT
|
$ | 4,751,151 | $ | 3,316,035 | ||||
Deferred
|
− | − | ||||||
$ | 4,751,151 | $ | 3,316,035 |
A
reconciliation of the provision for income taxes determined at the local income
tax to the Company’s effective income tax rate is as follows:
For
the Year Ended
December
31,
|
||||||||
2009
|
2008 | |||||||
Pre-tax
income
|
$ | 18,975,876 | $ | 13,215,726 | ||||
United
States federal corporate income tax rate
|
34 | % | 34 | % | ||||
Income
tax computed at United States federal corporate income tax
rate
|
6,451,798 | 4,493,347 | ||||||
Reconciling
items:
|
||||||||
Rate
differential for PRC earnings
|
(1,707,829 | ) | (1,189,416 | ) | ||||
Non-deductible
expenses and non-taxable income
|
7,182 | 12,104 | ||||||
Effective
tax expense
|
$ | 4,751,151 | $ | 3,316,035 |
F-18
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
11 INCOME TAXES
(CONTINUED)
The
Company has analyzed the tax positions taken or expected to be taken in its tax
filings and has concluded it has no material liability related to uncertain tax
positions or unrecognized tax benefits as of December 31, 2009 and
2008.
The New
EIT Law imposes a withholding tax of 10% unless reduced by a tax treaty, for
dividends distributed by a PRC-resident enterprise to its immediate holding
company outside the PRC for earnings accumulated beginning on January 1, 2008
and undistributed earnings generated prior to January 1, 2008 are exempt from
such withholding tax. The Company has not provided for income taxes on the
accumulated undistributed earnings of Hengfeng as of December 31, 2009 and 2008,
since these earnings are intended to be reinvested indefinitely in the overseas
jurisdictions. It is not practicable to estimate the amount of additional taxes
that might be payable on such undistributed earnings.
According
to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational or other errors
made by the taxpayer or the withholding agent. The statute of limitations
extends to five years under special circumstances. In the case of transfer
pricing issues, the statute of limitation is ten years. There is no statute of
limitation in the case of tax evasion. Accordingly, the income tax returns of
Hengfeng for the years ended December 31, 2007 through 2009 are open to
examination by the PRC state and local tax authorities.
NOTE
12 RELATED PARTY
TRANSACTIONS
Loan
due from a related party
As of December 31, | ||||||
2009
|
2008
|
|||||
Mr.
Qionglin Lin, the general manager of the Company
|
$ | 3,148,707 | $ |
The above
loan due from related party as of December 31, 2009 is unsecured,
bears interest at 10% per annum and is repayable in one lump sum on or before
September 22, 2010. The Company recognized interest income of $219,587 on such
loan for the year ended December 31, 2009.
Due
to related party
As
of December 31,
|
|||||||
2009
|
2008
|
||||||
Advances
from Fujian Kobe Sports Goods Co., Ltd., a company controlled
by
|
|||||||
Mr.
Anding Lin, CEO and principal stockholder of the Company (see Note
1)
|
- | $ | 399,438 |
The above
amount due to related party as of December 31, 2008 was non-interest bearing,
unsecured and without fixed repayment date.
Guarantees
for the Company’s loans
Fujian
Jinjiang Chenli Yangli Hengfeng Shoe-Making Factory (the 6% minority shareholder
of Hengfeng) provided guarantees for the Company’s short-term bank loan of
$109,838 and $175,578 as of December 31, 2009 and 2008, respectively (See Note 8
above).
F-19
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
13 CERTAIN RISKS AND
CONCENTRATIONS
Credit
risk
As of
December 31, 2009 and 2008, 100% of the Company’s cash included cash on hand and
deposits in accounts maintained within the PRC where there is currently no rule
or regulation in place for obligatory insurance to cover bank deposits in the
event of bank failure. However, 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.
For the
two years ended December 31, 2009 and 2008, all of the Company’s revenue arose
in the PRC. In addition, all accounts receivable as of December 31, 2009 and
2008, respectively, were due from customers located in the PRC.
As of
December 31, 2009, there was one customer who accounted for 11% of the accounts
receivable of the Company. As of December 31, 2008, there was one customer who
accounted for 13.6% of the accounts receivable of the Company. Except for the
afore-mentioned, there was no other single customer who accounted for more than
10% of the Company’s accounts receivable as of December 31, 2009 and
2008.
There
were two customers who accounted for 12% and 10% of the Company’s revenue for
the year ended December 31, 2009. There was one customer who accounted for 10.6%
of the Company’s revenue for the year ended December 31, 2008. Except for the
afore-mentioned, there was no other single customer who accounted for 10% or
more of the Company’s revenue for the year ended December 31, 2009 or
2008.
Concentration
of suppliers
The five
largest subcontractors or suppliers accounted for 44.4% and 35.1% of the total
value of the Company’s purchases made during the years ended December 31, 2009
and 2008, respectively, out of which one single subcontractor accounted for
15.3% and 10.1%, respectively. Except for the afore-mentioned, there was no
other single subcontractor or supplier who accounted for 10% or more of the
Company’s purchases for the year ended December 31, 2009 or 2008.
