Mondo Acquisition III, Inc. - FORM 8-K - EX-99.1 - THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KOBE SPORT AS OF DECEMBER 31, 2008 AND 2007, AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KOBE SPORT AS OF SEPTEMBER 30, 2009 AND 2008

Attached files

file	filename
8-K - FORM 8-K - Mondo Acquisition III, Inc.	f8k021210_mondo.htm
EX-2.1 - SHARE EXCHANGE AGREEMENT BY AND BETWEEN THE COMPANY AND KOBE SPORT (INTERNATIONAL) COMPANY LIMITED, DATED FEBRUARY 12, 2010 - Mondo Acquisition III, Inc.	f8k021210ex2i_mondo.htm

Exhibit 99.1

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED) AND

THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets	2
Statements of Consolidated Income and Comprehensive Income	3
Consolidated Statements of Stockholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6-20

	Hong Kong Head Office 香港總公司
	9th Floor, Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong Kong
	香港灣仔告士打道1 3 8 號聯合鹿島大廈9 樓
	Tel 電話：852-2919 8988 Fax 傳真：852-2574 7287
	Beijing Office 北京辦事處
	Suite 601, China View, C-2 Gongti East Road, Chaoyang District, Beijing 100027
	北京朝陽區工體東路丙2 號紅階大廈3 號樓601 室(郵編100027)
	Tel 電話：86-10-6585 0599 Fax 傳真：86-10-6585 0558
	www.agcacpa.com.hk

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED:

We have audited the accompanying consolidated balance sheets of Kobe Sport (International) Company Limited and Subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the two years ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of the Company as of December 31, 2008 and 2007, the results of its operations and its cash flows for each of the two years ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

/s/ AGCA CPA Ltd.

Hong Kong, February 1, 2010

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
ASSETS	2009		2008		2007
	(Unaudited)
CURRENT ASSETS
Cash and cash equivalents	$	14,437,419	$	7,400,057	$	9,162,171
Accounts receivable, net of nil allowance		22,892,342		13,442,066		9,763,781
Advances to suppliers, net of nil allowance		-		1,347,087		1,698,218
Prepaid land use right – current portion		17,471		17,457		16,334
Inventories		1,849,495		3,187,275		2,477,342
Total current assets		39,196,727		25,393,942		23,117,846

OTHER ASSETS
Property, plant and equipment, net		10,057,338		10,508,041		3,156,678
Prepaid land use right-long term portion		795,235		808,947		775,955
Total non-current assets		10,852,573		11,316,988		3,932,633
Total assets	$	50,049,300	$	36,710,930	$	27,050,479
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short term bank loans	$	1,420,413	$	1,419,249	$	711,880
Accounts and notes payables		14,904,516		10,358,261		10,519,064
Other payables and accruals		2,122,970		1,156,449		1,106,930
Income taxes payable		1,294,038		920,357		553,654
Due to related parties		647,240		399,438		505,846
Total current liabilities		20,389,177		14,253,754		13,397,374
Total liabilities		20,389,177		14,253,754		13,397,374

MINORITY INTERESTS		1,779,607		1,347,431		819,186

COMMITMENT AND CONTINGENCIES (Note 13)

SHAREHOLDERS' EQUITY
Common stock, $1 par: 50,000 shares authorized, 20 shares issued and outstanding		20		20		20
Additional paid-in capital		2,407,983		2,407,983		2,407,983
Statutory reserves		2,009,528		2,009,528		1,019,559
Retained earnings		21,788,659		15,038,263		8,752,701
Accumulated other comprehensive income		1,674,326		1,653,951		653,656
Total shareholders' equity		27,880,516		21,109,745		12,833,919
Total liabilities and shareholders' equity	$	50,049,300	$	36,710,930	$	27,050,479

The accompany notes are an integral part of these consolidated financial statements.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(AMOUNTS EXPRESSED IN US DOLLAR)

	Nine Months ended September 30,						Year ended December 31,
	2009			2008			2008			2007
	(Unaudited)			(Unaudited)

NET REVENUE	$	59,161,504		$	45,936,542		$	63,406,121		$	47,575,629

Cost of sales		(42,394,758	)		(32,898,106	)		(45,463,469	)		(34,531,274	)

GROSS PROFIT		16,766,746			13,038,436			17,942,652			13,044,355

Selling expenses		(1,731,892	)		(2,164,256	)		(2,932,230	)		(2,194,606	)
General and administrative expenses		(1,483,933	)		(1,298,258	)		(1,742,675	)		(1,412,397	)

