Attached files
file | filename |
---|---|
8-K - MATCHES, INC. | jinkai20super208kfinal.htm |
EX-16 - MATCHES, INC. | ex17skan.htm |
EX-99 - MATCHES, INC. | annualaudit.htm |
EX-99 - MATCHES, INC. | pressreleaseacqv011.htm |
EX-2 - MATCHES, INC. | jinkaishareexchange.htm |
EX-10 - MATCHES, INC. | formofcalloptionagreement.htm |
EX-10 - MATCHES, INC. | sharespledgeagreementjinkaie.htm |
EX-10 - MATCHES, INC. | entrustedmanagementagreement.htm |
EX-10 - MATCHES, INC. | shareholdersvotingproxyagree.htm |
EX-10 - MATCHES, INC. | exclusiveoptionagreementjink.htm |
SUZHOU JINKAI TEXTILE CO., LTD
Consolidated Balance Sheets
See notes to the unaudited consolidated financial statements
F-1 | ||
SUZHOU JINKAI TEXTILE CO., LTD
Consolidated Statements of Income and Comprehensive Income
For the Nine months ended September 30, | |||||
2010 | 2009 | ||||
(Unaudited) | (Unaudited) | ||||
Sales | $ | 53,851,180 | $ | 35,832,711 | |
Cost of sales | 46,751,772 | 30,133,355 | |||
Gross margin | 7,099,408 | 5,699,356 | |||
General and administrative expenses | 1,551,129 | 917,916 | |||
Selling expenses | 563,774 | 310,264 | |||
Total operating expenses | 2,114,903 | 1,228,180 | |||
Income from operations | 4,984,505 | 4,471,176 | |||
Other income/(expense) | |||||
Subsidy income | 863,102 | 590,559 | |||
Interest income | 67,868 | 46,297 | |||
Interest expense | (974,258 | ) | (776,009 | ) | |
Other income | 149,498 | 128,962 | |||
106,210 | (10,191) | ||||
Income before income tax expense | 5,090,715 | 4,460,985 | |||
Income taxes expense | 1,168,381 | 1,042,155 | |||
Net income before allocation to noncontrolling interests | 3,922,334 | 3,418,830 | |||
Add: Net loss attributable to the noncontrolling interests | 14,167 | - | |||
Net income attributable to Jinkai | 3,936,501 | 3,418,830 | |||
Other comprehensive income | |||||
Net income | 3,922,334 | 3,418,830 | |||
Foreign Currency Translation Adjustment | 284,285 | 34,654 | |||
Comprehensive Income | $ | 4,206,619 | $ | 3,453,484 | |
Less: Comprehensive income attributable to noncontrolling interests | (3,560) | - | |||
Comprehensive Income Attributable to Jinkai | $ | 4,210,179 | $ | 3,453,484 |
See notes to the unaudited consolidated financial statements
F-2 | ||
SUZHOU JINKAI TEXTILE CO., LTD
Consolidated Statements of Cash Flows
For the Nine months ended September 30, | |||||
2010 | 2009 | ||||
(Unaudited) | (Unaudited) | ||||
Cash flows from operating activities: | |||||
Net income | $ | 3,922,334 | $ | 3,418,830 | |
Adjustments to reconcile net income to net cash provided by operation activities | |||||
Depreciation | 1,256,356 | 1,035,325 | |||
Amortization of land use rights and land development | 63,332 | 19,005 | |||
Loss on disposal of plant and equipment | - | 2,836 | |||
Changes in operating assets and liabilities: | |||||
Change in restricted cash | (6,217,020 | ) | 162,529 | ||
Notes receivable | 154,707 | 58,104 | |||
Accounts receivable | (4,259,980 | ) | 70,126 | ||
Advance to suppliers | (4,005,574 | ) | (740,021 | ) | |
Inventories | 1,024,246 | 2,158,932 | |||
Prepaid expenses | 26,407 | - | |||
Loans to third parties | (51,775 | ) | (2,969,509 | ) | |
Amount due from owners | - | (4,887,552 | ) | ||
Notes payable | 6,667,612 | (1,231,073 | ) | ||
Accounts payable | 392,610 | 1,639,444 | |||
Advance from customers | 754,245 | 709,168 | |||
Income tax payable | 156,801 | 311,078 | |||
Other payables | 2,810,993 | (1,029,794 | ) | ||
Amount due to owners | 63,083 | - | |||
Net cash provided by(used in) operating activities | 2,758,377 |
| (1,272,572) | ||
Cash flows from investing activities: | |||||
