Home System Group - FORM 8-K/A - EX-99.3 - December 14, 2010

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HOME SYSTEM GROUP
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Completion of Acquisition of  90% of Zhongshan Sanfan Electrical Appliances Co., Ltd.

On May 31, 2010, the Company, through its wholly-owned subsidiary, Weihe, entered into an Equity Ownership Transfer Agreement (the “Acquisition Agreement”) with Zhongshan Sanfan Electrical Appliance Co., Ltd. (“Sanfan”) and all the shareholders of Sanfan (the “Sellers”), pursuant to which the Company agreed to acquire and Sellers have agreed to sell 90% of the Sellers’ equity interest in Sanfan for cash consideration of approximately $12,000,000. The Company closed this acquisition on October 1, 2010.  As of September 30th, 2010, the Company paid a total of $4,835,027 to the shareholders of Sanfan, with the remaining portion of the purchase price to be paid by the end of 2011.

Completion of Acquisition of  100% of Jinxinglong Electrical Appliances Co., Ltd.

On July 15, 2010, the Company, through its wholly-owned subsidiaries, Weihe and Asia Forever, entered into an Equity Ownership Transfer Agreement with Jiangmen City Jinxinglong Electrical Appliance Co., Ltd. (“Jinxinglong”) and all the shareholders of Jinxinglong (the “Sellers”), pursuant to which Weihe and Asia Forever have agreed to acquire and Sellers have agreed to sell 100% of the Sellers’ equity interest in Jinxinglong for a cash consideration of approximately $15,000,000. The Company closed the acquisition on October 1, 2010. As of November 8, 2010, the Company paid a total of $3,021,892 to the shareholders of Jinxinglong, with the remaining portion of the purchase price to be paid by the end of 2011.
  
The following pro forma consolidated condensed statements of operations and balance sheets for the nine months ended September 30, 2010 and year ended December 31, 2009 reflect the financial results of Sanfan and Jinxinglong as if the acquisitions had occurred retroactively.

There was no significant accounting policy differences or other items which required adjustment in the accompanying unaudited pro forma condensed consolidated financial statements.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of Sanfan and Jinxinglong as well as those of the Company. The unaudited pro forma condensed consolidated financial statements do not purport to be indicative of the financial position or results of operations that would have actually been obtained had such transactions been completed as of the assumed dates and for the periods presented, or which may be obtained in the future. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that the Company believes are reasonable.
 
 
1
 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2010

   
In USD
  
   
Sanfan
    
Jinxinglong
    
HSG
    
Adjustment
    
HSYT
(Pro forma)
  
ASSETS
  
30-Sep-10
    
30-Sep-10
    
30-Sep-10
          
30-Sep-10
  
CURRENT ASSET
                              
Cash and cash equivalents
   $ 556,982     $ 121,090     $ 657,127     $ -     $ 1,335,199  
Accounts receivable – trade, net of  allowance
     10,954,254       10,704,755       39,527,768       -       61,186,777  
Notes receivable - short term
     -               8,126,205       -       8,126,205  
Deposits and advances
     -       21,808       1,947,901       -       1,969,709  
Inventories
     503,098       823,021       14,239,186       -       15,565,305  
    Other assets
     750       322,640       1,722,845       -       2,046,235  
 TOTAL CURRENT ASSET
     12,015,084       11,993,314       66,221,032       -       90,229,430  
    Notes receivable - long-term
     -       -       1,302,802       -       1,302,802  
Acquisition deposit
     -       -       7,856,919       (7,856,919 )     -  
Property, plant and equipment – net
     290,725       340,118       8,552,156       -       9,182,999  
Goodwill and  intangible assets
     -       -       26,522,325       16,406,740       42,441,670  
TOTAL ASSETS
   $ 12,305,809     $ 12,333,432     $ 110,455,234     $ 8,549,821     $ 143,644,296  
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                        
                                         
