Report of Independent Auditors



Exhibit 99.1



Report of Independent Auditors


To the Board of Directors and Shareholders of
Foshan Wanzhi Electron S&T Company Limited




We have audited the accompanying consolidated balance sheets of Foshan Wanzhi Electron S&T Company Limited and its subsidiary (the “Company”) as of June 30, 2007, December 31, 2006 and December 31, 2005 and the related consolidated statements of operations, shareholders' equity and cash flows for the six months ended June 30, 2007, the year ended December 31, 2006 and the period from November 4, 2005 (date of incorporation) to December 31, 2005. 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 statements 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 position of the Company as of June 30, 2007, December 31, 2006 and December 31, 2005 and the results of its operations and cash flows for the six months ended June 30, 2007, the year ended December 31, 2006 and the period from November 4, 2005 (date of incorporation) to December 31, 2005 in conformity with United States generally accepted accounting principles.




/s/ Mazars CPA Limited

Certified Public Accountants
Hong Kong
October 11, 2007




F - 1


 
Foshan Wanzhi Electron S&T Company Limited
Consolidated Statements of Operations
 
 
   
Note
 
Six months ended
June 30, 2007
   
Year ended December 31, 2006
   
From November 4, 2005 (date of incorporation) to December 31, 2005
 
 
 
 
US$
   
RMB
   
RMB
   
RMB
 
                           
Operating revenue
                         
Service income
     
304,057
     
2,371,650
     
1,486,446
     
-
 
                                   
Cost of services rendered
      (189,698 )     (1,479,646 )     (1,324,511 )    
-
 
                                   
Gross profit
     
114,359
     
892,004
     
161,935
     
-
 
                                   
General and administrative expenses
                                 
Depreciation of property, plant and equipment
      (1,524 )     (11,884 )     (3,281 )    
-
 
Other general and administrative expenses
      (38,949 )     (303,802 )     (91,170 )     (800 )
                                   
Total general and administrative expenses
      (40,473 )     (315,686 )     (94,451 )     (800 )
                                   
Income (Loss) from operations
     
73,886
     
576,318
     
67,484
      (800 )
                                   
Non-operating income
                                 
Interest income
     
180
     
1,396
     
1,241
     
-
 
Subsidy income
     
635
     
4,950
     
-
     
-
 
                                   
Total non-operating income
     
815
     
6,346
     
1,241
     
-
 
                                   
Income (Loss) before income taxes
     
74,701
     
582,664
     
68,725
      (800 )
                                   
Income tax
4
    (19,850 )     (154,831 )     (19,684 )    
-
 
                                   
Net income (loss)
     
54,851
     
427,833
     
49,041
      (800 )
 


The financial statements should be read in conjunction with the accompanying notes.


F - 2


 
Foshan Wanzhi Electron S&T Company Limited
Consolidated Balance Sheets

 
         
As of
 
         
June 30,
   
December 31,
 
         
2007
 
 
2007
   
2006
   
2005
 
 
 
