Exhibit 10.1


 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


 


FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004 (CONSOLIDATED) AND 2003


 





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


 


CONTENTS


 


	
  Report of
  Independent Registered Public Accounting Firm

  	
   

  
	
   

  	
   

  
	
  Balance Sheets as of December 31,
  2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of
  Operations and Comprehensive income for the years ended December 31,
  2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of
  Stockholders’ Equity for the years ended December 31, 2004 (Consolidated)
  and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of Cash Flows for
  the years ended December 31, 2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Notes to the
  Consolidated Financial Statements

  	
   

  



 





















 


	
  

  	
  Jimmy C.H. Cheung & Co

  
	
  Certified Public Accountants

  
	
  (A member of Kreston International)

  



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 


To
the Board of Directors of:


China
Kangtai Cactus Bio-tech Company Limited and subsidiary


 


We
have audited the accompanying balance sheets of China Kangtai Cactus Bio-tech
Company Limited and subsidiary, as of December 31, 2004 (Consolidated) and
2003 and the related statements of operations and comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2004
(Consolidated) and 2003. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.


 


We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits of the financial statements provide a reasonable basis for our opinion.


 


In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Kangtai Cactus Bio-tech
Company Limited, as of December 31, 2004 (Consolidated) and 2003, and the
profits of its operations and its cash flows for the years ended December 31,
2004 (Consolidated) and 2003, in conformity with accounting principles
generally accepted in the United States of America.


 


JIMMY C.H. CHEUNG & CO


Certified
Public Accountants


 


Hong
Kong


 


Date:
January 28, 2005, except for Note 12, which the date is June 10, 2005


 


	
   

  	
   

  	
  1607 Dominion Centre, 43
  Queen’s Road East, Wanchai, Hong Kong

  	
   

  	
  

  
	
   

  	
   

  	
  Tel: (852) 25295500 Fax:
  (852) 28651067 Email: jchc@krestoninternational.com.hk

  	
   

  
	
   

  	
   

  	
  Website:
  http://www.jimmycheungco.com

  	
   

  



 


1





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


 


BALANCE SHEETS

AS OF DECEMBER 31, 2004 (CONSOLIDATED) AND 2003


 


	
   

  	
   

  	
  Note

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ASSETS

  	
   

  
	
  CURRENT ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
   

  	
   

  	
  $

  	
  701,234

  	
   

  	
  $

  	
  142,398

  	
   

  
	
  Accounts receivable, net of allowances

  	
   

  	
  2

  	
   

  	
  429,866

  	
   

  	
  386,801

  	
   

  
	
  Due from a related company

  	
   

  	
   

  	
   

  	
  845,411

  	
   

  	
  809,179

  	
   

  
	
  Due from a stockholder

  	
   

  	
   

  	
   

  	
  —

  	
   

  	
  4,831

  	
   

  
	
  Inventories, net

  	
   

  	
  3

  	
   

  	
  3,960,319

  	
   

  	
  2,783,266

  	
   

  
	
  Other receivables

  	
   

  	
   

  	
   

  	
  36,147

  	
   

  	
  31,316

  	
   

  
	
  Total Current Assets

  	
   

  	
   

  	
   

  	
  5,972,977

  	
   

  	
  4,157,791

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  PROPERTY AND EQUIPMENT, NET

  	
   

  	
  4

  	
   

  	
  4,649,792

  	
   

  	
  4,780,743

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intangible assets

  	
   

  	
  5

  	
   

  	
  827,536

  	
   

  	
  940,580

  	
   

  
	
  Land use rights, net

  	
   

  	
   

  	
   

  	
  55,658

  	
   

  	
  56,865

  	
   

  
	
  TOTAL ASSETS

  	
   

  	
   

  	
   

  	
  $

  	
  11,505,963

  	
   

  	
  $

  	
  9,935,979

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES AND STOCKHOLDERS’ EQUITY

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CURRENT LIABILITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable

  	
   

  	
   

  	
   

  	
  $

  	
  159,971

  	
   

  	
  $

  	
  152,356

  	
   

  
	
  Other payables and accrued liabilities

  	
   

  	
  6

  	
   

  	
  282,210

  	
   

  	
  59,620

  	
   

  
	
  Notes payable

  	
   

