BP53409 -- Teda Travel Group, Inc. -- Exhibit 10.2










EXHIBIT 10.2






















TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003 AND 2002

































TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)










CONTENTS







	PAGE

	1

	INDEPENDENT AUDITORS' REPORT


	             

	                

	                                                                                                                            


	PAGE

	2

	CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 

AND 2002


	 	 	 
	PAGE

	3

	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 

YEARS ENDED DECEMBER 31, 2003 AND 2002


	 	 	 
	PAGE

	4

	CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002


	 	 	 
	PAGE

	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 

YEARS ENDED DECEMBER 31, 2003 AND 2002


	 	 	 
	PAGES

	6 – 14

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF 

DECEMBER 31, 2003 AND 2002




































INDEPENDENT AUDITORS' REPORT







To the Board of Directors of:

Teda Hotels Management Company, Limited

(A Wholly Owned Subsidiary of Teda Travel, Inc.)




We have audited the accompanying consolidated balance sheets of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted in the United States of America. 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 provide a reasonable basis for our opinion.




In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.













WEBB & COMPANY, P.A.







Boynton Beach, Florida

April 9, 2004





1














TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002










	 	2003

	 	2002


	ASSETS

	 

	 	     

	 	 
	 	 	 	 	 	 
	CURRENT ASSETS

	 	 	 	 	 
	Cash

	$

	98,079

	 	$

	323,283


	Accounts receivable, net

	 	88,509

	 	 	176,455


	Prepaid expenses and other current assets

	 	55,355

	 	 	2,889


	Due from director

	 	—

	 	 	6,659


	Total Current Assets

	 	241,943

	 	 	509,286


	                                                                                                                

	 	 	 	 	 
	PROPERTY AND EQUIPMENT, NET

	 	13,064

	 	 	3,506


	 	 	 	 	 	 
	INVESTMENT IN AFFILIATE

	 	3,661,868

	 	 	3,613,334


	 	 	 	 	 	 
	TOTAL ASSETS

	$

	3,916,875

	 	$

	4,126,126


	 	 	 	 	 	 
	LIABILITIES AND STOCKHOLDERS’ EQUITY

	 	 	 	 	 
	 	 	 	 	 	 
	CURRENT LIABILITIES

	 	 	 	 	 
	Accounts payable and accrued expenses

	$

	47,334

	 	$

	87,356


	Due to related parties

	 	3,263,724

	 	 	3,392,299


	 	 	 	 	 	 
	TOTAL LIABILITIES

	 	3,311,058

	 	 	3,479,655


	 	 	 	 	 	 
	STOCKHOLDERS’ EQUITY

	 	 	 	 	 
	Common stock, $1.00 par value, 50,000 shares authorized, 

100 shares issued and outstanding

	 	


100

	 	 	


100


	Retained earnings

	 	605,717

	 	 	646,326


	Total Stockholders’ Equity

	 	605,817

	 	 	646,471


	 	 	 	 	 	 
	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

	$

	3,916,875

	 	$

	4,126,126








2














TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002










	 	2003

	 	2002

	 
	                                                                                                                    

	 	 	     

	 	 	 
	REVENUE, NET

	$

	396,794

	 	$

	515,546

	 
	 	 	 	 	 	 	 
	EXPENSES

	 	 	 	 	 	 
	Management fees

	 	31,400

	 	 	24,645

	 
	Payroll

	 	117,784

	 	 	139,306

	 
	Other selling, general and administrative

	 	313,046

	 	 	268,050

	 
	Total Expenses

	 	462,230

	 	 	432,001

	 
	 	 	 	 	 	 	 
	INCOME (LOSS) FROM OPERATIONS

	 	(65,436

	)

	 	83,545

	 
	 	 	 	 	 	 	 
	OTHER INCOME (EXPENSE)

	 	 	 	 	 	 
	Equity in earnings of affiliate

	 	51,409

	 	 	223,909

	 
	Loss on disposal of property and equipment

	 	(3,202

	)

	 	—

	 
	Other income

	 	370

	 	 	591

	 
	Total Other Income (Expense)

	 	48,577

	 	 	224,500

	 
	 	 	 	 	 	 	 
	INCOME (LOSS) BEFORE INCOME TAXES

	 	(16,859

	)

	 	308,045

	 
	 	 	 	 	 	 	 