CURRENT LIABILITIES
                                        
Accounts payable – trade
   $ 7,390,723     $ 2,717,973     $ 16,854,036     $ -     $ 26,962,732  
Bills payable
     -       -       5,564,111       -       5,564,111  
Accrued expenses and other payables
     95,225       81,961       7,481,164       -       7,658,350  
Short term bank loans
     -       1,417,678       17,341,340       -       18,759,018  
Income taxes and other taxes payable
     467,491       462,092       2,788,787       -       3,718,370  
Notes payable – current portion
     -       -       2,779,109       -       2,779,109  
Due to stockholder & related parties – current portion
     -       -       3,203,702       -       3,203,702  
Acquisition costs payables
     -       -       -       19,143,081       19,143,081  
TOTAL CURRENT LIABILITIES
     7,953,439       4,679,704       56,012,249       19,143,081       87,788,473  
                                         
NON-CURRENT LIABILITIES
                                        
Due to stockholder – long term portion
     -       -       1,605,414       -       1,605,414  
Long term bank loan
     -       -       1,641,522       -       1,641,522  
TOTAL LIABILITIES
     7,953,439       4,679,704       59,259,185       19,143,081       91,035,409  
                                         
STOCKHOLDERS' EQUITY
                                        
Share capital
     146,308       388,014       67,490       (534,322 )     67,490  
Additional paid-in capital
     -       717,755       25,942,241       -       26,659,996  
Statutory reserve
     73,154       194,007       681,914               949,075  
Retained earnings
     4,075,038       6,147,112       22,321,807       (10,222,150 )     22,321,807  
Other comprehensive income
     57,870       206,840       2,182,597       (264,710 )     2,182,597  
Non-controlling interests
     -       -       -       427,922       427,922  
TOTAL STOCKHOLDERS' EQUITY
     4,352,370       7,653,728       51,196,049       (11,080,655 )     52,608,807  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   $ 12,305,809     $ 12,333,432     $ 110,455,234     $ 8,062,426     $ 143,644,296  
 
 
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HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 
   
In USD
  
Items
  
Sanfan
    
Jinxinglong
    
HSG
    
Adjustment
    
HSYT
(Pro forma)
  
   
30-Sep-10
    
30-Sep-10
    
30-Sep-10
          
30-Sep-10
  
Net Sales
   $ 17,132,548     $ 17,028,721     $ 86,607,478     $ -     $ 120,768,747  
Cost of Sales
     (13,455,112 )     (13,955,606 )     (66,877,268 )     -       (94,287,986 )
GROSS PROFIT
     3,677,436       3,073,115       19,730,210       -       26,480,761  
                                         
General, selling and administrative expenses
     (274,195 )     (327,547 )     (5,314,898 )     -       (5,916,640 )
                                         
INCOME FROM OPERATIONS
     3,403,241       2,745,568       14,415,312               20,564,121  
                                         
OTHER (EXPENSE) INCOME
                                        
Loss on debt conversion
     -       -       (1,747,762 )     -       (1,747,762 )
Other income (expense)
     45,125       723       815,951       -       861,799  
Interest expense, net
     1,487       (58,952 )     (1,007,428 )     -       (1,064,902 )
                                         
INCOME BEFORE INCOME TAXES
   $ 3,449,853     $ 2,687,339     $ 12,476,073     $ -     $ 18,613,265  
                                         
INCOME TAXES
     (862,463 )     (354,839 )     (3,045,826 )     -       (4,263,128 )
                                         
NET  INCOME
   $ 2,587,390     $ 2,332,500     $ 9,430,247     $ -     $ 14,350,137  
                                         
Less: income attributable to non controlling interest
     -       -       -       (258,739 )     (258,739 )
                                         
Net income attributable to HSYT shareholders
     2,587,390       2,332,500       9,430,247       (258,379 )     14,091,398  
Basic & Diluted Weighted Average Shares
     65,837,787       65,837,787       65,837,787       -       65,837,787  
Basic & Diluted Earnings per Share
     0.04       0.03       0.14       -       0.21  
 
 
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HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

The following adjustments to the unaudited pro forma financial statements are based on the assumption that the acquisitions of subsidiaries were consummated as of September 30, 2010.
 