Purchases of property plant and equipment | (2,915,876 | ) | (606,524 | ) | |
Payment for land use right and land development | (1,752) | (1,429,841 | ) | ||
Net cash used in investing activities | (2,917,628 | ) | (2,036,365 | ) | |
Cash flows from financing activities: | |||||
Contribution from non-controlling interests | 526,608 | - | |||
Repayments of capital lease obligations | (237,732 | ) | (116,916 | ) | |
Proceeds from bank loans | 15,167,831 | 9,921,798 | |||
Repayments of bank loans | (9,468,341 | ) | (5,392,758 | ) | |
Dividend paid to owners | (5,646,478 | ) | - | ||
Net cash provided by financing activities | 341,888 | 4,412,124 | |||
Effect of foreign currency fluctuation on cash and cash equivalents | 73,393 |
| 1,832 | ||
Net increase in cash and cash equivalents | 256,030 | 1,105,019 | |||
Cash and cash equivalents- beginning of period | 3,303,848 | 428,539 | |||
Cash and cash equivalents- end of period | $ | 3,559,878 | $ | 1,533,558 | |
Supplementary cash flow information:
Cash paid for interest expense | $ | 974,258 | $ | 776,009 |
|
Cash paid for income tax | $ | 1,011,580 | $ | 713,615 |
See notes to the unaudited consolidated financial statements
F-3 | ||
SUZHOU JINKAI TEXTILE CO., LTD
Notes to the Unaudited Consolidated Financial Statements
Note 1 - Organization and Description of Business
Suzhou Jinkai Textile Co., Ltd (the Jinkai or Company) and its subsidiaries, Suzhou Hangyu Textile Co., Ltd (the Hangyu), Taicang Jinkai Differentiated Fibers Research and Development Co., Ltd ( the Taicang Jinkai), Suzhou Zhongxian Supply Chain Management Co., Ltd ( the Zhongxian), are collectively referred to as the Group.
Jinkai was organized under the laws of Peoples Republic of China (the PRC) on April 17, 2001 with registered capital of $7,140,958, which was 90% owned by Mr. Chen Jinle, the Companies chairman, and 10% owned by Mr. Chen Chenxu, Mr. Chen Jinles nephew. In 2008, the owners injected further capital of $1,459,769 (RMB10,000,000) in Jinkai. Taicang Jinkai Differentiated Fibers Research and Development Co., Ltd (Taicang Jinkai) was established on April 25, 2008 with registered capital of $146,088, which was the wholly owned subsidiary of Jinkai.
Hangyu was organized under the laws of Peoples Republic of China (the PRC) on January 11, 2006 with registered capital of $2,279,343, which was 90% owned by Mr. Chen Jinle, and 10% owned by Mr. Chen Chenxu. The Companies are engaged in the manufacturing and sales of terylene partially oriented filament and terylene draw textured yarn.
On January 28, 2010, Mr. Chen Jinle and Mr. Chen Chenxu, the two shareholders of Hangyu, signed Share Transfer Agreements (the Agreements) with Jinkai respectively. Pursuant to the Agreements, Mr. Chen Jinle and Mr. Chen Chenxu transferred their total equity interest of Hangyu, representing 90% and 10%, respectively, to Jinkai as capital injection. Jinkai increased its registered capital from $8,600,727 (RMB66,000,000) to $10,880,070 (RMB84,000,000), Therefore, Hangyu became the wholly owned subsidiary of Jinkai since then.
On February 2, 2010, Zhongxian, a new subsidiary of Jinkai, was organized under the laws of Peoples Republic of China (the PRC) with registered capital of $1,170,104 (RMB 8,000,000). On the date of inception, Jinkai owns 20% and Mr. Chen Jinle owns 30% of Zhongxians equity interest. In April 2010, Mr. Chen Jinle and another individual owner of Zhongxian transferred 10% and 25%, respectively, equity interest in Zhongxian to Jinkai for cash. Jinkai owns 55% equity interest of Zhongxian since then.