	Income taxes

	 	23,795

	 	 	23,977

	 
	 	 	 	 	 	 	 
	NET INCOME (LOSS)

	$

	(40,654

	)

	$

	284,068

	 
	 	 	 	 	 	 	 
	NET INCOME (LOSS) PER COMMON SHARE – 

BASIC AND DILUTED

	


$

	


(406.54

	


)

	


$

	


2,840.68

	 
	 	 	 	 	 	 	 
	WEIGHTED AVERAGE SHARES OUTSTANDING – 

BASIC AND DILUTED

	 	


100

	 	 	


100

	 






3














TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002










	 	 	Common Stock

	 	Retained

Earnings

	 	Total

	 
	Shares

	 	Amount


	                                                                                        

	 	 	     

	 	 	     

	 	 	     

	 	 	 
	Balance, December 31, 2001

	 	100

	 	$

	100

	 	$

	362,303

	 	$

	362,403

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income, 2002

	 	—

	 	 	—

	 	 	284,068

	 	 	284,068

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2002

	 	100

	 	 	100

	 	 	646,371

	 	 	646,471

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss, 2003

	 	—

	 	 	—

	 	 	(40,654

	)

	 	(40,654

	)


	 	 	 	 	 	 	 	 	 	 	 	 	 
	BALANCE, DECEMBER 31, 2003

	 	100

	 	$

	100

	 	$

	605,717

	 	$

	605,817

	 









4














TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002







	 	2003

	 	2002

	 
	CASH FLOWS FROM OPERATING ACTIVITIES:

	 	 	     

	 	 	 
	Net income (loss)

	$

	(40,654

	)

	$

	284,068

	 
	Adjustments to reconcile net income (loss) to net cash 

provided by (used in) operating activities:

	 	 	 	 	 	 
	Depreciation and amortization

	 	5,890

	 	 	2,538

	 
	Loss on disposal of property and equipment

	 	3,202

	 	 	—

	 
	Provision for bad debts

	 	21,556

	 	 	—

	 
	Earnings in affiliate

	 	(48,534

	)

	 	(223,909

	)


	(Increase) decrease in:

	 	 	 	 	 	 
	Prepaid expenses

	 	(52,466

	)

	 	(2,086

	)


	Accounts receivable

	 	66,390

	 	 	23,235

	 
	Increase (decrease) in:

	 	 	 	 	 	 
	Accounts payable and accrued expenses

	 	(40,022

	)

	 	61,470

	 
	Net Cash Provided By (Used In) Operating Activities

	 	(84,638

	)

	 	145,316

	 
	                                                                                                                  

	 	 	 	 	 	 
	CASH FLOWS FROM INVESTING ACTIVITIES:

	 	 	 	 	 	 
	Purchase of property and equipment

	 	(18,650

	)

	 	(1,371

	)


	Due from directors

	 	6,659

	 	 	128

	 
	Due from stockholders

	 	2,489

	 	 	2,129

	 
	Net Cash Provided By (Used In) Investing Activities

	 	(9,502

	)

	 	886

	 
	 	 	 	 	 	 	 
	CASH FLOWS FROM FINANCING ACTIVITIES:

	 	 	 	 	 	 
	Payments on notes payable

	 	(131,064

	)

	 	—

	 
	Net Cash (Used In) Financing Activities

	 	(131,064

	)

	 	—

	 
	 	 	 	 	 	 	 
	INCREASE (DECREASE) IN CASH AND 

CASH EQUIVALENTS

	 	


(225,204

	


)

	 	


146,202

	 
	 	 	 	 	 	 	 
	CASH AND CASH EQUIVALENTS - BEGINNING 

OF YEAR

	 	


323,283

	 	 	


177,081

	 
	 	 	 	 	 	 	 
	CASH AND CASH EQUIVALENTS - END OF YEAR

	$

	98,079

	 	$

	323,283

	 
	 	 	 	 	 	 	 
	SUPPLEMENTAL DISCLOSURE OF CASH FLOW 

INFORMATION:

	 	 	 	 	 	 
	 	 	 	 	 	 	 
	Cash paid for income taxes

	$

	26,037

	 	$

	15,716

	 





NON-CASH INVESTING AND FINANCING ACTIVITIES:




During 2002, the Company recorded an investment in affiliate and due to related party of $3,389,425.