  	
  7

  	
   

  	
  730,677

  	
   

  	
  1,213,769

  	
   

  
	
  Other taxes payable

  	
   

  	
   

  	
   

  	
  27

  	
   

  	
  —

  	
   

  
	
  Value added tax payables

  	
   

  	
   

  	
   

  	
  666,075

  	
   

  	
  294,853

  	
   

  
	
  Total Current Liabilities

  	
   

  	
   

  	
   

  	
  1,838,960

  	
   

  	
  1,720,598

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COMMITMENTS AND CONTINGENCIES

  	
   

  	
   

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  STOCKHOLDERS’ EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $1.00 par value, 20,000,000 shares
  authorized, 500,000 shares issued and outstanding

  	
   

  	
  9

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  
	
  Additional paid-in capital

  	
   

  	
   

  	
   

  	
  4,702,559

  	
   

  	
  4,202,559

  	
   

  
	
  Retained earnings

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unappropriated

  	
   

  	
   

  	
   

  	
  3,701,862

  	
   

  	
  2,612,768

  	
   

  
	
  Appropriated

  	
   

  	
   

  	
   

  	
  696,182

  	
   

  	
  459,474

  	
   

  
	
  Due to stockholders

  	
   

  	
   

  	
   

  	
  66,400

  	
   

  	
  440,580

  	
   

  
	
  Total Stockholders’ Equity

  	
   

  	
   

  	
   

  	
  9,667,003

  	
   

  	
  8,215,381

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  	
   

  	
   

  	
   

  	
  $

  	
  11,505,963

  	
   

  	
  $

  	
  9,935,979

  	
   

  



 


The accompanying notes are an integral part of these
financial statements


 


2





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


 


STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003 


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET SALES

  	
   

  	
  $

  	
  6,447,510

  	
   

  	
  $

  	
  5,264,792

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COST OF SALES

  	
   

  	
  (4,257,305

  	
  )

  	
  (3,506,952

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GROSS PROFIT

  	
   

  	
  2,190,205

  	
   

  	
  1,757,840

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OPERATING EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Selling expenses

  	
   

  	
  298,165

  	
   

  	
  221,826

  	
   

  
	
  General and administrative expenses

  	
   

  	
  239,550

  	
   

  	
  250,196

  	
   

  
	
  Professional fees

  	
   

  	
  298,424

  	
   

  	
  3,527

  	
   

  
	
  Depreciation

  	
   

  	
  14,379

  	
   

  	
  8,841

  	
   

  
	
  Amortization of land use rights

  	
   

  	
  1,207

  	
   

  	
  1,207

  	
   

  
	
  Amortization of intangible assets

  	
   

  	
  113,044

  	
   

  	
  113,043

  	
   

  
	
  Total Operating Expenses

  	
   

  	
  964,769

  	
   

  	
  598,640

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME FROM OPERATIONS

  	
   

  	
  1,225,436

  	
   

  	
  1,159,200

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER INCOME (EXPENSES)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Government grant

  	
   

  	
  121,980

  	
   

  	
  95,411

  	
   

  
	
  Interest income

  	
   

  	
  180

  	
   

  	
  136

  	
   

  
	
  Interest expenses

  	
   

  	
  (21,543

  	
  )

  	
  (17,137

  	
  )

  
	
  Other expenses

  	
   

  	
  (251

  	
  )

  	
  (184

  	
  )

  
	
  Total Other Income

  	
   

  	
  100,366

  	
   

  	
  78,226

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME FROM OPERATIONS BEFORE TAXES

  	
   

  	
  1,325,802

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME TAX EXPENSE

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET INCOME

  	
   

  	
  1,325,802

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER COMPREHENSIVE LOSS

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Foreign currency translation loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COMPREHENSIVE INCOME

  	
   

  	
  $

  	
  1,325,802

  	
   

  	
  $

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income per share-basic and diluted

  	
   

  	
  $

  	
  2.65

  	
   

  	
  $

  	
  2.47

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted average number of shares
  outstanding during the year- basis and diluted

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  



 


The accompanying notes are an integral part of these
financial statements


 


3





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED


AND SUBSIDIARY


STATEMENTS OF SHAREHOLDERS’ EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Additional

  	
   