Income from operations		13,550,921			9,575,922			13,267,747			9,437,352

Other income (expenses):
Interest income		25,999			71,701			77,603			85,458
Interest expenses		(78,081	)		(94,863	)		(129,624	)		(208,393	)

Total other income (expenses)		(52,082	)		(23,162	)		(52,021	)		(122,935	)

Income before income taxes		13,498,839			9,552,760			13,215,726			9,314,417

Provision for income taxes		(3,390,209	)		(2,397,218	)		(3,316,035	)		(2,258,947	)

Income before minority interests		10,108,630			7,155,542			9,899,691			7,055,470

Minority interests		(606,518	)		(429,332	)		(593,981	)		(423,328	)

NET INCOME		9,502,112			6,726,210			9,305,710			6,632,142

OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments		20,375			1,029,189			1,000,295			653,657

TOTAL COMPREHENSIVE INCOME	$	9,522,487		$	7,755,399		$	10,306,005		$	7,285,799

The accompanying notes are an integral part of these consolidated financial statements

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(AMOUNTS EXPRESSED IN US DOLLAR)



													Accumulated
						Additional							Other
	Common Stock					Paid-in		Statutory		Reserves			Comprehensive
		Number		Amount		Capital		Retained		Earnings			Income			Total
At January 1, 2007			20	$	20	$	2,407,983	$	314,012	$	2,826,106$			(1	)	$	5,548,120

Net income			-		-		-				6,632,142			-			6,632,142
Foreign currency translation adjustment			-		-		-		-		-			653,657			653,657
Comprehensive income																	7,285,799

Appropriation of statutory reserves			-		-		-		705,547		(705,547	)		-			-

At December 31, 2007			20		20		2,407,983		1,019,559		8,752,701			653,656			12,833,919

Net income			-		-		-		-		9,305,710			-			9,305,710
Foreign currency translation adjustment			-		-		-		-		-			1,000,295			1,000,295
Comprehensive income																	10,306,005

Appropriation of statutory reserves									989,969		(989,969	)		-			-

Dividend paid to shareholders of the Company			-		-		-		-		(2,030,179	)		-			(2,030,179	)

At December 31, 2008			20		20		2,407,983		2,009,528		15,038,263			1,653,951			21,109,745

Net income (unedited)			-		-		-				9,502,112			-			9,502,112
Foreign currency translation adjustment (unaudited)			-		-		-		-		-			20,375			20,375
Comprehensive income (unaudited)																	9,522,487

Dividend paid to shareholders of the
Company (unaudited)			-		-		-		-		(2,751,716	)		-			(2,751,716	)

At September 30, 2009 (unaudited)			20	$	20	$	2,407,983	$	2,009,528	$	21,788,659		$	1,674,326		$	27,880,516

The accompanying notes are an integral part of these consolidated financial statements

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS EXPRESSED IN US DOLLAR)

	Nine Months ended September 30,						Year ended December 31,
	2009			2008			2008			2007
	(Unaudited)			(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,502,112		$	6,726,210		$	9,305,710		$	6,632,142
Adjustments for:
Minority interests		606,518			429,332			593,981			423,328
Depreciation and amortization		676,743			317,377			538,174			178,981
(Increase) decrease in assets:
Accounts receivable		(9,434,971	)		(3,273,458	)		(2,958,968	)		(3,350,888	)
Advances to suppliers		1,347,580			390,953			460,462			(1,460,389	)
Inventories		1,339,785			(135,529	)		(530,979	)		(211,356	)
Increase (decrease) in liabilities:
Accounts and notes payables		4,535,703			(2,261,598	)		(870,095	)		5,537,930
Other payables and accruals		965,134			523,666			(26,178	)		284,887
Income taxes payable		372,757			279,774			323,397			175,056
Net cash provided by operating activities		9,911,362			2,996,727			6,835,504			8,209,691

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(203,261	)		(7,497,781	)		(7,538,804	)		-
Net cash used in investing activities		(203,261	)		(7,497,781	)		(7,538,804	)		-

CASH FLOWS FROM FINANCING ACTIVITIES
Advances from (repayment to) related company		247,362			(138,189	)		(138,945	)		485,928
New short-term bank loans		-			1,818,650			2,185,682			683,851
Repayments of short-term bank loans		-			(1,174,247	)		(1,537,753	)		(3,333,772	)
Dividend paid to minority interests		(175,641	)		(128,881	)		(129,586	)		-
Dividend paid to shareholders of the Company		(2,751,716	)		(2,019,132	)		(2,030,179	)		-
Net cash used in financing activities		(2,679,995	)		(1,641,799	)		(1,650,781	)		(2,163,993	)