To recognize the 90% interests in Sanfan and recognize the goodwill occurred during the acquisition of Sanfan and eliminate the long term equity investments
  
Dr
    
Cr
  
             
Paid in capital
     131,677        
Retained earnings
     3,667,534        
Other comprehensive income
     52,083        
Acquisition deposit
             (4,835,027 )
Goodwill and Intangible assets*
     8,148,706          
Acquisition costs payable
             (7,164,973 )
                 
To recognize the 10% minority interests of the equity in Sanfan.
  
Minority  interest
             (427,922 )
Paid in capital
     14,631          
Retained earnings
     407,504          
Other comprehensive income
     5,787          
                 
To recognize the goodwill occurred during the acquisition of Jinxinglong and eliminate the long term equity investments
  
Acquisition deposit
             (3,021,892 )
Goodwill and intangible assets*
     8,258,034          
Acquisition costs payable
             (11,978,108 )
Paid in capital
     388,014          
Retained earnings
     6,634,507          
Other comprehensive income
     206,840          
 
* Adjustment subject to finalization to valuation and possible adjusts to recognize intangible assets.
 
 
4
 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2009
 
   
In USD
  
ASSETS
  
Sanfan April 1, 2009 (Date of Inception) to December 31, 2009)
    
Jinxinglong
31-Dec-09
    
HSG
31-Dec-09
    
Adjustment
    
HSYT
(Pro forma)
31-Dec-09
  
CURRENT ASSET
                              
Cash and cash equivalents
   $ 4,890     $ 55,507     $ 3,985,782     $ -     $ 4,046,179  
Accounts receivable – trade, net of  allowance
     6,699,987       5,237,826       23,909,114       -       35,846,927  
Notes receivable - short term
     -               3,704,137       -       3,704,137  
Deposits and advances
     -       -       1,344,070       -       1,344,070  
Inventories
     649,285       1,332,930       18,304,015       -       20,286,230  
    Other assets
     988       -       1,161,057       -       1,162,045  
 TOTAL CURRENT ASSET
     7,355,150       6,626,263       52,408,175       -       66,389,588  
    Notes receivable - long-term
     -       -       236,334       -       236,334  
Property, plant and equipment – net
     296,704       351,480       9,027,828       -       9,676,012  
Goodwill and intangible assets
     -       -       26,776,859       15,919,345       42,696,204  
TOTAL ASSETS
   $ 7,651,854     $ 6,977,743     $ 88,449,196     $ 15,919,345     $ 118,998,138  
                                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                        
                                         
CURRENT LIABILITIES
                                        
Accounts payable – trade
   $ 5,402,871     $ 625,185     $ 18,870,277     $ -     $ 24,898,333  
Bills payable
     -       -       3,478,223       -       3,478,223  
Accrued expenses and other payables
     61,121       71,228       7,109,157       -       7,241,506  
Short term bank loans
     -       1,098,386       12,548,441       -       13,646,827  
Income taxes and other taxes payable
     479,834       180,199       1,028,403       -       1,688,429  
Notes payable – current portion
     -       -       6,575,000       -       6,575,000  
Due to stockholder & related parties – current portion
     -       -       4,040,896       -       4,040,896  
Acquisition costs payables
     -       -       -       21,681,279       21,681,279  
TOTAL CURRENT LIABILITIES
     5,943,826       1,974,998       53,650,390       21,681,279       83,250,493  
                                         
NON-CURRENT LIABILITIES
                                        
Due to stockholder – long term portion
     -       -       1,308,433       -       1,308,433  
Long term bank loan
     -       -       1,464,515       -       1,464,515  
Notes payable - long term portion
     -       -       9,868,421       -       9,868,421  
TOTAL LIABILITIES
     5,943,826       1,974,998       66,291,759       21,681,279       95,891,862  
                                         
