HOME SYSTEM GROUP (GREY:HSYT)

Pro-forma income statement reflecting the addition of a recent acquisition Electrical Appliances Co., Ltd.  See exhibit 99.3

An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”), its principal executive officer, and Chief Financial Officer (“CFO”), its principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2009. Based on that evaluation, the CEO and CFO concluded that there had been substantial improvements of the Company’s disclosure controls and procedures and the manner in which information that is required to be disclosed in Exchange Act report is reported within the time period specified in the SEC’s rule and forms. CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2009.

2010 Second Quarter Financial Highlights: 

• Revenue recorded $27 million, a 33% increase from $20.5 million recorded in the second quarter of 2009.
  
• The Fans and Lightings segment contributed significantly to the Company's revenue and operating results with revenues of $23.2 million for the three months ended June 30, 2010, nearby double the $12.2 million of the prior year’s comparable period.
  
• Gross profit was $6.3 million, up from the $4.0 million of the second quarter of 2009, reflecting the higher revenues and improved gross margin.
  
• Income from operations in the second quarter of 2010 increased by 80.2% over the corresponding 2009 period.
  
• The Company had an equity for debt exchange in April, 2010, resulting in a non-cash loss on the conversion of $1.7 million.
  
• Net income and earnings per share in the second quarter of 2010 were relatively flat, at $0.02, as compared to net income in the second quarter of 2009 due to the loss on debt exchange.

Home System’s CEO, Mr. Yu, observed, “During the second quarter of 2010, product demand continued to be robust and Home System benefited from the substantial increase in sales of ceiling fans and decorative lightings. I am particularly pleased by how smoothly the operational transition from grills to fan production was accomplished and with the strong financial results. Building upon this performance, the Company is opportunistically seeking acquisition targets. Over the past three months, we announced the planned acquisitions of two fan manufacturers. We believe both of these acquisitions will be completed in early October, upon the finalization of due diligence. Through these two manufacturers, Home System expects to expand its geographic market coverage into Southeast Asia and Japan, which will diversify our customer base as well as reduce the seasonality impact on the Company’s operation. We believe that this will have positive effect by maintaining production on a more constant basis over the year. Moreover, by combining product procurements requirements, we can further improve our gross margin and earnings. In the future, we expect to further expand our sales network and diversify our product lines. We are confident in our business strategy and believe that Home system is very well positioned for continued growth.”  

On July 15, 2010, Home System Group (the “Company”) through its wholly-owned subsidiaries, Zhongshan City Weihe Appliances Co., Ltd. (“Weihe”), a company organized under the laws of the People’s Republic of China (“PRC”), and Asia Forever Investment Limited (“Asia Forever”), a company organized under the laws of the Hong Kong Special Administrative Region, entered into an Equity Ownership Transfer Agreement (the “Acquisition Agreement”) with Jiangmen City Jinxinglong Electrical Appliance Co., Ltd. (“Jinxinglong”) and all the shareholders of Jinxinglong (the “Sellers”), pursuant to which Wehei and Asia Forever have agreed to acquire and Sellers have agreed to sell 100% of the Sellers’ equity interest in Jinxinglong.

Pursuant to the terms of the Acquisition Agreement, Weihe and Asia Forever will acquire, for cash consideration of $15,000,000 (“Acquisition Price”), 70% and 30%, respectively, of all outstanding equity interest in Jinxinglong.

The total consideration for the acquisition of Jinxinglong will be paid to the Sellers in five payments as follows:

•  5% of the Acquisition Price within 5 business days of the full execution of the Acquisition Agreement. 
• 5% of the Acquisition Price within 5 business days of the completion of the registration of the transfer of 70% of the outstanding equity interest in Jinxinglong to Weihe and transfer of 30% of the outstanding equity interest in Jinxinglong to Asian Forever with the applicable regulatory government departments in the People’s Republic of China.
• 20% of the Acquisition Price within 5 business days of the completion of the May 31, 2010 financial audit of Jinxinglong. 
• 30% of the Acquisition Price upon the completion of the audit of Jinxinglong’s financial statements for the fiscal year 2010. 
• 30% of the Acquisition Price by December 31, 2011.

In the event the audit results of the financial statements of Jinxinglong show that its actual net income for the twelve months ended May 31, 2010 is less than $2,500,000, the Acquisition Price to be paid by Weihe and Asia Forever shall be adjusted proportionally.

Mr. Yu concluded, “As we enter 2010, the Company expects some continued weakness in the overall grill market, but we feel that the sales of our small appliances will continue to grow. Additionally we are continuing to review new product opportunities while maintaining our strengthened margins and our commitment to quality and customer satisfaction. In summary we look forward to another year of strong sales and earnings performance for Home System Group in 2010.”

Source: Business Wire (March 29, 2010)

Debt holders show a sign of confidence and convert approximately $17.5 million of debt, representing about half of the Company’s total debt of $36 million, into equity.

Source: 8K

We are removing Home System Group ($2.92) from the GeoSpecial list. The stock has had a nice run since our initial mention at $1.35 on July 29, 2009, when it resolved an outstanding debt issue that had been pressuring the stock. However, The Company's absolute EPS numbers are minimal.  We will continue to monitor the earnings per share picture and possibly interview the company.

Home System ($1.35) filed an 8K on July 28, 2009 outlining the restructuring of the repayment of past due shareholder loans.  The stock has been quite volatile of late rising from approximately $0.40 in may of  2009 to $1.30 in June.  In mid July the stock tumbled on one trading session to $0.75.  The GeoTeam® is speculating that this drop was predicated on concerns over past due loans.  The stock has since rebounded, possibly as a result of the resolution of this issue.  We are coding the stock as low tier special situation opportunity, based upon corporate restructuring.  Two items must still be diagnosed .

1)  Will Home System repay the loan from operations or will it be required to raise capital, leading to dilution?

2)  The company has yet to report consistent bottom-line growth.