On November 20, 2010, Jinkai entered into a series of agreements with its owners and Taicang Kehui Consultants Service Limited (Kehui), providing Kehui the ability to control Jinkai , including its financial interest (see Note 23). Thus, Jinkai qualifies as a Variable Interest Entity (the VIE). Therefore subsequent financial statements of Kehui will present Jinkai on a consolidated basis in accordance with ASC 810-10 .
Basis of presentation going concern
The unaudited consolidated financial statements of Suzhou Jinkai Textile Co., Ltd have been prepared on a going-concern basis which assumes that the Company will be able to realize assets and discharge liabilities in the normal course of business for the foreseeable future.
For the nine months ended September 30, 2010, the Company has negative working capital, which raises substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to meet its commitments as they become payable is dependent on the ability of the Company to obtain necessary financing or achieve a consistently profitable level of operations. The management plans to raise necessary working capital by obtaining new loans from banks, and the owners of the Company would provide any capital gap. There are no assurances that the Company will be successful in achieving these goals.
These financial statements do not give effect to adjustments to the amounts and classifications to assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
F-4
Note 2 - Summary of Significant Accounting Policies
Principles of consolidation and basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted as permitted by rules and regulations of the U.S. Securities and Exchange Commission (SEC), although we believe that the disclosures made are adequate to provide for fair presentation. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited combined financial statements as of December 31, 2009 of Jinkai and Hangyu.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of September 30, 2010, and the results of operations and cash flows for the nine months ended September 30, 2009 and 2010, have been made. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the results for the full fiscal year ending December 31, 2010.
The accompanying consolidated financial statements include Jinkai, Hangyu, Taicang Jinkai and Zhongxian. All inter-company transactions and balances have been eliminated in consolidation.
Recently issued accounting pronouncements
In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
After May 2010, FASB issued several ASUs-ASU-20 through ASU-26, which do not require adoption until a future date are not expected to have a material impact on the consolidated financial statement upon adoption.
NOTE 3 Restricted cash
The Companies are required to make a restricted security deposit between 30% and 100% of the face amount of the notes payable accepted by the bank for the Companies until the notes are settled. Cash restricted for this purpose amounted to $9,449,430 and $3,059,078, as of September 30, 2010 and December 31, 2009, respectively. (See Note 12)
NOTE 4 Notes receivable
Notes receivables of $2,497,044 as of September 30, 2010 and $2,600,480 as of December 31, 2009 represents bank acceptance notes the Company received from customers for sales of products. The notes have maturity durations of 6 months, bear no interest and are accepted by banks.
F-5
NOTE 5 Accounts receivable
Accounts receivable at September 30, 2010 and December 31, 2009 consisted of the following:
September 30, 2010 | December 31, 2009 | ||||||
(Unaudited) | |||||||
Accounts receivable | $ | 10,872,740 | $ | 6,404,518 | |||
No allowance for doubtful accounts was recorded during the nine months ended September 30, 2010 and 2009 as management believes no accounts are uncollectible as of September 30, 2010 and 2009. All balances have been collected subsequent to the balance sheet dates.
NOTE 6 Advance to suppliers
In order to secure stock supplies of raw materials, the Company made advance payments to certain suppliers. As of September 30, 2010 and December 31, 2009, the advance payments to suppliers amounted to $6,906, 464 and $1,084,251, respectively.
NOTE 7 Inventory
Inventories consisted of the following:
September 30, 2010 | December 31, 2009 | ||||||
(Unaudited) | |||||||
Raw materials | $ | 1,623,998 | $ | 2,896,670 | |||
Work in progress | 1,472,233 | 747,881 | |||||
Finished goods | 488,327 | 888,210 | |||||
$ | 3,584,558 | $ | 4,532,761 |
No provision for inventory obsolescence was recorded during the nine months ended September 30, 2010 and 2009.
NOTE 8 Loans to third parties
Loans to third parties of $119,206 as of September 30, 2010 and $65,163 as of December 31, 2009 were non-interest bearing loans, representing loan receivable due on the Companies demand.