  	
  Unappropriated

  	
   

  	
  Appropriated

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Common
  Stock

  	
   

  	
  paid-in

  	
   

  	
  retained

  	
   

  	
  retained

  	
   

  	
  Due to

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Shares

  	
   

  	
  Amount

  	
   

  	
  capital

  	
   

  	
  earnings

  	
   

  	
  earnings

  	
   

  	
  stockholders

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at
  December 31, 2002

  	
   

  	
  500,000 

  	
   

  	
  $

  	
  500,000 

  	
   

  	
  $

  	
  4,202,559

  	
   

  	
  $

  	
  1,560,956

  	
   

  	
  $

  	
  273,860 

  	
   

  	
  $

  	
  440,580

  	
   

  	
  $

  	
  6,977,955

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income for the
  year

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,237,426

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transfer of statutory
  and staff welfare reserves

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (185,614

  	
  )

  	
  185,614

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at
  December 31, 2003

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  	
  4,202,55 9

  	
   

  	
  2,612,768

  	
   

  	
  459,474

  	
   

  	
  440,580

  	
   

  	
  8,215,381

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Contribution by
  stockholders

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income for the
  year

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,325,802

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,325,802

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Repayment

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (374,180

  	
  )

  	
  (374,180

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transfer of statutory
  and staff welfare reserves

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (236,708

  	
  )

  	
  236,708

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Balance at
  December 31, 2004 (Consolidated)

  	
   

  	
  500,000 

  	
   

  	
  $

  	
  500,000 

  	
   

  	
  $

  	
  4,702,559

  	
   

  	
  $

  	
  3,701,862

  	
   

  	
  $

  	
  696,182 

  	
   

  	
  $

  	
  66,400

  	
   

  	
  $

  	
  9,667,003

  	
   

  



 


The
accompanying are an integral part of these financial statements


 


4





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM OPERATING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income

  	
   

  	
  $

  	
  1,325,802

  	
   

  	
  $

  	
  1,237,426

  	
   

  
	
  Adjusted to reconcile net income to cash
  provided by operating activities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation - cost of sales

  	
   

  	
  313,434

  	
   

  	
  250,128

  	
   

  
	
  Depreciation-operating expenses

  	
   

  	
  14,379

  	
   

  	
  8,841

  	
   

  
	
  Amortization of land use rights

  	
   

  	
  1,207

  	
   

  	
  1,207

  	
   

  
	
  Amortization of intangible assets

  	
   

  	
  113,044

  	
   

  	
  113,043

  	
   

  
	
  Provision for doubtful debts

  	
   

  	
  38,530

  	
   

  	
  21,999

  	
   

  
	
  Changes in operating assets and liabilities
  (Increase) decrease in:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts receivable, net allowances

  	
   

  	
  (81,595

  	
  )

  	
  (153,368

  	
  )

  
	
  Other receivable and prepaid expenses

  	
   

  	
  (4,831

  	
  )

  	
  (906

  	
  )

  
	
  Inventories

  	
   

  	
  (1,177,053

  	
  )

  	
  (371,970

  	
  )

  
	
  Increase (decrease) in:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable

  	
   

  	
  7,615

  	
   

  	
  (115,002

  	
  )

  
	
  Other payables and accrued liabilities

  	
   

  	
  222,590

  	
   

  	
  18,954

  	
   

  
	
  Other tax payables

  	
   

  	
  27

  	
   

  	
  —

  	
   

  
	
  Value added tax payables

  	
   

  	
  371,222

  	
   

  	
  294,615

  	
   

  
	
  Net cash provided by operating activities

  	
   

  	
  1,144,371

  	
   

  	
  1,304,967

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM INVESTING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of property and equipment

  	
   

  	
  (196,862

  	
  )

  	
  (860,889

  	
  )

  
	
  Net cash used in investing activities

  	
   

  	
  (196,862

  	
  )

  	
  (860,889

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM FINANCING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Proceeds from issuance of common stock

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  
	
  Due from a stockholder

  	
   

  	
  4,831

  	
   

  	
  (4,831

  	
  )

  
	
  Due from a related company

  	
   

  	
  (36,232

  	
  )

  	
  (809,179

  	
  )

  
	
  Due to stockholders

  	
   

