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SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 2004
Commission File Number 1-10366
WEIDA COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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New Jersey
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22-2582847
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(State or Other Jurisdiction of Incorporation
or Organization)
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(IRS Employer Identification No.)
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515 East Las Olas Boulevard, Suite 1350
Fort Lauderdale, Florida
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33301
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(Address of Principal Executive Offices)
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(Zip Code)
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(954) 527-7750
(Registrant’s Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share.
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes o No ý
As
of December 31, 2003, the aggregate market value of the common equity held
by non-affiliates of the registrant was approximately $2,685,089. The
determination of stock ownership by non-affiliates is based upon the
registrant’s knowledge of stock ownership as of December 31, 2003 and is
made solely for purposes of responding to the requirements of the form and the
registrant is not bound by this determination for any other purpose. The
aggregate market value is based upon the closing sales price of the
registrant’s common stock of $3.60, as reported by the Over-The-Counter
Bulletin Board on December 31, 2003.
As
of June 30, 2004, the aggregate market value of the common equity held by
non-affiliates of the registrant was approximately $231,571,675. The
determination of stock ownership by non-affiliates is based upon the
registrant’s knowledge of stock ownership as of June 30, 2004 and is made
solely for purposes of responding to the requirements of the form and the
registrant is not bound by this determination for any other purpose. The
aggregate market value is based upon the closing sales price of the
registrant’s common stock of $5.50, as reported by the Over-The-Counter
Bulletin Board on June 30, 2004.
As
of September 17, 2004, the registrant had 72,334,486 shares of common
stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
WEIDA COMMUNICATIONS, INC.
Form 10-K
For the Fiscal Year Ended June 30, 2004
Index
i
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements as that term is defined
in the Private Securities Litigation Reform Act of 1995. The words “believe,”
“may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,”
“expect” and similar expressions, as they relate to us, are intended to
identify forward-looking statements. Such statements are based on the current
expectations of our management only, and are subject to a number of risks,
uncertainties and assumptions described in this report, including, among other
things: the need for equity financing in order to consummate the acquisition of
an equity interest in Guangzhou Weida Communications Technology Co., Ltd.
(a/k/a Weida Communications Technology Company Limited), limited operating
history, our historical and likely future losses, uncertain regulatory
landscape in the People’s Republic of China, fluctuations in quarterly
operating results, our reliance on the provision of VSAT-based communications
services for the majority of our revenues, changes in technology and market
requirements, decline in demand for our products, inability to timely develop
and introduce new technologies, products and applications, difficulties or
delays in absorbing and integrating acquired operations, products, technologies
and personnel, loss of market share, and pressure on pricing resulting from competition,
which could cause our actual results or performance to differ materially from
those described herein. These risks are not exhaustive. Other sections of this
report may include additional factors that could adversely impact our business
and financial performance. Moreover, we operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for our management to predict all risk factors, nor can we
assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
You should read this report and the documents that we reference in this
report and have filed as exhibits, completely and with the understanding that
our actual future results may be materially different from what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
ii
In this report, the terms “Company,” “Weida,” “we,” “us,” and “our”
refer to Weida Communications, Inc., a New Jersey corporation, and its
subsidiaries.
PART
I
ITEM
1. BUSINESS
Overview
We were incorporated in March 1985 under the laws of the State of
New Jersey as Laser Recording Systems, Inc.
In June 2004, we changed our name to Weida Communications, Inc.
We conduct our business in China solely through certain contractual
arrangements among our affiliates, Guangzhou Weida Communications Technology
Co., Ltd. (a/k/a Weida Communications Technology Company Limited), a
communications service company organized under the laws of the People’s
Republic of China (“PRC” or “China”) and wholly-owned by PRC citizens (“Weida
PRC”) and the shareholders of Weida PRC.
Although we do not have an equity interest in Weida PRC, we control and
enjoy the economic benefits of Weida PRC through such contractual arrangements.
Our wholly-owned subsidiary, SCL Ventures, Ltd., a company organized
under the laws of the British Virgin Islands (“SCL”), was formed in May 2003
for the purpose of engaging in the telecommunications business in China and
entered into a master agreement with Weida PRC which was ratified and approved
by the board of directors of SCL in May 2003.
We recently acquired all of the issued and outstanding shares of SCL in
a share exchange transaction in June 2004, which has been accounted for
similar to a reverse acquisition in which SCL is the acquirer for accounting
purposes.
As part of the transactions contemplated by the master agreement, we
completed in October 2004 the acquisition of 99.99% of the registered
capital of Ocean International Holdings Limited, a company incorporated in the
Hong Kong Special Administrative Region of the PRC (“OIHL”). The remaining .01% of the registered capital
of OIHL is held by one of our executives as a nominal holder in order to meet
local Hong Kong legal requirements.
OIHL is the sole owner and holder of all of the registered capital of
Ocean Tian Di Communication Technology Co., Ltd. (Guangzhou), a wholly-owned
foreign enterprise (the “WOFE”). The
WOFE has entered into an exclusive service and support agreement with Weida
PRC, effective as of September 1, 2004, which provides for the WOFE to provide
support services to Weida PRC in exchange for receiving fees equal to 51% of
all Weida PRC revenues above certain minimum amounts.
We were organized as the successor to several
other businesses of our original founder. From our organization until 1993, we
developed and marketed document imaging systems to the pharmaceutical industry,
the legal profession and others having a need to manage large volumes of
documents. From 1988 to 1998, Poly Ventures Ltd. held approximately 70% of the
outstanding voting shares and maintained a controlling interest in the Company.
In 1998, several investors acquired the remaining interest in the Company from
Poly Ventures Ltd. As reported in our
Quarterly Report on Form 10-Q for the quarter ended October 31, 1993, we
ceased operations, terminated all of our employees on August 16, 1993 and
carried out an orderly winding up of our affairs, including transferring all of
our existing projects to our customers. From October 31, 1993 to
January 7, 2000, we did not file any reports with the SEC. On
January 7, 2000, we filed an Annual Report on Form 10-K for the fiscal
year ended January 31, 1999 and the required Form 10-Q’s for the following
quarters and thereafter filed the required Form 10-K’s and Form 10-Q’s for the
following fiscal periods.
1
Our Corporate
Structure
The chart below sets forth our corporate and share ownership structure
as of the date of this report.
(1) As of the date of this report, we do not have
an equity interest in Weida PRC.
Rather, we have control of and a 51% profit-sharing interest in Weida
PRC through contractual arrangements between the WOFE and Weida PRC. Pursuant to the terms of a trust agreement
entered into by SCL, Weida PRC and the shareholders of Weida PRC, these
shareholders hold 51% of the shares of Weida PRC and the Weida EJV (a
Sino-foreign Equity Joint Venture) in trust for the benefit of SCL for future
transfer to SCL pursuant to the terms of the equity interest transfer agreement
and the future equity interest transfer agreement described below. These shareholders may only transfer or
dispose of the shares held in trust upon written instructions from SCL and must
at all times exercise the voting rights of the shares held in trust at the
direction of SCL. Upon consummation of
an equity interest transfer agreement between SCL and the current shareholders
of Weida PRC, SCL will own 25% of the equity interest in Weida PRC, at which
time our 51% profit-sharing interest in Weida PRC will proportionally
decrease. Upon consummation of a future
equity interest transfer agreement between SCL and the current shareholders of
Weida PRC, SCL will own between 25% and 51% of the equity interest in Weida
PRC, at which time our then-current percentage profit-sharing interest in Weida
PRC will proportionally decrease.
(2) Upon consummation of an equity interest
transfer agreement between SCL and the current shareholders of Weida PRC, SCL
will own 25% of the equity interest in Weida PRC and the current shareholders
of Weida PRC will own 75% of the equity interest in Weida PRC. Upon consummation of a future equity
interest transfer agreement between SCL and the current shareholders of Weida
PRC, SCL will own between 25% and 51% of the equity interest in Weida PRC and
the current shareholders of Weida PRC will own the remaining percentage of the
equity interest in Weida PRC.
We do not have an equity interest in Weida PRC, but instead control and
enjoy the economic benefits of Weida PRC through certain contractual
arrangements among our affiliates, Weida PRC and the shareholders of Weida PRC
as described below. For a further
description of each of these agreements, see Item 13, “Certain Relationships
and Related Transactions – Related Party Agreements – Acquisition of Control
and a Majority Profit-Sharing Interest in Weida PRC.”
As part of these contractual arrangements, SCL has entered into a
master agreement with Weida PRC and all of Weida PRC’s shareholders. The master agreement, as modified by a
stock transfer memo executed by the Company, provides the framework for the
acquisition, through a series of transactions, of control and a legal ownership
interest in Weida PRC.
SCL, together with one of our officers (the latter as a nominal holder
in order to meet local Hong Kong legal requirements), entered in
August 2004 into a purchase and sale agreement with the shareholders
2
of OIHL. Pursuant to this
agreement, SCL and the executive recently acquired all of the registered
capital of OIHL, with SCL owning 99.99% of the registered capital of OIHL and
the executive owning .01% of the registered capital. OIHL is the sole owner and
holder of all of the registered capital of the WOFE.
SCL has also entered into a trust agreement with Weida PRC and the
shareholders of Weida PRC. Pursuant to
this agreement, the shareholders of Weida PRC will hold 51% of the shares of
Weida PRC and the Weida EJV (a Sino-foreign Joint Venture) in trust for the
benefit of SCL.
The WOFE has also entered into a service and support agreement with
Weida PRC. Pursuant to this agreement,
the WOFE will provide to Weida PRC business support and services within the
PRC, including but not limited to, assistance in selection, procurement and
financing of satellite communication and network infrastructure equipment;
outsourcing of employees; marketing research and consulting services; and
business promotion services, in exchange for service fees. Also pursuant to this agreement, the WOFE
will be the sole and exclusive owner of all intellectual property rights
arising from the performance of this agreement, whether developed by the WOFE
or Weida PRC, and whether based on the WOFE’s or Weida PRC’s intellectual
property rights. The shareholders of
Weida PRC have also entered into a pledge agreement with the WOFE, pursuant to
which these shareholders pledged their interest in Weida PRC to guarantee the
performance of Weida PRC’s payment and other obligations under the service and
support agreement.
SCL has also entered into an equity interest transfer agreement with
the shareholders of Weida PRC. Pursuant
to this agreement, the shareholders of Weida PRC will sell and transfer to SCL
25% of the equity interest in Weida PRC upon conversion of Weida PRC into a
Sino-foreign Equity Joint Venture (the “Weida EJV”).
SCL has also entered into (i) an equity joint venture contract and (ii)
articles of association with the shareholders of Weida PRC. Pursuant to these agreements, Weida PRC will
be converted into the Weida EJV upon the fulfillment of certain conditions
precedent. These agreements establish
the purpose and scope of the Weida EJV and set forth the capitalization and
financing requirements, operations and corporate governance structure of the
Weida EJV.
SCL has also entered into a future equity interest transfer agreement
with the shareholders of Weida PRC.
Pursuant to this agreement, at such future time as the laws of the PRC
allow, the shareholders of Weida PRC will sell and transfer to SCL, on a pro
rata basis, additional equity ownership in Weida PRC (over and above the 25%
equity interest in Weida PRC being transferred to SCL pursuant to the equity
interest transfer agreement) up to the greater of (i) the maximum allowed by
PRC law and (ii) a total of 51% of the equity interest in Weida PRC (including
the 25% equity interest in Weida PRC being transferred to SCL pursuant to the
equity interest transfer agreement).
In the opinion of our PRC legal counsel, Chen & Co. Law Firm, the ownership
structures of the WOFE, Weida PRC and the Weida EJV (the latter when duly
approved by the relevant PRC authorities), and our contractual arrangements
with these companies and their respective shareholders as described in this
report, are (to the extent they purport to be governed by PRC law) in
compliance with all existing PRC laws and regulations and are (to the extent
they purport to be governed by PRC law) enforceable in accordance with their
terms and conditions. Nevertheless, there are substantial uncertainties
regarding the interpretation and implementation of current PRC laws and
regulations. See this Item 1, “—Risks Related to Our Business and Corporate
Structure—If the PRC government finds that the agreements that establish the
structure for operating our business do not comply with PRC government
restrictions, we could be subject to severe penalties” and “—Risks Related to
Our Business and Corporate Structure—Our contractual arrangements with Weida
PRC may not be as effective in providing operational control as direct
ownership of this business and may be difficult to enforce.” As discussed in those risk factors, certain
events may cause us to lose the benefits and control intended to be created by these
arrangements.
3
Employees
As of September 17, 2004 we had 35 full time equivalent employees.
Guangzhou Weida
Communications Technology Co., Ltd.
General
Weida PRC is a wholly privately-owned company established in 2001 in
response to the Chinese government recently allowing an individual company to
obtain a 100% private, non-governmental and non-military, VSAT satellite
license. VSAT (Very Small Aperture Terminal) is a relatively small satellite
antenna used by corporations and governments for satellite based
point-to-multipoint data communications, such as financial transactions,
Internet services, multimedia and television. VSAT offers a number of
advantages over terrestrial alternatives for businesses and homes. For private
applications, companies can have total control of their own communication
system without dependence on other companies. Business and home users also get
greater bandwidth than if using ordinary telephone service.
Currently, Weida PRC is the only wholly privately-owned company holding
a VSAT satellite license in the PRC (the only other privately-owned company to
recently hold a license was merged into a joint government venture in
January 2004). The scope of the
license permits the offer and sale of a variety of broadband satellite
communications services, including audio and video services, Internet
connectivity, multimedia services, HDTV, and Voice Over IP. The license granted
provides Weida PRC the opportunity to develop and deliver such satellite
communications in China. Weida PRC is licensed to provide services in the
rapidly growing Voice Over IP telephone service market, and to provide such
services as a phone operator.
Weida PRC is currently delivering service to over 56 customers, with
more than 250 VSAT terminals in regular revenue-generating use at June 30,
2004, compared with 36 customers and 140 VSAT terminals at June 30, 2003,
and has entered into contracts and negotiations with customer targets including
brokerage firms, hotels, and national governmental ministries.
In August 2004 Weida PRC entered into a cooperation agreement with
a subsidiary of China Telecommunications Corporation (“China Telecom”). Pursuant to this agreement, Weida PRC will
offer its satellite transmission equipment and network as part of a disaster
recovery program and back-up system for China Telecom’s major accounts and will
furnish Internet capability. The arrangement covers all of China Telecom’s
divisions. Pursuant to this agreement,
the next step will be cooperative efforts between Weida PRC and each China
Telecom division to market and sell the satellite transmission equipment and
network as part of a disaster recovery program and back-up system for China
Telecom’s major accounts. Weida PRC expects to receive both equipment payments
and continuing service-related fees from purchase orders from China Telecom
accounts. Our revenues from the
cooperation agreement depend on China Telecom’s end-user accounts placing
purchase orders. No such purchase
orders have yet been obtained, and there is not likely to be a material amount
of revenue for Weida PRC from this arrangement before the first quarter of
2005.
Weida PRC does not launch or operate the space satellites. Instead, it
provides the ground based transmitters and receivers that allow corporate and
government customers to use satellite communications. Weida PRC negotiates for
and provides satellite bandwidth, provides equipment sales and installations,
and, equally important, manages and improves the communications data stream to
the customer.
VSATs and Satellites
in the China Market
VSAT is a rapidly growing method of transmission in China, as it can be
far more efficient in many ways than landlines. For example, in the United
States MCI is installing a system for the United States
4
Postal Service to include 40,000 sites. Bass Hotels & Resorts,
which owns and operates more than 3,000 hotels in nearly 100 countries, uses
VSAT transmissions for about 70% of its networking.
In China, utilizing Weida PRC’s satellite transmission services and
products can solve a key existing problem - the lack of telecommunications in
many zones that are difficult to wire because of geography or because existing
telecommunications facilities are held by monopoly in a particular area.
Satellite is an ideal solution for residential hillsides, office buildings and
student co-ops. Satellite transmission facilities can be implemented much more
rapidly and at much lower cost than landlines. The large population bases of
major cities, coupled with extensive “old” buildings, means that re-wiring for
broadband services is not a practical venture in many instances. VSAT provides
a much more cost-effective solution.
China has over 5,400 islands, many of which are populated, remote and
cannot be efficiently hard-wired for high speed Internet access with
traditional landlines. Further, China has more than 40% of its land mass
designated as “mountainous.” “Flatlands” only account for 12% of China’s land
area. Moreover, China’s central government is aggressively promoting growth and
investment westward to bring economic and social improvement to the poorer
western provinces requiring additional communications infrastructure. Clearly,
satellite provides an immediate, low cost solution to these infrastructure
challenges.
Wireless satellite communications are the only means currently
available to resolve “moveable communications” demands, meaning the use of
remote wireless transmission vehicles. Such demands stem from a wide range of
applications such as geologic exploration, archeological excavations and other
civil industries. This key area of opportunity comes from the ability of
satellite transmissions to skip from city to city, providing for obvious
benefits versus large-scale projects requiring broadband wiring across the
country’s large and difficult terrain. Satellite receivers can be deployed
today, while subterranean broadband wiring requires substantial capital and
decades of deployment across the expansive country.
Voice Over Internet
Protocol in the China Market
The market for Voice Over Internet Protocol (VOIP) telephone service
presents a particular opportunity for Weida PRC. Approximately 900 million
Chinese consumers do not presently have phone service. Weida PRC’s VOIP can
rapidly create low-cost service to these non-users as well as provide
lower-cost telephone service to the existing users. This market provides both a
growth opportunity for Weida PRC in phone services and a market for Weida PRC’s
other high-bandwidth, higher revenue services such as Internet, multimedia,
gaming, and e-Learning, among others.
By using VOIP, consumers and businesses can greatly reduce their phone
bills. Weida PRC has licensed technology to reduce potential low-quality audio
that had been an objection to VOIP. We expect VOIP to be a key choice for rural
telephone users and anyone desiring lower phone costs, and VOIP is experiencing
rapid growth in China.
Prospective Markets
and Applications for Weida PRC Services
Currently 99.5% of satellite data transmissions in China are one-way
only, merely downloaded to a specific site. Weida PRC’s VSAT license allows for
back-channel, bi-directional communications, the critical element necessary for
interactivity, Internet services, polling, remote metering and sensing, and
e-learning, among others.
As the only private entity to hold a full array of VSAT licenses, Weida
PRC believes it can be a leader in the significant demand for satellite
services within China. The license provides, among other things, for both
low-speed and high-speed digital communications, including audio and video
services, Internet, multimedia, HDTV, and VOIP.
5
The large population bases of major cities, coupled with extensive
“old” buildings, means that re-wiring for broadband services is not a practical
venture in many instances. VSAT provides a dramatically more cost-effective
solution. Weida PRC believes that it can provide broadband Internet IP services
at a substantially reduced cost to what is currently charged by the fixed line
telecom providers.
In addition to initial beta and test deployment sites, Weida PRC has
installed the first three of a chain of substations for military security
purposes, and separate intranet/VPNs for a hotel chain, financial services and
broadcasting group. Currently, Weida PRC has several proposals under review
with hotel chains servicing major metropolitan areas in China. Weida PRC has
submitted proposals to a number of potential users and intends to submit
additional proposals to two distance learning universities in China working in
cooperation with U.S. and European universities.
Another example of possible use is through the State Grid Corporation
of China and China Southern Power Grid Company. Each has begun an initiative to
have dual communications links between its transformer substations and control
centers, as a method to automate over 35,000 substations into non-manned
metering centers. Only 20% are currently unmanned. Each has determined that
satellite linkage is the ideal choice. As part of an initial proof of concept,
Weida PRC has 76 VSAT substations running in the electricity system, which is
hosted on the main satellite station of the National Bureau of Seismology.
Weida PRC projects opening between 600 to 1,000 new substations per annum for
the next 5 years. Another example is the state’s program for grain depot
monitoring and Weida PRC is in discussions regarding monitoring solutions for
its 9,000 depots.
Environmental protection is another government initiative requiring
unmanned metering. Weida PRC is in discussions with several provincial
departments of environmental protection concerning a pilot project for
pollution monitoring in lakes, rivers, forests and urban areas.
Another major opportunity is in enterprise-wide networks for
corporations. Weida PRC can tie together a corporation’s offices in various
regions utilizing high security. Another advantage is speed, as a field office
can be quickly, easily and inexpensively incorporated into the enterprise
network with an installation time of only two hours for a satellite substation.
In addition to common data communications, the enterprise can use Weida PRC
satellites to create an in-company TV network for visual meetings and training
broadcasting, along with remote monitoring (security and processes), and
controlling devices (office automation systems).
Weida PRC’s satellites have similar advantages for the stock brokerage
industry. Weida PRC can publicly broadcast information and then complete
ordering and other instructions for transactions through their bi-directional
channel capabilities.
Internet connections in hotels have become an important criterion for
tourists choosing a hotel. For instance, the China Correspondents Association
set Internet connectivity as one of the first requirements in determining a
hotel’s readiness to receive travelers in conjunction with the Asian qualifying
games for the World Soccer Cup and the Summer Olympic Games in 2008. At
present, there are over 10,000 three-star hotels in China, of which fewer than
10% have Internet connectivity. As many hotels were built at an earlier time
when the Internet was not available, setting up a conventional network is
expensive and time-consuming for these hotels.
Weida PRC’s Service
and Product Offerings
Weida PRC designs, engineers, integrates and installs satellite-based
ground segment systems and network solutions for the business-to-business
market segment in China. Our systems consist
of an earth station and ancillary subsystems in what is referred to as a ground
segment. An earth station is an
integrated system consisting of antennas, radio signal transmitting and
receiving equipment, modulation and demodulation equipment, monitor and control
systems and voice, data and video network interface
6
equipment. Ancillary subsystems
may include microwave links or fiber optic links for the transmission of
communication traffic to a central office, or generators for emergency power
requirements. Weida PRC’s customizable
modular earth stations may be sold individually as stand-alone ground segment
systems or may be used as subsystems to integrate into a complete ground
segment system or network. Weida PRC
segments this to create a modular capability allowing it to address its
customers’ specific service and equipment needs, as well as affording it the
flexibility to integrate to a wide variety of legacy systems and network
platforms. All of Weida PRC’s earth
stations conform to China’s applicable satellite standards.
Weida PRC’s earth stations provide point-to-point high-capacity data
links and hubs for satellite networks.
Its earth stations are modular with all electronics enclosed in a
compact unit.
• Weida PRC’s Terminals. Weida PRC provides a range of
general purpose, medium-capacity earth stations, designed for
business-to-business networks. All of
the supporting electronics are housed in a light-weight weatherproof unit mounted
on the antenna. The modem is housed in
an indoor enclosure.
Additionally, Weida PRC supplies a family of digital earth stations to
be used in environments requiring limited capacity in geographic areas with
limited or no telecommunications infrastructure. These earth stations integrate radio frequency and satellite
modem components into one antenna mounted package.
Weida PRC also provides a transportable earth station designed
primarily for emergency communications and data gathering. The group is comprised of portable modular
earth stations designed for quick deployment and operate anywhere in
China. All of the components are
mounted in separate cases, which are small and compact enough to transport by
trucks and commercial carriers.
• Communications
Service. Weida PRC customizes its
communications service to meet customer needs by offering standardized services
and custom-engineered solutions. The
standard service can be sold separately or can be used as part of a customized
solution. Weida PRC uses its experience
in satellite communications, Internet Protocol, networks and information
technology in designing its customized solutions.
China is following the telecommunications path laid out by the western
world by moving to Internet Protocol based networks and services based on the
lower cost of integration and implementation, and the flexibility these
networks offer. Satellite-based
communications complement this transition as many of the regions in China lack
the next generation terrestrial networks required to accommodate the rapid and
reliable transmission of information and bandwidth underlying the growth in
traffic. Weida PRC is a network service
provider that offers next generation network services to service providers,
ISP’s, enterprises, and government agencies in China. It allows customers such as corporate headquarters and government
agencies to combine satellite and terrestrial communications networks and
connect to China’s Internet backbone to obtain high-speed access services.
Weida PRC also provides point-to-multipoint delivery of
multimedia. It provides video, audio
and data satellite solutions that service retail, business-to-business
customers and government agencies. As
China continues to convert into a market economy the retail sector continues to
develop ways to promote their products.
Weida PRC provides video digital networks to support in-store messaging
and training. Training is becoming a
significant segment as government agencies look for cost effective ways to deploy
and educate employees.
Weida PRC’s Internet network offers point-to-point and multipoint
Internet connectivity for ISP’s, service providers, government and
business-to-business customers. These
services provide asymmetrical forward and return links optimized for Internet
applications. Weida PRC offers two way
satellite Internet connectivity as well as one-way satellite Internet
connectivity with terrestrial return.
7
• ISDN Network. Weida PRC’s services offer full-time connections at
standard rates of 64Kbps and 128Kbps to geographically dispersed
locations. It can provide these
services to organizations needing full-time digital connections for voice,
data, and video conferencing in locations around China where the terrestrial
infrastructure is inadequate or unavailable.
Weida PRC also provides high-speed data connections for intermittent
use through an added value service subscription. It provides data rates up to 2Mbps to geographically dispersed
locations. Customers who have high
bandwidth requirements use this service to reduce costs when they require
intermittent services (e.g., emergency agencies).
Overview of Weida’s
VSAT Network
The Weida PRC VSAT satellite network has
three main components:
• Network
Operations Center (NOC).
This is the central hub in Beijing where the data, video, voice and audio
content originates from. The central hub is connected to a 7-meter earth
station, which transmits and receives the content from the satellite. The hub
controls the network through a network management system (NMS) server, which
allows a network operator to monitor and control all the components of the
network.
• The
Satellite. We currently
lease satellite transponder bandwidth from the ASIASAT satellite to transmit
and receive content for our VSAT satellite network. The NOC transmits the
outbound information (from the NOC to the VSATs) at 64Kbps (2Mbps low-speed
VSAT terminal subscribers) to the 128Kbps satellite, which beams it back to earth
for reception by the remote VSATs. The VSATs located in the remote locations
also send inbound information (from the VSATs to the NOC) via the same
satellite transponder to the NOC.
• VSAT Remote
Terminal. We use the 2Mbps
(for one-way broadcast) and the ViaSat 2Mbps (for two-way communications) VSAT
equipment for our network. These VSATs have two main sub-systems: the dish
antenna and the Indoor Unit. The VSAT dish antenna is usually installed at the
remote customer site on a roof or wall, although a mobile unit is available and
is in limited use by a few customers. A
coaxial or Ethernet cable is then run from the VSAT dish antenna to the Indoor
Unit, which is installed inside the customer site and connects to a customer’s
PC/LAN, television or telephone system.
Marketing and Sales
We utilize distribution channels such as a
small direct sales force, distributors, resellers, Internet marketing as well
as joint marketing with strategic allies to reach our customers. We believe
these channels are most appropriate because they enable us to market ourselves
in the shortest time, reduce our capital requirements and are good for close
customer relationship building. Our primary focus is to jointly work with China
Telecom and our other partners to combine forces to adequately service the
business-to-business markets.
Our sales and marketing team currently
consists of nine personnel located in our offices in Beijing and Guangzhou. A
typical sales process involves relationship building, customer requirements
analysis, product presentations, demonstrations, project implementation and
after-sales support. The following are some of the marketing activities that we
conduct to reach out to new customers:
• Direct
Marketing. The sales team conducts direct marketing to
potential clients and existing customers. They conduct pre-sales presentations
that demonstrate the nature and benefits of our products and services and how
such services will enhance their operations and management. In particular, the
sales team demonstrates how clients can take advantage of our solutions to
implement their networking and data
8
transmission needs. The sales team is also
trained to address the business concerns and networking requirements of
customers.
• Joint
Marketing. We work closely with China Telecom
Information Systems to promote our services, which are distributed by China
Telecom as a private labeled service, as well as under Weida PRC’s brand name. Print, local media and telemarketing achieve
this.
We also participate in various road shows and seminars
organized by our marketing department and our other strategic partners to
present our latest satellite transmission solutions to our potential customers.
Regulatory
Environment
The VSAT licensing structure in China was formerly under the control of
the Ministry of Post and Telecommunication. It is now under the auspices of the
Ministry of Information Industries (MII). Only the MII can grant VSAT licenses
within the country.
The MII has deemed VSAT communications to be a “value-added business.”
As such, a separate business license is required. Before 2000, any company
applying for such a license had to show more than 50% ownership by state-owned
assets. After 2000, the requirement was lifted. However, the difficulties of
obtaining a VSAT license have only intensified, and Weida PRC remains the first
and currently the only such private licensee (the only other privately-owned
entity recently holding a license was merged into a joint government venture in
January 2004). Weida PRC has no
ownership by the state.
A requirement for obtaining a license is the strict provision regarding
registered capital. The registered capital required for a VSAT operator has now
been raised to RMB 50,000,000 (more than US$ 6 million), a significant barrier
to entry within China. However, such capital is not the only requirement. Any
company applying must prove long-term service viability to MII. Early VSAT
failures by inefficient state-owned entities have made MII particularly
stringent, and leery of awarding any more licenses. Although the government
appears to have in place sensible, quantitative requirements, in reality it
makes a highly qualitative decision in which few companies can prevail.
During 2001, more than 100 companies applied to the MII for VSAT
business licenses and only five of them were granted (i.e., less than 5%). In
2002, one additional VSAT license was granted, to a government-controlled
enterprise, and three were rescinded. The government did not grant any VSAT
licenses in 2003, and approximately three to five were rescinded, as the
government continued to shut down inefficient operators. As of September 17, 2004, no VSAT
licenses have been granted in 2004, the only other private operation was closed
and merged into a joint venture with the government, and five more licenses had
been rescinded. There is a regulation within the MII that no more VSAT licenses
will be granted for the existing value-added business line. Although this information
is not publicly published, if a company applies for a business-line VSAT
license and there is an existing company already licensed, the applicant cannot
gain a license. Instead, the MII suggests to the applicant that it seek some
type of cooperative agreement with the licensed entity.
Current
Marketplace and Competition
Currently, there are approximately 34 VSAT licensed operators in China,
operating a total of approximately 34,540 terminals, of which approximately 76%
are receive-only (unidirectional) and 24% are bi-directional. Weida PRC’s largest competitors in satellite
transmission are ChinaSat, China Orient, ChinaCast, Guangdong South Satellite
Telecom and Shanghai VSAT. Other
competitors include approximately 15 small single system and network
providers. Most of Weida PRC’s
competitors are substantially larger, with greater capital resources, longer
operating history and a larger base of installed revenue-producing VSAT
terminals.
9
In terms of receive-only users, television receiving, stock quotes
receiving and receive-only distance learning stations account for 40%, 50% and
10% respectively. In terms of bi-direction users, paging is the major
application. Owing to the decline and slower growth of the paging business in
China, many VSAT stations lie idle. Data acquisition and distance communication
stations form the other subset of two-way users. The speed of most two-way
stations is low, ranging from 960bps to 64Kbps, as these operators use older
equipment and protocols.
Therefore, most operators are engaged in one-way broadcast services,
and their original systems simply cannot meet the demands required for robust,
two-way applications. Yet, this is the growth area of the market - hundreds of
business-to-business customers who are demanding high-speed, two-way services.
With respect to technology, Weida PRC believes that there is little
competitive edge between operators in terms of equipment. All operators can
select from the same hardware manufacturers, and there is no exclusivity. We
believe companies will compete for new applications and better services. This
is where we believe Weida PRC has a decided edge due to its ability to create
customized hardware and software solutions and services in response to its
customers’ demands. We believe Weida PRC stands above other VSAT operators with
respect to its in-house technical capabilities for unique customer solutions.