5








NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND 

ORGANIZATION




(A) Nature of Operations and Organization and Basis of Presentation




Teda Hotels Management Company, Limited was incorporated in the British Virgin Islands on June 23, 2001.




Teda Hotels Management, Limited was incorporated in Hong Kong on July 28, 2000.




Teda Hotels Management Company, Limited is a wholly owned subsidiary of Teda Travel, Inc. (the “Parent”). Teda Hotels Management Company, Limited is hereafter referred to as (the “Company”) (See Note 11).




The Company provides management services for hotels and resorts located in China and invests in real estate through its joint venture in China.




(B) Principles of Consolidation




The accompanying consolidated financial statements for 2003 and 2002 include the accounts of Teda Hotels Management Company, Limited and its wholly owned subsidiary Teda Hotels Management Limited. The Company accounts for its 35% investment in a joint venture on the equity method (See Note 4).




All significant intercompany transactions and balances have been eliminated in the combination.




(C) Use of Estimates




In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.




(D) Property and Equipment




Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets from three to thirty nine years. Repairs and maintenance on property and equipment are expensed as incurred.




(E) Revenue Recognition




The Company recognizes hotel and resort management service fees in the period when the services are rendered and earned.





6








(F) Earnings (Loss) Per Common Share




Basic earnings (loss) per common share are computed by dividing the net income (loss) applicable to common stock stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding. There are no dilutive securities outstanding as of December 31, 2003 and 2002.




(G) Foreign Currency Translation




The Company’s assets and liabilities that are denominated in foreign currencies are translated into the currency of U.S. dollars using the exchange rates at the balance sheet date. For revenues and expenses, the average exchange rate during the year was used to translate Hong Kong dollars and Chinese Renminbi into United States dollars. The translation gains and losses resulting form changes in the exchange rate are charged or credited directly to the shareholders’ equity section of the balance sheet when material. All realized and unrealized transaction gains and losses are included in the determination of income in the period in which they occur. Translation and transaction gains and losses are not included in the statement of operations because they are not material as of December 31, 2003 and 2002.




(H) Fair Value of Financial Instruments




The carrying amounts of the Company’s financial instruments, including accounts payable and accrued interest, approximate fair value due to the relatively short period to maturity for these instruments.




(I) Income Taxes




The Company accounts for income taxes under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (“Statement 109”). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.




(J) Long-Lived Assets




In accordance with SFAS 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.





7








(K) Concentration of Credit Risk




The Company maintains its cash in foreign bank deposit accounts, which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk for cash.




(L) Business Segments




The Company's operating segments are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments.




(M) Recent Accounting Pronouncements




In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, and Interpretation of ARB 51". FIN No. 46 provides guidance on the identification of entities of which control is achieved through means other than voting rights (“variable interest entities” or “VIE’s”) and how to determine when and which business enterprise should consolidate the VIE (the “Primary Beneficiary”). In addition, FIN No. 46 required that both the Primary Beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements of FIN No. 46 are required in all financial statements initially issued after January 31, 2003, if certain conditions are met.




In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003 and all of its provisions should be applied prospectively.




In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.




SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such 





8








as a market index, or varies inversely with the value of the issuer’s shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.




Most of the provisions of SFAS No. 150 are consistent with the existing definition of liabilities of FASB Concepts Statement No. 6, “Elements of Financial Statements”. The remaining provisions of this statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003.




The adoption of these pronouncements will not have a material effect on the Company’s financial position or results of operations.




NOTE 2

ACCOUNTS RECEIVABLE




Accounts receivable were as follows at December 31, 2003 and 2002:




	 	2003

	 	2002


	                                                                                                                  

	 	             

	     

	 	             


	Accounts receivable

	$

	110,065

	 	$

	176,455


	Less Allowance for doubtful accounts

	 	21,556

	 	 	—


	 	 	 	 	 	 
	 	$

	88,509

	 	$

	176,455







For the years ended December 31, 2003 and 2002, the Company recorded a provision for doubtful accounts of $21,556 and $0, respectively.