  	
  (374,180

  	
  )

  	
  —

  	
   

  
	
  Notes payable

  	
   

  	
  (483,092

  	
  )

  	
  416,668

  	
   

  
	
  Net cash used in financing activities

  	
   

  	
  (388,673

  	
  )

  	
  (397,342

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET INCREASE IN CASH AND CASH EQUIVALENTS

  	
   

  	
  558,836

  	
   

  	
  46,736

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR

  	
   

  	
  142,398

  	
   

  	
  95,662

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH AND CASH EQUIVALENTS AT END OF YEAR

  	
   

  	
  $

  	
  701,234

  	
   

  	
  $

  	
  142,398

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash paid for interest expenses

  	
   

  	
  $

  	
  21,543

  	
   

  	
  $

  	
  17,137

  	
   

  



 


The accompanying notes are an integral part of
these financial statements


 


5





















 


CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY


NOTES
TO THE FINANCIAL STATEMENTS


AS OF DECEMBER 31, 2004
(CONSOLIDATED) AND 2003


 


1.     SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND ORGANIZATION


 


(A)    Organization


 


China Kangtai Cactus Bio-tech Company Limited (“China
Kangtai”) was incorporated in the British Virgin Islands (“BVI”) on November 26,
2004. Harbin Hainan Kangda Cacti Hygienical Foods Joint-Stock Co., Ltd. (“Harbin
Hainan Kangda”) was incorporated in the People’s Republic of China (“PRC”) on December 30,
1998 as a company with limited liability and restructured as a joint stock
company on July 7, 2004 under the laws of PRC.


 


China Kangtai is an investment holding company and
Harbin Hainan Kangda’s principal activities are planting cactus, developing new
types of cactus, producing and trading of cactus health foods and related
products in the PRC.


 


During 2004, Harbin Hainan Kangda’s shareholders
exchanged 100% of their ownership of Harbin Hainan Kangda for 500,000 shares of
China Kangtai under a reorganization plan. The transfer has been accounted for
as a reorganization of entities under common control as the companies were
beneficially owned by principally identical stockholders and share common
management.  The financial statements
have been prepared as if the reorganization had occurred retroactively.  China Kangtai and Harbin Hainan Kangda are
hereafter referred to as (the “Company”)


 


(B)     Principles of consolidation


 


The accompanying consolidated financial statements
for 2004 include the accounts of the Company and its wholly owned subsidiary,
Harbin Hainan Kangda. The financial statements for 2003 include the accounts of
Harbin Hainan Kangda. All significant inter-company accounts and transactions
have been eliminated on consolidation.


 


(C)     Use of estimates


 


The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.


 


(D)    Cash and cash equivalents


 


For purpose of the statements of cash flows, cash and
cash equivalents include cash on hand and demand deposits with a bank with a
maturity of less than 3 months.


 


(E)     Accounts receivable


 


The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated risks by
performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is
established and recorded based on managements’ assessment of the credit history
with the customer and current relationships with them.


 


(F)     Inventories


 


Inventories are stated at lower of cost or market
value, cost being determined on a first in first out method.  The Company provided inventory allowances
based on excess and obsolete inventories determined principally by customer
demand.


 


6





















 


(G)     Property and equipment


 


Property and equipment are stated at cost, less
accumulated depreciation.  Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.


 


Depreciation is provided on a straight-line basis,
less estimated residual value over the assets’ estimated useful lives.  The estimated useful lives are as follows:


 


	
  Buildings

  	
   

  	
  40 Years

  	
   

  
	
  Plant and machinery

  	
   

  	
  12 Years

  	
   

  
	
  Motor vehicles

  	
   

  	
  10 Years

  	
   

  
	
  Furniture, fixtures and equipment

  	
   

  	
  8
  Years

  	
   

  



 


Land use rights are stated at cost, less accumulated
amortization and are amortized over the term of the relevant rights of 50 years
from the date of acquisition.


 


(H)    Long-lived assets


 


In accordance with Statement of Financial Accounting
Standards No. 144, “Accounting for the impairment or disposal of
Long-Lived Assets”, long-lived assets and certain identifiable intangible
assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
related to the long- lived assets. The Company reviews long-lived assets to
determine that carrying values are not impaired.