Note
   
US$
   
RMB
   
RMB
   
RMB
 
                               
ASSETS                              
                               
Current assets
                             
    Cash and bank balances
         
185,946
     
1,450,377
     
120,139
     
610,300
 
    Trade receivables from third parties
         
27,421
     
213,885
     
45,220
     
-
 
    Trade receivable from a related party
   
5
     
21,481
     
167,555
     
30,775
     
-
 
    Prepayments and deposits
           
4,584
     
35,754
     
5,724
     
-
 
    Income tax recoverable
           
5,898
     
46,003
     
-
     
-
 
    Inventories
           
18,701
     
145,871
     
-
     
-
 
                                         
Total current assets
           
264,031
     
2,059,445
     
201,858
     
610,300
 
                                         
Property, plant and equipment, net
   
6
     
50,857
     
396,685
     
64,369
     
-
 
Intangible assets, net
   
7
     
310,256
     
2,420,000
     
2,420,000
     
-
 
Prepayments for purchase of a subsidiary
           
-
     
-
     
750,000
     
-
 
Prepayments for an operating right
   
8
     
927,383
     
7,233,585
     
5,936,410
         
Prepayments for purchase of computer equipment and software
   
8
     
192,308
     
1,500,000
     
1,500,000
     
-
 
Goodwill, net
   
9
     
75,685
     
590,343
     
-
     
-
 
                                         
Total assets
           
1,820,520
     
14,200,058
     
10,872,637
     
610,300
 
                                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
                                         
Current liabilities
                                       
Trade payables to third parties
           
37,170
     
289,923
     
65,631
     
-
 
Accrued charges and other payables
   
10
     
295,515
     
2,305,018
     
420,854
     
800
 
Amounts due to related parties
   
5
     
16,544
     
129,043
     
321,666
     
10,300
 
Temporary receipt
   
11
     
128,205
     
1,000,000
     
-
     
-
 
Income taxes payable
           
-
     
-
     
16,245
     
-
 
                                         
Total current liabilities
           
477,434
     
3,723,984
     
824,396
     
11,100
 
                                         
Commitments and contingencies
   
12
                                 
                                         
Shareholders' equity
                                       
Registered capital
           
1,282,051
     
10,000,000
     
10,000,000
     
600,000
 
Dedicated capital
   
13
     
682
     
5,322
     
5,322
     
-
 
Accumulated profits (losses)
           
60,353
     
470,752
     
42,919
      (800 )
                                         
Total shareholders’ equity
           
1,343,086
     
10,476,074
     
10,048,241
     
599,200
 
                                         
Total liabilities and shareholders' equity
           
1,820,520
     
14,200,058
     
10,872,637
     
610,300
 


The financial statements should be read in conjunction with the accompanying notes.

F - 3


 
Foshan Wanzhi Electron S&T Company Limited
Consolidated Statements of Shareholders' Equity

 
   
Registered Capital
   
Dedicated
Capital
   
Accumulated
(Losses) Profits
   
Total
 
   
RMB
   
RMB
   
RMB
   
RMB
   
US$
 
                               
                               
Contributions to registered capital on incorporation
   
600,000
     
-
     
-
     
600,000
     
76,923
 
                                         
     Net loss
   
-
     
-
      (800 )     (800 )     (103 )
                                         
Balance as of December 31, 2005
   
600,000
     
-
      (800 )    
599,200
     
76,820
 
                                         
     Additional contributions to registered capital
   
9,400,000
     
-
     
-
     
9,400,000
     
1,205,128
 
                                         
     Net income
   
-
     
-
     
49,041
     
49,041
     
6,287
 
                                         
     Transfer to dedicated capital
   
-
     
5,322
      (5,322 )    
-
     
-
 
                                         
Balance as of December 31, 2006
   
10,000,000
     
5,322
     
42,919
     
10,048,241
     
1,288,235
 
                                         
     Net income
   
-
     
-
     
427,833
     
427,833
     
54,851
 
                                         
Balance as of June 30, 2007
   
10,000,000
     
5,322
     
470,752
     
10,476,074
     
1,343,086
 

 
 
 
The financial statements should be read in conjunction with the accompanying notes.



F - 4


Foshan Wanzhi Electron S&T Company Limited
Consolidated Statements of Cash Flows

 
   
Note
   
Six months ended
June 30, 2007
   
Year ended
December 31, 2006
   
From  
November 4, 2005 (date of incorporation) to December 31, 2005
 
         
US$
   
RMB
   
RMB
   
RMB
 
                               
Cash flows from operating activities:
                             
Net income (loss)
         
54,851
     
427,833
     
49,041
      (800 )
                                       
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                                     
Depreciation
         
1,524
     
11,884
     
3,281
     
-
 
Changes in working capital:
                                     
Trade receivables
          (39,160 )     (305,445 )     (75,995 )    
-
 
Inventories
          (42 )     (329 )    
-
     
-
 
Prepayments and deposits
          (3,613 )     (28,185 )     (5,724 )    
-
 
Trade payables
         
28,755
     
224,292
     
65,631
     
-
 
Accrued charges and other payables
         
100,362
     
782,821
     
420,054
     
800
 
Income taxes recoverable (payable)
          (7,981 )     (62,248 )    
16,245
     
-
 
                                       
Net cash provided by operating activities
         
134,696
     
1,050,623
     
472,533
     
-
 
                                       
Cash flows from investing activities:
                                     
Payments for purchase of property, plant and equipment
          (44,128 )     (344,200 )     (67,650 )    
-
 
Payments for purchase of intangible assets
         
-
     
-
      (2,420,000 )    
-
 
Prepayments for purchase of a subsidiary
          (2,564 )     (20,000 )     (750,000 )    
-
 