NOTE 9 Property plant and equipment, net
Property, plant and equipment as of September 30, 2010 and December 31, 2009 consisted of the following:
The depreciation expenses were $1,256,356 and $1,035,325 for the nine months ended September 30, 2010 and 2009, respectively. The net book value of the equipments used to guarantee bank loans were $4,408,527 at September 30, 2010 and $4,929,854 at December 31, 2009. The net book value of the buildings used to guarantee bank loans was $2,887,104 at September 30, 2010 and $2,919,223 at December 31, 2009. (See Note 11)
F-6
NOTE 10 Land use rights and land development, net
Land use rights and land development, net as of September 30, 2010 and December 31, 2009 consisted of the following:
September 30, 2010 | December 31, 2009 | ||||||
(Unaudited) | |||||||
Land use right | $ | 1,511,924 | $ | 1,479,419 | |||
Land development | 2,769,394 | 2,713,051 | |||||
Less: Accumulated amortization | (204,983) | (137,674) | |||||
$ | 4,076,335 | $ | 4,054,796 |
Amortization expenses were $63,332 and $19,005 for the nine months ended September 30, 2010 and 2009, respectively. The net book value of the lands used to guarantee bank loans was $3,958,647 at September 30, 2010 and $3,937,461 at December 31, 2009. (See Note 11)
NOTE 11 Short-term bank loans
Short-term bank loans as of September 30, 2010 and December 31, 2009 consisted of the following:
September 30, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
Loan from China Construction Bank, with an interest rate of 4.779%, collateralized by land and buildings, matured on February 25, 2010 | $ - | $ 1,316,328 | ||||||
Loan from China Construction Bank, with an interest rate of 4.779%, collateralized by land and plant, guaranteed by Suzhou Danuo foundry Co., Ltd., matured on May 25, 2010 | - | 994,559 | ||||||
Loan from China Construction Bank, with an interest rate of 4.779%, collateralized by land, buildings and equipments, matured on May 26, 2010 | - | 1,053,063 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 8.496%, collateralized by equipments, matured on May19, 2010 | - | 1,170,070 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 8.496%, collateralized by equipments, matured on June 8, 2010 | - | 292,517 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.776%, guaranteed by Suzhou Chenglian Investment and Guaranty Co.,Ltd., matured on April 20, 2010 | - | 292,517 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.776%, guaranteed by Suzhou Chenglian Investment and Guaranty Co.,Ltd., matured on April 26, 2010 | - | 438,776 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 8.496%, guaranteed by Suzhou Chenglian Investment and Guaranty Co.,Ltd., maturing on November 17, 2010 | 746,480 | 731,294 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 8.496%, guaranteed by Suzhou Chenglian Investment and Guaranty Co.,Ltd., maturing on November 25, 2010 | 298,592 | 292,517 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 5.31%, guaranteed by Suzhou Chenglian Investment and Guaranty Co., Ltd., maturing on November 19, 2010 | 298,592 | 292,517 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, guaranteed by Suzhou Chenglian Investment and Guaranty Co., Ltd. , matured on April 29, 2010 | - | 292,517 | ||||||
Loan from China Construction Bank, with an interest rate of 6.1065%, guaranteed by Suzhou Jinkai Textile Co., Ltd, matured on February 3, 2010 | - | 146,259 | ||||||
Loan from China Construction Bank, with an interest rate of 5.841%, guaranteed by Suzhou Jinkai Textile Co., Ltd, matured on August 16, 2010 | - | 914,117 | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.965%, guaranteed by Taicang Agriculture development Investment & Guaranty Co., Ltd. , matured on February 21, 2010 | - | 731,294 | ||||||
Loan from China Merchants Bank, with an interest rate of 5.31%, guaranteed by Xiang Tang Group, matured on September 23, 2010 | - | 1,462,587 | ||||||
Loan from China Construction Bank, with an interest rate of 5.841%, guaranteed by Suzhou Jinkai Textile Co., Ltd, matured on November 11, 2010 | 1,940,849 | 1,901,364 | ||||||