Effect of exchange rate changes on cash		9,256			504,907			591,967			432,511

Net increase (decrease) in cash and cash equivalents		7,037,362			(5,637,946	)		(1,762,114	)		6,478,209

Cash and cash equivalents, beginning of period/year		7,400,057			9,162,171			9,162,171			2,683,962

Cash and cash equivalents, end of period/year	$	14,437,419		$	3,524,225		$	7,400,057		$	9,162,171

SUPPLEMENTAL DISCLOSURE INFORMATION
Cash paid for interest	$	78,081		$	94,864		$	129,624		$	208,393
Cash paid for income taxes	$	3,017,453		$	2,117,444		$	2,992,639		$	2,083,891

The accompanying notes are an integral part of these consolidated financial statements.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 1 DESCRIPTION OF BUSINESS AND ORGANIZATION

Nature of operations

Kobe Sport (International) Company Limited (“Kobe”) is a holding company and, through its subsidiaries, primarily engages in design, manufacturing and sales of sports shoes, sportswear and related accessories. Kobe together with its subsidiaries are collectively referred to as the “Company”.

Corporate organization

Kobe was incorporated with limited liability on September 25, 2009 under the International Business Companies Act in the British Virgin Islands. Details of its subsidiaries are as follows:

	Place and date of	Ownership by
Subsidiaries’ names	incorporation	the Company	Principal activities
Nam Kwong Trading Company	Hong Kong	100%	Holding company
Limited (“Nam Kwong”)	October 8, 2009
Fujian Jinjiang Hengfeng Shoes &	People’s Republic of	94% (through	Design, manufacturing and sales
Garments Co., Ltd.	China (“PRC”)	Nam Kwong)	of sports shoes, sportswear and
(“Hengfeng”)	March 2, 1992		related accessories

Hengfeng is a sino-foreign joint stock limited liability company established in the PRC. On December 4, 2009, Hengfeng underwent a reorganization (“Reorganization”). Before the Reorganization, Hengfeng had been owned as to 94% by Nam Kwong Trading Co. (“Nam Kwong Unincorporated”, an unincorporated company registered in Hong Kong) and 6% by another unrelated minority shareholder, which is a company registered in the PRC, according to their respective capital contribution. Pursuant to the Reorgnization, Nam Kwong Unincorporated transferred the 94% interest in Hengfeng held by it to Nam Kwong. As a result, through Nam Kwong, Kobe owns 94% interest in Hengfeng.

Both before and after the Reorganization, Nam Kwong Unincorporated, Nam Kwong and Kobe have all been beneficially owned and controlled by Mr. Anding Lin, who is also the managing director of Hengfeng.

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation and consolidation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

The Reorganization has been accounted for as a common control transaction and a recapitalization of Hengfeng with retroactive effect in the accompanying financial statements. The financial statements have been prepared as if the existing corporate structure had been in existence throughout all periods and the Reorganization had occurred as of the beginning of the earliest period presented in the accompanying financial statements.

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances between the Company and its subsidiaries are eliminated upon consolidation.

The interim consolidated financial statements for the nine-month periods ended September 30, 2009 and 2008 are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim consolidated financial statements have been included. The results reported in the interim consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying interim consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Use of estimates

The preparation of these financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions.

Cash and cash equivalents

Cash and cash equivalents consist of all cash balances and highly liquid investments with an original maturity of three months or less. Because of the short maturity of these investments, the carrying amounts approximate their fair value. Restricted cash is excluded from cash and cash equivalents.

Accounts receivable

Accounts receivable is stated at cost, net of allowance for doubtful accounts. The Company uses an allowance for doubtful accounts for any estimated losses resulting from the failure of customers to make required payments. The Company reviews the accounts receivable on a periodic basis and makes allowances where there is doubt as to the collectibility of individual balances. In evaluating the collectibility of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s payment history, its current credit-worthiness and current economic trends.

Inventories

Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management will write down the inventories to market value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.

Financial instruments

SFAS 107, “Disclosures about Fair Value of Financial Instruments” requires disclosure of the fair value of financial instruments held by the Company. The carrying amounts reported in the balance sheet for cash, accounts and other receivables, accounts and other payables approximate their fair values based on the short-term maturity of these instruments.

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”. The standard provides enhanced guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. The adoption of SFAS No. 157 with respect to provisions applicable to the Company did not have a material effect on the accompanying financial statements.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of property, plant and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred.

Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows:

	Useful Life (In years)
Buildings	50
Machinery	10
Office equipment	5

The carrying value of property, plant and equipment is assessed annually and when factors indicating impairment is present, the carrying value of the fixed assets is reduced by the amount of the impairment. The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the net asset carrying value. An impairment loss, if exists, is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Prepaid land use right

Lease prepayments represent lump sum payment for land use rights in the PRC. The amount is expensed out on a straight-line basis over the period of land use rights of 50 years.