This is where Weida PRC intends to excel, owing to the vision of its
management team and high quality of its market-oriented personnel. Weida PRC
plans to focus upon capturing market share through new services and
imaginatively converging various technologies.
Technology
The communication rate and protocols of the early satellite system do
not comply with the current communication requirements and market desires. If
these older systems are attempting IP communications, some new equipment must
be added, such as routers, switches, etc. This previous equipment is based on a
private line communication mode, which yields low efficiency when applied to
the current, widely-used TCP/IP acknowledgement scheme. Further, this pre-2000
equipment does not contain the “spoofing” protocol as demanded by customers for
TCP/IP applications.
Weida PRC believes it is ahead of others in China in the usage of the
IP platform for satellite communications of data, audio and video (multimedia).
At present, Weida PRC believes no other Chinese VSAT operator offers such
services. Weida PRC has completed its pilot work, and is estimated to be one
year ahead of competitors, both technologically and in terms of market
delivery.
It is important to note that China Telecom examined 15 VSAT operators
before selecting Weida PRC. China Telecom has indicated that they consider
Weida PRC as the most technologically advanced operator owing to its great
experimental work to date and ability to meet customer needs with specialized
solutions.
Intellectual
Property
Weida PRC’s VSAT license was issued in 2001
and covers every province in China.
This VSAT license expires on August 11, 2006 and is renewable
automatically for additional 2-year terms unless either party terminates in
accordance with the terms of the license. In addition, Weida PRC received an
Internet ISP license in 2003, which covers 20 cities in China. This Internet ISP license expires on
August 11, 2008 and is renewable automatically for additional 2-year terms
unless either party terminates in accordance with the terms of the license.
Weida PRC’s VSAT license is a scarce and
hard-to-obtain asset. The government
has increased the capital investment requirement from $2,500,000 to over
$6,000,000 to apply for a VSAT license.
Additionally, new applicants are required to operate in a beta
environment for a minimum of 2 years before they can officially apply for the
grant of a license.
10
Research and
Development
Weida PRC purchases almost all of its equipment and software from
existing industry vendors, but it maintains a limited development effort
focused on customer application development for satellite communications and
integration to legacy systems and networks. The costs of such efforts have not
been material, and are included in operating expenses.
Employees
As of September 17, 2004 Weida PRC had 30 full time equivalent
employees, including 8 in product development, 9 in sales and marketing, 5 in
customer support services and 8 in distribution services and administration.
Risks Related to Our
Business and Corporate Structure
We are a recently
established business.
We are a recently established business as the result of the share
exchange transaction with SCL in June 2004 and are subject to all of the
risks inherent in the creation of a new business, including the absence of a
history of any significant operations or proven business plan. In recent years, we have had only limited
operations, which have been concentrated almost exclusively in development,
organizational and start-up activities. As a result, we continue to establish many functions that are
necessary to conduct our business, including managerial and administrative
services, marketing activities, financial systems and personnel recruitment. Our business and prospects must be considered
in light of the risks, expenses and difficulties frequently encountered by
businesses in their early stages of development, particularly in established,
highly competitive and continuously evolving markets. We have not yet generated any revenues and expect to incur
operating losses, which could extend over a long period if any of our funding
or operational assumptions prove to be incorrect. There can be no assurance that our operations will be
successful, that we will be successful in meeting our stated business
objectives, that we will ever generate revenues, or that we will become
profitable.
We may not achieve
profitability if we are unable to maintain, improve and develop our products
and services or if our new or enhanced products or services fail to achieve
market acceptance.
We believe that our future business prospects depend in part on our
ability to maintain and improve our current products and services and to
develop new ones on a timely basis. Our products and services will have to achieve
market acceptance, maintain technological competitiveness and meet an expanding
range of customer requirements. As a result of the complexities inherent in our
products and service offerings, new products and services and enhancements to
current products and services require long development and testing periods. We
may experience difficulties that could delay or prevent the successful
development, introduction or marketing of new or enhanced products and
services. Additionally, our new or enhanced products or services may not
achieve market acceptance.
If we cannot effectively maintain, improve and develop products and
services, or if our new or enhanced products or services fail to achieve market
acceptance, we may not be able to recover our fixed costs or otherwise become
profitable.
We will require
significant capital and financing to complete the acquisition of control and a
legal ownership interest in Weida PRC and finance its continuing operations.
In addition to issuing stock to the OIHL shareholders, we will have to
pay approximately $15.8 million to complete the acquisition, as follows:
11
• $805,153 in cash
to the shareholders of Weida PRC, which payment shall also be deemed to satisfy
our obligation to contribute a capital contribution to the Sino-foreign Equity
Joint Venture that Weida PRC is being converted into (the “Weida EJV”) (which
payment has been deposited and is reserved for payment); and
• $15,000,000,
payable in cash to the former shareholders of OIHL.
These payments are required to be made only if the conditions to the
formation of the Weida EJV discussed elsewhere in this report have been
completed and the Weida EJV has been formed and has a valid business license
showing SCL’s 25% equity ownership.
We do not expect that our shareholders or the current Weida PRC
shareholders will provide all of our financing requirements. Consequently, we
cannot be sure that any additional financing will be available as and when
needed, on commercially reasonable terms, or at all. If we cannot obtain
additional financing as and when needed, we may not be able to complete the
acquisition of legal ownership of a 51% interest in Weida PRC, which could have
a material adverse effect on our financial condition and results of operations.
Therefore, it is possible that the acquisition of a legal ownership
interest in Weida PRC (as compared with our current contractual and
profit-sharing arrangements) may never be consummated, in which instance our
common stock may have lesser value than it has currently.
SCL was also originally obligated to provide or arrange for
approximately $159 million of working capital for the Weida EJV in the form of
equipment leasing, asset purchases, cash equivalents, or other commercially
reasonable forms based on a business plan to be agreed upon by the board of the
Weida EJV after SCL had appointed its members, but provision of this working
capital was not a condition precedent to SCL’s acquiring control of, or a
profit-sharing or ownership interest in, Weida PRC. The terms of the equity
joint venture contract and articles of association of the Weida EJV entered
into in August 2004 no longer specify any specific level of required
financing, and any such financing will require approval of the Weida EJV’s
board.
Weida PRC’s future working capital needs have not yet been determined.
Although there is no expressed date by which working capital is to be arranged,
nonetheless, failure to successfully arrange for all or substantially all of
such working capital requirements could materially and adversely impact the
viability or future profitability and growth of Weida PRC. SCL and we have
recently provided limited funding support for Weida PRC equipment purchases. Neither we nor SCL currently has and we have
not yet made any other plans, proposals or arrangements for such working
capital funding, and do not expect to pursue such financing requirements until
a business plan for Weida PRC for the remainder of 2004 and for 2005 is prepared,
reviewed and approved by us. Consequently, there is no assurance that the
necessary working capital financing for Weida PRC can or will be obtained.
To raise capital, we
may have to issue equity or debt securities on terms that are detrimental to
existing shareholders.
In order to complete the acquisition of control and a legal ownership
interest in Weida PRC, we will be required to issue 16,296,296 shares of common
stock, representing approximately 18% of our outstanding common stock after
such issuance, to the former shareholders of OIHL. Further, in order to meet
our capital requirements, we expect to offer equity securities for sale, and
shareholders will experience additional dilution. Any new equity securities we
issue may have rights, preferences or privileges senior to those of existing
holders of common stock. We may issue debt securities with substantial debt
service requirements, high interest rates or other terms that limit our ability
to obtain financing or take advantage of business opportunities.
12
If the PRC
government finds that the agreements that establish the structure for operating
our business do not comply with PRC government restrictions, we could be
subject to severe penalties.
In December 2001, in order to comply with China’s commitments with
respect to its entry into the World Trade Organization (“WTO”), the State
Council promulgated the Administrative Rules for Foreign Investments in
Telecommunications Enterprises, or the Telecom FIE Rules. The Telecom FIE Rules
set forth detailed requirements with respect to capitalization, investor
qualifications and application procedures in connection with the establishment
of a foreign-invested telecommunications enterprise. Pursuant to the Telecom
FIE Rules, the ultimate ownership interest of a foreign investor in a
foreign-funded telecommunications enterprise shall not exceed 50%.
We and our subsidiaries are considered to be foreign persons or
foreign-invested enterprises under PRC laws. As a result, we operate in China
through Weida PRC, which is owned by PRC citizens. We do not have any equity
interest in Weida PRC and instead enjoy the economic benefit of Weida PRC
through contractual arrangements, including agreements on provision of
services, intellectual property, and certain capitalization and corporate
governance matters. Weida PRC conducts substantially all of our operations and
generates substantially all of our revenues. It also holds the licenses and
approvals that are essential to our business.
There are substantial uncertainties regarding the interpretation and
application of current or future PRC laws and regulations, including but not
limited to the laws and regulations governing the validity and enforcement of
our contractual arrangements. Accordingly, we cannot assure you that PRC
regulatory authorities will not determine that our contractual arrangements
with Weida PRC violate PRC laws or regulations.
If we, our subsidiaries or our operating company were found to violate
any existing or future PRC laws or regulations, the relevant regulatory
authorities would have broad discretion in dealing with such violation,
including, without limitation, the following:
• levying fines;
• confiscating our
or our operating company’s income;
• revoking our or
our operating company’s business license;
• requiring us to
restructure our ownership structure or operations; and/or
• requiring us or
our operating company to discontinue our satellite telecommunications business.
Any of these or similar actions could cause significant disruptions to
our business operations or render us unable to conduct our business operations
and may materially adversely affect our business, financial condition and
results of operations.
Our contractual arrangements
with Weida PRC may not be as effective in providing operational control as
direct ownership of this business and may be difficult to enforce.
PRC laws and regulations currently restrict foreign ownership of
companies that provide telecommunications services. As a result, we conduct
substantially all of our operations and generate substantially all of our
revenues through Weida PRC pursuant to a series of contractual arrangements
with Weida PRC and its shareholders. These agreements may not be as effective
in providing control over our operations as direct ownership of this business.
In particular, our operating company could fail to perform or make payments as
required under the contractual agreements, and we will have to rely on the PRC
legal system to enforce this agreement, which we cannot be sure would be
effective.
13
Holding company
structure and operating subsidiaries not wholly owned or controlled.
An investment in our common stock represents an equity interest in a
holding company and not in an operating company. We conduct operations through
subsidiaries. Even when the equity
interest in our major operating subsidiary, Weida PRC, is fully acquired by
SCL, such equity interest will be only up to 51%. This structure, and our less than 100% ownership, may result in
us not realizing the full benefits of capital that we provide to subsidiaries,
may require substantial management attention in dealing with minority
shareholders, and may reduce the value of an investment in us.
The dividends and
other distributions on equity we may receive from Weida PRC, or other payments
we may receive are subject to restrictions under Chinese law or agreements that
these entities may enter into with third parties.
We are a holding company. We will operate, directly or indirectly,
through Weida PRC, which has entered into contractual arrangements with our
subsidiaries through which we will conduct our business activities and will
receive substantially all of our revenues in the form of service fees. If Weida
PRC or our other subsidiaries incur debt in the future, the instruments
governing the debt may restrict their ability to pay fees or make other
payments or distributions to us. In addition, Chinese law requires that payment
of dividends by our subsidiaries that are incorporated in China can only be
made out of their net income, if any, determined in accordance with Chinese
accounting standards and regulations. Under Chinese law, those subsidiaries are
also required to set aside a portion, up to 10% of their after-tax net income
each year to fund certain reserve funds, and these reserves are not
distributable as dividends. Any limitation on the payment of fees by Weida PRC
or dividends by our subsidiaries generally could materially adversely affect
our ability to grow, fund investments, make acquisitions, pay dividends, and
otherwise fund and conduct our business.
If we are unable to
maintain Weida PRC’s VSAT license on acceptable terms, or at all, our business
and revenue, costs and expenses and financial condition would be seriously
harmed.
Weida PRC currently holds a VSAT satellite
license in the PRC for a limited period, ending in 2006. The scope of the
license permits the offer and sale of a variety of broadband satellite
communications services, including audio and video services, Internet
connectivity, multimedia services, HDTV, and VOIP. The license granted provides
Weida PRC the opportunity to develop and deliver such satellite communications
in China. Weida PRC is licensed to provide services in the rapidly growing VOIP
telephone service market, and to provide such services as a phone operator.
Although we believe Weida PRC’s VSAT license will be renewed when its current
term expires, there can be no assurance that we will be able to renew Weida
PRC’s current VSAT license on acceptable terms, or at all, which would severely
harm our business and revenue, costs and expenses and financial condition, and
would require us to make radical changes in our business plans and operations.
The markets in which
we expect to operate are characterized by rapid technological changes and
frequent new products and service introductions. We may not be able to keep up with these rapid technological and
other changes.
We expect to operate in several markets, each characterized by rapidly
changing technology and evolving industry standards. The introduction of products embodying new technology and the
emergence of new industry standards can render existing products obsolete and
unmarketable and can exert price pressures on existing products. We anticipate that a number of existing and
potential competitors will be introducing new and enhanced products that could
adversely affect the competitive position of our products.
Our ability to anticipate changes in technology and industry standards
and to successfully develop and introduce new, enhanced and competitive
products, on a timely basis, in all the markets where we
14
operate, will be a critical factor in our ability to grow and be
competitive. As a result, we expect to
continue to make significant expenditures on research and development. Frequent
new products and service introductions could require substantial modification
and customization of our current products and business models, as well as the
introduction of new products. Customer
acceptance of these new technologies may be slower than we anticipate. We cannot assure you that the market or
demand for our products and services will grow as rapidly as we expect, or if
at all, that we will successfully develop new products and services or
introduce new applications for existing products and services, that such new
products and services will achieve market acceptance or that the introduction
of new products and services or technological developments by others will not
render our products and services obsolete.
In addition, our products and services must readily integrate with our
customers. Our inability to develop
products that are competitive in technology and price and responsive to
customer needs could have a material adverse effect on our business, financial
condition and results of operations.
If we lose our key
suppliers, our business may suffer.
Certain components and subassemblies that are used in the manufacture
of Weida PRC’s existing products are purchased from a single or a limited
number of suppliers. In the event that
any of these suppliers are unable to meet our requirements in a timely manner,
we may experience an interruption in production until an alternative source of
supply can be obtained. Any disruption,
or any other interruption of a supplier’s ability to provide components to us,
could result in delays in making product shipments, which could have a material
adverse effect on our business, financial condition and results of
operations. In addition, some of our
major suppliers use proprietary technology and software code that could require
significant redesign of our products in the case of a change in vendor. Further, if suppliers discontinue their
products, or modify them in manners incompatible with our current use, or use
manufacturing processes and tools that could not be easily migrated to other
vendors, we could have significant delays in product availability, which would
have a significant adverse impact on our results of operations and financial
condition. Although Weida PRC
generally maintains an inventory for some of our components and subassemblies
to limit the potential for an interruption, and we believe that we can obtain
alternative sources of supply in the event our suppliers are unable to meet our
requirements in a timely manner, we cannot assure you that our inventory and
alternative sources of supply would be sufficient to avoid a material
interruption or delay in production.
We may fail to
support our anticipated growth in operations, which could reduce demand for our
products and services and could materially adversely affect our revenue.
Our business strategy is based on the assumption that the number of
subscribers to our products and services, the amount of information they want
to receive and the number of products and services we offer will all increase.
We must continue to develop and expand our systems and operations to
accommodate this growth. We may be
unable to expand our operations for one or more of the following reasons:
• we may not be
able to locate or hire at reasonable compensation rates qualified engineers and
other employees necessary to expand our capacity;
• we may not be
able to obtain or develop the hardware necessary to expand our capacity; and
• we may not be
able to expand our required support systems.
The ability of our systems and operations to connect and manage a
substantially larger number of customers while maintaining superior performance
is uncertain. Any failure on our part to develop and maintain our products and
services as we experience rapid growth could significantly reduce demand for
our products and services and materially adversely affect our revenue.
15
Our ability to sell
new and existing products and services at a profit could be impaired by
competitors.
Intense competition exists in the market for the products and services
we offer, with a large number of competitors, many of which have established
market recognition. Our competitors may use the same products and services in
competition with us. With time and capital, it would be possible for
competitors to replicate our products and services. Our competitors may have
significantly greater resources than we do.
Furthermore, competitors may develop a different approach to marketing
the products and services we provide. Competition could reduce our market share
or force us to lower prices to unprofitable levels.
We depend on
recruiting and retaining key management and technical personnel and we may not
be able to develop new products and services or support existing products and
services if we cannot hire or retain qualified employees.
Because of the technical nature of our products and services and the
dynamic market in which we compete, our performance depends on attracting and
retaining key employees. Competition for qualified personnel in our industry is
intensifying and finding qualified personnel with experience may be difficult
in the years to come. There can be no
assurance that we will be able to successfully recruit and integrate new
employees. This difficulty may be
exacerbated if we fail to make progress in achieving our business goals.
Competitors and others have in the past attempted, and may in the future
attempt, to recruit our employees. An inability to attract and retain highly
qualified employees may have an adverse effect on our ability to develop new products
and services and enhancements for existing products and services and to
successfully market such products and services, all of which would likely have
a material adverse effect on our results of operations and financial position. Our success also depends, to a significant
extent, upon the continued service of a number of key management, sales,
marketing and technical employees, the loss of whom could materially adversely
affect our business, financial condition and results of operations.
Undetected problems
in our products could directly impair our financial results.
If flaws in design, production, assembly or testing of our products (by
us or our suppliers) were to occur, we could experience a rate of failure in
our products that would result in substantial repair, replacement or service
costs and potential liability and damage to our reputation. There can be no assurance that our efforts
to monitor, develop, modify and implement appropriate test and manufacturing
processes for our products will be sufficient to permit us to avoid a rate of
failure in our products that results in substantial delays in shipment,
significant repair or replacement costs or potential damage to our reputation,
any of which could have a material adverse effect on our business, results of
operations and financial condition.
We may not be able
to adequately protect our intellectual property, which could cause us to be
less competitive.
We rely on a combination of copyright, trademark and trade secret laws
and restrictions on disclosure to protect our intellectual property rights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our technology. Monitoring
unauthorized use of our products is difficult and costly, and we cannot be
certain that the steps we have taken will prevent misappropriations of our
technology, particularly in countries where the laws may not protect our
proprietary rights as fully as in other countries such as the United States.
From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and
diversion of our resources.
16
We may be exposed to
infringement claims by third parties, which, if successful, could cause us to
pay significant damage awards.
Third parties may initiate litigation against us alleging infringement
of their proprietary rights. In the event of a successful claim of infringement
and our failure or inability to develop non-infringing technology or license
the infringed or similar technology on a timely basis, our business could be
harmed. In addition, even if we are able to license the infringed or similar
technology, license fees could be substantial and may adversely affect our
results of operations.
Terrorist activities, international conflicts
and acts of war may seriously harm our business and revenue, costs and expenses
and financial condition.
Terrorist activities or acts of war (wherever located around the world)
may cause damage or disruption to us, our employees, facilities, partners,
suppliers, distributors or customers, which could significantly impact our
revenue, costs and expenses and financial condition. The terrorist attacks that
took place in the United States on September 11, 2001 and subsequent
terrorist attacks in other countries have created many economic and political
uncertainties, some of which may materially harm our business and results of
operations. The potential for future terrorist attacks, the national and
international responses to terrorist attacks or perceived threats to national
security, and other actual or potential conflicts or acts of war, including the
ongoing military operations in Afghanistan and Iraq as well as the threat of
conflict with North Korea, have created many economic and political
uncertainties that could adversely affect our business, results of operations
and stock price in ways that we cannot presently predict. We are predominantly
uninsured for losses and interruptions caused by terrorist activities and acts
of war. Any political, economic or other instability in the United States,
Taiwan or China in particular could adversely affect our suppliers and our
business.
We will continue to
incur increased costs as a result of being a public company subject to the
Sarbanes-Oxley Act of 2002, as well as new rules implemented by the Securities
and Exchange Commission, and our new management faces challenges in
implementing those requirements.
As a public company, we incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules
subsequently implemented by the Securities and Exchange Commission (“SEC”), has
required changes in corporate governance practices of public companies. We
expect these new rules and regulations to increase our legal and financial
compliance costs and to make some activities more time-consuming and costly.
For example, as a result of the Sarbanes-Oxley Act and related rules adopted by
the SEC, we have created additional board committees and are adopting
comprehensive new policies regarding internal controls and disclosure controls
and procedures. We are currently evaluating and monitoring developments with respect
to these new rules, and we cannot predict or estimate the amount of additional
costs we may incur, particularly those relating to implementation of new
requirements relating to assessment of internal controls, or the timing of such
costs.
The burdens placed upon us by these requirements and changes in
regulations on our new management following the share exchange are substantial.
These burdens will increase even further as a result of our acquisition of
control of, and a 51% profit-sharing interest in, Weida PRC. Therefore, we
cannot predict with certainty our ability to achieve and maintain compliance
with all requirements at acceptable levels of cost and management attention.
Together, a limited
number of shareholders currently own a substantial percentage of our common
stock, and could significantly influence matters requiring shareholder
approval.
Currently, ten of our shareholders own, collectively, approximately 50%
of our outstanding common stock. If these shareholders act together, they would
be able to control virtually all matters
17
requiring shareholder approval, including the election of directors and
the determination of significant corporate actions. This concentration of
ownership may depress our stock price or delay or prevent a change in control
that may otherwise be beneficial to our shareholders.
Risks Related to the
PRC
China’s economic,
political and social conditions, as well as government policies, could affect
our business.
Substantially all of the assets owned by Weida PRC are located in China
and substantially all of our revenues will be derived from Weida PRC’s
operations in China. Accordingly, our results of operations and prospects are
subject, to a significant degree, to economic, political and legal developments
in China. The economy of China differs from the economies of most developed
countries in many respects, including:
• the extent of
government involvement;
• economic
structure;
• level of capital
reinvestment;
• its level of
development;
• inflation rates;
• its growth rate;
and
• its control of
foreign exchange.
The economy of China has been transitioning from a planned economy to a
more market-oriented economy. Although in recent years the Chinese government
has implemented measures emphasizing the utilization of market forces for
economic reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the Chinese
government. In addition, the Chinese government continues to play a significant
role in regulating industrial development. It also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries
or companies.
While China’s economy has experienced significant growth in the past
twenty years, growth has been uneven across both geographic regions and the
various sectors of the economy. The Chinese government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of China but may have a
negative effect on us. For example, our operating results and financial
condition could be materially and adversely affected by government monetary
policies, changes in interest rate polices, tax regulations or policies and
regulations affecting the securities markets and asset management industry.
Extensive government
regulation of the telecommunications industry may limit our flexibility in
responding to market conditions, competition or changes in our cost structure.
The telecommunications business in China is subject to extensive
government regulation. The Ministry of Information Industry, which is the
primary telecommunications industry regulator under China’s State Council,
regulates, among other things:
18
• industry
policies and regulations;
• licensing;
• tariffs;
• competition;
• telecommunications
resource allocation;
• service
standards;
• technical
standards;
• interconnection
and settlement arrangements; and
• universal
service obligations.
Other Chinese governmental authorities also take part in regulating
tariff policies, capital investment and foreign investment in the
telecommunications industry. Major capital investments, including
telecommunications network development projects, are subject to the approval of
relevant Chinese government authorities. The regulatory framework within which
we will operate may constrain our ability to implement our business strategies
and limit our flexibility to respond to market conditions or to change our cost
structure.
Future changes to
the regulations and policies governing the telecommunications industry in China
may have a material adverse effect on our business and operations.
Possible future changes to regulations and policies of the Chinese
government governing the telecommunications industry could adversely affect our
business and operations. For example, to provide a uniform regulatory framework
for the orderly development of the telecommunications industry, the Chinese
government is currently preparing a draft telecommunications law. If and when
the telecommunications law is adopted by the Standing Committee of the National
People’s Congress, it is expected to provide a new regulatory framework for
telecommunications regulation in China. The contents of the draft
telecommunications law have not yet been made public. While we expect that the
telecommunications law will have an overall positive effect on the development
of the telecommunications industry in China, we cannot be certain how this law
will affect our own business and operations. If it should contain provisions
more stringent than the current telecommunications regulations, our ability to
carry out our business plan could be adversely affected.
The legal system in
China has inherent uncertainties that could limit the legal protections
available to us.
Our equity interest in Weida PRC will be held through a joint venture
organized under the laws of China and will be governed by its articles of
association. The Chinese legal system is based on written statutes. Prior court
decisions may be cited for reference but are not binding on subsequent cases
and have limited precedential value. Since 1979, the Chinese legislative bodies
have promulgated laws and regulations dealing with such economic matters as
foreign investment, corporate organization and governance, commerce, taxation
and trade. However, because these laws and regulations are relatively new, and
because of the limited volume of published decisions and their non-binding
nature, the interpretation and enforcement of these laws and regulations
involve uncertainties. These
uncertainties could limit the legal protections available to foreign investors,
including us. In addition, the PRC may
enact new laws or amend current laws that may be detrimental to our current
contractual arrangements with Weida PRC, which may in turn have a material
adverse effect on our business operations.
19
You may experience
difficulties in effecting service of legal process or enforcing foreign
judgments based on United States or other foreign law.
Weida PRC is a company incorporated under the laws of China, and
substantially all of the assets of Weida PRC are located in China. In addition, some members of management of
Weida PRC reside within China, and substantially all of the assets of these
persons are located within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
management, including with respect to matters arising under United States
federal securities laws or applicable state securities laws. Moreover, China does not have treaties
providing for the reciprocal recognition and enforcement of judgments of courts
with the United States or many other countries. Furthermore, Hong Kong has no
arrangement for the reciprocal enforcement of judgments with the United
States. As a result, recognition and
enforcement in China or Hong Kong of judgments of a court in the United States
and many other jurisdictions in relation to any matter may be difficult or
impossible.
Government control
of currency conversion may adversely affect our operations and financial
results.
We will receive substantially all of our revenues in Renminbi, which
currently is not a freely convertible currency. A portion of these revenues may
have to be converted into other currencies to meet our foreign currency
obligations. These foreign currency-denominated obligations include:
• payment of
interest and principal on foreign currency-denominated debt;
• payment for
equipment and materials purchased offshore; and
• payment of any
dividends we may declare on our shares.
Under China’s existing foreign exchange regulations, following
completion of the acquisition of a controlling equity interest in Weida PRC, we
will be able to pay dividends in foreign currencies without prior approval from
the State Administration of Foreign Exchange by complying with certain
procedural requirements. However, the Chinese government may take measures at
its discretion in the future to restrict access to foreign currencies for
current account transactions if foreign currencies become scarce in China. We
may not be able to pay dividends in dollars or other foreign currencies to our
shareholders if the Chinese government restricts access to foreign currencies
for current account transactions.
Foreign exchange transactions under our capital account, including
foreign currency-dominated borrowings from Chinese or foreign banks and
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require the
approval of the State Administration of Foreign Exchange. These limitations
could affect our ability to obtain foreign exchange through debt or equity
financing, or to obtain foreign exchange for capital expenditures.
Fluctuation of the
Renminbi could materially affect our financial condition and results of
operations.
The value of the Renminbi fluctuates and is subject to changes in
China’s political and economic conditions. Since 1994, the conversion of
Renminbi into foreign currencies, including United States and Hong Kong
dollars, has been based on rates set by the People’s Bank of China, which are
set daily based on the previous day’s interbank foreign exchange market rates
and current exchange rates on the world financial markets. Since 1994, the
official exchange rate for the conversion of Renminbi to United States dollars
has generally been stable. However, any devaluation of the Renminbi could
adversely affect the value of, and dividends, if any, payable on shares of our
capital stock in foreign currency terms, since we will receive substantially
all of our revenues in Renminbi. Fluctuations in exchange rates could also
adversely affect the value, translated or converted into United States or Hong
Kong dollars, of our net assets, earnings and any declared dividends. Our financial condition and results of
operations may also be
20
adversely affected by changes in the value of certain currencies in
which our obligations are denominated. In particular, a devaluation of the
Renminbi is likely to increase the portion of our cash flow required to satisfy
any foreign currency denominated obligations.
Any future outbreak
of Severe Acute Respiratory Syndrome (SARS) or any other epidemic in China may
have a material adverse effect on our business operations, financial condition
and results of operations.
From December 2002 to June 2003, China and certain other
countries experienced an outbreak of a new and highly contagious form of
atypical pneumonia now known as SARS. On July 5, 2003, the World Health
Organization declared that SARS had been contained. However, in recent months,
a few new cases of SARS have been reported in Asia since the initial outbreak
of SARS was declared contained on July 5, 2003. An outbreak in the future
may disrupt our business operations and have a material adverse effect on our
financial condition and results of operations. For instance, a new outbreak of
SARS or any other epidemic may reduce the level of economic activity in
affected areas, which may lead to a reduction in our revenue if our clients
cancel existing contracts or defer future expenditures. In addition, health or
other government regulations may require temporary closure of our offices, or
the offices of our customers or partners, which will severely disrupt our
business operations and have a material adverse effect on our financial
condition and results of operations. Though Weida PRC took some emergency
measures during the SARS outbreak in 2003, we have not adopted any written
preventive measures or contingency plans to combat any future outbreak of SARS
or any other epidemic.
Risks Related to Our
Common Stock
Sales of large
amounts of our common stock in the public market could depress the market price
of our common stock and impair the ability to raise capital through offerings
of equity securities.
None of the shares of our common stock issued to SCL’s shareholders in
the share exchange were, and none of the shares of our common stock sold and
issuable to investors and advisors in recent private placement transactions or
to the former OIHL shareholders will be, registered under the Securities Act.
Accordingly, most of our shareholders will not be able to sell their shares
unless they are later registered or covered by an available exemption such as
Rule 144. As a result of these restrictions, the market for our common stock
has remained “thin” for some time, with trading in the shares limited to
approximately 825,000 shares (excluding shares subject to a one-year lockup). We may determine to register the shares of
one or more other holders of common stock, at any time or from time to time. If
holders of our common stock sell substantial numbers of shares in the public
markets, the price of our common stock may fall, making it more difficult to
raise capital.
Under Rule 144, each of the holders of the 69,809,480 shares issued to
SCL’s shareholders in the exchange will be eligible to sell up to 1% of our
outstanding common stock every three months commencing June 11, 2005, and
each of the future holders of shares of our common stock sold and issuable to
investors and advisors in recent private placement transactions or to the
former OIHL shareholders will be eligible to sell up to 1% of our outstanding
common stock every three months commencing 12 months after those shares are
issued (subject in each case to the restrictions on volume, manner of sale and
other conditions of Rule 144). SCL shareholders who received shares of our
common stock in the exchange and who are not “affiliates” of the Company will
be able to sell all of their shares of common stock commencing June 11,
2006. Recent investors and advisors in
private placement transactions and the former OIHL shareholders who are not
“affiliates” of the Company will be able to sell all of their shares of common
stock commencing 24 months after those shares are issued. The number of shares
eligible to be sold could be substantially increased if we determine to
register shares held by one or more holders of shares of common stock. The sale
or prospective sale of these shares could impede the ability to raise capital
for some time to come.
21
As a stock quoted on
the OTCBB, our common stock currently has limited liquidity.
Holders of shares of our common stock, which are quoted on the OTCBB,
may find that the liquidity of our common stock is impaired as compared with
the liquidity of securities listed on NASDAQ or one of the national or regional
exchanges in the United States. This impairment of liquidity may result from
reduced coverage by security analysts and news media of the Company and lower
prices for our common stock than might otherwise be attained.
Although we have applied for listing of our securities on NASDAQ, we
cannot give you assurance as to when our application for listing will be
approved, if at all.
Our common stock has
in the past been subject to the SEC’s “penny stock” rules which may limit its
liquidity.