Loan from China Construction Bank, with an interest rate of 5.31%, collateralized by land and buildings, maturing on February 23, 2011 | 1,343,665 | - | ||||||
Loan from China Construction Bank, with an interest rate of 4.779%, collateralized by land and buildings, maturing on May 20, 2011 | 1,015,213 | - | ||||||
Loan from China Construction Bank, with an interest rate of 4.779%, collateralized by land and equipments, maturing on May 18, 2011 | 1,074,932 | - | ||||||
Loan from China Construction Bank, with an interest rate of 4.779%, guaranteed by XiangTang Group Ltd., maturing on August 2, 2011 | 1,418,313 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.965%, guaranteed by Suzhou Chenglian Investment and Guaranty Co., Ltd. , maturing on January 25, 2011 | 1,791,553 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 5.31%, collateralized by bank deposit , maturing on March 10, 2011 | 1,701,975 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, collateralized by equipments, matured on October 14, 2010 | 298,592 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, collateralized by equipments, matured on October 14, 2010 | 447,888 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, collateralized by equipments, matured on October 21, 2010 | 298,592 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, collateralized by equipments, matured on November 16, 2010 | 597,184 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, guaranteed by Suzhou Jinkai Textile Co., Ltd, matured on November 17, 2010 | 597,184 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.29%, guaranteed by equipments, maturing on December 2, 2010 | 298,592 | - | ||||||
Loan from China Merchants Bank, with an interest rate of 5.841%, guaranteed by XiangTang Group Ltd., maturing on January 5, 2011 | 1,492,961 | - | ||||||
Loan from Industrial and Commercial Bank of China, with an interest rate of 4.86%, collateralized by notes receivable, maturing on January 23, 2011 | 149,296 | - | ||||||
Loan from Industrial and Commercial Bank of China, with an interest rate of 4.86%, collateralized by notes receivable, maturing on May 18, 2011 | 89,578 | - | ||||||
Loan from Industrial and Commercial Bank of China, with an interest rate of 4.86%, collateralized by notes receivable, maturing on May 17, 2011 | 89,578 | - | ||||||
Loan from China Construction Bank, with an interest rate of 5.841%, guaranteed by Suzhou Jinkai Textile Co., Ltd, maturing on February 1, 2011 | 149,296 | - | ||||||
Loan from China Merchants Bank, with an interest rate of 5.31%, guaranteed by XiangTang Group Ltd., maturing on September 19, 2011 | 1,492,961 | - | ||||||
Loan from Jiangsu Rural Commercial Bank, with an interest rate of 7.965%, guaranteed by TaiCang Agriculture Development Co., Ltd., maturing on February 7, 2011 | 746,480 | - | ||||||
$ | 18,378,346 | $ | 12,322,296 |
F-7
The interest expenses for these bank loans were $974,258 and $776,009 for the nine months ended September 30, 2010 and 2009, respectively. The weighted average interest rates for these bank loans were 6.13% and 6.29% at September 30, 2010 and December 31, 2009, respectively. The loans terms are between five and twelve months. The net book value of the lands used to guarantee these bank loans was $3,958,647 and $3,937,461 at September 30, 2010 and December 31, 2009, respectively. The net book value of the equipments used to guarantee these bank loans was $$4,408,527 and $4,929,854 at September 30, 2010 and December 31, 2009, respectively. The net book value of the buildings used to guarantee these bank loans was $2,887,104 and $2,919,223 at September 30, 2010 and December 31, 2009, respectively.
NOTE 12 Notes payable
The Companies issued certain notes payable to suppliers which are guaranteed by the banks. These notes payable were issued as replacements of the accounts payable and bear no interest. The terms of these draft notes payable vary depending on the negotiations with the suppliers. Typical terms are six months. On the maturity dates, the note holders present these notes to the banks to draw cash based on the note amounts. The Companies are subject to a bank fee of 0.05% on notes payable amounts.