NOTE 3

PROPERTY AND EQUIPMENT




Property and equipment as of December 31, 2003 and 2002 consisted of the following:




	 	2003

	 	2002


	                                                                                                                  

	 	             

	     

	 	             


	Computer equipment

	$

	15,104

	 	$

	8,380


	Office furniture

	 	7,657

	 	 	—


	Less accumulated depreciation

	 	9,697

	 	 	4,874


	 	 	 	 	 	 
	 	$

	13,064

	 	$

	3,506







Depreciation expense for the years ended December 31, 2003 and 2002 was $5,890 and $2,538, respectively. During 2003, the Company closed its Beijing office and recognized a loss on leasehold improvements of $3,202.





9








NOTE 4

INVESTMENT IN AFFILIATE




On January 6, 2002, the Company acquired a 35% interest in a real estate joint venture located in China. The joint venture was formed to develop and manage a mixed-use complex of apartments, restaurants, a hotel and a private clubhouse. The joint venture was formed with a maximum life of 50 years.




The Company’s 35% interest in the joint venture is accounted for using the equity method of accounting and is stated at cost plus equity in undistributed earnings since acquisition. The Company’s share of the earnings for 2003 and 2002 was $51,408 and $223,909.




A summary of the audited financial statements of the affiliate as of December 31, 2003 and 2002 is as follows:




	 	 	2003

	 	2002


	        

	                                                                                              

	 	                  

	     

	 	                  


	 	Current assets

	$

	15,573,083

	 	$

	10,379,641


	 	Non-current assets

	 	32,624,627

	 	 	26,904,049


	 	 	 	 	 	 	 
	 	Total Assets

	$

	48,197,710

	 	$

	37,283,690


	 	 	 	 	 	 	 
	 	Current liabilities

	$

	32,977,282

	 	$

	25,191,768


	 	Non-current liabilities

	 	4,837,929

	 	 	4,837,930


	 	Stockholders’ equity

	 	10,382,499

	 	 	7,253,992


	 	 	 	 	 	 	 
	 	Total Liabilities and Stockholders’ Equity

	$

	48,197,710

	 	$

	37,283,690


	 	 	 	 	 	 	 
	 	Revenues

	 	9,910,030

	 	 	22,469,595


	 	 	 	 	 	 	 
	 	Operating Income

	 	2,720,928

	 	 	1,052,595


	 	 	 	 	 	 	 
	 	Net Income

	$

	1,026,918

	 	$

	964,681







The Company’s share of the earnings for 2003 after accounting for differences between Hong Kong GAAP and U.S. GAAP:




	 	 	2003

	 	2002


	        

	                                                                                              

	 	                  

	     

	 	                  


	 	Company share at 35%

	$

	359,421

	 	$

	337,638


	 	Less U.S. GAAP adjustment for depreciation

	 	308,013

	 	 	113,729


	 	 	 	 	 	 	 
	 	Equity in earnings of affiliate

	$

	51,408

	 	$

	223,909








10








NOTE 5

DUE TO RELATED PARTIES




Due to related parties at December 31, 2003 and 2002 consists of the following:




	 	 	2003

	 	2002


	        

	                                                                                              

	 	                  

	     

	 	                  


	 	Due to Parent

	$

	3,258,361

	 	$

	3,389,425


	 	Due to company owned by a stockholder and director

	 	5,363

	 	 	2,874


	 	 	 	 	 	 	 
	 	 	$

	3,263,724

	 	$

	3,392,299







NOTE 6

COMMITMENTS AND CONTINGENCIES




(A) Operating Lease Agreements




The Company leases corporate office space and office equipment under operating leases. The leases expire at various dates through November 2005. Future minimum lease payments for the operating leases are as follows:




	 	Year

	 	Amount


	                                        

	 	                                              

	 	 
	 	2004

	 	$

	35,500


	 	2005

	 	 	25,100


	 	 	 	 	 
	 	 	 	$

	60,600







Rent expense under operating leases for the years ended December 31, 2003 and 2002 aggregated $31,401 and $24,115, respectively.




NOTE 7

EQUITY




The Company is a wholly owned subsidiary of Teda Travel, Inc. (See Note 11).




NOTE 8

CONCENTRATION OF CREDIT RISK




The Company received 100% of its revenues from three hotels in 2003 and four hotels in 2002 that it provides management services for located in China. Three of the hotels constituted 52%, 31% and 15% of the revenue recorded for the year ended December 31, 2003 and 45%, 33% and 12% for December 31, 2002.