Our common stock has in the past been subject to the SEC’s “penny
stock” rules. Penny stocks generally are equity securities that are not
registered on certain national securities exchanges or quoted by NASDAQ and
have a price per share of less than $5.00. Penny stocks are subject to “penny
stock rules” that impose additional sales practice requirements on
broker-dealers who sell the stocks to persons other than established customers
and accredited investors. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
such securities and obtain the purchaser’s written consent to the transaction
prior to the sale. Prior to the sale, broker-dealers must also deliver to the
potential purchaser a disclosure schedule prescribed by the SEC describing
the penny stock market and disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, broker-dealers must deliver to penny stock investors
monthly statements disclosing recent price information for penny stocks held in
the account and information on the limited market in penny stocks. These
additional requirements restrict the ability of broker-dealers to sell our
common stock and make it more difficult for investors to dispose of our common
stock in the secondary market.
The market price and
marketability of our common stock may not improve, and may even decrease.
Currently, our common stock is thinly traded on the OTCBB. The market
price and marketability of our common stock will depend on many factors, some
of which will be outside our control. We cannot assure you that the market
price per share of our common stock in the future will remain the same, equal
or exceed the market price immediately after the share exchange.
Our stock price may
be volatile, and you may not be able to resell shares of our common stock at or
above the price you paid, or at all.
The trading price of our common stock could be subject to wide
fluctuations due to the factors discussed in this risk factors section and
elsewhere in this report. In addition, the stock market in general, and
technology companies in particular, have experienced extreme price and volume
fluctuations. The average trading volume of our common stock is low, and
current trading prices and valuations may not be sustainable. These broad
market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. In addition, in the past,
following periods of volatility in the overall market and the market price of a
company’s securities, securities class action litigation has often been
instituted against companies that have experienced significant declines in
share prices. This type of litigation, if instituted against us, could result
in substantial costs and a diversion of our management’s attention and
resources.
22
ITEM
2. PROPERTIES
We maintain our principal executive offices at 515 Las Olas Boulevard,
Suite 1350, Fort Lauderdale, Florida 33301 through leased office space
consisting of an aggregate of approximately 4,200 square feet. We believe that
these facilities are adequate for our needs in the foreseeable future.
Guangzhou Weida
Communications Technology Co., Ltd.
Weida PRC maintains offices in both Beijing and Suzhou. Its principal executive offices are located
at the 10th floor of building C in Binhe Mansion, No. 1 Che, Daogou, Haidian,
Beijing 100089 through leased office space consisting of an aggregate of
approximately 30,000 square feet. We believe that these facilities are adequate
for Weida PRC’s needs in the foreseeable future.
ITEM
3. LEGAL PROCEEDINGS
Except as set forth below, there are no material legal proceedings
pending to which we are a party or to which our property is subject. We are
subject to various claims that arise in the ordinary course of business. In the
opinion of our board, the amount of any ultimate liability with respect to
these claims will not materially affect our financial position, liquidity or
results of operations.
An employee of SCL has recently asserted claims for unpaid salary in
the amount of $0.5 million and 3.3 million shares of SCL common stock based on
an asserted employment agreement between him and SCL, and has indicated through
his counsel that if terminated he will also assert a claim for severance in the
additional amount of $0.75 million. SCL’s management believes SCL has
meritorious defenses to the claims, including that the employee in question did
not perform the services contemplated by the alleged agreement. A portion of
the employee’s alleged unpaid salary had been and continues to be included in
SCL’s financial statements as accounts payable.
SCL has commenced legal proceedings against the employee for breach of
contract and declaratory relief and has given him notice of termination of
employment. The employee has moved to compel arbitration of the matter.
Litigation or arbitration proceedings with respect to the employee’s claims are
probable. There can be no assurance as to the outcome of any litigation or
arbitration proceedings. Any adverse decision in such proceedings could
adversely affect the financial condition of SCL and/or the Company.
A shareholder and former chief financial officer of Teleflex
Technologies, Inc. (“Teleflex”), a currently inactive privately-held company
which had attempted to pursue joint venture opportunities in China in late 2001
and in 2002, and of which Mitchell Sepaniak, our President and Chief Executive
Officer, was chief executive officer commencing early 2003, has recently
asserted claims in New York State court against SCL, Teleflex and Mr. Sepaniak.
The plaintiff’s petition alleges failure on the part of Mr. Sepaniak and
Teleflex to comply with corporate formalities such as holding annual meetings
and also alleges corporate waste, and is seeking various relief, including
allowing shareholders to inspect the books and records, including balance
sheets and profit and loss earnings statements. The former chief financial
officer has also asserted claims against SCL, Teleflex and Mr. Sepaniak for
unpaid salary and compensation. The plaintiff’s claims and requests for relief
are not asserted against the Company, although the Company has been named as a
party by reason of its role as a party in the exchange offer with SCL. The
Company has moved to dismiss the petition.
Litigation proceedings with respect to the plaintiff’s claims are
probable. The proceedings are at an early stage, and therefore there can be no
assurance as to the outcome of such proceedings. Any adverse decision in such
proceedings could adversely affect the financial condition of SCL and/or the
Company.
23
Guangzhou Weida
Communications Technology Co., Ltd.
There are no material legal proceedings to which Weida PRC is a party
or to which any of its property is subject. Weida PRC is subject to various
claims that arise in the ordinary course of business. In the opinion of our
board, the amount of any ultimate liability with respect to these claims will
not materially affect our financial position, liquidity or results of
operations.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Shareholders on June 10,
2004 whereby the following actions were approved by shareholders holding
approximately 67% of the Company’s then-outstanding common stock: (1) the
Company entering into the share exchange with SCL, (2) the Company changing
auditors to Deloitte Touche Tohmatsu, (3) the Company changing its name from
Laser Recording Systems, Inc. to Weida Communications, Inc., and (4) the
election of Carl Lanzisera, Mitchell Sepaniak and Tilmon Holloway to serve as
members of the board of directors. The
results of matters voted at that Special Meeting were reported in the Company’s
Current Report on Form 8-K dated June 9, 2004, and filed with the SEC on
June 18, 2004.
24
PART
II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Our
Common Stock
Our common stock is traded on the Over-The-Counter Bulletin Board
(“OTCBB”) under the symbol “WDAC.” The following table sets forth the range of
high and low closing sale prices for our common stock for the periods indicated
(as adjusted to reflect the one-for-four reverse stock split that took effect
on June 11, 2004):
|
|
|
High
Sale
Price
|
|
Low
Sale
Price
|
|
|
Calendar2002:
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.120
|
|
$
|
0.092
|
|
|
Second Quarter
|
|
$
|
0.140
|
|
$
|
0.080
|
|
|
Third Quarter
|
|
$
|
0.100
|
|
$
|
0.076
|
|
|
Fourth Quarter
|
|
$
|
0.068
|
|
$
|
0.060
|
|
|
|
|
|
|
|
|
|
Calendar 2003:
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.080
|
|
$
|
0.068
|
|
|
Second Quarter
|
|
$
|
5.200
|
|
$
|
0.080
|
|
|
Third Quarter
|
|
$
|
4.680
|
|
$
|
2.560
|
|
|
Fourth Quarter
|
|
$
|
3.600
|
|
$
|
1.440
|
|
|
|
|
|
|
|
|
|
Calendar 2004:
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.760
|
|
$
|
1.240
|
|
|
Second Quarter
|
|
$
|
6.450
|
|
$
|
2.120
|
|
|
Third Quarter (through September 17,
2004)
|
|
$
|
6.100
|
|
$
|
5.050
|
|
On September 17, 2004, there were approximately 368 shareholders
of record of our common stock, and 72,334,486 shares issued and outstanding,
which does not include (i) 1,661,245 shares of common stock to be issued to
existing and recent investors and advisors as of September 17, 2004, (ii)
16,296,296 shares of common stock to be issued to the shareholders of OIHL and
(iii) 3,014,526 shares of common stock to be issued upon exercise of issued and
outstanding warrants and warrants to be issued to existing and recent investors
as of September 17, 2004.
Private Placements
On June 18, 2004, we initiated a private placement transaction
pursuant to which we sold through September 17, 2004 and will issue
1,661,245 shares of our common stock, which includes 372,322 shares of our
common stock to be issued to advisors, at a price of $3.00 per share, and
warrants to purchase an additional 644,478 shares of our common stock at $2.75
per share. The shares and warrant shares were sold and will be issued under
common individual purchase agreements and advisory agreements. The warrants
carry a three and one-half year term from the time such warrants are
exercisable. Our common stock and warrants to be issued to investors and
advisors were sold and will be issued pursuant to an exemption from the
registration requirements of the Securities Act pursuant to Regulation D
promulgated thereunder.
25
ITEM 6. SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The share exchange transaction between the Company and SCL in
June 2004 was accounted for similar to a reverse acquisition in which SCL
is the accounting acquirer and the Company is the legal acquirer. As a result
of the share exchange transaction (i) the historical financial statements of
the Company for periods prior to the date of the transaction are no longer
presented and (ii) the historical financial statements for periods prior to the
date of the transaction are those of SCL.
Subsequent to June 30, 2004, the Company acquired control of and a
51% profit-sharing interest in, Weida PRC through contractual arrangements
between the WOFE and Weida PRC, including a trust arrangement for the benefit
of SCL with respect to 51% of the shares of Weida PRC. See Notes 1 and 9 to the
Consolidated Financial Statements of the Company included elsewhere in this
report.
The following selected financial data for the Company and Weida PRC
should be read in conjunction with our financial statements, the notes thereto,
and Item 7, “Management’s Discussion and Analysis of Consolidated Financial
Condition and Results of Operations” appearing elsewhere in this report. The
selected statements of operations data for the Company for the six months ended
June 30, 2004, for the period from May 16, 2003 to June 30, 2003
(unaudited) and for the period from May 16, 2003 to December 31, 2003, and
the selected balance sheet data for the Company as of June 30, 2004 and
December 31, 2003, are derived from our audited and unaudited financial
statements included elsewhere in this report. The selected statements of
operations data for Weida PRC for the six months ended June 30, 2004 and June 30,
2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001,
and the selected balance sheet data for Weida PRC as of June 30, 2004,
June 30, 2003 (unaudited) and December 31, 2003, 2002 and 2001 are
derived from Weida PRC’s audited and unaudited financial statements included
elsewhere in this report.
Weida Communications, Inc.
Statement of
Operations Data
|
|
|
Six Months
Ended
June 30, 2004
|
|
Period
From
May 16, 2003
(date of inception)
to June 30, 2003
(Unaudited)
|
|
Period
From
May 16, 2003
(date of inception)
to December 31, 2003
|
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(1,930,660
|
)
|
(137,469
|
)
|
(1,180,702
|
)
|
|
Interest income
|
|
49,060
|
|
—
|
|
31,908
|
|
|
Net loss
|
|
(1,881,600
|
)
|
(137,469
|
)
|
(1,148,794
|
)
|
Balance Sheet Data
|
|
|
As of
June 30, 2004
|
|
As of
December 31, 2003
|
|
|
|
|
US$
|
|
US$
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
36,014
|
|
(1,504,079
|
)
|
|
Cash and cash-equivalents
|
|
1,617,845
|
|
—
|
|
|
Property, plant and equipment, net
|
|
18,121
|
|
—
|
|
|
Total assets
|
|
10,299,708
|
|
6,929,966
|
|
|
Total liabilities
|
|
2,545,189
|
|
1,535,987
|
|
|
Accumulated deficit
|
|
(3,030,394
|
)
|
(1,148,794
|
)
|
|
Stockholders’ equity
|
|
7,754,519
|
|
5,393,979
|
|
26
Guangzhou Weida
Communications Technology Co., Ltd.
Statement of
Operations Data
|
|
|
Six Months
Ended
June 30, 2004
|
|
Six Months
Ended
June 30, 2004
|
|
Six Months
Ended
June 30, 2003
(Unaudited)
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
56,669
|
|
469,023
|
|
712,108
|
|
|
Cost of revenue
|
|
(868,115
|
)
|
(7,185,044
|
)
|
(3,764,539
|
)
|
|
Operating loss
|
|
(1,215,725
|
)
|
(10,062,075
|
)
|
(5,941,052
|
)
|
|
Net loss
|
|
(1,320,513
|
)
|
(10,929,367
|
)
|
(6,646,195
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2766 RMB to the dollar.
|
|
|
January 1,
2003
to
December 31, 2003
|
|
January 1,
2002
to
December 31, 2002
|
|
April 2,
2001
to
December 31, 2001
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
158,134
|
|
1,310,517
|
|
537,427
|
|
448,718
|
|
|
Cost of revenue
|
|
(1,308,903
|
)
|
(10,847,406
|
)
|
(2,821,249
|
)
|
(576,878
|
)
|
|
Operating loss
|
|
(1,928,422
|
)
|
(15,981,601
|
)
|
(6,562,306
|
)
|
(2,319,933
|
)
|
|
Net loss
|
|
(2,144,154
|
)
|
(17,769,459
|
)
|
(7,939,835
|
)
|
(3,269,912
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2874 RMB to the dollar.
Balance Sheet Data
|
|
|
As of
June 30, 2004
|
|
As of
June 30, 2004
|
|
As of
June 30, 2003
(Unaudited)
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
(4,353,019
|
)
|
(36,028,192
|
)
|
(13,574,078
|
)
|
|
Cash and cash-equivalents
|
|
54,009
|
|
447,009
|
|
1,974,918
|
|
|
Property, plant and equipment, net
|
|
1,553,665
|
|
12,859,052
|
|
15,918,136
|
|
|
Total assets
|
|
3,001,335
|
|
24,840,830
|
|
55,243,571
|
|
|
Bank debt
|
|
2,416,451
|
|
20,000,000
|
|
40,000,000
|
|
|
Total liabilities
|
|
5,406,739
|
|
44,749,403
|
|
52,899,513
|
|
|
Stockholders’ (deficiency) equity
|
|
(2,405,404
|
)
|
(19,908,573
|
)
|
2,344,058
|
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2766 RMB to the dollar.
27
|
|
|
As of December 31,
|
|
As of December 31,
|
|
|
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
(4,416,609
|
)
|
(36,602,206
|
)
|
(218,038
|
)
|
9,465,397
|
|
|
Cash and cash-equivalents
|
|
65,443
|
|
542,352
|
|
721,096
|
|
5,892,872
|
|
|
Property, plant and equipment, net
|
|
1,728,286
|
|
14,323,000
|
|
9,208,291
|
|
1,554,599
|
|
|
Total assets
|
|
4,524,369
|
|
37,495,261
|
|
33,347,945
|
|
43,678,767
|
|
|
Bank debt
|
|
4,826,604
|
|
40,000,000
|
|
20,000,000
|
|
25,000,000
|
|
|
Total liabilities
|
|
5,583,713
|
|
46,274,467
|
|
24,357,692
|
|
26,748,679
|
|
|
Stockholders’ (deficiency) equity
|
|
(1,059,344
|
)
|
(8,779,206
|
)
|
8,990,253
|
|
16,930,088
|
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2874 RMB to the dollar.
|
ITEM 7.
|
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction
with our financial statements and notes thereto included elsewhere in this
report. In addition to historical information contained herein, this discussion
and analysis contains forward-looking statements. These statements involve
risks and uncertainties and can be identified by the use of forward-looking
terminology such as “estimates,” “projects,” “anticipates,” “plans,” “future,”
“may,” “should,” “predicts,” “potential,” “continue,” “expects,” “intends,”
“believes,” and similar expressions. Examples of forward-looking statements
include those relating to the need for equity financing in order to consummate
the acquisition of legal ownership of an equity interest in Weida PRC, our
historical and likely future losses and our reliance on the provision of
VSAT-based communications services for the majority of our revenues. These and
other forward-looking statements are only estimates and predictions. While we
believe that the expectations reflected in the forward-looking statements are
reasonable, our actual results could differ materially due to a number of
factors, including the risk factors set forth elsewhere in this report. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s expectations only as of the date hereof.
Overview
We are a United States-managed company that is participating in the
fast-growing China telecommunications market through control of and a 51%
profit-sharing interest, and our planned 51% combined equity ownership and
profit-sharing interest, in the only wholly privately-owned company in China holding licenses for bi-directional VSAT
communications (the only other privately-owned company recently holding a
license was merged into a joint government venture in January 2004). Weida
PRC’s satellite operations in China provide ground-based equipment and related
services to support government and corporate applications, including broadband
Internet access, remote meter monitoring, and mission-critical data backup
systems.
Results of Operations
We were established as SCL on May 16, 2003 to acquire an interest in
telecommunications and related service entities in Asia. On April 29,
2003, SCL entered into a master agreement with Weida PRC, as more fully
described elsewhere in this report. SCL has had no sources of revenue, and its
operations prior to September 2004 have been limited to activities to
complete the transaction with Weida PRC.
For the period from date of inception to June 30, 2004, SCL
incurred total operating expenses of $3,111,362, and deferred acquisition costs
of $5,704,004.
28
Professional, General and Administrative Expenses
Operating expenses totaled $3,111,362 from inception to June 30,
2004. These expenses reflect the expected one time costs associated with the
negotiation and execution of the share exchange agreement and share exchange
between the Company and SCL. Included in these expenses are legal fees,
accounting fees, and consultant fees paid to certain parties in relation to
funding activities. These expenses also reflect numerous due diligence trips to
China for certain executives of SCL as well as their advisors.
Liquidity and Capital Resources
As shown in the consolidated financial statements, at June 30,
2004 (following the consummation of the share exchange) we had positive working
capital of approximately $0.04 million and an accumulated deficit of
approximately $3.0 million. Since SCL’s formation in May 2003, we have funded
all of our operating expenses and deficit from the net proceeds of private
placements of our shares and warrants to private investors and, to a lesser
extent, from shareholder loans.
At June 30, 2004, we had total consolidated assets of
approximately $10.3 million. Included in total assets is a promissory note
issued by Glendora Management Ltd. (“Glendora”), a British Virgin Islands
corporation, to SCL in the amount of $2.2 million. Certain of Glendora’s
shareholders are also shareholders of the Company. Borrowings under the note
bear interest at the London Interbank Offered Rate plus 200 basis points
(effective rate of 4.46% at June 30, 2004), with interest and principal
due five years from the date of the note. Glendora has granted to SCL a
security interest in and to certain of its property and assets as collateral
for repayment of the note. The carrying amount of this note receivable
approximates its fair value.
Additionally, SCL and Glendora signed an assignment agreement whereby
SCL has granted Glendora the rights to enter into a transaction with Guangzhou
Suntek New Tech R&D Co., Ltd (“Suntek”), which was previously held by SCL.
No value has been designated to the assignment agreement as it assigns the
right to pursue a purchase agreement with Suntek and not a negotiated purchase
agreement.
Our current cash and cash equivalents and funding commitments described
below are not sufficient for us to sustain present operations beyond the third
calendar quarter of 2005. We will need additional funding to continue
operations as an ongoing entity. We are in the process of negotiating to raise
additional private funding to satisfy these requirements. We are also in
preliminary negotiations with certain banking and financial institutions to
secure a corporate credit line.
Effective as of September 3, 2004, a credit facility for up to $5
million has been made available to us by Anthony Giordano, a Company
shareholder, together with one of Mr. Giordano’s family limited partnerships,
to fund the Company’s future operations. This credit facility is unsecured,
bears interest on any funds advanced at a rate equal to the London Interbank
Offered Rate plus 200 basis points, has no equity component, and terminates on
October 31, 2005. For additional disclosure concerning Mr. Giordano, see
Item 12, “Security Ownership of Certain Beneficial Owners and Management–Matters
concerning a beneficial shareholder.”
29
Guangzhou Weida Communications Technology Co., Ltd.
Revenue and Costs of Revenue
Weida PRC, in which we recently acquired a 51% profit-sharing interest
and control, and therefore will report its operating results on a consolidated
basis with our own with effect from October 1, 2004, currently receives
revenue from two sources, equipment sales and from satellite bandwidth
provision agreements. The following tables set forth the revenues in these
categories and costs of revenues for each of the 6 months ended June 30,
2004 and June 30, 2003 (unaudited), and for the 12 months ended
December 31, 2003, the 12 months ended December 31, 2002 and for the
period from April 2, 2001 through December 31, 2001:
|
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2003
to
June 30, 2003
(Unaudited)
|
|
|
|
|
USD(1)
|
|
RMB
|
|
RMB
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Sales of equipment
|
|
42,030
|
|
347,863
|
|
591,112
|
|
|
Satellite bandwidth revenue
|
|
14,639
|
|
121,160
|
|
120,996
|
|
|
Total revenue
|
|
56,669
|
|
469,023
|
|
712,108
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
(868,115
|
)
|
(7,185,044
|
)
|
(3,764,539
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2766 RMB to the dollar.
|
|
|
January 1, 2003
to
December 31, 2003
|
|
January 1, 2002
to
December 31, 2002
|
|
April 2, 2001
to
December 31, 2001
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
Sales of equipment
|
|
121,744
|
|
1,009,189
|
|
418,803
|
|
448,718
|
|
|
Satellite bandwidth revenue
|
|
36,360
|
|
301,328
|
|
118,624
|
|
—
|
|
|
Total revenue
|
|
158,134
|
|
1,310,517
|
|
537,427
|
|
448,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
(1,308,903
|
)
|
(10,847,406
|
)
|
(2,821,249
|
)
|
(576,878
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2874 RMB to the dollar.
Equipment sales are primarily VSAT equipment. Revenue is recognized
when the equipment is delivered, title has passed to the customers and Weida
PRC has no further obligations to provide services related to the operation of the
equipment.
Revenue from
satellite bandwidth provision agreements is recognized on a straight-line basis
over the period of the agreements. The excess of the amounts received or
receivable from customers over the revenue recognized is included in accrued
expenses and other payables, and amounted to RMB 338,920 (US$40,949) and RMB
130,480 at June 30, 2004 and June 30, 2003 (unaudited), respectively,
and RMB 389,280 (US$46,973) and RMB 14,400 at December 31, 2003 and
December 31, 2002, respectively.
During 2001 and 2002 Weida PRC was demonstrating to its customers that
its network and technology was operational and competitive. During 2002 revenue
from equipment sales remained flat compared with 2001 while market demand for
satellite bandwidth increased due to network sharing of equipment by some of
Weida PRC’s customer base. As Weida PRC’s system and equipment sales efforts
30
produced positive results, Weida PRC’s current customer base added
additional equipment and utilization increased respectively. Weida PRC did not sell additional equipment
during that timeframe while it focused on implementing and operating in a beta
development phase with China Telecom.
During 2001
and 2002 Weida PRC was offering special discounts to achieve a statistical
sample set to prove its product capability. In addition, during the first three
quarters of 2002 Weida PRC intentionally did not accept orders until they had
obtained a significant statistical sample of production volume and service
queries to make appropriate adjustments and enhancements before it would accept
additional customers. As Weida PRC’s results from positive tests in the field
and actual production continued to mount, Weida PRC’s revenue increased to RMB
1,310,517 (US$158,134) in 2003 compared with revenues of RMB 537,427 in 2002,
reflecting increases in both equipment sales and satellite bandwidth revenue.
However, revenues decreased in the six months ended June 30, 2004 to RMB
469,023 (US$56,669) compared with RMB 712,108 in the 6 months ended
June 30, 2003 a result of the beta development phase that Weida PRC was
implementing with China Telecom. Utilization will consistently lag behind
equipment purchases, as Weida PRC’s accounts require an average of three to six
months to integrate systems, test protocols with internal software and run
quality assurance programs.
With any start up, in order to obtain distribution an organization must
prove they can deliver what they promise. The satellite communications market
is no exception to this rule. Weida PRC needed to obtain a customer base to
prove that its technology and service were sound, worked and reliable. To
entice customers to take a risk and work with a new provider, Weida PRC needed
to offer its customers equipment and service contracts at a highly competitive
and relatively low price point that would allow Weida PRC to enter the market.
These service offerings were required to allow Weida PRC opportunities to prove
its capability, but adversely affected revenues. Having now established itself
as a viable supplier of equipment and a qualified service provider, Weida PRC
intends to eliminate its current early stage pricing structure and move to its
operating plan pricing, which calls for increases in product equipment pricing
and utilization pricing with the goal of achieving gross margins above 50% on
sales for 2005 for all new accounts and any existing accounts upon expiration
of the related satellite bandwidth provision agreements, which typically have a
2 to 3 year term.
In addition, costs of revenues in 2002 were substantially higher as a
result of expenditures required to increase its bandwidth to meet anticipated
customer needs. Costs of revenues continued to increase dramatically in 2003 to
RMB 10,847,406 (US$1,308,903), compared with RMB 2,821,249 in 2002, reflecting
an increase in salaried employees and an expansion of Weida PRC’s facilities.
Cost of revenue in the six months ended June 30, 2004 was RMB 7,185,044
(US$868,155) compared with RMB 3,764,539 in the six months ended June 30,
2003 because of an increase in the amount of infrastructure equipment deployed
as well as an increase in the bandwidth needed for increased capacity. Additionally Weida PRC is currently using
only 5% of its bandwidth capacity, which adversely affects cost of revenues. As
Weida PRC adds additional customers this cost as a percentage can be expected
to decrease. In future periods depreciation expense will increase, reflecting
the increase in 2002 and 2003 in the capital expansion of the network and the
asset levels resulting from that expansion.
Operating Expenses
Weida PRC’s operating expenses increased from RMB 2,191,773 in the
period from April 2, 2001 (date of establishment) to December 31,
2001, to RMB 4,278,484 in the 12 months ended December 31, 2002, and to
RMB 6,444,712 (US$777,653) in the 12 months ended December 31, 2003.
Similarly, operating expenses for the six months ended June 30, 2004
increased to RMB 3,346,054 (US$404,279), compared with RMB 2,888,621 for the
six months ended June 30, 2003.
These increases were related to increases in salaries associated with
the addition of employees in Weida PRC’s service department along with
additional employee and other costs relating to deployment and distribution.
Weida PRC also realized increases in marketing expense and rent with the
addition of two network locations. This trend is expected to continue during
fiscal 2005, although it can be expected to decrease as a percent of sales.
Weida PRC
31
expects SG&A expenses to stabilize at lower levels (as a percentage
of total revenue) by the end of fiscal year 2005.
|
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2003
to
June 30, 2003
(Unaudited)
|
|
|
|
|
USD(1)
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(404,279
|
)
|
(3,346,054
|
)
|
(2,888,621
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2766 RMB to the dollar.
|
|
|
January 1, 2003
to
December 31, 2003
|
|
January 1, 2002
to
December 31, 2002
|
|
April 2, 2001
to
December 31, 2001
|
|
|
|
|
US$(1)
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(777,653
|
)
|
(6,444,712
|
)
|
(4,278,484
|
)
|
(2,191,773
|
)
|
(1) Convenience translation into United States
dollars, based on an exchange rate of 8.2874 RMB to the dollar.
Liquidity and Capital Resources
Weida PRC’s operations have been funded to date by both shareholder
equity investment and shareholder loans, and bank loans. Weida PRC’s paid in
capital reflects the approximately RMB 20 million direct investment by
several founding shareholders in 2001. In addition, in 2001 Weida PRC obtained a bank
loan for RMB 25 million, which was used for working capital and capital
expenditures. The loan was repaid in April 2002.
Weida PRC’s cash position decreased by RMB 5.2 million during 2002
as a result of equipment purchases and repayment of bank debt. In 2002, Weida
PRC obtained another bank loan for RMB 20 million, which was used for
working capital and capital expenditures. During the twelve months ended December 31,
2003 Weida PRC incurred additional bank debt of RMB 40 million. These
loans funded the repayment of RMB 20 million of earlier bank debt and also
funded working capital needed for Weida PRC’s network and product inventory
needs (RMB 13 million for advances and RMB 5 million for inventory).
During the six months ended June 30, 2004, Weida PRC’s bank debt
declined from RMB 40 million to RMB 20 million as a result of meeting the
repayment terms of the bank loan.
Obtaining additional funding from Chinese banks became difficult because
of the loan restrictions imposed upon these banks by the Chinese government. As
a partial replacement for these funds, Weida PRC increased its borrowings from
its shareholders and their affiliates by approximately RMB 9.8 million, and
also obtained advances of RMB 3.6 million from SCL. Cash and cash-equivalents
during this period declined from approximately RMB 2 million to less than RMB
0.5 million. The working capital deficiency decreased slightly from
approximately RMB 36.6 million at December 31, 2003 to approximately RMB
36.0 million (US$(4.4 million)) at June 30, 2004.
Weida PRC’s current cash and cash equivalents and credit facilities are
not sufficient for it to sustain present operations beyond the second calendar
quarter of 2005. Weida PRC will need additional funding of at least
US$35 million in 2005 to maintain and expand its network including the
purchase of additional earth
32
stations to meet the China Telecom business requirements. Weida PRC
anticipates utilizing and relying in large part on the Company’s potential
access to both private equity and public equity markets to obtain the necessary
funding to satisfy these requirements, although it and the Company may seek
such requirements other than through the Company. However, there is no
assurance that such efforts will be successful in whole or in part, and the
audited consolidated financial statements of Weida PRC therefore reflect that
there is substantial doubt about its ability to continue as a going concern.
Management Changes
On June 9, 2004, Walter J. Hinchcliffe resigned as a member of our
board of directors. This decision was
made mutually by Mr. Hinchcliffe and the board of directors based on differences
regarding the future direction of the Company.
On June 10, 2004, the shareholders of the Company approved the
election of Mitchell Sepaniak, Tilmon Holloway and Carl Lanzisera as the new
board of directors of the Company following the share exchange.
On June 11, 2004, our board of directors approved the election of
Mitchell Sepaniak as President, Chief Executive Officer and Chairman of the
Board of the Company; Joseph Zumwalt as Senior Vice President, Chief Financial
Officer and Secretary of the Company; and Amanda Harmon as Vice President,
Controller and Treasurer of the Company. On June 24, 2004, our board of
directors approved the election of Jack Chin as Vice President Business
Development of the Company. In July 2004, Ms. Harmon resigned from her
positions as Vice President, Controller and Treasurer of the Company, and
terminated her employment with the Company.
On August 9, 2004, our board of directors approved the election of
Joseph Theismann and Shitotomo Yamauchi as additional members of the board of
directors of the Company.
Critical accounting policies
The preparation of our consolidated financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States requires management to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates and assumptions based upon experience and various
other factors and circumstances. Management believes that our estimates and
assumptions are reasonable under the circumstances; however, actual results may
vary from these estimates and assumptions under different future circumstances.
We have identified the following critical accounting policies that affect the
more significant judgments and estimates used in the preparation of the
consolidated financial statements of the Company.
Accruals and Provisions for Loss
Contingencies
We make provisions for all loss contingencies when information
available to us prior to the issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability had been
incurred at the date of the consolidated financial statements and the amount of
loss can be reasonably estimated.
For provisions or accruals related to litigations, we make provisions
based on information from legal counsel and the best estimation of management.
As discussed in Note 8 to the consolidated financial statements of the Company,
we are involved in various legal proceedings and contingencies, and we have not
yet recorded a liability in relation to an asserted claim by a former employee
of SCL. In accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 5 Accounting for Contingencies, SFAS
33
No. 5 requires a liability to be recorded based on our estimate of the
probable costs of the resolution of the contingency. The actual resolution of
this contingency may differ from our estimates. If the contingency were settled
for an amount greater than our estimate, a future charge to income would
result. Likewise, if the contingency were settled for an amount that is less
than our estimate, a future credit to income would result.
Recently Issued Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity, which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003.
The adoption of SFAS No. 150 had no impact on the financial statements
as the Company did not have any financial instruments with characteristics of
both liabilities and equity during the period ended December 31, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
and clarifies accounting for derivative instruments and for hedging activities
under SFAS No. 133. Specifically, SFAS No. 149 requires that contracts with
comparable characteristics be accounted for similarly. Additionally, SFAS No.