The Companies are required to make a restricted security deposit between 30% and 100% of the face amount of the notes in the banks until the notes are settled. Cash restricted for this purpose amounted to $9,449,430 and $3,059,078, as of September 30, 2010 and December 31, 2009. (See note 3)
NOTE 13 Other payables
Other payables as of September 30, 2010 and December 31, 2009 consisted of the following:
September 30, 2010 | December 31, 2009 | |||||
(Unaudited) | ||||||
Payable for purchasing equipment | $ | 1,886,326 | $ | 524,810 | ||
Accrued expense | 1,017,661 | 192,071 | ||||
Payroll payable and welfare payables | 180,967 | 149,028 | ||||
Other tax payables | 371,413 | 59,457 | ||||
Others | 348,857 | - | ||||
$ | 3,805,224 | $ | 925,366 |
NOTE 14 Capital lease payable
In September 2009, the Companies signed a lease agreement with an equipment supplier under a capital lease arrangement. The arrangement entitles the Companies a right to purchase the leased high-speed stretch yarn machines at $0 at the end of the 3-year lease term. The installations for these machines were completed in December 2009. The leased assets were recorded under property plant and equipment at the present value of minimum lease payment and amortized over the estimated productive lives, which is 10 years, on a straight-line basis. Capital lease obligations at September 30, 2010 and December 31, 2009 consisted of the following:
September 30, 2010 | December 31, 2009 | |||||
(Unaudited) | ||||||
Capital lease obligation-current portion | $ | 311,738 | $ | 313,727 | ||
Capital lease obligation-long-term portion | 262,197 | 485,540 | ||||
Total capital lease obligation | $ | 573,935 | $ | 799,267 |
The following table sets out the remaining contractual maturities at the balance sheet date of the capital lease, which are based on contractual undiscounted cash flows (including interest payments computed using loan rate of the Peoples Bank of China.) and the earliest date the Companies would be required to repay:
Amount | ||||||
2010 | $ | 81,426 | ||||
2011 | 322,793 | |||||
2012 | 220,794 | |||||
Total | 625,013 | |||||
Less: Amount representing interest | (51,078)) | |||||
Total at present value | $ | 573,9357 |
As of September 30, 2010, the gross amount of the equipment recorded under capital lease agreement was $1,032,862, depreciation expense for the nine months ended September 30, 2010 and 2009 was $64,144 and $0.
F-8
NOTE 15 Statutory reserve
The company is required to allocate at least 10% of its after tax profits as determined under generally accepted accounting principal in the PRC to a statutory surplus reserve until the reserve balance reaches 50% of its registered capital. For the year ended December 31, 2009, the Company made appropriation to this statutory reserve of $481,506. The accumulated balance of the statutory reserve of the Company as of December 31, 2009 was $685,367. The Company is required to appropriate statutory reserve annually, generally in the end of each years, therefore, as of September 30, 2010, the accumulated balance of statutory reserve was $685,367, same as the balance of December 31, 2009.
In accordance with the PRC laws and regulations, the Companies are restricted in their ability to transfer a portion of its net assets to the Company in the form of dividends, which amounted to $685,367 representing the amount of accumulated balance of statutory reserve of Jinkai and Hangyu attributable to the owner of the Company, as of September 30, 2010 and December, 31 2009.
NOTE 16 Subsidy income
Subsidy income of $863,102 and $590,559 for the nine months ended September 30, 2010 and 2009, respectively, represented governmental subsidies received by the Companies from the local government as the innovation fund to the Companies who met the conditions of being the Technology Middle/Small Enterprise.
NOTE 17 Income taxes
Income taxes expense for the nine months ended September 30, 2010 and 2009 represents PRC current income taxes. Income taxes expenses of $1,168,381 and $1,042,155 for the nine months ended September 30, 2010 and 2009, respectively.
The Companies are subject to PRC Enterprise Income Tax (EIT) on the taxable income. According to PRC tax laws and regulations, the Companies are subject to EIT with the tax rate 25% since January 1, 2008.
Reconciliation between the statutory PRC EIT rate of 25% and the effective tax rate is as follows:
Nine Months Ended September 30 | ||||||
2010 | 2009 | |||||
% | % | |||||
Reconciling items: | ||||||
PRC statutory tax rate | 25 | 25 | ||||
Non-taxable subsidy income | (12) | (7) | ||||
Non-deductable expenses | 10 | 5 | ||||
Effective tax rate | 23 | 23 |
NOTE 18 Related party transaction
The Company made a loan to owner Mr. Chen Jinle of $4,887,552 during the nine months ended September 30, 2009. The loan was non-interest bearing, and receivable upon the Companys demand. The loan was repaid by Mr. Chen Jinle before December 31, 2009.
NOTE 19 Concentrations and credit risks
As of September 30, 2010 and December 31, 2009, the Companies held cash in banks of $3,559,878 and $3,303,848, respectively that is uninsured by the government authority. To limit exposure to credit risk relating to deposits, the Companies primarily place cash deposits only with large financial institution in the PRC with acceptable credit rating.