Prepayments for an operating right
          (166,304 )     (1,297,175 )     (5,936,410 )    
-
 
Prepayments for purchase of computer equipment and software
         
-
     
-
      (1,500,000 )    
-
 
Temporary receipt
         
128,205
     
1,000,000
     
-
     
-
 
Acquisition of a subsidiary
   
9
     
145,335
     
1,133,613
     
-
     
-
 
                                         
Net cash provided by (used in) investing activities
           
60,544
     
472,238
      (10,674,060 )    
-
 
                                         
Cash flows from financing activities:
                                       
Contributions to registered capital
           
-
     
-
     
9,400,000
     
600,000
 
Net (repayments to) advances from related parties
            (24,696 )     (192,623 )    
311,366
     
10,300
 
                                         
Net cash (used in) provided by financing activities
            (24,696 )     (192,623 )    
9,711,366
     
610,300
 
                                         
Net increase (decrease) in cash and cash equivalents
           
170,544
     
1,330,238
      (490,161 )    
610,300
 
                                         
Cash and cash equivalents at beginning of period/year
           
15,402
     
120,139
     
610,300
     
-
 
                                         
Cash and cash equivalents at end of period/year, represented by cash and bank balances
           
185,946
     
1,450,377
     
120,139
     
610,300
 
                                         
                   
Supplemental disclosure of cash flow information
                 
                                         
Cash paid for income taxes
           
27,831
     
217,079
     
3,439
     
-
 

 
The financial statements should be read in conjunction with the accompanying notes.
 

F - 5


Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements


1.
ORGANIZATION AND PRINCIPAL ACTIVITIES

Foshan Wanzhi Electron S&T Company Limited (“Wanzhi”) was established in the People’s Republic of China (the “PRC”) on November 4, 2005 with registered capital of RMB600,000. The registered capital of Wanzhi subsequently increased to RMB10,000,000 on May 10, 2006. Wanzhi’s registered office is located at Feng Gang Road, Lishui, Nanhai District, Foshan, China.

The principal activities of Wanzhi are the provision of smart card payment system and related value-added services mainly in Guangdong province, the PRC.

On December 26, 2006, Wanzhi entered into agreements with third parties (the “Sellers”) to acquire the entire equity interest in (“Foshan Company”) at a total consideration of RMB750,000 (the “Agreements”). Foshan Company owns an operating right for the public transport smart card system in Foshan, Guangdong Province, the PRC.

Pursuant to the terms of the Agreements, the acquisition of the interest in Foshan Company becomes effective when certain conditions are fulfilled, which mainly include obtaining formal approval from the Foshan Administration Council of Industry and Commerce (the “Approval”). The Approval was obtained by Wanzhi on January 14, 2007.

On March 17, 2007, Wanzhi signed supplementary agreements with the Sellers pursuant to which Wanzhi and the Sellers agreed that the acquisition of interest in Foshan Company will only become effective when the disputes with the tax bureau are resolved. The disputes were resolved in June 2007. For accounting purpose, the acquisition of Foshan Company is deemed to be effective on June 30, 2007.

Wanzhi and Foshan Company are collectively referred to as the “Company”.

2.           BASIS OF PRESENTATION

The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America ("USGAAP").

The financial statements are presented in Renminbi which is the Company’s functional currency because the Company’s operations are primarily located in the PRC. For illustrative purposes, the exchange rate adopted for the presentation of financial information as of June 30, 2007 and for the period then ended has been made at RMB7.80 to US$1.00. No representation is made that the Renminbi could have been, or could be, converted into the United States dollars at that rate on June 30, 2007 or at any other date.

3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation
The consolidated financial statements include the financial information of the Company and its subsidiary. All intercompany balances and transactions have been eliminated on consolidation.

Goodwill
Goodwill represents the excess of cost over fair value of acquired net assets and is subject to annual impairment test. As part of an ongoing review of the valuation of goodwill, management assesses the fair value of the reporting units to determine if changes in facts and circumstances suggest that they may be impaired. If this review indicates that the goodwill is not recoverable, as determined by a discounted cash flow analysis, the carrying value of the Company's goodwill would be reduced accordingly.