Impairment of long-lived assets

The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets, including goodwill, if any. An impairment loss is measured and recorded based on discounted estimated future cash flows. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups.

Revenue recognition

Revenue is recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

Sales revenue is presented net of sales taxes, discounts and returns and is recognized at the time when the title to goods passes to the customer. Based on historical experience, management estimates that sales returns are immaterial and has not made allowance for estimated sales returns.

Research and development costs

Research and development costs are expensed as incurred. During the years ended December 31, 2008 and 2007, research and development costs were $137,386 and $112,679, respectively. During the nine months period ended September 30, 2009 and 2008, research and development costs were $118,977 and $101,130, respectively (unaudited).

Advertising costs

The Company expenses all advertising costs as incurred. The total amount of advertising costs charged to selling, general and administrative expense were $1,759,254 and $1,272,499 for the years ended December 31, 2008 and 2007, respectively. The total amount of advertising costs charged to selling, general and administrative expense were $1,588,736 and $1,316,122 for the nine months period ended September 30, 2009 and 2008, respectively (unaudited).

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Shipping and handling costs

Substantially all costs of shipping and handling of products to customers are included in selling, general and administrative expense. Shipping and handling costs for the years ended December 31, 2008 and 2007 were $8,079 and $8,047, respectively. Shipping and handling costs for the nine months period ended September 30, 2009 and 2008 were $9,659 and $3,952, respectively (unaudited).

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

In July 2006, the FASB issued ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109”) which became effective for fiscal years beginning after December 15, 2006. The interpretation prescribes a recognition threshold and a measurement attribute for the financial statements recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company’s adoption of ASC 740-10-25-5 through 740-10-25-7 and 740-10-25-13 did not result in any adjustments to the opening balance of the Company’s retained earnings as of January 1, 2007. The Company did not have any significant unrecognized uncertain tax positions for the two years ended December 31, 2008 and the nine months ended September 30, 2009.

Fair value measurements

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 -

Level 2 -

Quoted prices in active markets for identical assets or liabilities.

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 -

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying values of cash and cash equivalents, trade receivables and payables, and short-term debts approximate their fair values due to their short maturities.

There were no assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2009 and December 31, 2008.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Foreign currency

The Company uses United States dollars (“U.S. dollar” or “US$” or “$”) for financial reporting purposes. The Company maintains the books and records in its functional currency, Chinese Renminbi (“RMB”), being the primary currency of the economic environment in which its operations are conducted. The Company translates its assets and liabilities into U.S. dollars using applicable exchange rates prevailing at balance sheet dates, and statements of income are translated at average exchange rates during the reporting periods. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the financial statements were as follows:-

	September 30, 2009	December 31, 2008	December 31, 2007
Balance sheet items, except for equity accounts	US$1=RMB6.8290	US$1=RMB6.8346	US$1=RMB7.3046
Items in statements of income and cash flows	US$1=RMB6.8321	US$1=RMB6.9452	US$1=RMB7.6040

No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the above rates.

The value of RMB against U.S. dollars and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. Any significant revaluation of RMB may materially affect the Company’s financial condition in terms of U.S. dollar reporting.

Comprehensive income

SFAS No.130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Accumulated other comprehensive income includes foreign currency translation adjustments.

Commitments and contingencies

The Company follows ASC Subtopic 450-20, Loss Contingencies in determining its accruals and disclosures with respect to loss contingencies. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be been incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

Recent accounting pronouncements

In June 2009, the FASB established the FASB Accounting Standards CodificationTM (ASC) as the single source of authoritative U.S generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC superseded all previously existing non-SEC accounting and reporting standards, and any prior sources of U.S. GAAP not included in the ASC or grandfathered are not authoritative. New accounting standards issued subsequent to June 30, 2009 are communicated by the FASB through Accounting Standards Updates (ASUs). The ASC did not change current U.S. GAAP but changes the approach by referencing authoritative literature by topic (each a “Topic”) rather than by type of standard. The ASC is effective for interim and annual periods ending after September 15, 2009. Adoption of the ASC did not have a material impact on the Company’s Consolidated Financial Statements, but references in the Company’s Notes to Consolidated Financial Statements to former FASB positions, statements, interpretations, opinions, bulletins or other pronouncements are now presented as references to the corresponding Topic in the ASC.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recent accounting pronouncements (continued)

Effective January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, Determination of the Useful Life of Intangible Assets), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The Company will apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired subsequent to the adoption date. The adoption of these revised provisions had no impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161, Disclosures about Derivative Instruments and Hedging Activities), which amends and expands previously existing guidance on derivative instruments to require tabular disclosure of the fair value of derivative instruments and their gains and losses., This ASC also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The adoption of this ASC did not have a material impact on the Company’s Consolidated Financial Statements.