149 clarifies the circumstances in which a contract with an initial net
investment meets the characteristics of a derivative and when a derivative
contains a financing component that requires special reporting in the statement
of cash flows. This Statement is
generally effective for contracts entered into or modified after June 30,
2003 and did not have a significant impact on the Company’s financial position
or results of operations.
In January 2003, the FASB issued Interpretation (“FIN”) No. 46,
Consolidation of Variable Interest Entities (“FIN 46”) and, in
December 2003, issued a revision to that interpretation (“FIN 46R”). FIN 46R replaces FIN 46 and addresses
consolidation by business enterprises of variable interest entities that
possess certain characteristics. A
variable interest entity (“VIE”) is defined as (a) an ownership, contractual or
monetary interest in an entity where the ability to influence financial
decisions is not proportional to the investment interest, or (b) an entity
lacking the invested capital sufficient to fund future activities without the
support of a third party. FIN 46R establishes standards for determining under
what circumstances VIEs should be consolidated with their primary beneficiary,
including those to which the usual condition for consolidation does not apply. The Company did not have any ownership in any
variable interest entities as of June 30, 2004 or December 31, 2003.
Contractual Obligations
As
of June 30, 2004, our future contractual cash obligations are as follows:
|
|
|
Payments due by period
|
|
|
Contractual
Obligations (1)
|
|
Total
|
|
2004
|
|
2005 – 2006
|
|
2007 – 2008
|
|
2009 and
thereafter
|
|
|
Long-Term Obligations (2)
|
|
270,000
|
|
0
|
|
0
|
|
270,000
|
|
0
|
|
|
Total
|
|
270,000
|
|
0
|
|
0
|
|
270,000
|
|
0
|
|
(1) We do not have any purchase
obligations other than standard purchase orders in the ordinary course of
business. We do not have any capital lease obligations or operating lease
obligations.
(2) Our long-term obligations are
primarily comprised of a long-term loan from a shareholder. The shareholder has indicated that he will
not seek repayment prior to July 2005.
Although there is no commitment that the loan will be repaid in
2007-2008, our board of directors believes the loan will be repaid during such
time period.
34
Off-Balance Sheet Arrangements
In connection with our acquisition of control of and a 51%
profit-sharing interest in Weida PRC, we will be required to pay approximately
$15.8 million as follows:
• $805,153 in cash
to the Weida PRC shareholders, which payment shall also be deemed to satisfy
our obligation to contribute a capital contribution to the Weida EJV (which
payment has been deposited and is reserved for payment); and
• $15,000,000,
payable in cash to the former shareholders of OIHL.
These payments are required to be made only if the conditions to the
formation of the Weida EJV discussed elsewhere in this report have been
completed and the Weida EJV has been formed and has a valid business license
showing SCL’s 25% equity ownership.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market-Rate Sensitive Instruments and Risk Management
We are exposed to certain market risks from transactions that are
entered into during the normal course of business. Fluctuating foreign exchange
rates for the Renminbi may impact our financial condition and results of
operations. Our foreign exchange
exposure is presently exclusively related to activities associated with Weida
PRC. The Company does not attempt to
manage these risks by entering into forward exchange contracts. We do not use derivative financial
instruments for speculative or trading purposes. Therefore, no quantitative tabular
disclosures are required.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and other financial information that are required by this
Item 8 are listed in Item 15 of Part IV. The financial statements and
supplementary financial information referenced in Item 15 are incorporated in
this Item 8 by reference.
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
A change in our certifying accountants was reported under Item 4 of our
Current Report on Form 8-K dated June 9, 2004, and filed with the SEC on
June 18, 2004.
ITEM
9A. CONTROLS
AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our principal executive
officer and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as
of the end of the period covered by this Annual Report on Form 10-K. Based on
such evaluation, our principal executive officer and principal financial
officer have concluded, as of the end of such period, that our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in our
reports that we file or submit under the Exchange Act.
35
Internal Control Over Financial Reporting
We evaluate our internal control over financial reporting on a regular
basis. If we identify a problem in our internal control over financial
reporting during the course of our evaluations, we consider what revision,
improvement and/or correction to make in order to ensure that our internal
controls are effective. Our principal executive and financial officers
recognize that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives. Accordingly, we intend to continue to refine our internal
control over financial reporting on an ongoing basis as we deem appropriate with
a view towards making improvements.
We have made no changes during the fourth quarter of fiscal year 2004
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
36
PART
III
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of our
executive officers and directors as of September 17, 2004:
|
Name
|
|
Age
|
|
Position
|
|
Mitchell Sepaniak (2)
|
|
47
|
|
President, Chief Executive Officer and Chairman of the Board
|
|
Joseph Zumwalt
|
|
45
|
|
Senior Vice President, Chief Financial Officer and Secretary
|
|
Jack Chin
|
|
69
|
|
Vice President Business Development
|
|
Tilmon Holloway (1)
|
|
65
|
|
Director
|
|
Carl Lanzisera (1)(2)
|
|
64
|
|
Director
|
|
Joseph Theismann (1)
|
|
55
|
|
Director
|
|
Shitotomo Yamauchi, PhD
|
|
68
|
|
Director
|
(1) Messrs. Holloway, Lanzisera and Theismann are
members of the audit committee.
(2) Messrs. Sepaniak and Lanzisera are members of
the compensation committee.
Mr. Sepaniak was appointed as our President, Chief Executive Officer
and Chairman of the Board in June 2004.
Mr. Sepaniak was a business consultant developing business plans for
China based companies from August 2001 until he founded SCL Ventures, Ltd.
in May 2003. Prior to working as a consultant, Mr. Sepaniak was Senior Vice
President of Marketing with Healtheon/WebMD Corporation from January 1999
to August 2001. Prior to serving with Healtheon/WebMD (HLTH), he was the
Sr. Executive VP of Marketing and Business Development for MedEAmerica
Corporation from January 1998 to January 1999. From March 1996
to January 1998, Mr. Sepaniak held the position of Sr. Vice President of
Sales and Marketing with Automated Data Processing, (ADP), the largest
outsource payroll processing corporation in North America, where he was
responsible for the marketing and sales activities with partner banks. Prior to
this position, he was the Executive Director of Marketing with National Data
Corporation, where he managed all marketing activities in the Credit Card,
Medical and International Treasury EDI markets. Previously, Mr. Sepaniak was
Director of Marketing for Bausch & Lomb. He has over 20 years experience in
global marketing of consumer, high-tech and medical/financial EDI and
e-commerce markets.
Mr. Zumwalt was appointed as our Senior Vice President, Chief Financial
Officer and Secretary in June 2004.
Mr. Zumwalt has been Chief Operating Officer and Portfolio Manager of
Broadmoor Asset Management since May 2000.
As COO, Mr. Zumwalt handled the day-to-day operations of Broadmoor. As Portfolio Manager, Mr. Zumwalt has been
instrumental in designing the asset allocation and economic models for
Broadmoor. Prior to his joining Broadmoor, Mr. Zumwalt spent 21 years in the
financial services industry with firms such as Prudential Bache Securities,
Oppenheimer and Company and Southeast Bancorp as Vice President of Merchant
Banking. Mr. Zumwalt also served as Executive Vice-President, Investment
Banking to Morgenthau and Associates and as a Chief Financial Officer to Wall
Street Review, Inc.
Mr. Chin was appointed as our Vice President Business Development in
June 2004. Prior to joining the
Company, Mr. Chin was President of Dai Tong Co. Inc. Prior to joining Dai Tong Co. Inc., Mr. Chin
was an executive partner at Plans Securities Investment, Inc. and prior to
joining Plans Securities Investment, Inc., Mr. Chin was a general partner and
securities analyst at Hwa Hsing Investors, Inc.
37
Mr. Holloway has served on our board of directors since June 2004.
He has been President and Chief Executive Officer of Baptist Community Services
since February 1996.
Mr. Lanzisera has served on our board of directors since August 1997. Mr. Lanzisera served as President of the
Company from March 2003 to June 2004 and Treasurer of the Company
from August 1997 to June 2004.
Since January 1999, he has been the President of Federated
Securities, Inc., a registered broker dealer. Since July 2004, Mr.
Lanzisera has been a member of the board of directors of Barricini Foods
Inc. From 1997 to 1998 he was branch
manager of an independent office of First Securities, Inc. Prior to that he was
branch manager of an independent office of Myers Pollack & Robbins
Securities. He has been registered with the NASD for more than 35 years and has
been a registered securities principal for 25 years.
Mr. Theismann has served on our board of directors since
August 2004. He has served as an expert analyst for ESPN network covering
National Football League games since 1988. Prior to joining ESPN, Mr. Theismann
was a professional football player from 1971 to 1985, playing in both the
Canadian Football League and the National Football League. Since 1975, Mr. Thiesmann has been the
President of JRT Associates, Inc. Mr.
Theismann is also the owner and operator of a chain of restaurants bearing his
name and has served as chief executive officer of The Devils Inn, Inc. (d/b/a
Joe Theismann’s Restaurant).
Dr. Yamauchi has served on our board of directors since
August 2004. In 1998, Dr. Yamauchi founded KDL GmbH, a Tokyo-based
licensing company for Pirfenidone, a drug used to treat pulmonary
fibrosis. Dr. Yamauchi filed the patent
for Pirfenidone in 1989. Dr. Yamauchi also founded and operates a company that
holds the business license for a cell phone network and help desk support
center in Japan.
There is no family relationship between any of our directors or
executive officers.
Board Composition
Currently, our board of directors has five (5) members, a majority of
whom, including Messrs. Holloway, Theismann and Yamauchi, are “independent
directors” as defined by the rules of the National Association of Securities
Dealers, Inc. (“NASD”).
Director Compensation
Board members did not receive any compensation in fiscal 2004. In June 2004, the board of directors
determined that outside directors would receive $1,200 per regularly scheduled
board meeting attended in person or telephonically and $1,200 per committee
meeting attended in person or telephonically. Directors are also to be
reimbursed for certain expenses in connection with attendance at board and
committee meetings.
Board Committees
Our board of directors has the authority to appoint committees to perform
certain management and administrative functions. Our board of directors
currently has an audit committee and a compensation committee. Our board of directors does not currently
have a nominating and governance committee.
Audit Committee
Our audit committee is responsible for annually recommending
independent accountants, preparing the reports, statements or charters as may
be required by the NASD or the SEC, and reviewing:
• the adequacy of
our system of internal accounting controls;
38
• our audited
financial statements and reports and discussing the statements and reports with
management, including any significant adjustments, management judgments and
estimates, new accounting policies and disagreements with management; and
• disclosures by
independent accountants concerning relationships with our company and the
performance of our independent accountants.
Our audit committee currently consists of Messrs. Lanzisera, Holloway
and Theismann. Although we are not
currently subject to the rules of the NASD, we note that Mr. Holloway and Mr.
Theismann are each an ““independent director” as that term is defined under
Rule 4200(a)(15) of the NASD. Mr.
Lanzisera may not be deemed an “independent director” (in the event we were
subject to the rules of the NASD) as a result of having served as president of
the Company from March 2003 to June 2004 and treasurer of the Company
from August 1997 to June 2004, although he was not an employee of and
did not receive a salary from the Company.
However, pursuant to Rule 4350(d)(2)(B) of the NASD, the board of
directors has determined that if it is determined that Mr. Lanzisera is not an
“independent director” under Rule 4200(a)(15) of the NASD, Mr. Lanzisera nonetheless
meets the requirements of Rule 10A-3(b)(1) promulgated under the Exchange Act
and that his membership on the audit committee is in the best interests of the
Company and its shareholders due to Mr. Lanzisera’s past employment experience
and financial sophistication.
The board of directors has determined that no member of the audit
committee satisfies all of the criteria to be a “financial expert” as defined
in Item 401(h) of Regulation S-K. We currently do not have an audit committee
financial expert. Our principal focus recently has been on the recently
completed share exchange, the Weida PRC acquisition and the reporting
requirements under the Exchange Act. As
a result of those efforts, we were unable to allocate the resources necessary
to identify an individual with the expertise necessary to serve as a financial
expert on the audit committee.
Compensation Committee
Our compensation committee is primarily responsible for reviewing and
approving the compensation, benefits, corporate goals and objectives of our
chief executive officer and our other executive officers; evaluating the
performance and compensation of our executive officers in light of those goals
and objectives; administering any employee benefit plans and making
recommendations to our board of directors regarding these matters.
Our compensation committee currently consists of Messrs. Sepaniak and
Lanzisera. Although we are not currently
subject to the rules of the NASD, we note that Mr. Sepaniak is not an
“independent director” as that term is defined under Rule 4200(a)(15) of the
NASD. Mr. Lanzisera may not be deemed an
“independent director” (in the event we were subject to the rules of the NASD)
as a result of having served as president of the Company from March 2003
to June 2004 and treasurer of the Company from August 1997 to
June 2004, although he was not an employee of and did not receive a salary
from the Company.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee (“Interlock”). There are no Interlocks between our board
of directors or compensation committee and boards of directors or compensation
committees of other companies.
39
Mr. Sepaniak, who is a member of our compensation committee, is also
our President and Chief Executive Officer.
Nominating and Governance Committee
Our board of directors does not have a standing nominating and
governance committee. Our board of
directors does not believe that it is appropriate to have a standing nominating
and governance committee since we have a relatively small board and our
directors will serve in the capacity of a nominating and governance committee
when necessary. All of our directors
participate in the consideration of director nominees and matters relating to
governance.
Code of Ethics
We have approved and adopted a code of ethics for our directors and
senior executive, financial and accounting officers. A copy of the code of ethics is attached as
Exhibit 14 to our Current Report on Form 8-K, dated August 9, 2004, filed
with the SEC on August 16, 2004 and will be available without charge upon
written request directed to Secretary, Weida Communications, Inc., 515 East Las
Olas Blvd., Suite 1350, Fort Lauderdale, Florida 33301.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers,
directors, and persons or entities that own more than 10% of the Company’s
common stock to file reports regarding ownership of and transactions in the
Company’s securities with the SEC and to provide the Company with copies of
those filings. Based solely on its review of the copies of such forms received
by the Company, or written representations from certain reporting persons, the
Company believes the following directors, officers and greater than 10%
beneficial owners were inadvertently delinquent in their filing requirements:
• Each of Mitchell
Sepaniak, Joseph Zumwalt, Amanda Harmon, Tilmon Holloway, EPG Limited Partners,
Ltd. and A. Giordano Family Limited Partnership were delinquent in their Form 3
filings by one (1) day.
• Jack Chin was
delinquent in his Form 3 filing by two (2) days.
• Each of Joseph
Theismann and Shitotomo Yamauchi were delinquent in their Form 3 filings by
four (4) days.
• Carl Lanzisera
was delinquent in his Form 3 filing and a Form 4 filing by more than four (4)
days.
ITEM
11. EXECUTIVE
COMPENSATION
During and at all times prior to the fiscal year ended June 30,
2004, none of our executive officers received any annual or long-term
compensation and there are no outstanding stock options or warrants issued to
our executive officers. In
June 2004, our board of directors approved the following executive
compensation for fiscal 2005:
• Mitchell
Sepaniak, our President, Chief Executive Officer and Chairman of the Board, will
receive an annual base compensation of $150,000 once we are successful in
raising $10 million (calculated from April 1, 2004). As discussed below, the board of directors
subsequently amended these terms in August 2004.
40
• Joseph Zumwalt,
our Vice President, Chief Financial Officer and Secretary, will receive an
annual base compensation of $82,000, which will be increased to $100,000 once
we are successful in raising $10 million (calculated from April 1, 2004).
• Jack Chin, our
Vice President Business Development, will receive an annual base compensation
of $100,000 once we are successful in raising $10 million (calculated from
April 1, 2004).
• Amanda Harmon,
then our Vice President, Controller and Treasurer, was to receive an annual
base compensation of $58,000. However, Ms. Harmon terminated her employment
with the Company in July 2004 and received a cash payment from the Company
in connection with such termination of $25,000.
In August 2004, our board of directors approved an amendment to
Mitchell Sepaniak’s executive compensation for fiscal 2005 that lowered the
triggering event for consummation of Mr. Sepaniak’s compensation from $10
million to $7 million. Pursuant to such
amendment, Mr. Sepaniak’s executive compensation for fiscal 2005 is as follows:
• Mitchell
Sepaniak, our President, Chief Executive Officer and Chairman of the Board,
will receive an annual base compensation of $150,000 once we are successful in
raising $7 million (calculated from April 1, 2004).
We do not maintain any equity compensation plans and no options have
been granted to our executive officers.
Under an arrangement between SCL and Mitchell Sepaniak entered into in
2003, Mr. Sepaniak has the right to acquire 285,000 shares of common stock upon
the completion of certain capital raising efforts for the Company, which
efforts have not been completed. The terms of this arrangement have not yet
been reduced to writing and the Company’s board of directors has not yet adopted
and assumed such arrangement.
Employment Agreements
In June 2004, the board of directors adopted and assumed as
Company obligations the employment agreements of Mitchell Sepaniak, Joseph
Zumwalt and Amanda Harmon with SCL. In
August 2004, the board of directors approved adopting the employment
agreement of Jack Chin. Each of the
employment agreements has a one-year term and provides for an annual salary as
described above and a like severance payment if the agreement is terminated by
us without cause. In August 2004,
the board of directors approved an amendment to Mr. Sepaniak’s employment
agreement that provides for an amended annual salary as described above.
Limitation on Liability and Indemnification Matters
Article Eighth of the Company’s Restated Certificate of
Incorporation authorizes the Company to indemnify its directors and officers in
any proceeding by a third party or in actions by or in the right of the Company
to the maximum extent permitted under New Jersey law.
Article IX of the Company’s Amended and Restated Bylaws provides
for mandatory indemnification of its officers and directors to the maximum
extent permitted under New Jersey law. The rights to indemnity thereunder
continue as to any person who has ceased to be a director, officer, employee or
agent of the Company and shall inure to the benefit of the heirs, executors and
administrators of such person. In addition, the indemnity extends to persons
who are or were serving at the request of the Company in any capacity of
another corporation, partnership, join venture, trust, employee benefit plan or
other enterprise.
41
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of September 17, 2004 as to
(i) each person who is known by us to own beneficially more than five percent
(5%) of the outstanding shares of our common stock, (ii) each director,
(iii) each of the Company’s executive officers and (iv) all five percent
shareholders, directors and executive officers as a group. This table is based
on information provided to us or filed with the SEC by our directors, executive
officers and principal shareholders. Except as otherwise indicated, we believe
that the beneficial owners of the shares listed below have sole investment and
voting power with respect to such shares, subject to community property laws.
We do not know of any arrangements, including any pledge by any person of
securities of ours, the operation of which may at a subsequent date result in a
change of control of our company. Unless otherwise noted above, the address for
each shareholder on this table is c/o Weida Communications, Inc., 515 East Las
Olas Boulevard, Suite 1350, Fort Lauderdale, FL 33301.
|
Five
percent shareholders,
directors, and certain executive officers
|
|
Common stock
outstanding
|
|
Options/Warrants
exercisable within
60 days
|
|
Common
stock
beneficially
owned
|
|
Approximate
percentage
owned
|
|
|
Mitchell Sepaniak (1)
|
|
8,387,268
|
|
0
|
|
8,387,268
|
|
11.59
|
%
|
|
Tilmon Holloway (2)
|
|
907,500
|
|
0
|
|
907,500
|
|
1.25
|
%
|
|
Carl Lanzisera
|
|
1,504,398
|
|
0
|
|
1,504,398
|
|
2.08
|
%
|
|
Joseph Zumwalt (3)
|
|
600,000
|
|
0
|
|
600,000
|
|
|
*
|
|
Joseph Theismann (4)
|
|
262,500
|
|
0
|
|
262,500
|
|
|
*
|
|
Shitotomo Yamauchi, PhD
|
|
2,000,000
|
|
0
|
|
2,000,000
|
|
2.76
|
%
|
|
Jack Chin (5)
|
|
4,969,500
|
|
0
|
|
4,969,500
|
|
6.87
|
%
|
|
A. Giordano Family Limited Partnership (6)
|
|
7,611,879
|
|
0
|
|
7,611,879
|
|
10.52
|
%
|
|
Deng Long Long
|
|
4,000,000
|
|
0
|
|
4,000,000
|
|
5.53
|
%
|
|
Norstar I, LLC (7)
|
|
5,000,000
|
|
0
|
|
5,000,000
|
|
6.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
All five percent shareholders, directors
and executive officers as a group (10 persons)
|
|
35,243,045
|
|
0
|
|
35,243,045
|
|
48.72
|
%
|
Applicable percentage of ownership is based on 72,334,486 shares of
common stock outstanding as of September 17, 2004, but does not include
(i) 1,661,245 shares of common stock sold but not yet issued to existing and
recent investors and advisors as of September 17, 2004 or (ii) 16,296,296
shares of common stock to be issued to the shareholders of OIHL. Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power with respect to shares. Shares of common stock
subject to options or warrants currently exercisable or exercisable within
sixty (60) days after September 17, 2004 are deemed outstanding for
computing the percentage ownership of the person holding such options or
warrants, but are not deemed outstanding for computing the percentage of any
other person.
* Less than 1% of common stock
outstanding.
42
(1) Includes (i) 8,187,268 shares of common stock
held of record by Mitchell Sepaniak, (ii) 100,000 shares of common stock held
of record by Ashley Sepaniak and (iii) 100,000 shares of common stock held of
record by Lindsay Sepaniak. Does not
include 1,000,000 shares of common stock held of record by Susan Sepaniak, as
to which Mr. Sepaniak disclaims beneficial ownership. Does not reflect an understanding between SCL
and Mr. Sepaniak that gives him the right to acquire 285,000 shares of common
stock upon the completion of certain capital raising efforts for the Company,
which efforts have not been completed.
(2) Does not include 1,500,000 shares held by
Baptist Community Services, of which Mr. Holloway is President and Chief
Executive Officer. Mr. Holloway disclaims beneficial ownership of those 1,500,000
shares of common stock.
(3) Does not include 530,874 shares and warrants
to purchase 2,000,000 shares of common stock held by EPG Limited Partners,
Ltd., which Mr. Zumwalt serves as the individual managing member. Mr. Zumwalt
disclaims beneficial ownership of those 530,874 shares and warrants to purchase
2,000,000 shares of common stock.
(4) Does not include 15,000 shares of common
stock held of record by Robin Theismann, as to which Mr. Theismann disclaims
beneficial ownership.
(5) Includes (i) 2,369,500 shares of common stock
held of record by Jack Chin, (ii) 1,000,000 shares of common stock held of
record by Jack Chin and Jane Chin jointly, (iii) 1,000,000 shares of common
stock held of record by Jane Chin and (iv) 600,000 shares of common stock held
of record by Penny June Chin.
(6) Does not include 360,000 shares of common
stock owned by Bronwyn Kathryn Fulton, its general partner. A. Giordano Family Limited Partnership
disclaims beneficial ownership of those 360,000 shares of common stock.
(7) Does not include 1,000,000 shares held by
Allan Rothstein, its managing member.
Norstar I LLC disclaims beneficial ownership of those 1,000,000 shares
of common stock.
Matters concerning a beneficial shareholder
Anthony Giordano, together with EPG Global Private Equity Fund, Ltd., a
hedge fund founded by Mr. Giordano, were the subject of a civil complaint and
administrative proceeding instituted by the SEC alleging violations of the
federal securities laws in connection with activities unrelated to SCL, the Company
or the share exchange. In
February 2004, Mr. Giordano and EPG Global Private Equity Fund, Ltd.
consented to the entry of a final judgment (the “Final Judgment”) permanently
enjoining them from further violations of the registration and anti-fraud provisions
of the federal securities laws without admitting or denying the allegations
raised in the SEC’s complaint. Further,
in connection with settlement of the administrative proceeding, Mr. Giordano
has also been barred from association with any broker-dealer or investment
adviser and has agreed to pay $50,000 in civil penalties. EPG Global Private Equity Fund, Ltd., which
was never funded, has since been terminated.
In connection with the share exchange, Mr. Giordano, who was then the
beneficial holder of more than 5% of our common stock assuming completion of
the share exchange, agreed in April 2004 that he will not, without our
consent, at any time, serve as an officer or member of the board of directors
of the Company and that he will not, at any time, beneficially own more than
five percent of our common stock (exclusive of stock acquired and held as of
the date he and we entered into this agreement). Mr. Giordano may, however, provide certain
consulting services to SCL or the Company with respect to evaluating
prospective merger, acquisition and financing transactions presented to the
Company which will not involve association with any broker-dealer or investment
adviser required to be registered as such under the federal securities laws.
Mr. Giordano also agreed not to sell or otherwise transfer any shares of
our common stock without our consent for a period of one year following the
close of the share exchange on the same terms and conditions applicable to
certain of our shareholders subject to the lock up under the share exchange
agreement entered into between the Company and SCL in 2003.
43
See Item 13, “Certain Relationships and Related Transactions–Other
Related Party Agreements”, for information
relating to Mr. Giordano’s consulting agreement with SCL and funding commitment
letter with the Company.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Overview
We describe below the transactions in which we acquired control of and
a majority profit-sharing interest in Weida PRC.
We also describe below transactions to which we were a party or will be
a party, in which:
• the amounts
involved exceeded or will exceed $60,000; and
• a director,
executive officer, holder of more than 5% of our common stock or any member of
their immediate family had or will have a direct or indirect material interest.
We also describe below certain other transactions with our directors,
executive officers and shareholders.
Related Party Agreements – Acquisition of Control and a Majority
Profit-Sharing Interest in Weida PRC
In order to comply with PRC regulations, we currently operate our
business in China through Weida PRC, a company wholly owned by Li Shun Xing, Li
Xiang Ning, Pang Da Qing and Xie Li, all of whom are PRC citizens. Certain of
our wholly-owned subsidiaries have entered into a series of contractual
arrangements with Weida PRC and its shareholders, including agreements on
provision of services, intellectual property, and certain capitalization,
corporate governance and future share acquisition and equity joint venture
matters.
Below is a summary of the material provisions of these agreements.
Master Agreement. SCL entered into a master agreement with
Weida PRC and Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li, the
shareholders of Weida PRC, on April 29, 2003. Pursuant to this agreement, as modified by a
stock transfer memo, dated August 26, 2004, executed by the Company and
the shareholders of Weida PRC on August 27, 2004 that supplements certain
provisions of this agreement, SCL, Weida PRC and the shareholders of Weida PRC
established the framework for the acquisition, through a series of
transactions, of control and a majority interest in Weida PRC. The agreement provides for, among other
elements, the conversion of Weida PRC into the Weida EJV and the acquisition by
SCL of up to a 51% interest in the Weida EJV.
In consideration for acquisition of this interest and control, SCL was
required to pay to the shareholders of Weida PRC a cash sum of approximately
$15 million and to cause to be issued to the shareholders of OIHL approximately
16.3 million shares of our common stock.
For purposes of this agreement, the shares to be delivered were deemed
to have a value of $6.75 per share (or an aggregate value of $110 million). The
value fixed for our shares for purposes of this agreement was arrived at after
discussions between SCL and the shareholders of Weida PRC, and represented a
compromise between the substantially lower market price of our common stock at
the time of the negotiations and estimates of possible future market prices of
our common stock following completion of the share exchange, the acquisition of
Weida PRC, and the provision of adequate working capital financing for the Weida
EJV. However, neither party to the negotiations regarding the Weida PRC
transaction
44
conducted or obtained any appraisal, estimate or investment banking
advice or opinion regarding the prospective value of the combined companies, or
possible future market prices of our common stock. Moreover, the value fixed
for purposes of this agreement is vastly higher than the market price of our
common stock during all periods during which the transaction was discussed,
negotiated and documented and throughout 2003 and early 2004 (the market price
of our common stock ranging from a low of $.060 to a high of $5.20 during such
period on a post-reverse split basis). In addition, neither SCL nor the Company
during the negotiation of the share exchange performed a separate valuation of
our common stock for purposes of calculating the share exchange ratio. The
valuation amount therefore must be regarded as having been fixed at a
negotiated value. It is not, and should not be construed as, an implied or
actual estimate of any future value of our common stock following the share
exchange or the acquisition of an interest and control in the Weida EJV. In
addition, it is not the actual valuation of the stock being issued for
accounting purposes.
The master agreement also originally provided for SCL to provide or
arrange for approximately $159 million of working capital for the Weida EJV in
the form of equipment leasing, asset purchases, cash equivalents, or other
commercially reasonable forms based on a business plan to be agreed upon by the
board of the Weida EJV after SCL has appointed its members, but provision of
this working capital was not a condition precedent to SCL’s acquiring control
of, or a profit-sharing or ownership interest in, Weida PRC.
This agreement with Weida PRC is subject to a number of conditions
including:
• the issuance of
a business license for the Weida EJV (showing SCL’s equity ownership);
• completion of a
due diligence study by SCL’s legal and financial advisors satisfactory to SCL
in its sole discretion;
• the shareholders
of Weida PRC entering into appropriate employment agreements with Weida PRC
acceptable to SCL; and
• satisfying all
of the state, local and foreign requirements for the transaction.
The parties to the agreement have agreed to make any modifications to
the overall investment plan contemplated by the agreement as the Chinese
licensing and approval process may require. Currently applicable Chinese rules
and regulations limit foreign direct ownership in a telecommunications company
and the parties to the agreement have agreed to take all necessary steps to
modify the agreement to effectuate its central intent while complying with all
such rules and regulations.
In August 2004 SCL, the Weida PRC shareholders and other parties
entered into a series of agreements and transactions intended to implement the
basic goals of the master agreement. These agreements and transactions are
described below.
Purchase and Sale Agreement. SCL and Jack Chin, our Vice President,
Business Development (the latter as a nominal holder in order to meet local
Hong Kong legal requirements), entered into a purchase and sale agreement,
dated as of August 26, 2004, with Honest Link International Ltd., Worldwise
Development Ltd., Magic Technology Development Ltd., Energic Development Ltd.,
and Ocean Channel Investments Ltd., the shareholders of OIHL, on
August 27, 2004. Pursuant to this
agreement, as modified by a stock transfer memo, dated August 26, 2004,
executed by the Company on August 27, 2004 that supplements certain
provisions of this agreement, SCL and Jack Chin have acquired all of the issued
and outstanding shares of OIHL, which is the owner and holder of 100% of the
registered capital stock of the WOFE.
Mr. Chin received one (1) share of OIHL, which represents a .01% equity
interest, and SCL received the remaining shares of OIHL, which represent a
99.99% equity interest. The
consideration for the sale of the shares of OIHL is (i) US$15 million and (ii)
16,296,296 shares of the Company’s common stock. Although SCL and Mr. Chin acquired the shares
of OIHL on the closing date,
45
payment of consideration for such shares of OIHL will not be due and payable
until the following conditions have been met:
• The 16,296,296
shares of Company common stock to be issued pursuant to this agreement shall be
issued upon consummation of the service and support agreement between the WOFE
and Weida PRC, execution and delivery of all of the other agreements described
elsewhere in this report and satisfaction of certain due diligence requests of
SCL.
• The $15,000,000
cash payment shall be payable to the former shareholders of OIHL if and when
the conditions to the formation of the Weida EJV discussed elsewhere in this
report have been completed and the Weida EJV has been formed and has a valid
business license showing SCL’s 25% equity ownership.
The closing of the purchase of the shares of OIHL is currently in progress,
the conditions to issuance of the 16,296,296 shares of our common stock are in
the process of being satisfied, and those shares will then be issued as
restricted stock pursuant to Section 4(2) of the Securities Act.