Revenue recognition
The Company generally recognizes service revenues when persuasive evidence of an arrangement exists, services are rendered, the fee is fixed or determinable, and collectibility is probable.  Service revenues are recognized net of discounts.

Income and other taxes
Provision for income and other taxes has been made in accordance with the tax rates and laws in effect in the PRC.

Deferred taxes are provided using the liability method for all significant temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards. The tax consequences of those differences are classified as current or non-current based on the classification of the related assets or liabilities in the financial statements.

Inventories
Inventories, mainly comprise smart cards, are stated at the lower of cost and net realizable value.  Cost, which comprises all costs of purchase and, where applicable, other costs that have been incurred in bringing the inventories to their present location and condition, is calculated using the first-in, first-out method.  Net realizable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

F - 6

 
 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
 
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases.  Rentals receivable and payable under operating leases are recognized as income and expenses respectively on a straight-line basis over the lease terms.

Fair value of financial instruments
The estimated fair values for financial instruments under SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, are determined at discrete points in time based on relevant market information.  These estimates involve uncertainties and cannot be determined with precision.  The estimated fair values of the Company’s financial instruments, which include cash, trade receivables and trade payables, approximate their carrying values in the financial statements due to short-term maturities of these assets and liabilities.

Related parties
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

Cash equivalents
Cash equivalents include all highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and are so near maturity that they represent insignificant risk of changes in value because of changes in interest rates.

Trade receivables
Trade receivables are recorded at original invoice amount, less an estimated allowance for uncollectible accounts.  Trade credit is generally granted on a short-term basis, thus trade receivables do not bear interest.  Trade receivables are periodically evaluated for collectibility based on past credit history with customers and their current financial condition.  Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised.  Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts.  The Company generally does not require collateral for trade receivables.

Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation.

The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Expenditure incurred after the assets have been put into operation, such as repairs and maintenance, is normally recognized as an expense in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the assets, the expenditure is capitalized.

When assets are sold or retired, their costs and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognized in the statement of operations.

Depreciation is provided to write off the cost of property, plant and equipment over their estimated useful lives from the date on which they become fully operational and after taking into account their estimated residual values, using the straight-line method at the following rates per annum:

Office equipments    5 years
Computers         5 years

Intangible assets
Purchased intangible assets with finite useful lives represent computer software, which are amortized using the straight-line method over the estimated economic lives of 5 years.

Impairment of long-lived assets
The long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Determination of recoverability of asset to be held and used is by comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

F - 7

 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
 
Use of estimates
The preparation of financial statements in conformity with USGAAP requires management 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 the reported amounts of revenues and expenses during the reporting period. Such estimates include but are not limited to depreciation, amortization, taxes and contingencies.  Actual results could differ from those estimates.

New accounting pronouncements
There are no new accounting pronouncements for which adoption is expected to have a material impact on the Company’s financial statements.

4.           TAXATION

The Company is subject to PRC enterprise income tax at the rates of 33% for 2007 and 27% for 2006 and 2005.

A reconciliation of the PRC enterprise income tax rate to the effective income tax rate is as follows:

 
Six months ended
June 30, 2007
Year ended
December 31, 2006
From November 4, 2004 (date of incorporation) to December 31, 2005
 
%
%
%
       
Statutory rate
33.0
27.0
(27.0)
Unrecognized temporary differences (Note)
(0.3)
1.6
27.0
Under provision in current period/year
(6.1)
--
--
       
Effective tax rate
26.6
28.6
--

 
Note: Deferred taxation has not been recognized because the amounts are not significant to the financial statements.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), during the six months ended June 30, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Pursuant to FIN 48, the Company will recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon audit based solely on the technical merits of the tax position. The adoption of FIN 48 did not have a material impact on the Company’s financial position or results of operations.

5.           RELATED PARTY TRANSACTIONS

In addition to the transactions / information disclosed elsewhere in these financial statements, the Company had the following transactions with related parties.

(a)
Name and relationship of related parties
 
     
 
Name
Existing relationships with the Company
 
Li Xing Hao
A director and shareholder of the Company
 
Chen Jun
A director and shareholder of the Company
 
Guangdong Zhi Gao Air Conditioning Co. Ltd. (“Zhi Gao”)*
A company in which Li Xing Hao has control and beneficial interest
 
Guangzhou Wan Tao Networking Co. Ltd. (“Wan Tao”)*
A company in which Chen Jun has control and beneficial interest up to June 29, 2006

 
* The official names are in Chinese and the English names are translation for reference only.