The Companies operations are carried out in the PRC. Accordingly, the Companies business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC as well as by the general state of the PRCs economy. The business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
No single customer accounted for 10% or more of the total sales for the nine months ended September 30, 2010 and 2009.
Two major suppliers accounted for 68% ($26,674,794) of the Companies inventory purchase for the nine months ended September 30, 2010. Three major suppliers accounted for 77% ($18,294,563) of the Companies inventory purchase for nine months ended September 30, 2009. If these suppliers terminate their supply relationship with the Companies, the Companies may be unable to purchase sufficient raw material on acceptable terms, and finally the Companies financial results may be adversely affected.
F-9
NOTE 20 Dividends
During the nine months ended September 30, 2010, Jinkai declared and paid cash dividends in the amount of $5,646,478 to its owners.
NOTE 21 Commitments and contingencies
The following table sets forth the Companies' contractual obligations by specified categories as of September 30, 2010:
Payment Due by Period | ||||||
Total | Less Than 1 Year | More Than 1 Year | ||||
Capital lease commitments | $ | 625.,013 | $ | 325,704 | $ | 299,309 |
Construction in progress | 396,530 | 396,530 | - | |||
Total | $ | 1,021,543 | $ | 722,234 | $ | 299,309 |
The Company is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have material adverse effect on the business, financial condition or results of operations.
The Companies has not recorded any legal contingencies as of September 30, 2010.
NOTE 22 Subsequent events
On November 20, 2010, a series of agreements (the VIE Agreements) were entered into among Jinkai and its owners and Taicang Kehui Consulting Service Limited (Kehui), providing Kehui the ability to control Jinkai , including its financial interest as described below. Thus, Jinkai became a contractually controlled subsidiary of Kehui (the Reorganization).
Entrusted Management Agreement Pursuant to this entrusted management agreement among Kehui, the Jinkais shareholders and Jinkai (the Entrusted Management Agreement), Jinkai and its shareholders agreed to entrust the operations and management of the business to Kehui. Under the Entrusted Management Agreement, Kehui will manage Jinkais operations and assets, control all of Jinkai's cash flow through an entrusted bank account, will be entitled to Jinkai's net profits as a management fee, and will be obligated to pay all Jinkai payables and loan payments. The Entrusted Management Agreement will remain in effect until Kehui acquires all of the assets or equity of Jinkai. Prior to that acquisition, Jinkai will own all assets. Jinkai will continue to be the contracting party under its customer contracts, banks loans and certain other assets until such time as those may be transferred to Kehui.
Shareholders Voting Proxy Agreement Under the shareholders' voting proxy agreement among the Jinkai shareholders and Kehui, the Jinkai shareholders irrevocably and exclusively appointed the members of Kehuis board of directors as their proxies to vote on all matters that require Jinkai shareholder approval.
Exclusive Option Agreement Under the exclusive option agreement among Kehui, Jinkai and the Jinkai shareholders (the Exclusive Option Agreement), the Jinkai shareholders have granted Kehui an irrevocable and exclusive purchase option (the Option) to acquire Jinkais equity and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Since current PRC law does not specifically allow non-PRC interest in a PRC entity that engages in business dealing with classified government information, accordingly, the Option is exercisable when PRC law and regulation would allow foreign equity interest in businesses dealing with classified government information. The consideration for the exercise of the Option is to be determined by the parties and memorialized in future, definitive agreements setting forth the kind and value of such consideration. To the extent Jinkai shareholders receive any of such consideration, the Option requires them to transfer (and not retain) the same to Jinkai or Kehui.
Share Pledge Agreement Under the share pledge agreement among Kehui and the Jinkai shareholders (the Share Pledge Agreement), the Jinkai shareholders have pledged all of their equity interests in Jinkai, including the proceeds thereof, to guarantee all of Kehui's rights. Prior to termination of the Share Pledge Agreement, the pledged equity interests cannot be transferred without Kehui's prior written consent.
F-10
Kehui was incorporated under the laws of PRC as the wholly owned subsidiary of Triple Success Holding LLC (Triple Success ) on October 22, 2010. Triple Success was incorporated in United State of America as a limited liability company on May 25, 2010, which was a wholly owned subsidiary of Golden Stone Rising Limited (Golden Stone). Golden Stone is a corporation in British Virgin Islands ( BVI ) which was incorporated on June 22, 2010. Golden Stone, Triple Success and Kehui are collectively referred to as the Control Group.