Trust Agreement. SCL entered into a trust agreement, dated as
of August 26, 2004, with Weida PRC and Li Shun Xing, Li Xiang Ning, Pang
Da Qing and Xie Li, the shareholders of Weida PRC, on August 27,
2004. Pursuant to this agreement, these
shareholders hold 51% of the shares of Weida PRC and the Weida EJV in trust for
the benefit of SCL for future transfer to SCL pursuant to the terms of the
equity interest transfer agreement and the future equity interest transfer
agreement described below. These
shareholders may only transfer or dispose of the shares held in trust upon
written instructions from SCL and will at all times exercise the voting rights
of the shares held in trust at the direction of SCL.
Service and Support Agreement.
The WOFE entered into an exclusive service and support agreement, dated as of
August 26, 2004 and effective as of September 1, 2004, with Weida PRC
on August 27, 2004, pursuant to which the WOFE will provide to Weida PRC
business support and services within the PRC on an exclusive basis. The business support and services to be
provided under the agreement include, among others, assistance in selection,
procurement and financing of satellite communication and network infrastructure
equipment; outsourcing of employees; marketing research and consulting services;
and business promotion services. The
service fees will be accrued monthly, and will be at the rate of 51% of all
monthly revenue, including any monthly equipment sales revenue, equipment lease
revenue, equipment maintenance revenue, other service and support revenue, and
subscription and transmission revenue package fees paid by Weida PRC’s
customers and end users to Weida PRC.
The exact amount of service fees will be calculated and paid quarterly
in arrears. The service fees will not be
payable until Weida PRC has net quarterly profits before taxes of at least RMB
500,000 for at least one full fiscal quarter, as reported on Weida PRC’s
regularly prepared consolidated financial statements. The agreement also provides that the WOFE
will be the sole and exclusive owner of all intellectual property rights
arising from the performance of the agreement, whether developed by the WOFE or
Weida PRC, and whether based on the WOFE’s or Weida PRC’s intellectual property
rights. The term of this agreement is
for 10 years and will automatically be extend for another 10-year term unless
terminated by the WOFE.
Pledge Agreement. Li
Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li, the shareholders of Weida
PRC, entered into a pledge agreement, dated as of August 26, 2004, with
the WOFE on August 27, 2004. Pursuant to this agreement, each of these
shareholders pledged all of his or her equity interest in Weida PRC to the WOFE
to guarantee the performance by Weida PRC of its obligations under the service
and support agreement described elsewhere in this report. The term of the
agreement is from the date on which the pledges are recorded in the stock
ledger of Weida PRC until all obligations of Weida PRC under the service and
support agreement have been terminated.
46
Equity Interest Transfer Agreement. SCL entered into an equity interest transfer
agreement, dated as of August 26, 2004, with Li Shun Xing, Li Xiang Ning,
Pang Da Qing and Xie Li, the shareholders of Weida PRC, on August 27,
2004. Pursuant to this agreement, these
shareholders will sell and transfer a 25% equity interest in Weida PRC to SCL
upon conversion of Weida PRC into the Weida EJV. The aggregate consideration for the sale of
the 25% equity interest in Weida PRC is the greater of US$805,153 and the
lowest amount then permitted by PRC law.
This agreement provides that the shareholders of Weida PRC shall cause
Weida PRC to appoint three of the five directors as directed by SCL.
In addition, pursuant to this agreement, these shareholders, Weida PRC
and any affiliate of Weida PRC may not do any of the following without the
prior written consent of SCL: (i) amend Weida PRC’s articles of association, or
any document or agreement in connection with its establishment or in relation
to its business and operations; (ii)
change Weida PRC’s business scope and nature, abandon any qualification or
license already obtained and/or to be obtained by it, or cause such qualification
or license to lapse, or, except for any actions undertaken as required by law,
depart from its business or the business procedures as disclosed to SCL; (iii)
permit Weida PRC or its affiliates to invest in any other company; (iv) sell,
transfer, let, permit, donate, assign or deal with the sale of any part or all
of Weida PRC’s business, property or assets except in the ordinary course of
business; (v) amend any terms of remuneration or bonuses payable to any
director or officer, or enter into or amend the terms of service agreements
with any director or officer; (vi) provide any loan or any credit to any third
party or provide any indemnity, warranty or enter into any similar arrangement;
(vii) devise or issue any bonds, mortgages, pledges or other guarantees, or
increase any loans secured thereby, including but not limited to, increasing
the sum guaranteed or extend the duration of guarantee; (viii) purchase, sell,
mortgage or pledge any shares or bonds of any corporation or company, including
any shares or bonds of Weida PRC; (ix) purchase, acquire any interests or
rights in land or assets or undertake any capital commitment; (x) do anything
which would have a material adverse impact on businesses or assets of Weida PRC
or its affiliates; (xi) enter into any compromise, settlement, exemption, withdrawal,
termination or waiver, of any rights in respect of any action, arbitration or
other claim, legal action, demand or dispute of a material nature; (xii)
declare or pay any dividend or distribution with respect to the 25% equity
interest in Weida PRC being transferred to SCL or any other shares of Weida
PRC; (xiii) make any payments to any
shareholder of Weida PRC or any other related party of Weida PRC, including any
payment of any interest or principal with respect to Weida PRC shareholder or
other related party loans to Weida PRC; or (xiv) let or agree to let or give up
in any other form any part or all of the rights to use or rights of ownership
of the assets of Weida PRC or its affiliates, or enter into any agreement to
acquire or rent or manage any property.
This agreement may be terminated by SCL prior to completion upon (i) a
material breach by the shareholders of Weida PRC of their representations,
warranties, obligations or undertakings set forth in this agreement; (ii) Weida
PRC sustaining a loss or damage which constitutes a material adverse change or
effect; or (iii) a petition for the winding up or liquidation of Weida PRC or
Weida PRC conducting a reorganization, whether through an arrangement with
creditors or otherwise.
Equity Joint Venture Contract/Articles of
Association.
SCL entered into (i) an equity joint venture contract, dated as of
August 26, 2004, and (ii) articles of association, dated as of
August 26, 2004, with Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li,
the shareholders of Weida PRC, on August 27, 2004. Pursuant to these agreements, the parties
established the purpose and scope of the Weida EJV and set forth the terms of
the Weida EJV, including capitalization, operations and corporate
governance. The obligations of the
parties under these agreements are subject to fulfillment, unless waived by
SCL, of each of the following conditions:
(i) the equity interest transfer agreement between SCL and the
shareholders of Weida PRC and any and all other documents needed to satisfy all
necessary authorities of the PRC, have been duly executed by these
shareholders, SCL, and Weida PRC; (ii) a business license for the Weida EJV
from the appropriate PRC government authority has been issued; (iii) all PRC
government
47
requirements have been satisfied; (iv) a due diligence study by the
financial and legal counsel of SCL has been completed to the satisfaction of
SCL, in its sole discretion; (v) the necessary approval from SCL’s board of
directors has been obtained; (vi) the necessary resolutions of the board and
the general meeting of Weida PRC, duly approving the transactions contemplated
by these agreements and the equity interest transfer agreement, have been
obtained; and (vii) Weida PRC and its shareholders have executed the
representations and warranties and undertakings, which is an attachment to the
equity interest transfer agreement, and all of the matters described therein
are true and complete.
Pursuant to these agreements, the total amount of investment (including
loans required or obtained by the Weida EJV) of the Weida EJV will be
US$4,833,836 and the registered capital of the Weida EJV will be US$2,416,918, of
which SCL will contribute twenty-five percent (25%) and the shareholders of
Weida PRC will contribute seventy-five percent (75%). Pursuant to these agreements, SCL will be
deemed to have fully paid its contribution to the Weida EJV upon its paying to the
shareholders of Weida PRC the consideration set forth in the equity interest transfer
agreement described elsewhere in this report.
A party desiring to transfer its contribution to the registered capital
to the Weida EJV must first offer such contribution in writing to the other
parties, except that SCL has the right to transfer its contribution to the
registered capital of the Weida EJV to a successor in interest of its entire
business, to a person which is at least fifty percent (50%) controlled directly
or indirectly by SCL, or to a person which controls directly or indirectly
fifty percent (50%) or more of SCL.
Notwithstanding the foregoing, subject to certain limited circumstances,
SCL may not utilize the right of first offer to reduce the percentage of its
share of the Weida EJV’s registered capital below twenty-five percent (25%).
The parties to these agreements will share the profits, risks and
losses of the Weida EJV in proportion to their respective contribution to the
registered capital of the Weida EJV and the liability of each party will be limited
to the amount of its contribution due or made to the registered capital of the
Weida EJV.
The equity joint venture contract and articles of association provide
that when the Weida EJV is established, the board of directors of the Weida EJV
will be composed of five (5) directors as follows: two (2) directors will be appointed by SCL,
two (2) directors will be appointed by the shareholders of Weida PRC, and the
remaining director will be appointed jointly by (i) SCL and (ii) collectively,
the shareholders of Weida PRC. The board
of directors will have one chairman, who will be appointed by SCL. The quorum necessary to hold meetings of the
board of directors of the Weida EJV will be three (3) directors, including at
least one director appointed by SCL. All
resolutions of the board of directors of the Weida EJV will require a majority
of the votes of the directors present at the meeting who constitute the
necessary quorum. The Weida EJV will
have one (1) general manager of the EJV, who will initially be appointed by
SCL. The general manager will implement the resolutions of the board of
directors of the Weida EJV, be responsible for the daily management and
operation of the Weida EJV, and will appoint and dismiss subordinates. SCL has the sole power to appoint and dismiss
the controller and the chief financial officer of the Weida EJV.
These agreements set forth certain other terms of the Weida EJV
including, but not limited to, certain additional responsibilities of the
parties, licensing and sale of the Weida EJV products and services, labor
management, financial affairs and accounting, taxation, confidentiality,
termination and liquidation, non-competition and indemnification.
These agreements do not require SCL to provide or arrange for any
specified amount of working capital for the Weida EJV.
48
The term of the Weida EJV will commence on the date of issuance of a
business license from the appropriate PRC government authority and will expire,
unless extended or sooner terminated, thirty (30) years after the date of
issuance of such business license.
Future Equity Interest Transfer Agreement. SCL entered into a future equity interest
transfer agreement, dated as of August 26, 2004, with Li Shun Xing, Li
Xiang Ning, Pang Da Qing and Xie Li, the shareholders of Weida PRC, on
August 27, 2004. Pursuant to this
agreement, at such future time as the laws of the PRC allow, and upon receipt
of a legal opinion issued by SCL’s Chinese counsel confirming such allowance,
these shareholders will sell and transfer additional equity interests in Weida
PRC to SCL (over and above the 25% equity interest in Weida PRC being
transferred to SCL pursuant to the equity interest transfer agreement) up to
the greater of (i) the maximum allowed by PRC law and (ii) a total of 51%
equity interest in Weida PRC (including the 25% equity interest in Weida PRC
being transferred to SCL pursuant to the equity interest transfer
agreement). The acquisition of the
additional equity interests may be made in increments, always to the maximum
then allowed by PRC law. The
consideration for the sale of the additional equity interests in Weida PRC will
be the lowest amount then permitted by PRC law.
This agreement also provides that the shareholders of Weida PRC shall
cause Weida PRC to appoint three of the five directors as directed by SCL.
Pursuant to this agreement, these shareholders, Weida PRC and any
affiliate of Weida PRC may not do any of the following without the prior
written consent of SCL: (i) amend Weida PRC’s articles of association, or any
document or agreement in connection with its establishment or in relation to
its business and operations; (ii) change
Weida PRC’s business scope and nature, abandon any qualification or license
already obtained and/or to be obtained by it, or cause such qualification or
license to lapse, or, except for any actions undertaken as required by law,
depart from its business or the business procedures as disclosed to SCL; (iii)
permit Weida PRC or its affiliates to invest in any other company; (iv) sell,
transfer, let, permit, donate, assign or deal with the sale of any part or all
of Weida PRC’s business, property or assets except in the ordinary course of
business; (v) amend any terms of remuneration or bonuses payable to any
director or officer, or enter into or amend the terms of service agreements
with any director or officer; (vi) provide any loan or any credit to any third
party or provide any indemnity, warranty or enter into any similar arrangement;
(vii) devise or issue any bonds, mortgages, pledges or other guarantees, or
increase any loans secured thereby, including but not limited to, increasing
the sum guaranteed or extend the duration of guarantee; (viii) purchase, sell,
mortgage or pledge any shares or bonds of any corporation or company, including
any shares or bonds of Weida PRC; (ix) purchase, acquire any interests or
rights in land or assets or undertake any capital commitment; (x) do anything
which would have a material adverse impact on businesses or assets of Weida PRC
or its affiliates; (xi) enter into any compromise, settlement, exemption,
withdrawal, termination or waiver, of any rights in respect of any action,
arbitration or other claim, legal action, demand or dispute of a material
nature; (xii) declare or pay any dividend or distribution with respect to the
25% equity interest in Weida PRC being transferred to SCL or any other shares
of Weida PRC; (xiii) make any payments
to any shareholder of Weida PRC or any other related party of Weida PRC,
including any payment of any interest or principal with respect to Weida PRC
shareholder or other related party loans to Weida PRC; or (xiv) let or agree to
let or give up in any other form any part or all of the rights to use or rights
of ownership of the assets of Weida PRC or its affiliates, or enter into any
agreement to acquire or rent or manage any property.
This agreement may be terminated by SCL prior to completion upon (i) a
material breach by the shareholders of Weida PRC of their representations,
warranties, obligations or undertakings set forth in this agreement; (ii) Weida
PRC sustaining a loss or damage which constitutes a material adverse change or
effect; or (iii) a petition for the winding up or liquidation of Weida PRC or
Weida PRC conducting a reorganization, whether through an arrangement with
creditors or otherwise.
49
Power of Attorney.
On August 23, 2004, Weida PRC and Li Shun Xing, Li Xiang Ning, Pang Da
Qing and Xie Li, the shareholders of Weida PRC (collectively, the “Grantors”),
executed a power of attorney granting Deng Long Long full power and authority
to (i) negotiate the acquisition by SCL of a legal ownership interest in Weida
PRC, (ii) make commitments concerning the Grantors rights and obligations
concerning such acquisition and (iii) sign all contracts, agreements and
documents concerning such acquisition.
Other Related Party Agreements
On December 3, 2003, we entered into a consulting agreement with Carl
Lanzisera, our former president and current member of our board of
directors. The agreement provides for
Mr. Lanzisera to assist us in structuring, operating and growing our business.
The agreement is for a term ending on December 31, 2004 and provides for
cash payments aggregating $100,000 and the issuance of 25,000 restricted shares
of our common stock. All cash payments
and the issuance of shares required under this agreement have been completed.
SCL has entered into an amended and restated consulting agreement with
Anthony Giordano, a beneficial holder of our common stock following
consummation of the share exchange, effective as of April 1, 2004. The
agreement provides for Mr. Giordano to assist SCL as a consultant by evaluating
prospective merger, acquisition and financing transactions that are presented
to SCL or the Company. The agreement is
for a term ending on March 30, 2006, with subsequent one-year extensions
unless otherwise terminated. The
agreement provides for a one-time initial consulting fee equal to $150,000,
which was paid to Mr. Giordano in April 2004. In addition, during the term of the
agreement, commencing April 2004, Mr. Giordano will receive a monthly
consulting fee, in arrears, in an amount equal to $20,000 plus reimbursement of
expenses. For additional disclosure
concerning Mr. Giordano, see Item 12, “Security Ownership of Certain Beneficial
Owners and Management–Matters concerning a beneficial shareholder.”
Effective as of September 3, 2004, a credit facility amounting to
$5 million has been made available to us by Anthony Giordano, a Company
shareholder, together with one of Mr. Giordano’s family limited partnerships,
to fund the Company’s future operations. This credit facility is unsecured,
bears interest on any funds advanced at a rate equal to the London Interbank
Offered Rate plus 200 basis points, has no equity component, and terminates on
October 31, 2005. For additional disclosure concerning Mr. Giordano, see
Item 12, “Security Ownership of Certain Beneficial Owners and
Management–Matters concerning a beneficial shareholder.”
On June 24, 2004, following the share exchange, our board of
directors approved our assumption of the obligations of SCL under certain
employment agreements entered into between it and various individuals, all of
who had become officers of the Company and were providing services to the
Company and in August 2004, our board of directors approved a resolution
adopting the employment agreement of Jack Chin.
The terms of these agreements are described above under “Executive
Compensation.”
We believe that the transactions described above were on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions between us and any director or executive officer are
subject to approval by a majority of the disinterested members of the board of
directors.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Auditor Fees
The aggregate fees billed for professional services rendered by our
former principal accountant, Tamas B. Revai, for the audit of our annual
financial statements and review of financial statements
50
included in our other filings with the SEC were $3,000 for the period
from February 1, 2003 to January 31, 2004 and $2,000 for the period
from February 1, 2002 to January 31, 2003.
The aggregate fees billed for professional services rendered by our
current principal independent accountant, Deloitte Touche Tohmatsu, (the
Company changed its fiscal year end to June 30 and appointed Deloitte
Touch Tohmatsu as its independent auditor on June 10, 2004) for the audit
of our annual financial statements and review of financial statements included
in our other filings with the SEC were $172,267 for the six months period ended
June 30, 2004.
Our former principal accountant, Tamas B. Revai, did not perform or
bill us for any audit-related services for the period from February 1,
2003 to January 31, 2004 or the period from February 1, 2002 to
January 31, 2003.
Our current principal independent accountant, Deloitte Touche Tohmatsu,
did not perform or bill us for any audit-related services for the six months
period ended June 30, 2004.
Our former principal accountant, Tamas B. Revai, did not perform or
bill us for any services rendered for tax compliance, tax advice and tax
planning for the period from February 1, 2003 to January 31, 2004 or
the period from February 1, 2002 to January 31, 2003.
Our current principal independent accountant, Deloitte Touche Tohmatsu,
did not perform or bill us for any services rendered for tax compliance, tax
advice and tax planning for the six months period ended June 30, 2004.
Our former principal accountant, Tamas B. Revai, did not perform or
bill us for any other services not reported in this section, for the period
from February 1, 2003 to January 31, 2004 or the period from
February 1, 2002 to January 31, 2003.
Our current principal independent accountant, Deloitte Touche Tohmatsu,
did not perform or bill us for any services not reported in this
section for the six months period ended June 30, 2004.
The
following table sets forth fees paid to our current principal independent
accountant, Deloitte Touche Tohmatsu, for the six months period ended
June 30, 2004:
|
Fee
Category
|
|
Six months period
ended June 30, 2004
|
|
% of Total
|
|
|
Audit Fees (1)
|
|
$
|
172,267
|
|
100
|
%
|
|
Audit-Related Fees (2)
|
|
$
|
0
|
|
—
|
|
|
Tax Fees (3)
|
|
$
|
0
|
|
—
|
|
|
All Other Fees (4)
|
|
$
|
0
|
|
—
|
|
|
Total Fees
|
|
$
|
172,267
|
|
100
|
%
|
(1) Audit Fees are fees for professional
services performed for the audit of our annual financial statements and review
of financial statements included in our 10-Q filings, and services that are
normally provided in connection with statutory and regulatory filings or
engagements.
(2) Audit-Related Fees are fees for
assurance and related services that are reasonably related to the performance
of the audit and review of our financial statements. This category consists
primarily of employee benefit and compensation plan audits, and consulting on financial
accounting/reporting standards.
(3) Tax Fees are fees for professional
services performed with respect to tax compliance, tax advice and tax planning.
51
(4) All Other Fees are fees for other permissible
work that does not meet the above category descriptions and consists primarily
of internal audit strategic assessment fees.
Independence
The audit committee of the board of directors has considered whether
the provision of services by Deloitte Touche Tohmatsu described above are
compatible with maintaining Deloitte Touche Tohmatsu’s independence as our
principal accountant. Our audit
committee believes that the provision of services by Deloitte Touche Tohmatsu
described above were compatible with maintaining their independence.
Pre-approval policy
Our
audit committee has policies and procedures that require the pre-approval by
the audit committee of all fees paid to, and all services performed by, our
independent auditors. At the beginning of each year, the audit committee
approves the proposed services, including the nature, type and scope of
services contemplated and the related fees, to be rendered by our accountants
during the year. In addition, audit committee pre-approval is also required for
those engagements that may arise during the course of the year that are outside
the scope of the initial services and fees pre-approved by the audit committee.
All of the fees and services provided as noted above were authorized
and approved by the audit committee in compliance with the pre-approval
policies and procedures described herein.
52
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8–K
(a)
The following documents are filed as part of this report:
|
|
|
PAGE
|
|
1.
|
Table of Contents to Financial
Statements of Weida
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND
FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2004, AND THE PERIOD FROM MAY
16, 2003 (DATE OF INCEPTION) TO DECEMBER 31, 2003 AND JUNE 30, 2003
(UNAUDITED)
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|
|
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Consolidated Balance Sheets
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F-3
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Consolidated Statements of Operations
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F-4
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Consolidated Statements of Changes
in Stockholders’ Equity
|
F-5
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|
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Consolidated Statements of Cash Flows
|
F-6
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|
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Notes to Consolidated Financial Statements
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F-7
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|
|
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2.
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Table of Contents to Financial Statements of
Weida PRC
|
F-14
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Independent Auditor’s
Report
|
F-15
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)
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Consolidated Balance Sheets
|
F-16
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Consolidated Statements of Operations
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F-17
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Consolidated Statements of Shareholders’
Deficiency
|
F-18
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Consolidated Statements of Cash Flows
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F-19
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|
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Notes to Consolidated Financial Statements
|
F-20
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3.
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Table of Contents to Financial Statements
of Weida PRC
|
F-29
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|
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Independent Auditor’s Report
|
F-30
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FOR THE PERIOD FROM
APRIL 2, 2001 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 2001
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|
|
|
Consolidated Balance Sheets
|
F-31
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|
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Consolidated Statements of Operations
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F-32
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|
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Consolidated Statements of Shareholders’ Equity (Capital Deficiency)
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F-33
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Consolidated Statements of Cash Flows
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F-34
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Notes to Consolidated Financial Statements
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F-35
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4.
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UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS
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F-44
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Pro Forma Combined Statement of Operations
for the Twelve Months Ended December 31, 2003
|
F-45
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Pro Forma Combined Balance Sheet as at
June 30, 2004
|
F-46
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Pro Forma Combined Statement of Operations
for the Six Months Ended June 30, 2004
|
F-47
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Notes to Pro Forma Financial Information
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F-48
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|
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|
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5.
|
Exhibits
|
|
|
|
The exhibits required by Item 601 of Regulation
S-K filed as part of, or incorporated by reference in, this report are listed
in the accompanying Exhibit Index found after the signature page to this
report.
|
|
53
(b) Reports on Form 8-K:
On June 18, 2004, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K, dated June 9, 2004,
disclosing under Items 1, 2, 4, 5, 7 and 8, (a) our Share Exchange with SCL,
(b) our acquisition of 100% of the outstanding capital stock of SCL pursuant to
the Exchange Agreement, (c) our change of public accountants, (d) our one-for-four
reverse stock split, (e) our name change, (f) the resignation of our former
director Walter J. Hinchcliffe, (g) SCL entering into a Registration Rights
Agreement with certain SCL shareholders and (h) change in our fiscal year.
On August 9, 2004, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K/A, dated June 9, 2004,
disclosing under Item 7, (a) SCL’s audited financial statements as at
December 31, 2003 and for the period from May 16, 2003 (date of inception)
to December 31, 2003 and (b) SCL’s unaudited financial statements as at
March 31, 2004 and for the three months ended March 31, 2004.
On August 16, 2004, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K, dated August 9, 2004, disclosing
under Items 5 and 7, (a) our Restated Certificate of Incorporation, (b) our
Amended and Restated Bylaws, (c) the appointment of board members Joseph
Theismann and Shitotomo Yamauchi, Ph.D. as independent directors, (d) our Audit
Committee Charter and (e) our Code of Ethics.
On September 2, 2004, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K, dated August 27, 2004,
disclosing under Items 1.01, 2.01, 2.03 and 9.01, (a) our acquisition of
control and a majority profit-sharing interest in Weida PRC, (b) our agreement
with China Telecom, (c) Weida PRC’s audited financial statements as at
December 31, 2001, 2002 and 2003 and for the period from April 2,
2001 to December 31, 2001 and the two years ended December 31, 2003,
(d) Weida PRC’s unaudited financial statements as at March 31, 2004 and
for the three months ended March 31, 2004, (e) an unaudited pro forma
combined balance sheet as of April 30, 2004, (f) an unaudited pro forma
statement of operations for the three-month period ended April 30, 2004
and (g) an unaudited pro forma statement of operations for the year ended
January 31, 2004.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
WEIDA COMMUNICATIONS, INC.
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(the Registrant)
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By:
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/s/ Mitchell Sepaniak
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Mitchell Sepaniak, President
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Dated: October 12, 2004
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55
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
|
Signature
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Title
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Date
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/s/ Mitchell Sepaniak
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President, Chief Executive Officer,
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October 12, 2004
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Mitchell Sepaniak
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Chairman of the Board and Director
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(Principal Executive Officer)
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/s/ Joseph Zumwalt
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Senior Vice President, Chief Financial
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October 12, 2004
|
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Joseph Zumwalt
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Officer and Secretary
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(Principal Financial and Accounting Officer)
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/s/ Tilmon Holloway
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Director
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October 12, 2004
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Tilmon Holloway
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/s/ Carl Lanzisera
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Director
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October 12, 2004
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Carl Lanzisera
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/s/ Joseph Theismann
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Director
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October 12, 2004
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Joseph Theismann
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/s/ Shitotomo Yamauchi
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Director
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October 12, 2004
|
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Shitotomo Yamauchi
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|
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56
EXHIBIT INDEX
|
2.1
|
|
Share Exchange Agreement, dated as of May 20, 2003, by and among the
Registrant, SCL, certain shareholders of the Registrant signatory thereto and
certain shareholders of SCL signatory thereto (previously filed as Exhibit
2.1 to, and incorporated by reference from, the Registrant’s Current Report
on Form 8-K, dated May 20, 2003, filed with the SEC on June 4, 2003).
|
|
|
|
|
|
2.2
|
|
Amendment to Share Exchange Agreement, dated as of November 30,
2003, by and among the Registrant, SCL, certain shareholders of the
Registrant signatory thereto and certain shareholders of SCL signatory
thereto (previously filed as Exhibit 10 to, and incorporated by reference
from, the Registrant’s Current Report on Form 8-K, dated December 3,
2003, filed with the SEC on December 18, 2003).
|
|
|
|
|
|
2.3
|
|
Second Amendment to Share Exchange Agreement, dated as of
March 31, 2004, by and among the Registrant, SCL, certain shareholders
of the Registrant signatory thereto and certain shareholders of SCL signatory
thereto (previously filed as Exhibit 10.3 to, and incorporated by reference
from, the Registrant’s Current Report on Form 8-K, dated June 9, 2004,
filed with the SEC on June 18, 2004).
|
|
|
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2.4
|
|
Share Lock Up and Escrow Agreement, dated as of April 16, 2004,
by and among Raice, Paykin & Krieg, as escrow agent, SCL, the Registrant,
certain shareholders of the Registrant signatory thereto, A. Giordano Family
Limited Partnership, EPG Limited and Anthony Giordano (previously filed as
Exhibit 10.4 to, and incorporated by reference from, the Registrant’s Current
Report on Form 8-K, dated June 9, 2004, filed with the SEC on
June 18, 2004).
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|
|
|
|
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3.1
|
|
Restated Certificate of Incorporation of Registrant (previously filed
as Exhibit 3.1 to, and incorporated by reference from, the Registrant’s
Current Report on Form 8-K, dated August 9, 2004, filed with the SEC on
August 16, 2004).
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|
|
|
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3.2
|
|
Amended and Restated Bylaws of Registrant (previously filed as
Exhibit 3.2 to, and incorporated by reference from, the Registrant’s Current
Report on Form 8-K, dated August 9, 2004, filed with the SEC on
August 16, 2004).
|
|
|
|
|
|
4.1
|
|
Specimen Common Stock Certificate of Registrant (previously filed as
Exhibit 4.1 to, and incorporated by reference from, the Registrant’s Form 8-A
filed with the SEC on September 30, 2004).
|
|
|
|
|
|
4.2
|
|
Registration Rights Agreement, dated as of June 25, 2004, by and
among the Registrant and the shareholders of the Registrant signatory thereto
(previously filed as Exhibit 4.2 to, and incorporated by reference from, the
Registrant’s Form 8-A filed with the SEC on September 30, 2004).
|
|
|
|
|
|
4.3
|
|
Form of Warrant Instrument dated as of June 11, 2004 (previously
filed as Exhibit 4.3 to, and incorporated by reference from, the Registrant’s
Form 8-A filed with the SEC on September 30, 2004).
|
|
|
|
|
|
4.4
|
|
Form of Warrant Certificate dated June 11, 2004 (previously
filed as Exhibit 4.4 to, and incorporated by reference from, the Registrant’s
Form 8-A filed with the SEC on September 30, 2004).
|
57
|
4.5
|
|
Form of Warrant Instrument to be issued in connection with the
June 18, 2004 private placement (previously filed as Exhibit 4.5 to, and
incorporated by reference from, the Registrant’s Form 8-A filed with the SEC
on September 30, 2004).
|
|
|
|
|
|
4.6
|
|
Form of Warrant Certificate to be issued in connection with the
June 18, 2004 private placement (previously filed as Exhibit 4.6 to, and
incorporated by reference from, the Registrant’s Form 8-A filed with the SEC
on September 30, 2004).
|
|
|
|
|
|
10.1
|
|
Master Agreement, dated as of April 29, 2003, by and among SCL,
Weida PRC, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously
filed as Exhibit 10.1 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.2
|
|
Stock Transfer Memo dated as of August 26, 2004 (previously
filed as Exhibit 10.2 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.3
|
|
Purchase and Sale Agreement, dated as of August 26, 2004, by and
among SCL, Jack Chin, Honest Link International Ltd., Worldwise Development
Ltd., Magic Technology Development Ltd., Energic Development Ltd., and Ocean
Channel Investments Ltd. (previously filed as Exhibit 10.3 to, and
incorporated by reference from, the Registrant’s Current Report on Form 8-K,
dated August 27, 2004, filed with the SEC on September 2, 2004).
|
|
|
|
|
|
10.4
|
|
Service and Support Agreement, dated as of August 26, 2004, by
and between the WOFE and Weida PRC (previously filed as Exhibit 10.4 to, and
incorporated by reference from, the Registrant’s Current Report on Form 8-K,
dated August 27, 2004, filed with the SEC on September 2, 2004).
|
|
|
|
|
|
10.5
|
|
Pledge Agreement, dated as of August 26, 2004, by and among the
WOFE, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously filed
as Exhibit 10.5 to, and incorporated by reference from, the Registrant’s
Current Report on Form 8-K, dated August 27, 2004, filed with the SEC on
September 2, 2004).
|
|
|
|
|
|
10.6
|
|
Equity Interest Transfer Agreement, dated as of August 26, 2004,
by and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li
(previously filed as Exhibit 10.6 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.7
|
|
Equity Joint Venture Contract, dated as of August 26, 2004, by
and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li
(previously filed as Exhibit 10.7 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.8
|
|
Articles of Association, dated as of August 26, 2004, by and
among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously
filed as Exhibit 10.8 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.9
|
|
Future Equity Interest Transfer Agreement, dated as of
August 26, 2004, by and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da
Qing and Xie Li (previously filed as Exhibit 10.9 to, and incorporated by
reference from, the Registrant’s Current Report on Form 8-K, dated
August 27, 2004, filed with the SEC on September 2, 2004).
|
58
|
10.10
|
|
Trust Agreement, dated as of August 26, 2004, by and among Li
Shun Xing, Li Xiang Ning, Pang Da Qing, Xie Li, SCL and Weida PRC (previously
filed as Exhibit 10.10 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed
with the SEC on September 2, 2004).
|
|
|
|
|
|
10.11
|
|
Power of Attorney dated as of August 23, 2004 (previously filed
as Exhibit 10.11 to, and incorporated by reference from, the Registrant’s
Current Report on Form 8-K, dated August 27, 2004, filed with the SEC on
September 2, 2004).
|
|
|
|
|
|
10.12
|
|
Business Expansion Cooperation Agreement, dated August 27, 2004,
by and between Weida PRC and China Telecom Group System Integration Co., Ltd.