Upon initial adoption of SFAS 157 on January 1, 2008, the Company adopted FASB ASC 820-10 (formerly FSP FAS 157-2, Effective Date of FASB Statement 157), which deferred the provisions of previously issued fair value guidance for nonfinancial assets and liabilities to the first fiscal period beginning after November 15, 2008. Deferred nonfinancial assets and liabilities include items such as goodwill and other non-amortizable intangibles. Effective April 1, 2009, the Company adopted the fair value guidance for nonfinancial assets and liabilities. The adoption of FASB ASC 820-10 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51), which amends previously issued guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity. Among other requirements, this Statement requires that the consolidated net income attributable to the parent and the non-controlling interest be clearly identified and presented on the face of the consolidated income statement. The adoption of the provisions in this ASC did not have a material impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R, Business Combinations), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in an acquiree and the goodwill acquired. In addition, the provisions in this ASC require that any additional reversal of deferred tax asset valuation allowance established in connection with fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting. The Company will apply ASC 805-10 to any business combinations subsequent to adoption.

Effective January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies), which amends ASC 805-10 to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of ASC Topic 450, Contingences, to determine whether the contingency should be recognized at the acquisition date or after such date. The adoption of ASC 805-20 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and Accounting Principles Board 28-1, Interim Disclosures about Fair Value of Financial Instruments), which amends previous guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The adoption of FASB ASC 825-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Recent accounting pronouncements (continued)

Effective July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). Under ASC 320-10-65, an other-thantemporary impairment must be recognized if the Company has the intent to sell the debt security or the Company is more likely than not will be required to sell the debt security before its anticipated recovery. In addition, ASC 320-10- 65 requires impairments related to credit loss, which is the difference between the present value of the cash flows expected to be collected and the amortized cost basis for each security, to be recognized in earnings while impairments related to all other factors to be recognized in other comprehensive income. The adoption of ASC 320-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying circumstances that indicate a transaction is not orderly. The adoption of ASC 820-10-65 did not have a material impact on the Company’s Consolidated Financial Statements.

Effective July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165, Subsequent Events), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Adoption of ASC 855-10 did not have a material impact on the Company’s Consolidated Financial Statements.

New accounting pronouncement to be adopted

In December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits (formerly FASB FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets), which expands the disclosure requirements about plan assets for defined benefit pension plans and postretirement plans. The Company is required to adopt these disclosure requirements in the quarter ended December 31, 2009. It is expected the adoption of these disclosure requirements will have no material effect on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140, (codified by ASU No. 2009-16 issued in December 2009). SFAS No. 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” along with the exception from applying FIN 46(R), Consolidation of Variable Interest Entities. The standard is effective for the first annual reporting period that begins after November 15, 2009 (i.e. the Company’s fiscal 2010). Earlier application is prohibited. It is expected the adoption of this Statement will have no material effect on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), (codified by ASU No. 2009-17 issued in December 2009). The standard amends FIN No. 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. SFAS No. 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN No. 46(R). This Statement will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 (i.e. the Company’s fiscal 2010). Earlier application is prohibited. It is expected the adoption of this Statement will have no material effect on the Company’s Consolidated Financial Statements.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

New accounting pronouncement to be adopted (continued)

In August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS 157, Fair Value Measurements). The Company is required to adopt Update 2009-05 in the quarter ended December 31, 2009. It is expected the adoption of this Update will have no material effect on the Company’s Consolidated Financial Statements.

In October 2009, the FASB concurrently issued the following ASC Updates (ASU):

· ASU No. 2009-13--Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1). ASU No. 2009-13 modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.

· ASU No. 2009-14--Software (ASC Topic 985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No. 09-3). ASU No. 2009-14 removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.

ASU No. 2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt these standards on a retrospective basis, but both these standards must be adopted in the same period using the same transition method. The Company expects to apply these ASU Updates on a prospective basis for revenue arrangements entered into or materially modified beginning January 1, 2011. The Company is currently evaluating the potential impact these ASC Updates may have on its financial position and results of operations.

In October 2009, the FASB also issued ASU No. 2009-15--Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other Options, to provide accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 with retrospective application required.

In January 2010, the FASB issued the following ASC Updates:

· ASU No. 2010-01--Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This Update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this Update are effective for interim and annual periods ending on or after December 15, 2009 with retrospective application.