(b)         Balances with related parties

(i)       Trade receivable from a related party

 
The amount due from Zhi Gao is unsecured, interest-free and has no fixed repayment term.
 
F - 8

 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
(ii)              Amounts due to related parties

   
As of
 
   
June 30,
   
December 31,
 
   
2007
   
2007
   
2006
   
2005
 
   
US$
   
RMB
   
RMB
   
RMB
 
                         
Zhi Gao
   
2,441
     
19,043
     
11,666
     
--
 
Wan Tao
   
--
     
--
     
--
     
10,300
 
Li Xing Hao
   
14,103
     
110,000
     
310,000
     
--
 
                                 
     
16,544
     
129,043
     
321,666
     
10,300
 

 
The amounts due are unsecured, interest-free and have no fixed repayment term.

(c)         Summary of related party transactions
 
   
Six months ended June 30, 2007
   
Year ended December 31, 2006
   
From November 4, 2004 (date of incorporation) to December 31, 2005
 
   
            US$
   
RMB
   
RMB
   
RMB
 
                         
Subcontracting charges to Wan Tao
   
-
     
-
     
72,400
     
-
 
Purchases of computer equipment and software from Li Xing Hao
   
125,826
     
981,440
     
-
     
-
 
Service income from Zhi Gao
   
-
     
-
     
321,971
     
-
 
Rental expenses to Zhi Gao
   
1,154
     
9,000
     
3,871
     
-
 
Salaries reimbursed to Zhi Gao
   
-
     
-
     
6,400
     
800
 
Sponsorship expense to Zhi Gao
   
641
     
5,000
     
-
     
-
 
 
6.           PROPERTY, PLANT AND EQUIPMENT, NET

   
As of
 
   
June 30,
   
December 31,
 
   
2007
   
2007
   
2006
   
2005
 
   
US$
   
RMB
   
RMB
   
RMB
 
                         
Office equipments
   
49,109
     
383,050
     
38,850
     
-
 
Computers
   
3,692
     
28,800
     
28,800
     
-
 
                                 
Cost
   
52,801
     
411,850
     
67,650
     
-
 
Less: accumulated depreciation
    (1,944 )     (15,165 )     (3,281 )    
-
 
                                 
     
50,857
     
396,685
     
64,369
     
-
 

7.
INTANGIBLE ASSETS

The balances of intangible assets represent cost of purchase of computer software. No amortization has been provided because the computer software has not been put into commercial use up to June 30, 2007.

F - 9

 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
 
8.           PREPAYMENTS FOR AN OPERATING RIGHT/PREPAYMENTS FOR PURCHASE OF COMPUTER EQUIPMENT AND SOFTWARE

On June 22, 2006, the Company entered into a co-operative agreement (the “Co-operative Agreement”) with other parties which include, inter alia, the Education Authority in the Nanhai District, Foshan (the “Education Authority”). Pursuant to the Co-operative Agreement, the Company needs to contribute certain computer equipment and software to the Education Authority and schools in the Nanhai District in exchange for an operating right for the provision of services in respect of a smart card system to be installed in schools located in the Nanhai District. The smart card system enables schools and parents to check progress and information of students, and being notified of their attendance record and examination results, etc. through short messages from mobile or fixed-line phones. The operating right is granted for a period of 10 years from June 30, 2006 to June 30, 2016. Management expects the setup of the smart card system will be completed by the end of 2007.

As of June 30, 2007 and December 31, 2006, the Company made contributions of computer equipment and software to the Education Authority amounting to RMB7,233,585 and RMB5,936,410 respectively.

On September 2, 2006, the Company entered into an agreement with Wan Tao to purchase computer equipment and software of RMB3,000,000 for contributions under the Co-operative Agreement and a deposit of RMB1,500,000 was paid by the Company. As of June 30, 2007, the computer equipment and software under the agreement dated September 2, 2006 had not yet been delivered. The remaining balance payment of RMB1,500,000 is disclosed as a capital commitment in note 12(b) below.

On January 12, 2007, the Company entered into another agreement with Wan Tao to further purchase computer equipment and software of RMB1,200,000. As of June 30, 2007, the computer equipment and software under the agreement dated January 12, 2007 had been delivered to the Education Authority.