(with certain confidential portions omitted) (previously filed as Exhibit
10.12 to, and incorporated by reference from, the Registrant’s Current Report
on Form 8-K, dated August 27, 2004, filed with the SEC on
September 2, 2004).
|
|
|
|
|
|
10.13
|
|
Employment Agreement of Mitchell Sepaniak effective June 11,
2004 (previously filed as Exhibit 10.5 to, and incorporated by reference
from, the Registrant’s Current Report on Form 8-K, dated June 9, 2004,
filed with the SEC on June 18, 2004).
|
|
|
|
|
|
10.14
|
|
Amendment Number 1 to Employment Agreement of Mitchell Sepaniak
effective April 1, 2004.
|
|
|
|
|
|
10.15
|
|
Employment Agreement of Joseph Zumwalt effective June 11, 2004
(previously filed as Exhibit 10.6 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with
the SEC on June 18, 2004).
|
|
|
|
|
|
10.16
|
|
Employment Agreement of Amanda Harmon effective June 11, 2004
(previously filed as Exhibit 10.7 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with
the SEC on June 18, 2004).
|
|
|
|
|
|
10.17
|
|
Employment Agreement of Jack Chin effective April 1, 2004.
|
|
|
|
|
|
10.18
|
|
Consulting Agreement with Carl Lanzisera dated December 3, 2003.
|
|
|
|
|
|
10.19
|
|
Amended and Restated Consulting Agreement with Anthony Giordano
effective April 1, 2004.
|
|
|
|
|
|
10.20
|
|
Funding Commitment Letter of Anthony Giordano and The Anthony F.
Giordano Family Limited Partnership III dated September 27, 2004.
|
|
|
|
|
|
14.1
|
|
Code of Ethics for Directors, Senior Executive, Financial and
Accounting Officers, approved and adopted by the Board of Directors of Weida
Communications, Inc. on August 9, 2004 (previously filed as Exhibit 14
to, and incorporated by reference from, the Registrant’s Current Report on
Form 8-K, dated August 9, 2004, filed with the SEC on August 16,
2004).
|
|
|
|
|
|
16.1
|
|
Letter re Change in Certifying Accountant, dated June 18, 2004
(previously filed as Exhibit 16.1 to, and incorporated by reference from, the
Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with
the SEC on June 18, 2004).
|
|
|
|
|
|
21.1
|
|
Subsidiaries of Registrant.
|
|
|
|
|
|
31.1
|
|
Certification of principal executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
59
|
31.2
|
|
Certification of principal financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
60
WEIDA COMMUNICATIONS, INC.
TABLE
OF CONTENTS
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Weida Communications, Inc.
Fort Lauderdale, FL
We have audited the accompanying consolidated balance sheets of Weida
Communications, Inc. (the “Company”) as of June 30, 2004 and
December 31, 2003 and the related consolidated statements of operations,
stockholders’ equity and cash flows for the six months ended June 30, 2004
and the period from May 16, 2003 (date of inception) to December 31, 2003. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated 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 audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at
June 30, 2004 and December 31, 2003, and the results of its
operations and its cash flows for the six months ended June 30, 2004 and
the period from May 16, 2003 (date of inception) to December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
September 27, 2004
F-2
WEIDA COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
June 30,
2004
|
|
December 31,
2003
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
$
|
1,617,845
|
|
$
|
—
|
|
|
Interest receivable
|
|
80,968
|
|
31,908
|
|
|
Due from related party
|
|
438,640
|
|
—
|
|
|
Prepaid expenses - current portion
|
|
173,750
|
|
—
|
|
|
Total current assets
|
|
2,311,203
|
|
31,908
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
18,121
|
|
—
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
Note receivable
|
|
2,200,000
|
|
2,200,000
|
|
|
Deposit in escrow
|
|
—
|
|
58,346
|
|
|
Deferred acquisition costs
|
|
5,704,004
|
|
4,639,712
|
|
|
Prepaid expenses - non-current portion
|
|
62,500
|
|
—
|
|
|
Other assets
|
|
3,880
|
|
—
|
|
|
Total other assets
|
|
7,970,384
|
|
6,898,058
|
|
|
TOTAL ASSETS
|
|
$
|
10,299,708
|
|
$
|
6,929,966
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,518,803
|
|
$
|
759,055
|
|
|
Due to a related party
|
|
756,386
|
|
776,932
|
|
|
Total current liabilities
|
|
2,275,189
|
|
1,535,987
|
|
|
|
|
|
|
|
|
|
Long term loan from a related party
|
|
270,000
|
|
—
|
|
|
Total liabilities
|
|
2,545,189
|
|
1,535,987
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
Common stock, $0 par value, 100,000,000
shares authorized and 72,334,486 and 71,462,981 issued and outstanding at
June 30, 2004 and December 31, 2003, respectively
|
|
9,408,958
|
|
6,542,773
|
|
|
Common stock to be issued, US$0 par value,
538,332 shares at June 30, 2004
|
|
1,375,955
|
|
—
|
|
|
Accumulated deficits
|
|
(3,030,394
|
)
|
(1,148,794
|
)
|
|
Total stockholders’ equity
|
|
7,754,519
|
|
5,393,979
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
10,299,708
|
|
$
|
6,929,966
|
|
See notes to consolidated financial statements.
F-3
WEIDA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
Six months
ended
June 30,
2004
|
|
Period
from
May 16, 2003
to
June 30,
2003
|
|
Period
from
May 16, 2003
to
December 31,
2003
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
(1,508,715
|
)
|
$
|
(29,649
|
)
|
$
|
(737,353
|
)
|
|
General and administrative expenses
|
|
(421,945
|
)
|
(107,820
|
)
|
(443,349
|
)
|
|
Total operating expenses
|
|
(1,930,660
|
)
|
(137,469
|
)
|
(1,180,702
|
)
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
49,060
|
|
—
|
|
31,908
|
|
|
NET LOSS
|
|
$
|
(1,881,600
|
)
|
$
|
(137,469
|
)
|
$
|
(1,148,794
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.03
|
)
|
$
|
(0.00
|
)
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
71,820,578
|
|
71,462,981
|
|
71,462,981
|
|
See notes to consolidated financial statements.
F-4
WEIDA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
|
|
|
SCL
Ventures, Ltd.
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
common
stock
|
|
Common
Stock
|
|
to be
issued
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
deficits
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to founders
|
|
68,962,975
|
|
$
|
689,630
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
689,630
|
|
|
Exchange of common stock (including 2,500,006
shares of stock held by Laser Recording System, Inc.’s shareholders)
|
|
(68,962,975
|
)
|
(689,630
|
)
|
71,462,981
|
|
689,630
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Additional capital contribution by existing
shareholders
|
|
—
|
|
—
|
|
—
|
|
5,853,143
|
|
—
|
|
—
|
|
—
|
|
5,853,143
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,148,794
|
)
|
(1,148,794
|
)
|
|
Balance as of December 31, 2003
|
|
—
|
|
—
|
|
71,462,981
|
|
6,542,773
|
|
—
|
|
—
|
|
(1,148,794
|
)
|
5,393,979
|
|
|
Issuance of common stock for cash
|
|
793,339
|
|
2,053,685
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,053,685
|
|
|
Exchange of common stock
|
|
(793,339
|
)
|
(2,053,685
|
)
|
793,339
|
|
2,053,685
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Issuance of common stock and warrants for service
rendered in connection with private placement
|
|
53,166
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Exchange of common stock
|
|
(53,166
|
)
|
—
|
|
53,166
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Common stock fully paid and to be issued
|
|
—
|
|
—
|
|
—
|
|
—
|
|
538,332
|
|
1,375,955
|
|
—
|
|
1,375,955
|
|
|
Additional capital contribution by existing
shareholders
|
|
—
|
|
—
|
|
—
|
|
675,000
|
|
—
|
|
—
|
|
—
|
|
675,000
|
|
|
Issuance of common stock for services provided
|
|
—
|
|
—
|
|
25,000
|
|
137,500
|
|
—
|
|
—
|
|
—
|
|
137,500
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,881,600
|
)
|
(1,881,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2004
|
|
—
|
|
$
|
—
|
|
72,334,486
|
|
$
|
9,408,958
|
|
538,332
|
|
$
|
1,375,955
|
|
$
|
(3,030,394
|
)
|
$
|
7,754,519
|
|
See notes to consolidated financial statements.
F-5
WEIDA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
Six months
ended
June 30,
2004
|
|
Period
from
May 16, 2003
to
June 30,
2003
|
|
Period
from
May 16, 2003
to
December 31,
2003
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,881,600
|
)
|
$
|
(137,469
|
)
|
$
|
(1,148,794
|
)
|
|
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Fair value of services provided by
shareholders at no cost
|
|
75,000
|
|
—
|
|
—
|
|
|
Fair value of services provided by a
related party settled by the issuance of common stock
|
|
68,750
|
|
—
|
|
—
|
|
|
Changes in assets and liabilities - net of
acquisition
|
|
|
|
|
|
|
|
|
Increase in interest receivable
|
|
(49,060
|
)
|
—
|
|
(31,908
|
)
|
|
Decrease in deposit in escrow
|
|
58,346
|
|
—
|
|
746,807
|
|
|
Increase in prepaid expenses
|
|
(167,500
|
)
|
—
|
|
—
|
|
|
Increase in other assets
|
|
(3,880
|
)
|
—
|
|
—
|
|
|
Increase in accounts payable and accrued
expenses
|
|
759,748
|
|
137,128
|
|
759,055
|
|
|
Net cash (used in) provided by operating
activities
|
|
(1,140,196
|
)
|
(341
|
)
|
325,160
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(18,121
|
)
|
—
|
|
—
|
|
|
Increase in deposit in escrow
|
|
—
|
|
(805,153
|
)
|
(805,153
|
)
|
|
Increase in deferred acquisition costs
|
|
(1,064,292
|
)
|
(3,221,529
|
)
|
(4,639,712
|
)
|
|
Changes in due from related party
|
|
(438,640
|
)
|
(2,200,000
|
)
|
—
|
|
|
Increase in notes receivable
|
|
—
|
|
—
|
|
(2,200,000
|
)
|
|
Cash used in investing activities
|
|
(1,521,053
|
)
|
(6,226,682
|
)
|
(7,644,865
|
)
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock to founders
|
|
—
|
|
—
|
|
689,630
|
|
|
Changes in due to a related party
|
|
(20,546
|
)
|
725,076
|
|
776,932
|
|
|
Loan from a related party
|
|
270,000
|
|
—
|
|
—
|
|
|
Proceeds from issuance of restricted common
shares
|
|
3,429,640
|
|
—
|
|
—
|
|
|
Shareholders’ contribution
|
|
600,000
|
|
5,501,947
|
|
5,853,143
|
|
|
Cash provided by financing activities
|
|
4,279,094
|
|
6,227,023
|
|
7,319,705
|
|
|
Net change in cash
|
|
1,617,845
|
|
—
|
|
—
|
|
|
Cash at beginning of period
|
|
—
|
|
—
|
|
—
|
|
|
Cash at end of period
|
|
$
|
1,617,845
|
|
$
|
—
|
|
$
|
—
|
|
|
Supplemental disclosure of non-cash
activities:
|
|
|
|
|
|
|
|
|
Issuance of stock in connection with
private placement
|
|
$
|
159,498
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants to purchase common
stock
|
|
$
|
217,000
|
|
$
|
—
|
|
$
|
—
|
|
See notes to consolidated financial statements.
F-6
WEIDA COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS PERIOD ENDED
JUNE 30, 2004, AND FOR THE PERIOD FROM MAY 16, 2003 TO DECEMBER 31,
2003 AND JUNE 30, 2003 (UNAUDITED)
1. ORGANIZATION
AND NATURE OF THE BUSINESS
SCL Ventures, LTD (“SCL”), a British Virgin Islands corporation, was
established on May 16, 2003 to acquire an interest in telecommunications and
related service entities in Asia.
On May 20, 2003, SCL entered a shares exchange agreement (the “Exchange
Agreement”) with Laser Recording Systems, Inc. (“Laser”), a New Jersey
corporation.
The Exchange Agreement set forth the terms and conditions of the
exchange by the SCL shareholders of their shares of capital stock, representing
all of the issued and outstanding shares of capital stock of SCL in exchange
for the issuance by Laser to the shareholders of SCL of 69,809,480 shares of
common stock, no par value per share. Pursuant to the Exchange Agreement, SCL
shareholders acquired approximately 96.5% of the issued and outstanding shares
of Laser and can elect three designees of SCL to the Board of Directors.
Following the share exchange with Laser (the “Exchange”) on
June 11, 2004, Laser changed its name to Weida Communications, Inc.
(“Weida” or the “Company”) and its fiscal year end from January 31 to
June 30.
The transaction was accounted similar to a reverse acquisition in which
SCL is the accounting acquirer and Laser is the legal acquirer. The management
of SCL has replaced the management of Laser. Since the transaction was
accounted for similar to a reverse acquisition and not a business combination,
no goodwill has been recorded in connection with the transaction and such
excess of purchase price over net assets acquired (goodwill) and the costs
incurred in connection with the transaction have been accounted for as an
expense.
As a result of the Exchange (i) the historical financial statements of
Laser for periods prior to the date of the transaction are no longer presented;
(ii) the historical financial statements of the Company for periods prior to
the date of the transaction are those of SCL; (iii) all references to the
financial statements of the Company apply to the historical financial
statements of SCL prior to the transaction and the financial statements of the
Company subsequent to the transaction; (iv) any reference to the Company
applies solely to Weida.
SCL entered into an agreement (the “Agreement”) with Guangzhou Weida
Communications Technology Co., Ltd. (“Weida PRC”) and the existing shareholders
of Weida PRC (“Existing Shareholders”) on April 29, 2003. The Agreement, as modified by a stock
transfer memorandum dated August 26, 2004, established the framework for
the acquisition, through a series of contractual arrangements, of control and a
majority interest in Weida PRC. Under
the Agreement:
1. Weida PRC will be converted
into a Sino-Foreign Equity Joint Venture (the “Weida EJV”)
F-7
2. SCL will obtain a 51%
participation interest in the Weida EJV through (i) a direct acquisition of a
25% ownership interest and (ii) an acquisition of a 26% profit-sharing interest
via a 100% ownership interest in a Hong Kong entity (“HK Company”). The HK Company will be established by the
Existing Shareholders, which, in turn, will establish a wholly owned foreign
enterprise (“WOFE”) to hold a direct 26% profit-sharing interest in the Weida
EJV.
The total consideration for the purchase of the 25% ownership interest
and 26% profit-sharing interest in the Weida EJV shall consist of the
following: (a) $805,153 in cash as registered capital to the Weida EJV; (b)
cash payment of $15 million to the Existing Shareholders upon the completion of
the conditions to the formation of the Weida EJV and the Weida EJV having been
formed and having a valid business license showing SCL’s 25% equity ownership;
(c) transfer to the Existing Shareholders of approximately 16.3 million common
shares of the Company (deemed aggregate value of $110 million); and (d)
provision or an arrangement to provide working capital for the Weida EJV and
WOFE up to an aggregate amount of $159.2 million.
Further, the Agreement provides for a number of condition precedents
required of SCL and the execution of necessary documents and agreements by
certain parties. In addition, the consummation of the Agreement is subject to
the People’s Republic of China (the “PRC”) licensing and approval process,
which may necessitate modification of the above mentioned transaction. However, the provision or the arrangement to
provide the $159.2 million working capital is not a condition precedent.
The deferred acquisition costs on the balance sheet represent amounts
spent in connection with the acquisition of Weida PRC.
Subsequent to June 30, 2004, SCL completed a series of contractual
arrangements (See Note 9) resulting in its acquisition of effective management
control and a 51% profit-sharing interest in Weida PRC.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principle of consolidation - The consolidated financial statements
include the financial statements of SCL and Laser. All significant
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
- - The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amount of revenues and
expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. They do not include all information and notes
required by generally accepted accounting principles for complete consolidated
financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals only)
considered necessary for a fair presentation have been included.
New Accounting Pronouncements
- - In May 2003, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, which establishes
F-8
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of
SFAS No. 150 had no impact on the financial statements as the Company did not
have any financial instruments with characteristics of both liabilities and
equity during the period ended December 31, 2003.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which amends and clarifies accounting for
derivative instruments and for hedging activities under SFAS No. 133.
Specifically, SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS No. 149
clarifies the circumstances in which a contract with an initial net investment
meets the characteristics of a derivative and when a derivative contains a
financing component that requires special reporting in the statement of cash
flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003 and
did not have a significant impact on the Company’s financial position or
results of operations.
In January 2003, the FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities
(“FIN 46”) and, in December 2003, issued a revision to that interpretation
(“FIN 46R”). FIN 46R replaces FIN 46
and addresses consolidation by business enterprises of variable interest
entities that possess certain characteristics.
A variable interest entity (“VIE”) is defined as (a) an ownership,
contractual or monetary interest in an entity where the ability to influence
financial decisions is not proportional to the investment interest, or (b) an
entity lacking the invested capital sufficient to fund future activities
without the support of a third party. FIN 46R establishes standards for
determining under what circumstances VIEs should be consolidated with their
primary beneficiary, including those to which the usual condition for
consolidation does not apply. The
Company did not have any ownership in any variable interest entities as of
June 30, 2004 and December 31, 2003.
Taxes
- - The Company is located in a jurisdiction where it has no actual operations or
that does not impose income taxes. As
such, no provision for income taxes has been provided.
3. NOTE
RECEIVABLE WITH RELATED PARTY
On August 1, 2003, SCL signed a promissory note receivable with
Glendora, Ltd. (“Glendora”), a British Virgin Islands corporation, in the
amount of $2.2 million. Glendora has
certain shareholders that are also shareholders of SCL and the Company. Borrowings under the note receivable bear
interest at the London Interbank Offered Rate plus 200 basis points (effective
rate of 3.47% at December 31, 2003
and 4.46% at June 30, 2004), with interest and principal due five years
from the date of the note. Glendora has
granted a general security interest in and to all of its tangible and
intangible property and assets of any kind as collateral for the note
receivable. The carrying amount of this
note receivable approximates its fair value.
Additionally, SCL and Glendora signed an assignment agreement whereby
SCL has granted Glendora the rights to enter into a transaction with Guangzhou
Suntek New Tech R&D Co., Ltd. (“Suntek”) which was previously held by
SCL. Management of the Company has not
assigned any value to the assignment agreement as the assignment agreement
assigns the right to pursue a purchase agreement with Suntek and not a negotiated
purchase agreement and, therefore, does not have any measurable value.
F-9
4. DUE
FROM RELATED PARTY
The amount represents an amount due from Weida PRC for payments made on
its behalf. The amount is unsecured,
interest-free and has no fixed terms of repayment.
5. STOCKHOLDERS’
EQUITY
SCL was incorporated on May 16, 2003 with 100,000,000 shares authorized
to be divided into such number of classes or series as designated by SCL.
In 2003, SCL issued 68,962,975 shares of restricted common stock, par
value US$0.01 per share. The subscription agreements set the purchase price of
US$0.01 per share. The initial purchase price of $689,630 was funded by the
funding shareholders. The restricted
common stock have been recorded as the issuance of founders stock, as the
restricted common stock was issued in exchange for contributions of various
rights and services related to the formation of SCL. The founding shareholders
have provided operating capital and contributed various services to SCL.
In connection with the Exchange (see Note 1), the number of shares in
the Company has been restated retrospectively to reflect the effect of the
Exchange.
As noted in Note 1 to the consolidated financial statements, the
Company has agreed to issue 16.3 million shares to the Existing Shareholders of
Weida PRC upon satisfaction of certain conditions.
In the first quarter of 2004, SCL issued 61,666 shares of restricted common stock for a
total gross proceeds of $195,000. The
subscription agreements set the purchase price of $3 to $3.75 per share. In addition, 156,040 shares were issued to
one of the founding shareholders for a total gross proceeds of $1,560.
In the second quarter of 2004, SCL issued 575,633 shares of restricted
common stock for a total gross proceeds of $1,857,125. SCL also issued 53,166 shares of common
stock at a value of $3 per share, and 31,249 warrants to purchase the common
stock, which shares and warrants have been accounted for as financing costs, in
connection with the private placement.
As part of the private placement the Company also issued warrants to
purchase 2.37 million shares of the Company’s common stock to the founding
shareholders and investors, including the 31,249 warrants mentioned in the
preceding paragraph. The warrants entitle the holders to exercise their
warrants and purchase shares of common stock exercisable commencing 24 months
after the Exchange at exercise prices of $1.00 and $2.75 per share, which apply
to 1.58 million and 790,000 warrants, respectively. These warrants were valued
at $217,000 using the Black-Scholes pricing model with the following
assumptions: (i) no expected dividends; (ii) a risk-free interest rate of
1.887%; (iii) expected volatility of 195%; and (iv) an expected life of three
years. As of June 30, 2004, there
have been no exercises of warrants and all warrants issued remain outstanding.
Subsequent to June 11, 2004, the Company received a total gross
proceeds of $1,375,955 in exchange for 458,332 shares of common stock and
warrants to purchase an additional 229,173 shares of common stock to be issued
to existing and new investors. The warrants carry a three and one-half year
term from the time such warrants are exercisable. The Company is also obligated
to issue 80,000 shares of common stock to advisors, which have been accounted
for as financing costs, in connection with this private placement. As of June 30, 2004, the Company has
not issued these shares and warrants.
F-10
6. NET
LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of shares of common stock
outstanding during the period. For periods in which a net loss has been
incurred, the calculation of diluted net loss per share excludes potential
common stock equivalents, as their effect is anti-dilutive. Potential common
stock includes incremental shares of common stock issuable upon the exercise of
2,370,000 outstanding stock warrants as of June 30, 2004.
7. COMMITMENTS AND CONTINGENCIES
(i) An employee of SCL asserted claims for
unpaid salary in the amount of $0.5 million and 3.3 million shares of SCL’s
common stock based on an asserted employment agreement between him and SCL, and
has indicated through his counsel that if terminated he will also assert a
claim for severance in the additional amount of $0.75 million. The Company’s management believes the
Company has meritorious defenses to the claims, including that the employee in
question did not perform the services contemplated by the alleged
agreement. A portion of the employee’s
alleged unpaid salary had been and continues to be included in the Company’s
consolidated financial statements as account payable.
SCL has commenced legal proceedings against the employee for breach of
contract and declaratory relief and has given him notice of termination of
employment. The employee has moved to
compel arbitration of the matter.
Litigation or arbitration proceedings with respect to the employee’s claims
are probable. There can be no assurance
as to the outcome of any litigation or arbitration proceedings. Any adverse decision in such proceedings
could adversely affect the financial condition of the Company.
(ii) A shareholder and former chief financial
officer of Teleflex Technologies, Inc. (“Teleflex”), a currently inactive
privately-held company which had attempted to pursue joint venture
opportunities in the PRC in late 2001 and in 2002, and of which Mitchell
Sepaniak, the president, chief executive officer and a shareholder of the
Company, was also a chief executive officer, commencing early 2003, has
recently asserted claims in New York State court against SCL, Teleflex and Mr.
Sepaniak. The plaintiff’s petition alleges failure on the part of Mr. Sepaniak
and Teleflex to comply with corporate formalities such as holding annual
meetings and also alleges corporate waste, and is seeking various relief,
including allowing shareholders to inspect the books and records, including
balance sheets and profit and loss earnings statements. The former chief
financial officer has also asserted claims against SCL, Teleflex and Mr.
Sepaniak for unpaid salary and compensation.
Litigation proceedings with respect to the plaintiff’s claims are
probable. The proceedings are at an early stage, and therefore there can be no
assurance as to the outcome of such proceedings. Any adverse decision in such
proceedings could adversely affect the financial condition of the Company.
(iii) The Company is also subject to various legal
proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of
any ultimate liability with respect to these actions will not materially affect
the Company’s financial position, liquidity, or results of operations.
F-11
8. RELATED
PARTY TRANSACTIONS
(i) On
December 3, 2003, the Company entered into a consulting agreement with
Carl Lanzisera, the former president and current member of the Company’s board
of directors. The agreement provides
for Mr. Lanzisera to assist the Company in structuring, operating and growing
the Company’s business. The agreement
is for a term ending on December 31, 2004 and provides for cash payments
aggregating $100,000 and the issuance of 25,000 restricted shares of the
Company’s common stock. The shares were
issued in June 2004 at the market value of $5.5 per share. The total consideration under the agreement
amounted to $237,500, of which $118,750 has been recognised as expense in the
consolidated statements of operations during the six months ended June 30,
2004.
(ii) SCL has entered into a consulting agreement
with Anthony Giordano, a beneficial holder of the Company’s common stock,
effective as of April 1, 2004. The agreement provides for Mr. Giordano to
assist SCL as a consultant by evaluating prospective merger, acquisition and
financing transactions that are presented to SCL or the Company. The agreement is for a term ending on
March 30, 2006, with subsequent one-year extensions unless otherwise
terminated. The agreement provides for
a one-time initial consulting fee equal to $150,000, which was paid to Mr.
Giordano in April 2004. In
addition, during the term of the agreement, commencing April 2004, Mr.
Giordano will receive a monthly consulting fee, in arrears, in an amount equal
to $20,000 plus reimbursement of expenses.
(iii) Certain shareholders contributed capital to fund
the Company’s operations through to December 31, 2003. In 2004, a founding shareholder of the
Company contributed $600,000 capital and loaned $270,000 to the Company to fund
its operations. The shareholder has
indicated it will not demand the repayment of $270,000 prior to July 2005. In addition, a company owned by the
shareholder also advanced $756,386 and $776,932 at June 30, 2004 and
December 31, 2003, respectively, to the Company to finance its operations.
In addition, subsequent to June 30, 2004, Mr. Giordano, together
with one of Mr. Giordano’s family limited partnerships, has granted a credit
facility amounting to $5 million to fund the Company’s future operations. This
credit facility is unsecured, bears interest equal to the London Interbank
Offered Rate plus 200 basis points, has no equity component, and terminates on
October 31, 2005.
(iv) During the six months ended June 30, 2004,
certain shareholders provided services to the Company at no cost. The value of the services is estimated to be
$75,000 and has been recorded as additional capital contribution by
shareholders.
9. SUBSEQUENT
EVENT
In August 2004, SCL completed a series of contractual
arrangements. As part of the
contractual arrangements, SCL acquired 99.99% of the registered capital of
Ocean International Holdings Limited (“OIHL”), a company incorporated in Hong Kong. The remaining 0.01% of the registered
capital of OIHL is held by one of the Company’s executives as a nominal holder
in order to meet local Hong Kong legal requirements. OIHL is the sole owner and holder of all the registered capital
of Ocean Tian Di Communication Technology Co., Ltd. (Guangzhou), a wholly owned
foreign enterprise (“OTDC”). OTDC has
entered into an exclusive service and support agreement with Weida PRC,
effective as of September 1, 2004, which provides for OTDC to provide
support services to Weida PRC in exchange for receiving service fees.
F-12
Pursuant to the terms of the contractual arrangements, SCL has acquired
effective majority ownership and control of Weida PRC through trust agreements
for 51% of its shares and an effective 51% profit-sharing interest in Weida
PRC. Under the contractual
arrangements, SCL can designate three of Weida PRC’s five directors.
As part of the contractual arrangements, when the Weida EJV is formed and
approved by the PRC authorities, its profit-sharing interest will be reduced to
26% so as to maintain its effective 51% majority interest.
F-13
GUANGZHOU
WEIDA COMMUNICATIONS
TECHNOLOGY
CO., LTD.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)
AND
INDEPENDENT AUDITORS’ REPORT
F-14
INDEPENDENT AUDITORS’ REPORT
To
the Board of Directors of Guangzhou Weida Communications Technology Co., Ltd:
We
have audited the accompanying consolidated balance sheet of Guangzhou Weida Communications
Technology Co., Ltd. and its subsidiary (the “Company”) as of June 30,
2004 and the related consolidated statements of operations, shareholders’
deficiency and cash flows for the six months ended June 30, 2004. These financial statements are the
responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audit in accordance with auditing standards generally accepted in
the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30,
2004 and the results of their operations and their cash flows for the six
months ended June 30, 2004 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company’s recurring net
losses, negative working capital and net operating cash outflows raise
substantial doubt about its ability to continue as a going concern. The arrangements entered into by management
concerning these matters are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our
audit also comprehended the translation of Renminbi amounts into United States
dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 3.
Such United States dollar amounts are presented solely for the
convenience of the readers.
Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
August 30, 2004
F-15
Guangzhou
Weida Communications Technology Co., Ltd.
CONSOLIDATED
BALANCE SHEETS
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
54,009
|
|
447,009
|
|
1,974,918
|
|
|
Restricted cash
|
|
—
|
|
—
|
|
10,000,000
|
|
|
Accounts receivables
|
|
18,090
|
|
149,720
|
|
628,480
|
|
|
Amounts due from other related parties
|
|
—
|
|
—
|
|
14,320,000
|
|
|
Inventories
|
|
757,596
|
|
6,270,317
|
|
6,451,466
|
|
|
Advances to suppliers
|
|
13,920
|
|
115,210
|
|
141,300
|
|
|
Prepaid expenses and other current assets
|
|
210,105
|
|
1,738,955
|
|
5,809,271
|
|
|
Total current assets
|
|
1,053,720
|
|
8,721,211
|
|
39,325,435
|
|
|
Deposit for purchase of property, plant and
equipment
|
|
393,950
|
|
3,260,567
|
|
—
|
|
|
Property, plant and equipment, net
|
|
1,553,665
|
|
12,859,052
|
|
15,918,136
|
|
|
TOTAL ASSETS
|
|
3,001,335
|
|
24,840,830
|
|
55,243,571
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ (DEFICIENCY) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank loans
|
|
2,416,451
|
|
20,000,000
|
|
40,000,000
|
|
|
Short-term loan
|
|
24,165
|
|
200,000
|
|
—
|
|
|
Accounts payable
|
|
942,961
|
|
7,804,511
|
|
10,090,000
|
|
|
Accrued expenses and other payables
|
|
158,100
|
|
1,308,526
|
|
817,634
|
|
|
Amounts due to shareholders
|
|
178,083
|
|
1,473,918
|
|
991,879
|
|
|
Amount due to SCL Ventures, Ltd.
|
|
438,640
|
|
3,630,448
|
|
—
|
|
|
Amounts due to other related parties
|
|
1,248,339
|
|
10,332,000
|
|
1,000,000
|
|
|
Total current liabilities
|
|
5,406,739
|
|
44,749,403
|
|
52,899,513
|
|
|
Shareholders’ (deficiency) equity:
|
|
|
|
|
|
|
|
|
Paid-in capital
|
|
2,416,451
|
|
20,000,000
|
|
20,200,000
|
|
|
Accumulated deficits
|
|
(4,821,855
|
)
|
(39,908,573
|
)
|
(17,855,942
|
)
|
|
Total shareholders’ (deficiency) equity
|
|
(2,405,404
|
)
|
(19,908,573
|
)
|
2,344,058
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’
(DEFICIENCY) EQUITY
|
|
3,001,335
|
|
24,840,830
|
|
55,243,571
|
|
See
notes to consolidated financial statements.