11








NOTE 9

BUSINESS SEGMENTS




The Company has two operating segments. They are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments. The real estate investment segment invests in real estate development projects. The accounting policies of the segments are the same as described in the summary of significant accounting policies. There are no inter-segment sales.

	 	 	Property 

Management

	 	Real Estate 

Investments

	 	Total

	 
	        

	2003

	 	                

	     

	 	                

	     

	 	                

	 
	 	Revenue

	$

	396,794

	 	$

	—

	 	$

	396,794

	 
	 	Net income (loss)

	 	(92,063

	)

	 	51,409

	 	 	(40,654

	)


	 	Depreciation

	 	3,202

	 	 	—

	 	 	3,202

	 
	 	Assets

	 	255,007

	 	 	3,661,868

	 	 	3,916,875

	 
	 	Capital expenditures

	 	18,650

	 	 	—

	 	 	18,650

	 
	 	                                                                          

	 	 	 	 	 	 	 	 	 
	 	2002

	 	 	 	 	 	 	 	 	 
	 	Revenue

	$

	515,546

	 	$

	—

	 	$

	515,546

	 
	 	Net income

	 	60,159

	 	 	223,909

	 	 	284,068

	 
	 	Depreciation

	 	2,538

	 	 	—

	 	 	2,538

	 
	 	Assets

	 	512,792

	 	 	3,613,334

	 	 	4,126,126

	 
	 	Capital expenditures

	 	1,371

	 	 	—

	 	 	1,371

	 





NOTE 10

INCOME TAXES




Income tax expense for the years ended December 31, 2003 and 2002 is summarized as follows:




	 	 	Current

	 	Deferred

	 	Total


	        

	2003

	 	                

	     

	 	                

	     

	 	                


	 	United States

	$

	—

	 	$

	—

	 	$

	—


	 	Foreign

	 	23,795

	 	 	—

	 	 	23,795


	 	                                                                          

	 	 	 	 	 	 	 	 
	 	 	$

	23,795

	 	$

	—

	 	$

	23,795


	 	2002

	 	 	 	 	 	 	 	 
	 	United States

	$

	—

	 	$

	—

	 	$

	—


	 	Foreign

	 	23,977

	 	 	—

	 	 	23,977


	 	 	 	 	 	 	 	 	 	 
	 	 	$

	23,977

	 	$

	—

	 	$

	23,977











12








Income tax expense for the years ended December 31, 2003 and 2002 differed from amounts computed by applying the statutory U.S. federal corporate income tax rate of 34% to income before income tax benefit as a result of the following:




	 	 	2003

	 	2002

	 
	        

	                                                                                                        

	 	            

	     

	 	            

	 
	 	Expected income tax expense (benefit)

	$

	(13,822

	)

	$

	96,583

	 
	 	 	 	 	 	 	 	 
	 	Tax effect on foreign income which is not subject to the

United States statutory rate

	 	


37,617

	 	 	


(72,606

	


)


	 	 	 	 	 	 	 	 
	 	 	$

	23,795

	 	$

	23,977

	 





The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows:




	 	 	2003

	 	2002

	 
	 	Deferred tax assets:

	 	 	 	 	 	 
	 	Net operating loss carryforward

	$

	—

	 	$

	—

	 
	 	Total deferred tax assets

	 	—

	 	 	—

	 
	 	Less valuation allowance

	 	—

	 	 	—

	 
	        

	                                                                                                        

	 	            

	     

	 	            

	 
	 	Net deferred tax assets

	$

	—

	 	$

	—

	 





At December 31, 2003, the Company had approximately $605,700 of undistributed earnings of the Company’s foreign subsidiaries. These earnings are considered to be indefinitely invested, and accordingly, no United States income tax has been provided for these earnings.




NOTE 11

SUBSEQUENT EVENTS




On March 10, 2004, the Company’s Parent approved the 100% spin-off of the Company to Acola Corp. As part of the transaction, the Parent set up a share redemption plan to distribute the shares of Acola Corp. to the common stockholders of the Parent. As of March 10, 2004, the Company became a wholly owned subsidiary of Acola Corp.




On March 18, 2004, $3,350,000 of the balance due to Parent was extinguished through a conversion of the debt towards a Convertible Promissory Note holder to equity in the Parent.