 


(I)      Fair value of financial instruments


 


Statement of Financial Accounting Standards No. 107,
“Disclosure About Fair Value of Financial Instruments,” requires certain
disclosures regarding the fair value of financial instruments. Trade accounts
receivable, accounts payable, and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of the
instruments.


 


(J)      Intangible assets


 


Under the Statement of Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”, all goodwill and certain intangible
assets determined to have indefinite lives will not be amortized but will be
tested for impairment at least annually. 
Intangible assets other than goodwill will be amortized over their
useful lives of 10 years and reviewed for impairment in accordance with SFAS No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets”.


 


(K)    Revenue recognition


 


The Company recognizes revenue upon delivery or
shipment of the products, at which time title passes to the customer provided
that: there are no uncertainties regarding customer acceptance; persuasive
evidence of an arrangement exists; the sales price is fixed or determinable;
and collectability is deemed probable.


 


The local agricultural department in Harbin, PRC
approved a grant to the Company to encourage the planting of cactus. The
Company recognizes the grant as revenue upon receipt from the local government.


 


7





















 


(L)     Income taxes


 


PRC income tax is computed according to the relevant
laws and regulations in the PRC.  The
Company is organized in the People’s Republic of China and no tax benefit is
expected from the tax credits in the future. The Company located its factories
in a special economic region in China. This economic region allows these
enterprises a two-year income tax exemption beginning in the December 2002
after they become profitable and a 50% income tax reduction for the following
three years. No income tax expense has been recorded for 2004 and 2003 as the
Company was exempt under the special economic region rules.


 


(M)   Foreign currency translation


 


The functional currency of the Company is the Chinese
Renminbi (“RMB”).  Transactions
denominated in currencies other than RMB are translated into United States
dollars using year end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. 
Capital accounts are translated at their historical exchange rates when
the capital transaction occurred.  Net
gains and losses resulting from foreign exchange translations are included in
the statements of operations and stockholder’s equity as other comprehensive
income (loss). Cumulative translation adjustment amounts were insignificant at
and for the years ended December 31, 2004 and 2003 as the RMB is pegged to
the United States dollar.


 


(N)    Comprehensive income


 


The foreign currency translation gain or loss
resulting from translation of the financial statements expressed in RMB to
United States Dollar is reported as other comprehensive income (loss) in the
statements of operations and stockholders’ equity. Cumulative translation
adjustment amounts were insignificant and for the years ended December 31,
2004 and 2003.


 


(O)    Income share


 


Basic income per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the year. 
Diluted income per share is computed similar to basic income per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. There are no
potentially dilutive securities for 2004 and 2003.


 


(P)     Segments


 


The Company operates in only one segment, thereafter
segment disclosure is not presented.


 


(Q)    Recent Accounting Pronouncements


 


Statement of Financial Accounting Standards (“SFAS”) No. 151,
“Inventory Costs – an amendment of ARB No. 43, Chapter 4”“ SFAS No. 152,
“Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB
Statements No. 66 and 67,” SFAS No. 153, “Exchanges of Non-monetary
Assets – an amendment of APB Opinion No. 29,” and SFAS No. 123
(revised 2004), “Share-Based Payment,” were recently issued.  SFAS No. 151, 152, 153 and 123 (revised
2004) have no current applicability to the Company and have no effect on the
financial statements.


 


8





















 


2.     ACCOUNTS RECEIVABLE


 


Accounts receivable at December 31, 2004 and
2003 consisted of the following:


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts receivable

  	
   

  	
  $

  	
  490,395

  	
   

  	
  $

  	
  408,800

  	
   

  
	
  Less: allowance for doubtful accounts

  	
   

  	
  (60,529

  	
  )

  	
  (21,999

  	
  )

  
	
  Accounts receivable, net

  	
   

  	
  $

  	
  429,866

  	
   

  	
  $

  	
  386,801

  	
   

  



 


For the years ended December 31, 2004 and 2003,
provision for doubtful accounts recorded by the Company was $38,530 and $21,999
respectively.