F-16
Guangzhou
Weida Communications Technology Co., Ltd.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2003
to
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Sales
of equipment
|
|
42,030
|
|
347,863
|
|
591,112
|
|
|
Satellite bandwidth revenue
|
|
14,639
|
|
121,160
|
|
120,996
|
|
|
Total revenues
|
|
56,669
|
|
469,023
|
|
712,108
|
|
|
Cost of revenues
|
|
(868,115
|
)
|
(7,185,044
|
)
|
(3,764,539
|
)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salary expenses
|
|
(128,230
|
)
|
(1,061,313
|
)
|
(1,020,913
|
)
|
|
Office rental expenses
|
|
(99,541
|
)
|
(823,860
|
)
|
(351,655
|
)
|
|
Advertising and promotion expenses
|
|
(36,568
|
)
|
(302,655
|
)
|
(609,599
|
)
|
|
Office expenses
|
|
(15,846
|
)
|
(131,139
|
)
|
(242,899
|
)
|
|
Others
|
|
(124,094
|
)
|
(1,027,087
|
)
|
(663,555
|
)
|
|
Loss
from operations
|
|
(1,215,725
|
)
|
(10,062,075
|
)
|
(5,941,052
|
)
|
|
Interest
expenses
|
|
(116,576
|
)
|
(964,853
|
)
|
(712,854
|
)
|
|
Interest
income
|
|
11,788
|
|
97,561
|
|
7,711
|
|
|
Net
loss
|
|
(1,320,513
|
)
|
(10,929,367
|
)
|
(6,646,195
|
)
|
See
notes to consolidated financial statements.
F-17
Guangzhou
Weida Communications Technology Co., Ltd.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ DEFICIENCY
|
|
|
Paid-in
capital
RMB
|
|
Accumulated
deficits
RMB
|
|
Total
shareholders’
(deficiency)
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2003
|
|
20,200,000
|
|
(11,209,747
|
)
|
8,990,253
|
|
|
Net loss (unaudited)
|
|
—
|
|
(6,646,195
|
)
|
(6,646,195
|
)
|
|
Balance at June 30, 2003 (unaudited)
|
|
20,200,000
|
|
(17,855,942
|
)
|
2,344,058
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2004
|
|
20,200,000
|
|
(28,979,206
|
)
|
(8,779,206
|
)
|
|
Reclassification of capital contribution to
short-term loan
|
|
(200,000
|
)
|
—
|
|
(200,000
|
)
|
|
Net loss
|
|
—
|
|
(10,929,367
|
)
|
(10,929,367
|
)
|
|
Balance at June 30, 2004
|
|
20,000,000
|
|
(39,908,573
|
)
|
(19,908,573
|
)
|
See
notes to consolidated financial statements.
F-18
Guangzhou
Weida Communications Technology Co., Ltd.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2004
to
June 30, 2004
|
|
January 1, 2003
to
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
(1,320,513
|
)
|
(10,929,367
|
)
|
(6,646,195
|
)
|
|
Adjustment to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
222,157
|
|
1,838,709
|
|
1,047,009
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
1,559
|
|
12,900
|
|
531,600
|
|
|
Inventories
|
|
63,242
|
|
523,427
|
|
(5,395,915
|
)
|
|
Advances to suppliers
|
|
22,073
|
|
182,690
|
|
(16,300
|
)
|
|
Prepaid expenses and other current assets
|
|
16,515
|
|
136,690
|
|
(4,652,396
|
)
|
|
Accounts payables
|
|
708,044
|
|
5,860,196
|
|
10,090,000
|
|
|
Accrued expenses and other payables
|
|
29,028
|
|
240,253
|
|
127,006
|
|
|
Net cash used in operating activities
|
|
(257,895
|
)
|
(2,134,502
|
)
|
(4,915,191
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Refund of deposits for purchases of
property, plant and equipment
|
|
1,631,105
|
|
13,500,000
|
|
—
|
|
|
Purchases of property, plant and equipment
|
|
(590
|
)
|
(4,880
|
)
|
(7,756,854
|
)
|
|
Changes in restricted cash
|
|
—
|
|
—
|
|
(10,000,000
|
)
|
|
Changes in amounts due from other related
parties
|
|
—
|
|
—
|
|
5,601,052
|
|
|
Net cash from (used in) investing
activities
|
|
1,630,515
|
|
13,495,120
|
|
(12,155,802
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Changes in amounts due to shareholders
|
|
35,285
|
|
292,039
|
|
(109,261
|
)
|
|
Changes in amounts due to other related
parties
|
|
997,028
|
|
8,252,000
|
|
(1,565,924
|
)
|
|
Proceeds from bank loan
|
|
2,416,451
|
|
20,000,000
|
|
40,000,000
|
|
|
Repayment of bank loans
|
|
(4,832,903
|
)
|
(40,000,000
|
)
|
(20,000,000
|
)
|
|
Net cash (used in) provided by financing
activities
|
|
(1,384,139
|
)
|
(11,455,961
|
)
|
18,324,815
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(11,519
|
)
|
(95,343
|
)
|
1,253,822
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the
period
|
|
65,528
|
|
542,352
|
|
721,096
|
|
|
Cash and cash equivalents at end of the
period
|
|
54,009
|
|
447,009
|
|
1,974,918
|
|
|
Supplemental disclosure of cash flows
information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
116,576
|
|
964,853
|
|
712,854
|
|
|
Non-cash transactions
|
|
|
|
|
|
|
|
|
Payments for purchases of property, plant
and equipment settled through the current account with SCL Ventures, Ltd.
|
|
44,690
|
|
369,881
|
|
—
|
|
|
Payment of deposit for property, plant and
equipment settled through the current account with SCL Ventures, Ltd.
|
|
393,950
|
|
3,260,567
|
|
—
|
|
See notes
to consolidated financial statements.
F-19
Guangzhou
Weida Communications Technology Co., Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)
AND INDEPENDENT
AUDITORS’ REPORT
1. ORGANIZATION
AND NATURE OF OPERATIONS
Guangzhou
Weida Communications Technology Co., Ltd., a company incorporated in the
People’s Republic of China (the “PRC”), and its wholly owned subsidiary
(collectively the “Company”), is engaged in designing, engineering, integration
and installation of satellite-based ground segment systems and network
solutions for the business-to-business market segment in the PRC, and sales of
domestic very small aperture terminal (“VSAT”) communication equipment in the
PRC.
The
Company, its existing shareholders (“Existing Shareholders”) and SCL Ventures,
Ltd. (“SCL”, a company incorporated in the British Virgin Islands and a wholly
owned subsidiary of Weida Communications, Inc.) entered into an agreement (the
“Agreement”) on April 29, 2003.
The Agreement, as modified by a stock transfer memorandum dated
August 26, 2004, established the framework for the acquisition, through a
series of contractual transactions, of control and a majority interest in the
Company. Under the Agreement:
a. The Company
will be converted into a Sino-Foreign Equity Joint Venture (“Weida EJV”);
b. SCL will
obtain a 51% participation in the Weida EJV through: (a) a direct acquisition
of 25% ownership interest; and (b) an acquisition of a 26% profit sharing
interest via a 100% ownership interest in a Hong Kong entity (“HK
Company”). The HK Company will be
established by Existing Shareholders; which, in turn, will establish a wholly
owned foreign entity (“WOFE”) to hold a direct 26% profit sharing interest in
the Weida EJV.
The total consideration for the purchase of the 25% ownership interest
and 26% profit-sharing interest in the Weida EJV shall consist of the
following: (a) USD805,153 in cash as registered capital to the Weida EJV; (b)
cash payment of USD15 million to the Existing Shareholders upon the completion
of the conditions to the formation of the Weida EJV and the Weida EJV having
been formed and having a valid business license showing SCL’s 25% equity
ownership; (c) transfer to the Existing Shareholders of approximately 16.3
million common shares of Weida Communications, Inc. (deemed aggregate value of
USD110 million); and (d) provision or an arrangement to provide working capital
for the Weida EJV and WOFE up to an aggregate amount of USD159.2 million.
Further, the Agreement provides for a number of condition precedents
required of SCL and the execution of necessary documents and agreements by
certain parties. In addition, the consummation of the Agreement is subject to
the PRC licensing and approval process, which may necessitate modification of
the above mentioned transaction.
However, the provision or the arrangement to provide the USD159.2
million working capital is not a condition precedent.
F-20
Subsequent to June 30, 2004, the Company completed a series of
contractual arrangements (See Note 13) resulting in SCL acquiring an effective
management control and a 51% profit-sharing interest in the Company.
2. BASIS
OF PRESENTATION
The
consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
of America, and assuming that the Company will continue as a going concern. The Company had net losses and net operating
cash outflows since its inception and as of June 30, 2004, had negative
working capital and a capital deficiency.
These factors, among others, raise substantial doubts about its ability
to continue as a going concern. As
discussed in Note 1, pursuant to the terms of the Agreement, additional funding
from SCL BVI is expected. Provided that
the new funding and working capital will be available to the Company upon
completion of the Agreement, management believes that the Company will be able
to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The accompanying unaudited consolidated financial statements as of and for
the six months ended June 30, 2003 have been prepared in accordance with
accounting principles generally accepted in the United States of America. They do not include all information and
notes required by generally accepted accounting principles for complete
consolidated financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals only) considered necessary for a fair presentation have been included.
3. SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES
Principle of consolidation - The consolidated financial statements
include the financial statements of Guangzhou Weida Communication Technology
Co., Ltd. and its wholly-owned subsidiary.
All significant
intercompany transactions and balances are eliminated in consolidation.
Use of estimates - The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could
differ from those estimates.
Property, plant and equipment - These are recorded at cost less
accumulated depreciation. Depreciation
is provided on a straight-line basis over the estimated useful lives of the
assets. Estimated useful lives of
property, plant and equipment are as follows:
|
VSAT and other equipment
|
|
5 years
|
|
Office
equipment
|
|
5
years
|
|
Computers
|
|
3
years
|
|
Motor vehicles
|
|
5 years
|
Major improvements of property,
plant and equipment are capitalized, while expenditures for repairs,
maintenance and minor renewals and betterments are expensed.
F-21
Inventories - Inventories, which primarily consist of VSAT equipment, are stated
at the lower of cost or market value.
Cost is determined by the first-in, first-out method.
Long-lived assets - The Company evaluates
its long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of the assets to future
undiscounted net cash flows expected to be generated by the assets. If the carrying amounts of long-lived assets
are not recoverable, an impairment is recognized for the amount by which the
carrying amounts of the assets exceed their fair values. No impairment loss was recorded for the
period presented.
Income taxes - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the carrying amounts of
existing assets and liabilities and their respective tax bases as well as
operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances are
established when it is more likely than not that some or all of the deferred
tax assets will not be realized.
Revenue recognition - Revenue from the satellite bandwidth provision agreement is
recognized on a straight line basis over the period of the agreements. The excess of amounts received or receivable
from customers over the revenue recognized is included in accrued expenses and
other payables account amounted to RMB 338,920 (USD 40,949) and RMB130,480 at
June 30, 2004 and 2003 (unaudited), respectively.
Sales of VSAT equipment are
recorded when the equipment is delivered, title has passed to the customers and
the Company has no further obligations to provide services related to the
operation of such equipment.
Foreign currency translation - The functional currency of the
Company is the Renminbi (“RMB”).
Transactions in other currencies are recorded in RMB at the rates of
exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies
are translated into RMB at rates of exchange in effect at the balance sheet
dates. Exchange gains and losses are
recorded in the consolidated statements of operations.
Translation into United States Dollars - The financial statements of the
Company are stated in RMB. The
translation of RMB amounts at and for the six months ended June 30, 2004
into United States dollars (“USD”) are included solely for the convenience of
readers and have been made at the rate of RMB 8.2766 to USD 1 at June 30,
2004. Such translations should not be
construed as representations that RMB amounts could be converted into USD at
that rate or any other rate.
Fair value of financial instruments - The
carrying amounts of cash and cash equivalents, amounts due to shareholders,
amounts due to other related parties, and bank loans approximate their fair
values due to the short-term maturity of these instruments.
Recently issued accounting pronouncements - In May 2003, the Financial Accounting
Standard Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 150, “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and
F-22
Equity”. It establishes standards for how an issuer
classifies and measures certain financial instruments. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after
September 15, 2003. It requires
that certain financial instruments that, under previous guidance, could be
accounted for as equity be classified as liabilities, or assets in some
circumstances. It does not apply to
features embedded in a financial instrument that is not a derivative in its
entirety. SFAS No. 150 also requires
disclosures about alternative ways of settling the instruments and the capital
structure of entities whose shares are mandatorily redeemable. The adoption of SFAS No. 150 did not have an
impact on the Company’s financial position, results of operations, or cash
flows.
In January 2003, the FASB
issued Interpretation No. (“FIN”) 46 (revised), “Consolidation of Variable Interest Entities”. FIN 46 (revised) requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities and results of the activities of the variable interest
entity should be included in consolidated financial statements of the business
enterprise. FIN 46 (revised) applies
immediately to variable interest entities created after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 (revised) are
effective beginning January 1, 2004.
The adoption of FIN 46 (revised) did not have a material impact on the
Company’s financial position, results of operations, or cash flows.
4. PROPERTY,
PLANT AND EQUIPMENT
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Property, plant and equipment consist of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VSAT and other equipment
|
|
1,933,899
|
|
16,006,100
|
|
15,824,509
|
|
|
Office equipment
|
|
33,878
|
|
280,396
|
|
270,936
|
|
|
Computers
|
|
175,028
|
|
1,448,631
|
|
981,429
|
|
|
Motor vehicles
|
|
46,249
|
|
382,785
|
|
382,785
|
|
|
Total
|
|
2,189,054
|
|
18,117,912
|
|
17,459,659
|
|
|
Less: Accumulated depreciation and amortization
|
|
(635,389
|
)
|
(5,258,860
|
)
|
(1,541,523
|
)
|
|
Property, plant and equipment, net
|
|
1,553,665
|
|
12,859,052
|
|
15,918,136
|
|
5. BANK
LOANS
The
bank loan outstanding as of June 30, 2004 of RMB 20,000,000 (USD
2,416,451) bears interest at 5.84% per annum and is due on May 13, 2005. The loan is guaranteed by related parties.
As
of June 30, 2003 (unaudited), the Company had 2 short-term loans with two
different banks in the amounts of RMB 20,000,000 (“Loan A”) and RMB 20,000,000
(“Loan B”). Loan A bore interest at
5.31% per annum and was due on May 6, 2004.
Loan B bore interest at 5.84%, was due on April 24, 2004 and was
collateralized by a bank deposit of RMB 10,000,000. These loans were guaranteed by related parties.
F-23
6. SHORT-TERM LOAN
The amount represents a loan from Mr. Li Ya
Jun. It is unsecured, interest-free and
is expected to be repaid within one year.
7. INCOME
TAXES
The
income tax rate applicable to enterprises in the PRC is generally 33%. However, preferential tax treatment of the
Company’s wholly owned subsidiary has been agreed with the relevant tax
authorities. The subsidiary is entitled
to a one year exemption from income tax commencing 2003. The Company had tax losses for the six
months ended June 30, 2004.
The Company’s
deferred tax assets as of June 30, 2004 and 2003 (unaudited) are
attributable to the following:
|
|
|
June 30, 2004
USD
|
|
June 30, 2004
RMB
|
|
June 30, 2003
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Property, plant and equipment - difference
in depreciation rates
|
|
96,507
|
|
798,750
|
|
271,910
|
|
|
Net operating losses
|
|
1,361,137
|
|
11,265,589
|
|
5,074,883
|
|
|
|
|
1,457,644
|
|
12,064,339
|
|
5,346,793
|
|
|
Valuation allowance
|
|
(1,457,644
|
)
|
(12,064,339
|
)
|
(5,346,793
|
)
|
|
|
|
—
|
|
—
|
|
—
|
|
The
realization of the recorded deferred tax assets is dependent on generating
sufficient taxable income prior to the expiration of net operating loss
carryforwards. As the management does
not believe that it is more likely than not that all of the deferred tax asset
will be realized, a full valuation allowance has been established at
June 30, 2004 and 2003.
At
June 30, 2004, the Company has net operating loss carryforwards of RMB
10,155,586
(USD 1,227,024), RMB 14,695,047 (USD 1,775,493), RMB 6,268,521 (USD 757,379)
and RMB 3,018,996 (USD 364,763) which will expire in 2009, 2008, 2007 and 2006,
respectively.
At
June 30, 2003 (unaudited), the Company had net operating loss carry
forwards of RMB6,090,915, RMB6,268,521 and RMB3,018,996, which would expire in
2008, 2007 and 2006, respectively.
8. COMMITMENTS
(a) The Company
has operating lease agreements principally for its office facilities and transponder
utilization services. Such leases have
remaining terms of 6 months to 46 months.
Rental expense was RMB 6,123,632 (USD 739,873) for the six months ended June 30,
2004 and RMB3,048,588 for the six months ended June 30, 2003 (unaudited).
F-24
Future
minimum lease payments under non-cancelable operating leases agreements were as
follows:
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
|
|
|
USD
|
|
RMB
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
|
|
|
2005
|
|
1,442,540
|
|
11,939,325
|
|
|
2006
|
|
1,302,046
|
|
10,776,512
|
|
|
2007
|
|
1,296,011
|
|
10,726,568
|
|
|
2008
|
|
1,078,333
|
|
8,924,934
|
|
|
Total
|
|
5,118,930
|
|
42,367,339
|
|
(b) During the
six months period ended June 30, 2004, the Company entered into an
agreement to purchase VSAT equipment with a third party. The contract sum was RMB 7,035,110 (USD
850,000), of which RMB 3,260,567 (USD 393,950) had been paid during the six months
period ended June 30, 2004. The
remaining balance of RMB 3,774,543 (USD 456,050) will be settled upon the
delivery of the equipment in 2004.
9. RELATED
PARTY BALANCES AND TRANSACTIONS
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Related
party balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from
other related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nin Xia Wei Lin Huo Xin Tan Co., Ltd. (note
i)
|
|
—
|
|
—
|
|
250,000
|
|
|
Guangzhou Suntek New Technology Research
& Design Co., Ltd. (“Guangzhou Suntek”) (note i)
|
|
—
|
|
—
|
|
14,070,000
|
|
|
|
|
—
|
|
—
|
|
14,320,000
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Pang Da Qing
|
|
(27,245
|
)
|
(225,500
|
)
|
(50,000
|
)
|
|
Ms. Xie Li
|
|
(149,322
|
)
|
(1,235,871
|
)
|
(941,879
|
)
|
|
Mr. Li Ya Jun
|
|
(1,516
|
)
|
(12,547
|
)
|
—
|
|
|
|
|
(178,083
|
)
|
(1,473,918
|
)
|
(991,879
|
)
|
|
|
|
|
|
|
|
|
|
|
Amount due to SCL
|
|
(438,640
|
)
|
(3,630,448
|
)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due to other related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Deng Long Long (note ii)
|
|
(120,823
|
)
|
(1,000,000
|
)
|
(1,000,000
|
)
|
|
Guangzhou Suntek (note i)
|
|
(1,127,516
|
)
|
(9,332,000
|
)
|
—
|
|
|
Total
|
|
(1,248,339
|
)
|
(10,332,000
|
)
|
(1,000,000
|
)
|
F-25
The
amounts due to shareholders, SCL and other related parties represent borrowings
from them, were unsecured and interest-free.
Notes:
(i) A director
and major shareholder of Nin Xia Wei Lin Huo Xin Tan Co., Ltd. and Guangzhou
Suntek exercises significant influence on the operations of the Company by
providing direct and indirect financial support.
(ii) Mr. Deng Long
Long is a related party because he can exercise significant influence on the
operations of the Company through direct and indirect financial support.
Related
party transactions
As
of June 30, 2004, the Company’s bank loan (see Note 5) was guaranteed by a
shareholder and other related parties at no charge. A director and major shareholder of these other related parties
exercises significant influence on the operations of the Company. Management believes that the estimated cost
of the guarantee was immaterial.
In
addition, certain related parties provided administrative services, such as
secondment of staff, to the Company at no cost. Management believes that the estimated value of those services
was immaterial.
10. PAID-IN
CAPITAL
The
shareholders and their respective capital contributions as of June 30,
2004 and 2003 (unaudited) are as follows:
|
|
|
June 30, 2004
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Ms. Li Shun Xing
|
|
2,295,629
|
|
19,000,000
|
|
16,400,000
|
|
|
Mr. Pang Da Qing
|
|
48,329
|
|
400,000
|
|
1,200,000
|
|
|
Mr. Li Xiang Ning
|
|
48,329
|
|
400,000
|
|
1,200,000
|
|
|
Ms. Xie Li
|
|
24,164
|
|
200,000
|
|
1,200,000
|
|
|
Mr. Li Ya Jun
|
|
—
|
|
—
|
|
200,000
|
|
|
|
|
2,416,451
|
|
20,000,000
|
|
20,200,000
|
|
The
shareholders have the right to vote and to receive dividends in proportion to
their registered shareholding percentages.
F-26
Mr.
Li Ya Jun contributed capital of RMB200,000 to the Company in 2001. This contribution has not been registered in
accordance with the relevant PRC regulations.
As a result of the series of contractual arrangements set out in Note 1,
the Company will return this RMB200,000 to Mr. Li Ya Jun. Accordingly, the amount has been
reclassified as short-term loan as of June 30, 2004 (see Note 6).
11. MAJOR
CUSTOMERS
Details of the customers
accounting for 10% or more of total sales are as follows:
|
|
|
January 1,
2004
|
|
January 1,
2003
|
|
|
|
|
to
|
|
to
|
|
|
|
|
June 30, 2004
|
|
June 30, 2003
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Company
A
|
|
53.58
|
%
|
83.01
|
%
|
|
Company
B
|
|
12.76
|
%
|
—
|
|
|
Company
C
|
|
10.66
|
%
|
—
|
|
The accounts receivable from
the 3 customers with the largest receivable balances represents 87.63% of the
balance of the account at June 30, 2004, while the accounts receivable
from the 2 customers with the largest receivable balances represented 97.76% of
the balance of the account at June 30, 2003 (unaudited).
12. EMPLOYEE
BENEFIT PLANS
Certain
employees of the Company in the PRC are entitled to retirement benefits
calculated with reference to their salaries upon retirement and their length of
service in accordance with a PRC government-managed retirement plan. The PRC government is directly responsible
for the payments of the benefits to these retired employees. The Company is required to make
contributions to the government-managed retirement plan at 11% to 20% of the
monthly basic salaries of certain employees.
The expense of such arrangements to the Company for the six months ended
June 30, 2004 and the six months ended June 30, 2003 (unaudited) were RMB
82,577 (USD 9,977) and RMB41,312, respectively.
In
addition, the Company is required by law to contribute approximately 0.4% to
10% of total salaries of certain employees for medical and unemployment
benefits and workers compensation. The
PRC government is directly responsible for the payments of the benefits to
these employees. The amounts
contributed amounted to RMB 37,725 (USD 4,558) and RMB22,202 for the six months
ended June 30, 2004 and six months ended June 30, 2003 (unaudited),
respectively.
13. SUBSEQUENT EVENT
In August 2004, a series of contractual arrangements were
completed. As part of the contractual
arrangements, SCL acquired 99.99% of the registered capital of Ocean
International Holdings Limited (“OIHL”), a company incorporated in Hong Kong. The remaining 0.01% of the registered
capital of OIHL is held by one of SCL’s executives as a nominal holder in order
to meet local Hong Kong legal requirements.
OIHL is the sole owner and holder of all the registered capital of Ocean
Tian Di Communication Technology Co., Ltd. (Guangzhou), a wholly
F-27
owned foreign enterprise (“OTDC”).
OTDC has entered into an exclusive service and support agreement with
the Company, effective as of September 1, 2004, which provides for OTDC to
provide support services to the Company in exchange for receiving service fees.
Pursuant to the terms of the contractual arrangements, SCL has acquired
effective majority ownership and control of the Company through trust agreements
for 51% of its shares and an effective 51% profit-sharing interest in the
Company. Under the contractual
arrangements, SCL can designate three of the Company’s five directors.
As part of the contractual arrangements, when the Weida EJV is formed and
approved by the PRC authorities, SCL’s profit-sharing interest will be reduced
to 26% so as to maintain its effective 51% majority interest.
F-28
GUANGZHOU
WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND
FOR THE PERIOD FROM APRIL 2, 2001 (DATE OF ESTABLISHMENT) TO
DECEMBER 31, 2001
Table of
Contents
F-29
INDEPENDENT AUDITORS’
REPORT
To the Board of Directors and Shareholders of Guangzhou Weida
Communications Technology Co., Ltd:
We have audited the accompanying consolidated balance sheets of
Guangzhou Weida Communications Technology Co., Ltd. and its subsidiary
(the “Company”) as of December 31, 2003 and 2002 and the related
consolidated statements of operations, shareholders’ equity (capital
deficiency) and cash flows for the years ended December 31, 2003 and 2002
and for the period from April 2, 2001 (date of establishment) to December 31,
2001. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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 statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
December 31, 2003, 2002 and December 31, 2001, and the results of
their operations and their cash flows for the years ended December 31,
2003 and 2002 and for the period from April 2, 2001 to December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company had net losses and net
operating cash outflows since its inception and, as of December 31, 2003,
had negative working capital and a capital deficiency. These factors, among
others, raise substantial doubts about its ability to continue as a going
concern. The arrangements entered into by management concerning these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audits also comprehended the translation of Renminbi amounts into
United States dollar amounts and, in our opinion, such translation has been
made in conformity with the basis stated in Note 3. Such United States
dollar amounts are presented solely for the convenience of the readers.
Deloitte Touche Tohmatsu
Hong Kong
April 16, 2004
F-30
GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
CONSOLIDATED BALANCE SHEETS
|
|
|
December 31,
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
65,443
|
|
542,352
|
|
721,096
|
|
5,892,872
|
|
|
Accounts receivable
|
|
19,622
|
|
162,620
|
|
1,160,080
|
|
525,000
|
|
|
Amounts due from related parties
|
|
—
|
|
—
|
|
19,921,052
|
|
26,680,000
|
|
|
Inventories
|
|
819,768
|
|
6,793,744
|
|
1,055,551
|
|
1,919,337
|
|
|
Advances to suppliers
|
|
35,946
|
|
297,900
|
|
125,000
|
|
—
|
|
|
Prepaid expenses
|
|
226,325
|
|
1,875,645
|
|
1,156,875
|
|
1,196,867
|
|
|
Total current assets
|
|
1,167,104
|
|
9,672,261
|
|
24,139,654
|
|
36,214,076
|
|
|
Deposits for purchases of property, plant
and equipment
|
|
1,628,979
|
|
13,500,000
|
|
—
|
|
5,910,092
|
|
|
Property, plant and equipment, net
|
|
1,728,286
|
|
14,323,000
|
|
9,208,291
|
|
1,554,599
|
|
|
TOTAL ASSETS
|
|
4,524,369
|
|
37,495,261
|
|
33,347,945
|
|
43,678,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
(CAPITAL DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
4,826,604
|
|
40,000,000
|
|
20,000,000
|
|
25,000,000
|
|
|
Accounts payable
|
|
234,611
|
|
1,944,315
|
|
—
|
|
—
|
|
|
Accrued expenses and other payables
|
|
128,903
|
|
1,068,273
|
|
690,628
|
|
33,679
|
|
|
Amounts due to shareholders
|
|
142,612
|
|
1,181,879
|
|
1,101,140
|
|
—
|
|
|
Amounts due to other related parties
|
|
250,983
|
|
2,080,000
|
|
2,565,924
|
|
1,715,000
|
|
|
Total current liabilities
|
|
5,583,713
|
|
46,274,467
|
|
24,357,692
|
|
26,748,679
|
|
|
Commitments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Shareholders’ equity (capital deficiency):
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital
|
|
2,437,435
|
|
20,200,000
|
|
20,200,000
|
|
20,200,000
|
|
|
Accumulated deficits
|
|
(3,496,779
|
)
|
(28,979,206
|
)
|
(11,209,747
|
)
|
(3,269,912
|
)
|
|
Total shareholders’ equity (capital
deficiency)
|
|
(1,059,344
|
)
|
(8,779,206
|
)
|
8,990,253
|
|
16,930,088
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
(CAPITAL DEFICIENCY)
|
|
4,524,369
|
|
37,495,261
|
|
33,347,945
|
|
43,678,767
|
|
See notes to consolidated financial statements.
F-31
GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
Year ended
December 31,
|
|
April 2,
2001 to
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
December 31,
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Sales of equipment
|
|
121,774
|
|
1,009,189
|
|
418,803
|
|
448,718
|
|
|
Transponder utilization revenue
|
|
36,360
|
|
301,328
|
|
118,624
|
|
—
|
|
|
Total revenues
|
|
158,134
|
|
1,310,517
|
|
537,427
|
|
448,718
|
|
|
Cost of revenues
|
|
1,308,903
|
|
10,847,406
|
|
2,821,249
|
|
576,878
|
|
|
|
|
(1,150,769
|
)
|
(9,536,889
|
)
|
(2,283,822
|
)
|
(128,160
|
)
|
|
Selling, general and administrative
expenses
|
|
777,653
|
|
6,444,712
|
|
4,278,484
|
|
2,191,773
|
|
|
Loss from operations
|
|
(1,928,422
|
)
|
(15,981,601
|
)
|
(6,562,306
|
)
|
(2,319,933
|
)
|
|
Interest expense
|
|
(222,713
|
)
|
(1,845,715
|
)
|
(1,388,636
|
)
|
(966,975
|
)
|
|
Interest income
|
|
6,981
|
|
57,857
|
|
11,107
|
|
16,996
|
|
|
Net loss
|
|
(2,144,154
|
)
|
(17,769,459
|
)
|
(7,939,835
|
)
|
(3,269,912
|
)
|
See notes to consolidated financial statements.
F-32
GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
|
|
|
Paid-in
capital
|
|
Accumulated
deficits
|
|
Total
shareholders’
equity
(capital deficiency)
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
20,200,000
|
|
—
|
|
20,200,000
|
|
|
Net loss
|
|
—
|
|
(3,269,912
|
)
|
(3,269,912
|
)
|
|
Balance at December 31, 2001
|
|
20,200,000
|
|
(3,269,912
|
)
|
16,930,088
|
|
|
Net loss
|
|
—
|
|
(7,939,835
|
)
|
(7,939,835
|
)
|
|
Balance at December 31, 2002
|
|
20,200,000
|
|
(11,209,747
|
)
|
8,990,253
|
|
|
Net loss
|
|
—
|
|
(17,769,459
|
)
|
(17,769,459
|
)
|
|
Balance at December 31, 2003
|
|
20,200,000
|
|
(28,979,206
|
)
|
(8,779,206
|
)
|
See notes to consolidated financial statements.