9.
ACQUISITION OF A SUBSIDIARY

On June 11, 2007, Wanzhi acquired the entire equity interest in Foshan Company which owns an operating right for the public transport smart card system in Foshan, Guangdong Province, the PRC. In connection with the acquisition, Wanzhi paid a cash consideration of RMB750,000 to the former owners of Foshan Company and incurred direct costs of RMB20,000.

The fair value of the identifiable assets and liabilities of Foshan Company as at the date of acquisition and their carrying value determined in accordance with USGAAP immediately before the acquisition are as follows:
 
   
Carrying value and
fair value
 
   
RMB
 
       
Bank balances and cash
   
1,133,613
 
Prepayments and deposits
   
1,845
 
Inventories
   
145,542
 
Accrued charges and other payables
    (1,101,343 )
         
     
179,657
 
Goodwill arising on acquisition
   
590,343
 
         
Total consideration
   
770,000
 
         
Consideration:
       
   Cash paid
   
750,000
 
   Costs associated with the acquisition
   
20,000
 
         
     
770,000
 
         
Net cash acquired from the subsidiary
   
1,133,613
 
Cash paid and costs incurred
    (770,000 )
         
Net cash inflow
   
363,613
 
 
The goodwill is attributable to the profitability and the synergies expected to arise from the acquisition.
 
F - 10

 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
10.
ACCRUED CHARGES AND OTHER PAYABLES

         
As of
 
         
June 30,
   
December 31,
 
         
2007
   
2007
   
2006
   
2005
 
   
Note
   
US$
   
RMB
   
RMB
   
RMB
 
                               
Other payables to an ex-shareholder of a subsidiary
         
120,996
     
943,768
     
-
     
-
 
Other payables for purchase of computer equipment and software
   
8
     
153,846
     
1,200,000
     
-
     
-
 
Accrued charges and other payables
           
20,673
     
161,250
     
420,854
     
800
 
                                         
             
295,515
     
2,305,018
     
420,854
     
800
 

11.
TEMPORARY RECEIPT

Pursuant to an agreement entered into between the Company and a third party individual (the “Purchaser”) on January 15, 2007, the Company will dispose of a 10% equity interest in Foshan Company to the Purchaser (the “Disposal”) at a consideration of RMB1,000,000. The consideration for the Disposal was received by the Company during the six months ended June 30, 2007. Management expects the Disposal will be completed by the end of October, 2007.

12.           COMMITMENTS AND CONTINGENCIES

(a)         Commitments under operating leases

The Company leases its office premises under non-cancelable operating leases. The following table summarizes the approximate future minimum lease payments:

   
As of
 
   
June 30,
   
June 30,
   
December 31,
   
December 31,
 
   
2007
   
2007
   
2006
   
2005
 
   
US$
   
RMB
   
RMB
   
RMB
 
                         
Payable during the following periods:
                       
   Within one year
   
4,615
     
36,000
     
36,000
     
--
 
   Over one year but not exceeding two years
   
769
     
6,000
     
24,000
     
--
 
                                 
Total operating lease commitments
   
5,384
     
42,000
     
60,000
     
---
 
 
Operating lease charges for the six months ended June 30, 2007, the year ended December 31, 2006 and the period from November 4, 2005 (date of incorporation) to December 31, 2005 was RMB9,000, RMB3,871 and RMBNil respectively.

(b)         Capital expenditure commitments
 
   
As of
 
   
June 30,
   
June 30,
   
December 31,
   
December 31,
 
   
2007
   
2007
   
2006
   
2005
 
   
US$
   
RMB
   
RMB
   
RMB
 
                         
Contracted but not provided for net of deposits paid
 
192,308
   
 1,500,000
   
 1,500,000
   
 --
 
 
F - 11

 
 
Foshan Wanzhi Electron S&T Company Limited
Notes to Financial Statements
 
 
13.           DEDICATED CAPITAL

As stipulated by the relevant laws and regulations in the PRC, the Company is required to maintain a discretionary dedicated capital. The Company is required to transfer an amount equal to a minimum of 10% of its statutory net income to the dedicated capital until the balance of the dedicated capital reaches 50% of the Company’s registered capital. The dedicated capital can only be utilized to offset prior years’ losses.
 
 

 
F - 12