 


3.     INVENTORIES


 


Inventories at December 31, 2004 and 2003
consisted of the following:


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cactus stock

  	
   

  	
  $

  	
  3,486,358

  	
   

  	
  $

  	
  2,718,914

  	
   

  
	
  Work-in-progress

  	
   

  	
  12,012

  	
   

  	
  38,626

  	
   

  
	
  Finished goods

  	
   

  	
  461,949

  	
   

  	
  25,726

  	
   

  
	
   

  	
   

  	
  3,960,319

  	
   

  	
  2,783,266

  	
   

  
	
  Less: provision of obsolescence

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  $

  	
  3,960,319

  	
   

  	
  $

  	
  2,783,266

  	
   

  



 


For the years ended December 31, 2004 and 2003,
no provision for obsolete inventories was recorded by the Company.


 


4.     PROPERTY AND EQUIPMENT


 


The following is a summary of property and equipment
at December 31:


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Buildings

  	
   

  	
  $

  	
  3,887,142

  	
   

  	
  $

  	
  3,887,142

  	
   

  
	
  Plant and machinery

  	
   

  	
  1,331,045

  	
   

  	
  1,260,282

  	
   

  
	
  Motor vehicles

  	
   

  	
  211,588

  	
   

  	
  87,818

  	
   

  
	
  Furniture and office equipment

  	
   

  	
  10,995

  	
   

  	
  8,667

  	
   

  
	
   

  	
   

  	
  5,440,770

  	
   

  	
  5,243,909

  	
   

  
	
  Less: accumulated depreciation

  	
   

  	
  790,978

  	
   

  	
  463,166

  	
   

  
	
  Property and equipment, net

  	
   

  	
  $

  	
  4,649,792

  	
   

  	
  $

  	
  4,780,743

  	
   

  



 


Depreciation expenses for the years ended December 31,
2004 and 2003 were $327,813 and $258,969 respectively.


 


9





















 


5.     INTANGIBLE ASSETS


 


Intangible assets related to registered patent rights
and formulations of various cactus health and pharmaceutical products acquired
by the Company from third parties; $888,889 were first acquired by the
stockholders and injected into the Company at cost as registered capital in
2002 (note 9(A)) and $241,546 were acquired from third parties in 2002.


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Patents

  	
   

  	
  $

  	
  1,130,435

  	
   

  	
  $

  	
  1,130,435

  	
   

  
	
  Less: accumulated amortization

  	
   

  	
  302,899

  	
   

  	
  189,855

  	
   

  
	
   

  	
   

  	
  $

  	
  827,536

  	
   

  	
  $

  	
  940,580

  	
   

  



 


 


The intangible assets are amortized over ten years on
a straight line basis.  The amortization
expense for both 2004 and 2003 was $113,044 and 113,043, respectively.


 


6.     OTHER PAYABLES AND ACCRUED LIABILITIES


 


Other payables and accrued liabilities at December 31,
2004 and 2003 consist of the following:


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other payables

  	
   

  	
  $

  	
  12,078

  	
   

  	
  $

  	
  12,078

  	
   

  
	
  Accrued liabilities

  	
   

  	
  72,817

  	
   

  	
  47,542

  	
   

  
	
  Professional fees due

  	
   

  	
  197,315

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  $

  	
  282,210

  	
   

  	
  $

  	
  59,620

  	
   

  



 


7.     NOTES PAYABLE


 


Balance at December 31:


 


	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  Note payable to a bank, interest rate of
  5.7525% per annum, unsecured, due June, 2004

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  483,092

  	
   

  
	
  Note payable to a third party, unsecured,
  interest-free, due on demand

  	
   

  	
  730,677

  	
   

  	
  730,677

  	
   

  
	
   

  	
   

  	
  $

  	
  730,677

  	
   

  	
  $

  	
  1,213,769

  	
   

  



 


8.     COMMITMENTS AND CONTINGENCIES


 


(A)    Employee benefits


 


The full time employees of the Company are entitled
to employee benefits including medical care, welfare subsidies, unemployment
insurance and pension benefits through a Chinese government mandated
multi-employer defined contribution plan. The Company is required to accrue for
those benefits based on certain percentages of the employees’ salaries and make
contributions to the plans out of the amounts accrued for medical and pension
benefits.  The total provisions and
contributions made for such employee benefits was $5,757 and $4,618 for the
years ended December 31, 2004 and 2003, respectively. The Chinese
government is responsible for the medical benefits and the pension liability to
be paid to these employees.