F-33
GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Year ended
December 31,
|
|
April 2,
2001 to
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
December 31,
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(2,144,154
|
)
|
(17,769,459
|
)
|
(7,939,835
|
)
|
(3,269,912
|
)
|
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
353,022
|
|
2,925,637
|
|
487,794
|
|
6,720
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
120,359
|
|
997,460
|
|
(635,080
|
)
|
(525,000
|
)
|
|
Inventories
|
|
(692,400
|
)
|
(5,738,193
|
)
|
863,786
|
|
(1,919,337
|
)
|
|
Advances to suppliers
|
|
(20,863
|
)
|
(172,900
|
)
|
(125,000
|
)
|
—
|
|
|
Prepaid expenses
|
|
(86,730
|
)
|
(718,770
|
)
|
39,992
|
|
(1,196,867
|
)
|
|
Accounts payable
|
|
234,611
|
|
1,944,315
|
|
—
|
|
—
|
|
|
Accrued expenses and other payables
|
|
45,568
|
|
377,645
|
|
656,949
|
|
33,679
|
|
|
Net cash used in operating activities
|
|
(2,190,587
|
)
|
(18,154,265
|
)
|
(6,651,394
|
)
|
(6,870,717
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Changes in deposits for purchases of
property, plant and equipment
|
|
(1,628,979
|
)
|
(13,500,000
|
)
|
5,910,092
|
|
(5,910,092
|
)
|
|
Purchases of property, plant and equipment
|
|
(970,189
|
)
|
(8,040,346
|
)
|
(8,141,486
|
)
|
(1,561,319
|
)
|
|
Changes in amounts due from related parties
|
|
2,403,776
|
|
19,921,052
|
|
6,758,948
|
|
(26,680,000
|
)
|
|
Net cash (used in) provided by investing
activities
|
|
(195,392
|
)
|
(1,619,294
|
)
|
4,527,554
|
|
(34,151,411
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital contribution
|
|
—
|
|
—
|
|
—
|
|
20,200,000
|
|
|
Proceeds from bank loans
|
|
4,826,604
|
|
40,000,000
|
|
20,000,000
|
|
25,000,000
|
|
|
Repayment of bank loans
|
|
(2,413,302
|
)
|
(20,000,000
|
)
|
(25,000,000
|
)
|
—
|
|
|
Changes in amounts due to shareholders
|
|
9,743
|
|
80,739
|
|
1,101,140
|
|
—
|
|
|
Changes in amounts due to other related
parties
|
|
(58,634
|
)
|
(485,924
|
)
|
850,924
|
|
1,715,000
|
|
|
Net cash provided by (used in) financing
activities
|
|
2,364,411
|
|
19,594,815
|
|
(3,047,936
|
)
|
46,915,000
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(21,568
|
)
|
(178,744
|
)
|
(5,171,776
|
)
|
5,892,872
|
|
|
Cash at beginning of the period
|
|
87,011
|
|
721,096
|
|
5,892,872
|
|
—
|
|
|
Cash at end of the period
|
|
65,443
|
|
542,352
|
|
721,096
|
|
5,892,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
information:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
222,713
|
|
1,845,715
|
|
1,388,636
|
|
966,975
|
|
See notes to consolidated financial statements.
F-34
GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002 AND FOR THE PERIOD FROM APRIL 2, 2001
(DATE OF ESTABLISHMENT) TO DECEMBER 31, 2001
1. ORGANIZATION AND NATURE OF
OPERATIONS
Guangzhou Weida Communications Technology Co., Ltd., a company
incorporated in the People’s Republic of China (the “PRC”), and its wholly
owned subsidiary, Guangzhou Weida Saite Communications Equipment Co., Ltd.
(collectively the “Company”), is engaged in providing communication network
technology services, sales of communication network equipment and operations of
domestic very small aperture terminal (“VSAT”) communication business in the
PRC.
The Company, its existing shareholders (“Existing Shareholders”) and
SCL Ventures Ltd. (“SCL BVI”, a company incorporated in the British Virgin
Islands) entered into an Agreement (“Agreement”) on April 29, 2003. Under
the Agreement:
a. The Company is
converted into a Sino-Foreign Equity Joint Venture (“EJV”);
b. SCL BVI obtains a
51% participation in the EJV through: (i) a 25% ownership interest; and
(ii) a 26% profit sharing interest via a 100% ownership interest in a Hong
Kong entity (“HK Company”). The HK Company will be established by Existing
Shareholders; which, in turn, will establish a wholly owned foreign entity
(“WOFE”) to hold a direct 26% profit sharing interest in the EJV.
The total consideration from SCL BVI for the 25% ownership interest and
26% profit sharing interest in the EJV shall consist of the following:
(i) cash capital contribution of USD 805,153 to the EJV; (ii) cash
payment to Existing Shareholders of USD 15,000,000; (iii) transfer to
Existing Shareholders of SCL common shares valued at USD 110,000,000; and
(iv) SCL BVI using its best efforts to provide or arrange for working
capital to the EJV and WOFE up to an aggregate amount of USD 159,194,847.
Further, the Agreement provides for, among others, a number of
condition precedents required of SCL BVI and the execution of necessary
documents and agreements by certain parties. In addition, the consummation of
the Agreement is subject to the PRC licensing and approval process, which may
necessitate modification of the abovementioned transaction. As of
April 16, 2004, the Company has not yet been converted into an EJV and
WOFE has not yet been established, and the considerations stipulated in the
preceding paragraph have not yet been paid/provided/transferred.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United
States of America, and assuming that the Company will continue as a going
concern. The Company had net losses and net operating
F-35
cash outflows since inception and, as of December 31, 2003, had
negative working capital and a capital deficiency. These factors, among others,
raise substantial doubts about its ability to continue as a going concern. As
discussed in Note 1, pursuant to the terms of the Agreement, additional
funding from SCL BVI is expected. Provided that the new funding and working
capital will be available to the Company upon completion of the agreement,
management believes that the Company will be able to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
3. SUMMARY OF PRINCIPAL
ACCOUNTING POLICIES
Principle of
consolidation-The consolidated financial
statements include the financial statements of Guangzhou Weida Communications
Technology Co., Ltd. and its wholly owned subsidiary. All significant intercompany
transactions and balances are eliminated in consolidation.
Use of estimates-The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Property, plant and
equipment-These are recorded at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis
over the estimated useful lives of the assets. Estimated useful lives of
property, plant and equipment are as follows:
|
VSAT and other equipment
|
|
5 years
|
|
Office equipment
|
|
5 years
|
|
Computers
|
|
3 years
|
|
Motor vehicles
|
|
5 years
|
Major improvements of property, plant and equipment are capitalized,
while expenditures for repairs, maintenance and minor renewals and betterments
are expensed.
Inventories-Inventories,
which primarily consist of VSAT equipment, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Long-lived assets-The
Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the assets to future undiscounted net
cash flows expected to be generated by the assets. If the carrying amounts of
long-lived assets are not recoverable, an impairment is recognized for the
amount by which the carrying amounts of the assets exceed their fair values. No
impairment loss was recorded in any period presented.
F-36
Income taxes-Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the carrying amounts of existing assets and
liabilities and their respective tax bases as well as operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation allowances
are established when it is more likely than not that some or all of the
deferred tax assets will not be realized.
Revenue recognition-Revenue
from transponder utilization agreements is recognized on a straight line basis
over the period of the agreements. The excess of lease rental received or
receivable from customers over the revenue recognized is deferred and included
in accrued expenses and other payables account amounted to RMB 389,280 (USD
46,973), RMB 14,400 and RMB NIL at December 31, 2003, 2002 and
December 31, 2001, respectively.
Sales of VSAT equipment are recorded when the equipment is delivered,
title has passed to the customers and the Company has no further obligations to
provide services related to the operation of such equipment.
Foreign currency
translation-The functional currency of the Company
is the Renminbi (“RMB”). Transactions in other currencies are recorded in RMB
at the rates of exchange prevailing when the transactions occur. Monetary
assets and liabilities denominated in other currencies are translated into RMB
at rates of exchange in effect at the balance sheet dates. Exchange gains and
losses are recorded in the consolidated statements of operations.
Translation into
United States Dollars-The financial statements of
the Company are stated in RMB. The translation of RMB amounts at and for the
year ended December 31, 2003 into United States dollars (“USD”) are
included solely for the convenience of readers and have been made at the rate
of RMB 8.2874 to USD 1 at December 31, 2003. Such translations should not
be construed as representations that RMB amounts could be converted into USD at
that rate or any other rate.
Fair value of
financial instruments-The carrying amounts of
cash, amounts due from (to) related parties, amounts due to shareholders, and
bank loans approximate their fair values due to the short-term maturity of
these instruments.
Recently Issued
Accounting Pronouncements-In May 2003, the
FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity”. It establishes standards
for how an issuer classifies and measures certain financial instruments. SFAS
No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It requires that
certain financial instruments that, under previous guidance, could be accounted
for as equity be classified as liabilities, or assets in some circumstances. It
does not apply to features embedded in a financial instrument that is not a
derivative in its entirety. SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital
F-37
structure of entities whose shares are mandatorily redeemable. The
adoption of SFAS No. 150 did not have an impact on the Company’s results
of operations or financial position.
In January 2003, the FASB issued FIN No. 46, “Consolidation
of Variable Interest Entities-an Interpretation of Accounting Research Bulletin
No. 51”. FIN No. 46 requires the primary beneficiary to consolidate a
variable interest entity if it has a variable interest that will absorb a
majority of the entity’s expected losses if they occur, receive a majority of
the entity’s expected residual returns if they occur, or both. FIN No. 46
applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which the entity
obtains an interest after that date. For variable interest entities acquired
before February 1, 2003, the effective date for the Company is
January 1, 2004. The Company believes the adoption of FIN No. 46 did
not have a material impact on its results of operations or financial position.
4. PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment consist of the following:
|
|
|
December 31
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VSAT and other equipment
|
|
1,930,789
|
|
16,001,220
|
|
8,747,308
|
|
857,701
|
|
|
Office equipment
|
|
33,429
|
|
277,036
|
|
248,523
|
|
172,393
|
|
|
Computers
|
|
130,573
|
|
1,082,110
|
|
443,689
|
|
267,940
|
|
|
Motor vehicles
|
|
46,189
|
|
382,785
|
|
263,285
|
|
263,285
|
|
|
Total
|
|
2,140,980
|
|
17,743,151
|
|
9,702,805
|
|
1,561,319
|
|
|
Less: Accumulated depreciation and
amortization
|
|
(412,694
|
)
|
(3,420,151
|
)
|
(494,514
|
)
|
(6,720
|
)
|
|
Property, plant and equipment, net
|
|
1,728,286
|
|
14,323,000
|
|
9,208,291
|
|
1,554,599
|
|
5. BANK LOANS
The bank loan outstanding as of December 31, 2001 of RMB
25,000,000 bore interest at 5.85% per annum and was repaid on April 26,
2002.
The bank loan outstanding as of December 31, 2002 of RMB
20,000,000 bore interest at 5.31% per annum and was repaid on March 1,
2003.
As of December 31, 2003, the Company has 2 short-term loans with
two different banks in the amounts of RMB 20,000,000 (USD 2,413,302, “Loan A”)
and RMB 20,000,000 (USD 2,413,302, “Loan B”).
Loan A bears interest at 5.31% per annum and is due on May 5,
2004. Loan B bears interest at 5.84%, is due on April 24, 2004. These
loans are guaranteed by related parties.
F-38
6. INCOME TAXES
The income tax rate applicable to enterprises in the PRC is generally
33%. However, preferential tax treatment of the Company’s wholly owned
subsidiary has been agreed with the relevant tax authorities. The subsidiary is
entitled to a one year exemption from income tax commencing 2003. The Company
had tax losses for the years ended December 31, 2003 and 2002 and the
period from April 2, 2001 to December 31, 2001.
The Company’s deferred tax assets as of September 30, 2003,
December 31, 2002 and December 31, 2001 are attributable to the
following:
|
|
|
December 31
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment-difference in
depreciation rates
|
|
65,570
|
|
543,402
|
|
82,798
|
|
—
|
|
|
Net operating losses
|
|
954,973
|
|
7,914,246
|
|
3,064,881
|
|
996,269
|
|
|
|
|
1,020,543
|
|
8,457,648
|
|
3,147,679
|
|
996,269
|
|
|
Valuation allowance
|
|
(1,020,543
|
)
|
(8,457,648
|
)
|
(3,147,679
|
)
|
(996,269
|
)
|
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
The realization of the recorded deferred tax assets is dependent on
generating sufficient taxable income prior to the expiration of net operating
loss carryforwards. As management does not believe that it is more likely than
not that all or a portion of the deferred tax asset will be realized, a full
valuation allowance has been established at December 31, 2003, 2002 and
December 31, 2001.
At December 31, 2003, the Company has net operating loss
carryforwards of RMB14,695,047 (USD1,773,179), RMB6,268,521 (USD756,392) and
RMB3,018,996 (USD364,287), which will expire in 2008, 2007 and 2006,
respectively.
7. COMMITMENTS
a. The Company has
operating lease agreements principally for its office facilities and
transponder utilization services. Such leases have remaining terms of
7 months to 52 months. Rental expense was RMB 9,198,152 (USD
1,109,896), RMB 2,818,139 and RMB 739,848 for the years ended December 31,
2003 and 2002 and the period from April 2, 2001 to December 31, 2001,
respectively.
Future minimum lease payments under non-cancellable operating lease
agreements were as follows:
F-39
|
|
|
December 31,
2003
|
|
December 31,
2003
|
|
|
|
|
USD
|
|
RMB
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
|
|
|
|
|
2004
|
|
1,451,045
|
|
12,025,393
|
|
|
2005
|
|
1,327,095
|
|
10,998,168
|
|
|
2006
|
|
1,299,636
|
|
10,770,600
|
|
|
2007
|
|
1,294,000
|
|
10,723,896
|
|
|
2008
|
|
431,333
|
|
3,574,632
|
|
|
Total
|
|
5,803,109
|
|
48,092,689
|
|
b. The Company has
entered into an agreement to purchase a Global Positioning System with a third
party. The contract sum was RMB 28,000,000 (USD 3,378,623), of which RMB
13,500,000 (USD 1,678,979) had been paid during the year ended
December 31, 2003. The remaining balance of RMB 14,500,000 (USD 1,749,644)
will be settled upon delivery of the system in 2004.
8. RELATED PARTY BALANCES AND TRANSACTIONS
|
|
|
December 31
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party
Balances
|
|
|
|
|
|
|
|
|
|
|
Amounts
due from related parties
|
|
|
|
|
|
|
|
|
|
|
Hai Tian Chang Xin Technology Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
19,671,052
|
|
—
|
|
|
Ning Xia Wei Lin Huo Xin Tan Co. Ltd.
(note i)
|
|
—
|
|
—
|
|
250,000
|
|
250,000
|
|
|
Shenzhen Rui Shi Te Shi Ye Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
—
|
|
1,000,000
|
|
|
Guangzhou Si Ma Te Zhi Ji Ka Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
—
|
|
25,430,000
|
|
|
Total
|
|
—
|
|
—
|
|
19,921,052
|
|
26,680,000
|
|
F-40
|
|
|
December 31
|
|
|
|
|
2003
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
USD
|
|
RMB
|
|
RMB
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due to shareholders
|
|
|
|
|
|
|
|
|
|
|
Mr. Pang Da Qing
|
|
(6,034
|
)
|
(50,000
|
)
|
(50,000
|
)
|
—
|
|
|
Ms. Xie Li
|
|
(136,578
|
)
|
(1,131,879
|
)
|
(1,051,140
|
)
|
—
|
|
|
|
|
(142,612
|
)
|
(1,181,879
|
)
|
(1,101,140
|
)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
due to other related parties
|
|
|
|
|
|
|
|
|
|
|
Mr. Deng Long Long (note ii)
|
|
(120,665
|
)
|
(1,000,000
|
)
|
(1,100,000
|
)
|
(1,000,000
|
)
|
|
Liaoning Suntek Technology Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
(110,000
|
)
|
—
|
|
|
Guangdong Xin Te Communication Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
(762,000
|
)
|
—
|
|
|
Guangzhou Suntek New Technology Research
& Design Co., Ltd. (note i)
|
|
(118,252
|
)
|
(980,000
|
)
|
(593,924
|
)
|
—
|
|
|
Zhejiang Topper Wireless Co., Ltd.
(note i)
|
|
—
|
|
—
|
|
—
|
|
(715,000
|
)
|
|
Hai Tian Cheng Xin Technology Co., Ltd.
(note i)
|
|
(12,066
|
)
|
(100,000
|
)
|
—
|
|
—
|
|
|
Total
|
|
(250,983
|
)
|
(2,080,000
|
)
|
(2,565,924
|
)
|
(1,715,000
|
)
|
The amounts due from related parties, amounts due to shareholders and
amounts due to other related parties represent cash advances to or borrowings
from them, and were unsecured, non-interest bearing and had no fixed repayment
terms.
In addition, the Company advanced to/from certain related parties
(note i) during the year ended December 31, 2003. These advances were
unsecured, non-interest bearing and had been repaid in full as of
December 31, 2003.
Notes:
(i) A director and
major shareholder of these related parties exercises significant influence on
the operations of the Company by providing direct and indirect financial
support.
(ii) Mr. Deng Long Long is a related
party because he can exercise significant influence on the operations of the
Company through direct and indirect financial support.
F-41
Related party transactions
The Company’s bank loans (see Note 5) were guaranteed by a
shareholder and other related parties at no charge. A director and major
shareholder of these related parties exercises significant influence on the
operations of the Company. Management believes that the estimated cost of the
guarantee was immaterial.
In addition, certain related parties provided administrative services,
such as secondment of staff, to the Company at no cost. Management believes
that the estimated value of those services was immaterial.
9. PAID-IN CAPITAL
The shareholders and their respective capital contributions as of
December 31, 2003, December 31, 2002 and December 31, 2001 are
as follows:
|
|
|
USD
|
|
RMB
|
|
|
|
|
|
|
|
|
|
Ms. Li Shun Xing
|
|
1,978,908
|
|
16,400,000
|
|
|
Mr. Pang Da Qing
|
|
144,798
|
|
1,200,000
|
|
|
Mr. Li Xiang Ning
|
|
144,798
|
|
1,200,000
|
|
|
Mr. Li Ya Jun
|
|
24,133
|
|
200,000
|
|
|
Ms. Xie Li
|
|
144,798
|
|
1,200,000
|
|
|
|
|
2,437,435
|
|
20,200,000
|
|
The shareholders have the right to vote and to receive dividends in
proportion to their shareholding percentages.
10. MAJOR CUSTOMERS
Details of the customers accounting for 10% or more of total sales are
as follows:
|
|
|
Year ended
December 31
|
|
April 2,
2001
to
|
|
|
|
|
2003
|
|
2002
|
|
December 31,
2001
|
|
|
|
|
|
|
|
|
|
|
|
Company A
|
|
75
|
%
|
78
|
%
|
100
|
%
|
|
Company B
|
|
—
|
|
11
|
%
|
—
|
|
The accounts receivable from the 2 customers with the largest
receivable balances represents 80%, 93% and 100% respectively, of the balance
of the account at December 31, 2003, December 31, 2002 and
December 31, 2001, respectively.
F-42
11. EMPLOYEE BENEFIT PLANS
Certain employees of the Company in the PRC are entitled to retirement
benefits calculated with reference to their salaries upon retirement and their
length of service in accordance with a PRC government-managed retirement plan.
The PRC government is directly responsible for the payments of the benefits to
these retired employees. The Company is required to make contributions to the
government-managed retirement plan at 11% to 20% of the monthly basic salaries
of certain employees. The expense of such arrangements to the Company for the
years ended December 31, 2003 and 2002 and the period from April 2,
2001 to December 31, 2001 was RMB 104,526 (USD 12,613), RMB 56,659 and RMB
Nil, respectively.
In addition, the Company is required by law to contribute approximately
0.4% to 10% of total salaries of certain employees for medical and unemployment
benefits and workers compensation. The PRC government is directly responsible
for the payments of the benefits to these employees. The amounts contributed
amounted to RMB 64,309 (USD 7,760), RMB 34,129 and RMB Nil for the years ended
December 31, 2003 and 2002 and the period from April 2, 2001 to
December 31, 2001, respectively.
F-43
UNADITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Financial
Statements
The following unaudited pro forma combined financial statements give
pro forma effect to the recently completed acquisition of Weida PRC by Weida, by using the purchase method of
accounting and the assumptions set forth in the accompanying notes to the pro
forma combined financial statements.
Weida has a 51% profit and loss participation agreement and the right to
appoint a majority of the board of directors of Weida PRC and the right to
appoint the general manager and chief financial officer of Weida PRC, both of
which rights it intends to exercise.
Weida therefore has operational and financial control of Weida PRC. This presentation assumes that the purchase
price has been allocated based on preliminary estimates of the fair market
value of Weida PRC’s assets and liabilities.
The pro forma assumptions are subject to change pending a final analysis
of the fair values of the assets acquired and liabilities assumed by Weida. The
impact of these changes could be material.
The unaudited pro forma combined balance sheet as of June 30, 2004
is presented to give effect to the acquisition of Weida PRC as if it had
occurred on June 30, 2004. The
unaudited pro forma statement of operations for the six-month period ended
June 30, 2004 is presented as if the acquisition of Weida PRC had taken
place on January 1, 2003 and, combines (i) the historical results of Weida
for the six-month period ended June 30, 2004 and (ii) the historical
results of Weida PRC for the six-month period ended June 30, 2004. The unaudited pro forma statement of
operations for the year ended December 31, 2003 is presented as if the
acquisition of Weida PRC had taken place on January 1, 2003 and combines
(i) the historical results of Weida for the period from May 16, 2003 (date of
inception) to December 31, 2003 and (ii) the historical results of Weida
PRC for the year ended December 31, 2003.
The unaudited pro forma combined financial statements are based on
estimates and assumptions. These
estimates and assumptions are preliminary and have been made solely for
purposes of developing this pro forma combined financial statement. Unaudited pro forma combined financial
statements are presented for illustrative purposes only and are not necessarily
indicative of the operating results that would have been achieved if the
acquisition of control of, and a majority profit-sharing interest in Weida PRC
had been consummated as of the beginning of the period indicated, nor are they
necessarily indicative of future results of operations. The pro forma combined financial statements
do not give effect to any cost savings or restructuring and integration costs
that may result from the integration of Weida’s and Weida PRC’s businesses.
Costs related to restructuring and integration have not yet been determined.
F-44
Weida Communications,
Inc.
Pro Forma Combined Statement of Operations
For the twelve months
ended December 31, 2003
|
|
|
Weida *
|
|
Weida PRC
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
Weida
|
|
|
|
|
US$
|
|
US$
|
|
|
|
US$
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Sales of equipment
|
|
—
|
|
121,774
|
|
—
|
|
121,774
|
|
|
Satellite bandwidth revenue
|
|
—
|
|
36,360
|
|
—
|
|
36,360
|
|
|
Total revenue
|
|
—
|
|
158,134
|
|
|
|
158,134
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
Cost of revenue
|
|
—
|
|
1,308,903
|
|
—
|
|
1,308,903
|
|
|
|
|
—
|
|
(1,150,769
|
)
|
|
|
(1,150,769
|
)
|
|
Selling, general and administrative
expenses
|
|
1,180,702
|
|
777,653
|
|
—
|
|
1,958,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(1,180,702
|
)
|
(1,928,422
|
)
|
|
|
(3,109,124
|
)
|
|
Interest expense
|
|
—
|
|
(222,713
|
)
|
—
|
|
(222,713
|
)
|
|
Interest income
|
|
31,908
|
|
6,981
|
|
—
|
|
38,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(1,148,794
|
)
|
(2,144,154
|
)
|
|
|
(3,292,948
|
)
|
* Weida
commenced operations on May 16th 2003.
F-45
Weida
Communications, Inc.
Pro Forma Combined Balance Sheet
As at
June 30, 2004
|
|
|
Weida
|
|
Weida PRC
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
Weida
|
|
|
|
|
US$
|
|
US$
|
|
|
|
US$
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Cash in bank
|
|
1,617,845
|
|
54,009
|
|
—
|
|
1,671,854
|
|
|
Accounts receivable
|
|
80,968
|
|
18,090
|
|
—
|
|
99,058
|
|
|
Due from related party
|
|
438,640
|
|
—
|
|
(438,640
|
)(vii)
|
0
|
|
|
Inventories
|
|
—
|
|
757,596
|
|
—
|
|
757,596
|
|
|
Advances to suppliers
|
|
—
|
|
13,920
|
|
—
|
|
13,920
|
|
|
Prepaid expenses and deposits
|
|
173,750
|
|
210,105
|
|
—
|
|
383,855
|
|
|
Total current assets
|
|
2,311,203
|
|
1,053,720
|
|
|
|
2,926,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit for purchase of property, plant and
equipment
|
|
—
|
|
393,950
|
|
|
|
393,950
|
|
|
Property, plant and equipment, net
|
|
18,121
|
|
1,553,665
|
|
—
|
|
1,571,786
|
|
|
Note receivable
|
|
2,200,000
|
|
—
|
|
—
|
|
2,200,000
|
|
|
Goodwill
|
|
—
|
|
—
|
|
24,115,226
|
(a)(i)-(vi)
|
24,115,226
|
|
|
Deferred acquisition costs
|
|
5,704,004
|
|
—
|
|
(5,704,004
|
)(a)(v)
|
—
|
|
|
Deferred expenses - non-current portion
|
|
62,500
|
|
—
|
|
|
|
62,500
|
|
|
Other assets
|
|
3,880
|
|
—
|
|
|
|
3,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
10,299,708
|
|
3,001,335
|
|
|
|
31,273,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
|
—
|
|
2,416,451
|
|
—
|
|
2,416,451
|
|
|
Short term loan
|
|
—
|
|
24,165
|
|
—
|
|
24,165
|
|
|
Accounts payable
|
|
1,518,803
|
|
942,961
|
|
—
|
|
2,461,764
|
|
|
Accrued expenses and other payables
|
|
—
|
|
158,100
|
|
15,805,153
|
(a)(i)(ii)
|
15,963,253
|
|
|
Amounts due to shareholders
|
|
—
|
|
178,083
|
|
—
|
|
178,083
|
|
|
Amount due to SCL Ventures, Ltd.
|
|
—
|
|
438,640
|
|
(438,640
|
)(vii)
|
—
|
|
|
Amounts due to other related parties
|
|
756,386
|
|
1,248,339
|
|
—
|
|
2,004,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
2,275,189
|
|
5,406,739
|
|
|
|
23,048,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non—current liabilities
|
|
|
|
|
|
|
|
|
|
|
Long term loan
|
|
270,000
|
|
—
|
|
—
|
|
270,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
2,545,189
|
|
5,406,739
|
|
|
|
23,318,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
—
|
|
—
|
|
(1,804,053
|
)(a)(vi)
|
—
|
|
|
|
|
|
|
|
|
1,804,053
|
(a)(vi)
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
Capital stocks and paid in capital
|
|
10,784,913
|
|
2,416,451
|
|
(2,416,451
|
)(a)(iv)
|
10,985,578
|
|
|
|
|
|
|
|
|
2,004,718
|
(a)(iii)
|
|
|
|
|
|
|
|
|
|
(1,804,053
|
)(a)(vi)
|
|
|
|
Deficit
|
|
(3,030,394
|
)
|
(4,821,855
|
)
|
4,821,855
|
(a)(iv)
|
(3,030,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
7,754,519
|
|
(2,405,404
|
)
|
|
|
7,955,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders’ equity
|
|
10,299,708
|
|
3,001,335
|
|
|
|
31,273,625
|
|
F-46
Weida Communications,
Inc.
Pro
Forma Combined Statement of Operations
For the six months
ended June 30, 2004
|
|
|
Weida
|
|
Weida PRC
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Combined
Weida
|
|
|
|
|
US$
|
|
US$
|
|
|
|
US$
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Sales of equipment
|
|
—
|
|
42,030
|
|
—
|
|
42,030
|
|
|
Satellite bandwidth revenue
|
|
—
|
|
14,639
|
|
—
|
|
14,639
|
|
|
Total revenue
|
|
—
|
|
56,669
|
|
|
|
56,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
—
|
|
868,115
|
|
—
|
|
868,115
|
|
|
|
|
|
|
(811,446
|
)
|
|
|
(811,446
|
)
|
|
Selling, general and administrative
expenses
|
|
2,057,313
|
|
404,279
|
|
—
|
|
2,461,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(2,057,313
|
)
|
(1,215,725
|
)
|
|
|
(3,273,038
|
)
|
|
Interest expense
|
|
—
|
|
(116,576
|
)
|
—
|
|
(116,576
|
)
|
|
Interest income
|
|
49,060
|
|
11,788
|
|
—
|
|
60,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(2,008,253
|
)
|
(1,320,513
|
)
|
|
|
(3,328,766
|
)
|
F-47
NOTES TO PRO FORMA FINANCIAL INFORMATION
Basis of Pro Forma Presentation
The acquisition of Weida PRC by Weida has been accounted for using the
purchase method of accounting.
The financial statements of Weida PRC are stated in RMB. The
translations of assets and liabilities as at December 31, 2003 from RMB
into USD in the pro forma combined balance sheet have been made at the rate of
RMB 8.2874 to USD 1 while the translations of assets and liabilities as at
June 30, 2004 from RMB into USD in the pro forma combined balance sheet
have been made at the rate of RMB8.2766.
The translations of income and expenses from RMB into USD in the pro
forma combined statement of operations for the year ended December 31,
2003 have been made at the rate of RMB8.2874 to USD 1 and RMB 8.2766 to USD 1
for the six-month period ended June 30, 2004. Such translations should not be construed as representations that
RMB amounts could be converted into USD at that rate or any other rate during
such period or at any other time.
The value of the Registrant’s shares issued to Weida PRC was based upon
the market capitalization of the Registrant, using an average closing price of
the Registrant’s common stock two days prior to and two days after May 20,
2003, the date the proposed share exchange was announced. The value used of
$0.1230 per share is the market value of $1.09 per share adjusted for all
shares issued in connection with the transactions.
Pro Forma Adjustments
(a) Adjustments
reflecting the acquisition of Weida PRC by Weida to reflect that upon
acquisition:
(i) Weida will provide
a cash capital contribution to Weida PRC of
$805,153;
(ii) Weida will make a
cash payment of $15,000,000 due to the existing shareholders of Weida PRC;
(iii) Weida will transfer to
existing shareholders of Weida PRC 16,296,296 shares of Weida common stock
valued at $0.1230 per share (an amount based on $1.09 per share, the average
closing price of Weida’s common stock two days prior to and two days after May
20, 2003, the date the proposed share exchange was announced, which share price
was adjusted (1) first, for the proposed 1-for-4 reverse split of Weida’s
common stock prior to the share exchange, and (2) second, for the issuance of
approximately 86.1 million additional shares which were issued in the exchange
and are assumed to be issued to the Weida PRC shareholders, consisting of
approximately 69.8 million shares issued to Weida shareholders, and
approximately 16.3 million shares assumed to be issued to the Weida PRC
shareholders), or $2,004,718 in the aggregate. The determination of the share
price used in recording the transaction is for accounting purposes only. It is
not the value ($6.25) used for determining the fixed amount of shares to be
issued in the acquisition of Weida PRC by Weida or the value of the
Registrant’s shares to be received by shareholders of Weida in connection with
the merger;
(iv) Weida PRC’s equity
accounts will be eliminated;
(v) deferred acquisition
costs will be reclassified to goodwill;
F-48
(vi) a minority interest in
(receivable from) Weida PRC will be eliminated; and
(vii) intercompany balances will
be eliminated.
The foregoing adjustments, including, without limitation, the
allocation of purchase price to goodwill, are subject to change pending a final
analysis of the fair values of the assets acquired and liabilities assumed by
Weida. Some of the goodwill amount will be allocated to licenses with definite
or indefinite life. The impact of any
such changes on future results of operations and reported assets and
liabilities could be material.
Additional Equity
Weida is in the process of raising additional equity, in connection
with the acquisition of Weida PRC, to satisfy the $15,000,000 due to Weida
PRC’s shareholders, which is payable upon the completion of the conditions to
the formation of the Weida EJV and the Weida EJV having been formed and having
a valid business license showing SCL’s 25% equity ownership.
F-49