· ASU No. 2010-02--Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This Update amends Subtopic 8 10-10 and related guidance to clarify that the scope of the decrease in ownership provisions of the Subtopic and related guidance applies to (i) a subsidiary or group of assets that is a business or nonprofit activity; (ii) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (iii) an exchange of a group of assets that constitutes a business or nonprofit activity for a non-controlling interest in an entity, but does not apply to: (i) sales of in substance real estate; and (ii) conveyances of petroleum and gas mineral rights. The amendments in this Update are effective beginning in the period that an entity adopts FAS 160 (now included in Subtopic 810-10).

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 2 SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

New accounting pronouncement to be adopted (continued)

· ASU No. 2010-05--Compensation—Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. This Update simply codifies EITF Topic D-1 10, “Escrowed Share Arrangements and the Presumption of Compensation and does not change any existing accounting standards.

· ASU No. 2010-06--Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends Subtopic 820-10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends Subtopic 820-10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.

The Company expects that the adoption of the above Updates issued in January 2010 will not have any significant impact on its financial position and results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s Consolidated Financial Statements upon adoption.

NOTE 3 ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:


		September 30,		December 31,
		2009		2008		2007
		(Unaudited)

Accounts receivable	$	22,892,342	$	13,442,066	$	9,763,781
Less: Allowance for doubtful debts		-		-		-
Accounts receivable, net	$	22,892,342	$	13,442,066	$	9,763,781

Based on the Company’s assessment of collectibility, there has been no allowance for doubtful accounts recognized for the two years ended December 31, 2008 and the nine months ended September 30, 2009.

NOTE 4 INVENTORIES

Inventories by major categories are summarized as follows:

		September 30,		As of December 31,
		2009		2008		2007
		(Unaudited)

Raw materials	$	712,323	$	1,417,307	$	1,163,549
Work in progress		408,584		445,780		323,651
Finished goods		728,588		1,324,188		990,142
	$	1,849,495	$	3,187,275	$	2,477,342

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 5PREPAID LAND USE RIGHTS

The Company has recorded as prepaid land use rights the lump sum payments paid to acquire long-term interest to utilize the land underlying the Company’s buildings and production facility. This type of arrangement is common for the use of land in the PRC. The prepaid land use rights are expensed on the straight-line basis over the term of the land use rights of 50 years.

The amount expensed on prepaid land use right for the years ended December 31, 2008 and 2007 were $20,045 and $18,759, respectively. The amount expensed on prepaid land use right for the nine months period ended September 30, 2009 and 2008 were $14,369 and $14,997, respectively. As of September 30, 2009, the estimated expense of the prepaid land use rights over each of the next five years and thereafter will be $17,471.

Land use right with net carrying value of $175,612 (unaudited) and $178,531 as of September 30, 2009 and December 31, 2008, respectively, has been pledged as collateral against the short-term bank loans (see Note 8 below).

NOTE 6 PROPERTY, PLANT AND EQUIPMENT, NET

	September 30, 2009			December 31,
	(Unaudited)			2008			2007
Cost:
Buildings	$	2,992,970		$	2,990,518		$	2,798,099
Machinery		8,824,787			8,633,932			1,096,952
Office equipment		368,681			348,817			139,938

Total cost		12,186,438			11,973,267			4,034,989
Less: Accumulated depreciation		(2,129,100	)		(1,465,226	)		(878,311	)

Net book value	$	10,057,338		$	10,508,041		$	3,156,678

Depreciation expenses for the years ended December 31, 2008 and 2007 were $518,129 and $160,222, respectively. Depreciation expenses for the nine months ended September 30, 2009 and 2008 were $662,374 and $302,380, respectively.

Buildings with net book value of $998,558 (unaudited) and $1,014,472 as of September 30, 2009 and December 31, 2008, respectively, have been pledged as collateral against the short-term bank loans (see Note 8 below).

NOTE 7 OTHER PAYABLES AND ACCRUALS

		September 30,		December 31,
		2009		2008		2007
		(Unaudited)

Accrued staff costs	$	277,625	$	280,210	$	203,888
Accrued expense on subsidizing refurbishment of exclusive shops		939,910		-		-
Value added tax and other taxes payable		905,435		876,239		629,242
Unsecured, non-interest bearing advance from unrelated entity		-		-		273,800
	$	2,122,970		1,156,449	$	1,106,930

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 8 SHORT TERM BANK LOANS

Short term bank loans consisted of the following loans granted by Industrial Bank Co., Ltd.:

	Annualized interest rate
	September 30,			December 31,				September 30,		December 31,
Maturity Date	2009			2008			Collaterals	2009		2008		2007
	(Unaudited)