 


10





















 


(B)     Operating leases commitments


 


The Company leases office and land spaces from third
parties under fourteen operating leases which expire from April 8, 2005 to
September 20, 2030.


 


As at December 31, 2004, the Company has
outstanding commitments with respect to the above non-cancelable operating
leases, which are due as follows:


 


	
  2005

  	
   

  	
  $

  	
  139,280

  	
   

  
	
  2006

  	
   

  	
  99,073

  	
   

  
	
  2007

  	
   

  	
  47,238

  	
   

  
	
  2008

  	
   

  	
  4,967

  	
   

  
	
  2009

  	
   

  	
  1,440

  	
   

  
	
  Thereafter

  	
   

  	
  51,695

  	
   

  
	
   

  	
   

  	
  $

  	
  343,693

  	
   

  



 


9.     SHAREHOLDERS’ EQUITY


 


(A)    Registered capital


 


In accordance with the Articles of Association of the
Company, the registered capital of the Company at the date of incorporation of December 30,
1998 was $241,546 (RMB2,000,000) which was fully paid on December 8, 1998
in cash by the shareholders. The registered capital of the Company was
subsequently increased to $4,444,444 (RMB36,800,000) by an increase of
$4,202,898 (RMB34,800,000) on April 18, 2000. The increase in registered
capital was paid for by the contribution of four patents transferred to the
Company amounting to $888,889 (RMB7,360,000) in lieu of cash and the remaining
balance has been fully paid in cash.


 


(B)     Appropriated retained earnings


 


The Company’s subsidiary, Harbin Hainan Kanda is
required to make appropriations to reserves funds, comprising the statutory
surplus reserve, statutory public welfare fund and discretionary surplus
reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC GAAP”).  Appropriation to the statutory surplus
reserve should be at least 10% of the after tax net income determined in
accordance with the PRC GAAP until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to
the statutory public welfare fund are at 5% to 10% of the after tax net income
determined in accordance with the PRC GAAP. 
The statutory public welfare fund is established for the purpose of
providing employee facilities and other collective benefits to the employees
and is non-distributable other than in liquidation.  Appropriations to the discretionary surplus
reserve are made at the discretion of the Board of Directors.


 


During 2004 and 2003, the Company’s subsidiary,
Harbin Hainan Kanda appropriated $236,708 and $185,614 respectively to the
reserve funds based on its net income under PRC GAAP.


 


10.   RELATED PARTY TRANSACTIONS


 


The Company had advanced funds totaling $4,831 to a
stockholder as of December 31, 2003 as a short-term, unsecured and
interest-free loan.  This loan was fully repaid
in 2004.  The Company had advanced funds
totaling $845,411 and $809,179 to a related company as of December 31,
2004 and 2003 respectively, unsecured, interest-free loan and repayable on
demand.


 


The Company owed $66,400 and $440,580 to stockholders
as of December 31, 2004 and 2003 respectively as short-term, unsecured and
interest-free loans.


 


11





















 


11.   CONCENTRATIONS AND RISKS


 


During 2004 and 2003, 100% of the Company’s assets
were located in China and 100% of the Company’s revenues were derived from
companies located in China.


 


12.   SUBSEQUENT EVENT


 


(A)    Plan of reorganization


 


On May 13, 2005, pursuant to a Stock Purchase
Agreement, InvestNet, Inc. (“InvestNet”) sold 30,000,000 shares to China
Kangtai for $300,000.  On the same date,
InvestNet entered into an Agreement and Plan of Reorganization with the
shareholders of China Kangtai to exchange 110,130,615 shares of InvestNet for
12% of the issued and outstanding stock of China Kangtai .  In addition, InvestNet issued a Convertible
Promissory Note for $8,070,000 due on October 28, 2005 (“the Note”) for
the remaining 88% of China Kangtai.  The
Note is convertible into 14,248,395 (post a one for seventy reverse split)
shares of InvestNet.  The Agreement and
Plan of Reorganization was completed on June 3, 2005.  As of August 15, 2005 the Note has not
been exercised.


 


(B)     Change of the name of the Company subsidiary


 


On March 22, 2005, the Company’s subsidiary
changed its name to Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin
Hainan Kangda”) and restructured as a limited liability company.


 


12