STOCKHOLDERS' EQUITY
                                        
Share capital
     146,308       388,014       62,478       (534,322 )     62,478  
Additional paid-in capital
     -       518,190       6,581,717       -       7,099,907  
Statutory reserve
     73,154       194,007       681,914       -       949,075  
Retained earnings
     1,487,648       3,814,612       12,891,560       (5,302,260 )     12,891,560  
Other comprehensive income
     918       87,922       1,939,768       (88,840 )     1,939,768  
Non-controlling interest
     -       -       -       163,488       163,488  
TOTAL STOCKHOLDERS' EQUITY
     1,708,028       5,002,745       22,157,437       (5,761,934 )     23,106,276  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
   $ 7,651,854       6,977,743     $ 88,449,196     $ 15,919,345       118,998,138  
 
 
5
 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD ENDED DECEMBER 31, 2009
 
   
In USD
  
Items
  
Sanfan
    
Jinxinglong
    
HSYT
    
Adjustment
    
HSYT
(Pro forma)
  
   
31-Dec-09
    
31-Dec-09
    
31-Dec-09
          
31-Dec-09
  
Net Sales
   $ 11,003,719     $ 17,604,997     $ 61,828,792     $ -     $ 90,437,508  
Cost of Sales
     8,770,567       14,440,618       45,875,295       -       69,086,480  
GROSS PROFIT
     2,233,152       3,164,379       15,953,497       -       21,351,028  
                                         
General, selling and administrative expenses
     153,476       513,430       5,437,139       -       6,104,045  
Amortization of intangible assets
     -       -       339,380       -       339,380  
                                         
INCOME FROM OPERATIONS
     2,079,676       2,650,949       10,176,978       -       14,907,603  
                                         
OTHER (EXPENSE) INCOME
                                        
Gain on the transfer of the building
     -       -       2,356,327       -       2,356,327  
Income on the reversal of rent
     -       -       1,372,121       -       1,372,121  
Other income, net
     22       -       640,839       -       904,350  
Interest income (expense), net
     1,371       (86,192 )     (2,242,517 )     -       (2,238,590 )
                                         
INCOME BEFORE INCOME TAXES
   $ 2,081,069     $ 2,564,757     $ 12,303,748     $ -     $ 16,949,574  
                                         
INCOME TAXES
     (520,267 )     (363,359 )     (2,977,716 )     -       (3,861,342 )
                                         
NET  INCOME
   $ 1,560,802     $ 2,201,398     $ 9,326,032     $ -     $ 13,088,232  
                                         
Less: income attributable to non controlling interest
     -       -       -       (156,080 )     (156,080 )
                                         
Net income attributable to HSYT shareholders
   $ 1,560,802     $ 2,464,887     $ 9,326,032     $ (156,080 )   $ 12,932,152  
Basic & Diluted Weighted Average Shares
     62,477,949       62,477,949       62,477,949       -       62,477,949  
Basic & Diluted Earnings per Share
     0.02       0.04       0.15       -       0.21  
 
 
6
 
 
HOME SYSTEM GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2009

The following adjustments to the unaudited pro forma financial statements are based on the assumption that the acquisitions of subsidiaries were consummated as of September 30, 2010.
 
To recognize the 90% interests in Sanfan and recognize the goodwill occurred during the acquisition of Sanfan and eliminate the long term equity investments
  
Dr
    
Cr
  
             
Paid in capital
     131,677        
Retained earnings
     1,338,883        
Other comprehensive income
     826        
Goodwill and identifiable intangible assets
     10,528,613        
Acquisition costs payable
             (12,000,000 )
                 
To recognize the 10% minority interests of the equity in Sanfan.
  
Minority  interest
             (163,487 )
Paid in capital
     14,631          
Retained earnings
     148,765          
Other comprehensive income
     92          
                 
To recognize the goodwill occurred during the acquisition of Jinxinglong and eliminate the long term equity investments
  
Goodwill and identifiable intangible assets
     7,770,639          
Acquisition costs payable
             (15,000,000 )
Paid in capital
     388,014          
Retained earnings
     4,102,442          
Other comprehensive income
     87,922          

* Adjustment subject to finalization to valuation and possible adjusts to recognize intangible assets
 
 
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