As a result of these VIE Arrangements, Kehui maintained the ability to approve decision made by Jinkai and was entitled to substantially all of the economic benefits of Jinkai. Therefore, the Kehui consolidates Jinkai from the date of the agreements in accordance with ASC 810-10. Jinkais controlling shareholder also substantially owned more than 50% of Golden Stone at November 20, 2010. Golden Stone and Jinkai were considered under common control at the date of Reorganization. Therefore the Reorganization will be accounted for as a transaction between entities under common control in a manner similar to pooling of interests.
Kehui was incorporated under the laws of PRC as the wholly owned subsidiary of Triple Success Holding LLC (Triple Success ) on October 22, 2010. Triple Success was incorporated in United State of America as a limited liability company on May 25, 2010, which was a wholly owned subsidiary of Golden Stone Rising Limited (Golden Stone). Golden Stone is a corporation in British Virgin Islands ( BVI ) which was incorporated on June 22, 2010.
The unaudited financial statements of Golden Stone as of September 30, 2010 were as below.
September 30, 2010 | ||
(Unaudited) | ||
Assets | ||
Cash and cash equivalents | $ | 70,464 |
Total Assets | $ | 70,464 |
Liabilities and Shareholders Equity | ||
Current liabilities: | ||
Due to shareholder | $ | 70,464 |
Total liabilities | 70,464 | |
Shareholders equity: | ||
Common stock ($.05 par value, 50,000,000 shares authorized, and 29,000 shares issued and outstanding as of September 30, 2010) | 1,450 | |
Subscription receivable | (1,450) | |
Total shareholders equity | - | |
Total Liabilities and Shareholders Equity | $ | 70,464 |
There was no income or expenses in Golden Stone from the inception through September 30, 2010.
The following pro forma balance sheet of Golden Stone as of September 30, 2010 has been derived from the balance sheets of Jinkai, Kehui, Triple Success and Golden Stone at September 30, 2010, and adjusts such information to give the effect of the VIE agreements as if it would have existed on September 30, 2010. The pro forma balance sheet is presented for informational purposes only and does not purport to be indicative of the financial condition that would have resulted if the restructuring would have existed on September 30, 2010.
September 30, 2010 | ||||
ASSETS | (Unaudited) | |||
Current Assets: | ||||
Cash and cash equivalents | $ | 3,630,342 | ||
Restricted cash | 9,449,430 | |||
Notes receivable | 2,497,044 | |||
Accounts receivable | 10,872,740 | |||
Advance to suppliers | 5,183,086 | |||
Inventories | 3,584,558 | |||
Prepaid expenses | - | |||
Loans to third parties | 119,206 | |||
Total current assets | 35,336,408 | |||
Property plant and equipments, net | 16,996,992 | |||
Land use rights and land development, net | 4,076,335 | |||
TOTAL ASSETS | $ | 56,409,733 | ||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||
Current liabilities: | ||||
Short-term bank loans | $ | 18,378,346 | ||
Notes payable | 16,812,098 | |||
Accounts payable | 1,001,159 | |||
Advances from customers | 1,331,981 | |||
Income tax payable | 652,833 | |||
Other payables | 3,805,224 | |||
Amount due to shareholder | 134,661 | |||
Capital lease payable-current portion | 311,738 | |||
h | ||||
Total current liabilities | 42,428,040 | |||
Capital lease payable-long-term portion | 262,197 | |||
Total Liabilities | 42,690,273 | |||
Shareholders Equity: | ||||
Common stock ($.05 par value, 50,000,000 shares authorized, and 29,000 shares issued and outstanding as of September 30, 2010) | 1,450 | |||
Additional paid-in capital | 10,878,620 | |||
Statutory reserve | 685,367 | |||
Retained earnings | (96,157) | |||
Accumulated other comprehensive income | 1,727,168 | |||
Total shareholders equity attributable to Golden Stone | 13,196,448 | |||
Noncontrolling interest | 523,048 | |||
Total Shareholders Equity | 13,719,496 | |||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY | $ | 56,409,733 |
F-11 | ||