Risk
arising from operations in China
Substantially
all of the Company’s operations are conducted in China. The Company’s operations
are subject to various political, economic, and other risks and uncertainties
inherent in China. Among other risks, the Company’s operations are subject to
the risks of restrictions on transfer of funds; export duties, quotas, and
embargoes; domestic and international customs and tariffs; changing taxation
policies; foreign exchange restrictions; and political conditions and
governmental regulations.
Currency
convertibility risk and restriction on net assets
Substantially
all of the Company’s businesses are transacted in RMB, which is not freely
convertible into foreign currencies. All foreign exchange transactions take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at exchange rates quoted by the People’s Bank of
China. Approval of foreign currency payments by the People’s Bank of China or
other regulatory institutions requires submitting a payment application form
with suppliers’ invoices, shipping documents and signed contracts. These
requirements imposed by the PRC government may restrict the ability of the PRC
subsidiary to transfer its net assets, representing 100% of the Company’s net
assets as of December 31, 2009, to the Company through loans, advances or cash
dividends.
F-20
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
14 COMMITMENTS AND
CONTINGENCIES
Lease
commitments
The
Company has entered into tenancy agreements for the lease of factory premises
and warehouse with independent parties. The Company’s commitments for minimum
lease payments under these operating leases for the next five years and
thereafter as of December 31, 2009 are as follows:
Year
ending December 31,
|
||||
2010
|
$ | 62,958 | ||
2011
|
31,296 | |||
2012
and thereafter
|
- | |||
Total
|
$ | 94,254 |
NOTE
15 SEGMENT
DATA
The
Company follows FASB ASC Topic 280, Segment Reporting, which
requires that companies disclose segment data based on how management makes
decision about allocating resources to segments and evaluating their
performance.
The
Company operates and manages its business as a single segment that includes the
design, manufacturing and sales of sports shoes, sportswear and related
accessories.
Throughout
the two years ended December 31, 2009 and 2008, all of the Company’s revenue was
derived from China and all of its assets were located in China.
The
Company’s major product categories are (1) sport shoes, which include casual
shoes, basketball shoes, jogging shoes, skate board and other shoes, and (2)
sportswear and accessories: sports bag, wristlet, basketball, travel bag, hat,
sport socks, and scarf, etc. The following table sets out the analysis of the
Company’s revenue by product:
For
the Year Ended
December
31,
|
||||||||
2009 | 2008 | |||||||
Revenue
from external customers:
|
||||||||
Sport
shoes
|
$ | 46,014,686 | $ | 41,473,871 | ||||
Sportswear
and accessories
|
35,172,905 | 21,932,250 | ||||||
Total
|
$ | 81,187,591 | $ | 63,406,121 |
F-21
KOBE
SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NOTE
16 SUBSEQUENT
EVENTS
The
Company has evaluated events subsequent to the balance sheet date through April
9, 2010, which represents the date these financial statements were available for
issuance.
Share
Exchange
On
February 12, 2010, the Company together with its shareholder entered into a
share exchange agreement (“Share Exchange Agreement”) with Mondo Acquisition
III, Inc (“Mondo”), a publicly reporting Form 10 company incorporated under the
laws of the State of Delaware with no significant operations. Under the Share
Exchange Agreement, Mondo issued 9,000,000 shares of its common stock, par value
$0.001, to the sole shareholder of Kobe Sport (the “Kobe Shareholder”) in
exchange for all the issued and outstanding shares of Kobe Sport (the “Share
Exchange”). As a result of the Share Exchange, Kobe Sport has become Mondo’s
wholly-owned subsidiary and Kobe Shareholder acquired 90% of Mondo’s issued and
outstanding stock. The Share Exchange resulted in a change in control of Mondo.
Immediately before the Share Exchange, Mondo was a shell company.
In
accordance with the Accounting and Financial Reporting Interpretations and
Guidance issued by the staff of the U.S. Securities and Exchange Commission (the
“SEC”), the Share Exchange will be accounted for as a reverse merger whereby
Mondo (the legal acquirer) is considered the accounting acquiree and the Company
(the legal acquiree) is considered the accounting acquirer. The consolidated
financial statements of the combined entity will be in substance those of the
Company’s, with the assets and liabilities, and revenues and expenses, of Mondo
being included effective from the date of consummation of the Share Exchange.
Mondo will be deemed to be a continuation of the Company’s business. The
outstanding stock of Mondo prior to the Share Exchange will be accounted for at
their net book value with no goodwill being recognized.
Change
of Name of Mondo
On or
about March 12, 2010, Mondo received written consents in lieu of a meeting of
stockholders from a shareholder of 6,300,000 voting shares representing
approximately 63% of the total voting stock of Mondo to amend its Articles of
Incorporation to change its name to “China Sports Holding Company Limited.” It
is anticipated the change of name will become effective on April 19, 2010, or as
soon thereafter as practicable in accordance with applicable law, including the
Delaware General Corporation Law.
F-22