February 25, 2009, extended To February 25, 2010		5.31	%		9.711	%	Guaranteed by a minority shareholder of Hengfeng	$	175,720	$	175,578		-

March 5, 2009, extended to March 5, 2010		5.31	%		10.458	%	Guaranteed by a third -party entity		366,086		365,785		-

April 2, 2009, extended to April 2, 2010		5.31	%		9.711	%	The Company’s land use rights and buildings		183,043		182,893		-

April 10, 2009, extended to April 10, 2010		5.31	%		9.711	%	The Company’s land use rights and buildings		183,043		182,893		-

April 22, 2009, extended to April 22, 2010		5.31	%		9.711	%	The Company’s land use rights and buildings		190,365		190,209		-

August 30, 2009, extended to August 30, 2010		5.31	%		9.36	%	The Company’s land use rights and buildings		102,504		102,419		-

September 26, 2009, extended to September 25, 2010		5.31	%		9.36	%	Guaranteed by a third -party entity		109,826		109,736		-

September 26, 2009, extended to September 25, 2010		5.31	%		9.36	%	Guaranteed by a third -party entity		109,826		109,736		-

February 6, 2008		N/A		(2007: 7.956%)			Guaranteed by a third -party entity		-		-		205,350

February 7, 2008		N/A		(2007: 7.945%)			Guaranteed by a minority shareholder of Hengfeng		-		-		164,280

March 6, 2008		N/A		(2007: 7.956%)			Guaranteed by a third- party entity		-		-		342,250

								$	1,420,413	$	1,419,249	$	711,880

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 9 STATUTORY RESERVES

In accordance with the PRC Companies Law, Hengfeng, the PRC subsidiary, is required to transfer 10% of its profits after tax, as determined in accordance with accounting standards and regulations of the PRC, to the statutory surplus reserve and had been required to transfer not less than 5%, as determined by management, of the profits after tax to the public welfare fund. With the amendment of the PRC Companies Law which was effective from January 1, 2006, enterprises in the PRC have no longer been required to transfer any profit to the public welfare fund. Any balance of public welfare fund brought forward from December 31, 2005 should be transferred to the statutory surplus reserve. The statutory surplus reserve is non-distributable.

NOTE 10 INCOME TAXES

British Virgin Islands

Kobe, being incorporated in the British Virgin Islands (“BVI”), is not subject to any income tax in the BVI.

Hong Kong

Nam Kwong is subject to Hong Kong income tax on its taxable income derived from trade or businesses carried out in Hong Kong at 16.5% for the year ended December 31, 2008 and the nine months ended September 30, 2009, and 17.5% for the year ended December 31, 2007.

PRC

Hengfeng is subject to PRC income taxes. In accordance with the relevant tax laws in the PRC, Hengfeng was subject to a preferential enterprise income tax (“EIT”) rate of 24% on its taxable income for the year ended December 31, 2007 since it is located in an economic development zone.

On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1, 2008. Under the New EIT Law, foreign-owned enterprises as well as domestic companies are subject to a uniform tax rate of 25%. Therefore, Hengfeng has been subject to an EIT rate of 25% on its taxable income for the year ended December 31, 2008 and thereafter.

The Company’s provision for income taxes consisted of:

	September 30,				December 31, 2009
	2009		2008		2008		2007
	(Unaudited)		(Unaudited)

Current – PRC EIT	$	3,390,209	$	2,397,218	$	3,316,035	$	2,258,947

A reconciliation of the provision for income taxes determined at the local income tax to the Company’s effective income tax rate is as follows:

	Year ended December 31,
		2008			2007

Pre-tax income	$	13,215,726		$	9,314,417
United States federal corporate income tax rate		34	%		34	%
Income tax computed at United States federal corporate income tax rate		4,493,347			3,166,902
Reconciling items:
Rate differential for PRC earnings		(1,189,416	)		(931,442	)
Non-deductible expenses		12,104			23,487
Effective tax expense	$	3,316,035		$	2,258,947

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 11 RELATED PARTY TRANSACTIONS

Due to related parties

	September 30,		December 31, 2009
	2009		2008		2007
	(Unaudited)

Advances from Fujian Kobe Sports Goods Co., Ltd. a company controlled by Mr. Anding Lin (see Note 1)		-	$	399,438		505,846
Mr. Anding Lin		647,240

	$	647,240		399,438	$	505,846

The above amounts due to related parties were non-interest bearing, unsecured and without fixed repayment date.

Guarantees to the Company

Fujian Jinjiang Chenli Yangli Hengfeng Shoe-making Factory (the 6% minority shareholder of Hengfeng) provided guarantees for the Company’s short-term bank loan of $175,720 and $175,578 as of September 30, 2009 and December 31, 2008, respectively (See Note 8 above).

NOTE 12 CERTAIN RISKS AND CONCENTRATION

Credit risk

As of September 30, 2009 and December 31, 2008, 100% of the Company’s cash included cash on hand and deposits in accounts maintained within the PRC where there is currently no rule or regulation in place for obligatory insurance to cover bank deposits in the event of bank failure. However, the Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

For the two years ended December 31, 2008 and nine months ended September 30, 2009, all of the Company’s revenue arose in the PRC. In addition, all accounts receivable as of September 30, 2009, December 31, 2008 and 2007, respectively, were due from customers located in the PRC.

As of September 30, 2009, there were two customers who accounted for 11% and 10% of the accounts receivable of the Company. As of December 31, 2008, there was one customer who accounted for 13.6% of the accounts receivable of the Company. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of September 30, 2009 and December 31, 2008.

As of December 31, 2008, there was one customer who accounted for 13.6% of the accounts receivable of the Company. As of December 31, 2007, there were two customers who accounted for 11.2% and 10.5% of the accounts receivable of the Company. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s accounts receivable as of December 31, 2008 or 2007.

There was one customer who accounted for 11.3% of the Company’s revenue for the nine months ended September 30, 2009. There was one customer who accounted for 10.6% of the Company’s revenue for the nine months ended September 30, 2008. Except for the afore-mentioned, there was no other single customer who accounted for more than 10% of the Company’s revenue for the nine months ended September 30, 2009 or 2008.

Except for one customer who accounted for 10.7% of the Company’s revenue for the year ended December 31, 2007, there was no other single customer who accounted for more than 10% of the Company’s revenue for either the year ended December 31, 2008 or 2007.

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 12 CERTAIN RISKS AND CONCENTRATION – CONTINUED

Risk arising from operations in China

Substantially all of the Company’s operations are conducted in China. The Company’s operations are subject to various political, economic, and other risks and uncertainties inherent in China. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas, and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

Currency convertibility risk and restriction on net assets

Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at exchange rates quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions requires submitting a payment application form with suppliers’ invoices, shipping documents and signed contracts. These requirements imposed by the PRC government may restrict the ability of the PRC subsidiary to transfer its net assets, representing 100% of the Company’s net assets as of September 30, 2009, to the Company through loans, advances or cash dividends.

NOTE 13 COMMITMENTS AND CONTINGENCIES

Lease commitments

The Company has entered into tenancy agreements for the lease of factory premises and warehouse with independent parties. The Company’s commitments for minimum lease payments under these operating leases for the next five years and thereafter as of September 30, 2009 are as follows:

		(Unaudited)

Remainder of 2009	$	1,097
2010		366
2011 and thereafter		-

Total	$	1,463

KOBE SPORT (INTERNATIONAL) COMPANY LIMITED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 (AUDITED)

AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008 (UNAUDITED)

NOTE 14 SEGMENT DATA

The Company follows FASB ASC Topic 280, Segment Reporting, which requires that companies disclose segment data based on how management makes decision about allocating resources to segments and evaluating their performance.

The Company operates and manages its business as a single segment that includes the design, manufacturing and sales of sports shoes, sportswear and related accessories.

Throughout the two years ended December 31, 2008 and nine months ended September 30, 2009, all of the Company’s revenue was derived from China and all of its assets were located in China.

The Company’s major product categories are (1) sport shoes, which include basketball shoes, jogging shoes, skate board and other shoes, and (2) sportswear and accesories, which includes sportswear, sport socks, caps and other sport accessories. The following table sets out the analysis of the Company’s revenue by product.

	Nine Months ended September 30,				Year ended December 31,
	2009		2008		2008		2007
	(Unaudited)		(Unaudited)

Revenue from external customers:
Sport shoes	$	33,936,476	$	29,815,519	$	41,473,871	$	33,390,098
Sportswear and accessories		25,225,028		16,121,023		21,932,250		14,185,531

Total	$	59,161,504	$	45,936,542	$	63,406,121	$	47,575,629

NOTE 15 SUBSEQUENT EVENTS

The Company has evaluated events subsequent to the balance sheet date through February 1, 2010, which represents the date these financial statements were available to be issued.

Mondo Acquisition III, Inc. - FORM 8-K - EX-99.1 - THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KOBE SPORT AS OF DECEMBER 31, 2008 AND 2007, AND THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF KOBE SPORT AS OF SEPTEMBER 30, 2009 AND 2008 - February 12, 2010

Attached files

Mondo Acquisition III, Inc. Reports