Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendnent No. 1)
Mark One
[X] ANNUAL REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to _______
Commission file number: 000-33195
XINHUA CHINA LTD.
______________________________________________
(Name of small business issuer in its charter)
NEVADA 88-0437644
_____________________________________________ ___________________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
B-26F, ORIENTAL KENZO DONGCHENG DISTRICT
BEIJING 100027
PEOPLE'S REPUBLIC OF CHINA
________________________________________
(Address of principal executive offices)
86-10-64168816 OR 86-10-64168916
________________________________
(Issuer's telephone number)
Securities registered pursuant to Section Name of each exchange on which
12(b) of the Act: registered:
NONE
____
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.000025 PAR VALUE
___________________________________________________________
(Title of Class)
Check whether the issuer is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. [X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [X ] No[ ]
1
Check if there is nondisclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The issuer's revenues for the fiscal year ended June 30, 2008 were $0.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked prices of such
common equity, as of September 28, 2008: approximately $333,635.
The number of shares of common stock of the issuer outstanding and the date is:
October 7, 2008: 82,460,118
2
XINHUA CHINA LTD.
FORM 10-KSB
PART I
Item 1. Description of Business 5
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 8
Item 6. Management's Discussion and Analysis or Plan of Operations 12
Item 7. Financial Statements 24
Item 8A(T). Controls and Procedures 25
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons
and Corporate Governance; Compliance with Section 16(a)
of the Exchange Act 27
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 12. Certain Relationships and Related Transactions and Director
Independence 33
Item 13. Exhibits 33
Item 14. Principal Accountant Fees and Services 33
3
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Xinhua China Ltd. files annual, quarterly, current reports, proxy statements,
and other information with the U.S. Securities and Exchange Commission (the
"Commission"). You may read and copy documents referred to in this Annual Report
on Form 10-K that have been filed with the Commission at the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov.
This Annual Report is being amended in response to the comment letter dated
March 6, 2009 from the Securities and Exchange Commission pertaining to certain
item numbered disclosures that were inadvertenly not included in the form 10-K
as filed, and to the report of the registered public accounting firm, and to our
internal controls and procedures.
4
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OUR BUSINESS AND PLANS-SUMMARY
Our company, Xinhua China Ltd. ("Company") was incorporated September 14, 1999
under the laws of the State of Nevada, USA. We have certain digital media
distribution and related rights in "China" where we mostly operate and seek to
pursue our business. We are in the development stage seeking to grow our
Company.
We are focused to develop a plan for funding, sales, marketing and other
benefits relating to China and this plan may include other related pursuits such
as assisting one or more USA or international companies to navigate the
regulatory demands of doing related business in China and to possibly join with
us by joint venture or similar arrangement to pursue business in one of the
World's if not the World's most rapidly growing financial and consumer
population environments. As part of this we still seek to establish ourselves as
a leader in the digital media industry first in China and then possibly
elsewhere. We intend to maximize our strategic position in the publishing
industry.
We are developing a new business plan focused on the upcoming New Year of 2009
to achieve several key areas or goals: restructure certain aspects of our
organization and relationships after careful consideration as part of our plan
to grow our Company and revenues; focus on market awareness of our Company
primarily making those investors in the USA stock markets aware of us, given our
arrangements, discussed below, with the People's Republic of China (China) seek
how we can expand our business in both our core license rights and to possibly
obtain other benefits or rights similar in nature, and seek acquisitions of
mainly China companies or assets that may be the subject of registrations or
"spin-off" transactions in the USA markets, both stock and business trade, given
the extensive energy, time and expense we have been through in learning about
the markets. These plans need to be developed and approved by the Board of
Directors, which we also plan to restructure by adding Directors to expand.
We are subject to many risks and there is no assurance of success in our plans.
CHINA MARKET/DEMOGRAPHICS
We believe the country (China), where we primarily seek to pursue our core
business, offers a tremendous emerging marketplace of consumers. It is key to
our business and plans, first in importance in understanding who we are and what
we may achieve, and the country when coupled with both are favorable status with
the paternal but market savvy government and certain government related contract
rights, we face the potential for major marketing, sales and revenues, subject
of course to many factors like obtaining sufficient capital funding and being
successful in our business plans.
5
Foreign direct investment in China has increased rapidly in the last twenty
years and the investment environment has further improved to encourage foreign
and local investors to invest in fields other than those considered by the
government of China to be sensitive. Distribution channels have been opened up
to new foreign investment subject to China government guidelines. Many companies
are involved in the electronic and traditional publishing and distribution of
literary and entertainment material. There are competitors with greater
financial resources than us.
PAST BUSINESS DEVELOPMENT
Since formation and up to September 4, 2004, our Company was considered an
inactive development stage enterprise. On October 12, 2004, we changed our name
from "Camden Mines Limited" to our current corporate name "Xinhua China Ltd."
The change in corporate name reflected plan of acquiring an interest in the
Chinese book distribution giant" Xinhua Circulation & Distribution ("Xinhua
C&D"). Please note that throughout this Annual Report, and unless otherwise
noted, the words "we," "our," "us," or the "Company" refer to Xinhua China Ltd.
XINHUA CIRCULATION & DISTRIBUTION-HISTORY
Major Agreement/National Rights. During September 2004, pursuant to the terms
and provisions of an investment agreement (the "Investment Agreement") among our
two subsidiaries, identified below, Pac-Poly and Beijing Boheng and Xinhua
Bookstore (Main Store) ("Xinhua Bookstore"), we acquired a 57.67% interest in
the publication distribution business in the People's Republic of China (the
"National Rights"). We reduced our interest in Beijing Boheng: effective
December 31, 2006, we disposed of our approximately 95% equity interest in our
subsidiary, Beijing Boheng. Recent Event: On August 25, 2008, the Company and
the Purchaser of Boheng agreed to terminate the consummation of acquisition of
Boheng whereby the 70,500,000 shares representing 96.58% of interests in Boheng
as held by the Purchaser will be transferred back to the Company in
consideration of the forbearance of Note Receivable $1,625,000 representing the
unpaid balance of the purchase price. Please also refer to the Company Financial
Statements for further details. The statements herein regarding Boheng, the
"Note" and related should be considered in light of this recent event.
The National Rights amount to the ability for our Company, subject to funding
and certain other considerations, to develop, and institute a marketing, sales
and distribution plan in the country of China, a major market, as to
publications mostly of a consumer oriented nature. (See, China
Market/Demographics.)
In accordance with the terms and provisions of the Investment Agreement, Xinhua
Bookstore transferred the publication distribution business into a newly formed
Chinese company called Xinhua Circulation & Distribution ("Xinhua C&D").
Xinhua C&D is presently primarily a book distribution enterprise.
Rise of Electronic Media/Shift. We had originally intended to help guide Xinhua
C&D through the modernization and growth of its systems and distribution
strategies. Realizing the large investment in real estate, equipment, fixed
assets requirements to achieve modernization and growth, as well as the shifting
of reading habits to a digital format and a dynamic and growing digital youth
(age 12-25) comprising over 50% of the population, our management, after very
careful consideration, effective May 31, 2006, revised our business focus to
instead concentrate on the growing opportunity in online content distribution,
co-publishing, and digital rights management. While executing this strategy, we
will continue to maximize our strategic position in the publishing industry by
utilizing the connections and channels we have established as a result of our
interest in Xinhua C&D.
6
Significant Debt Reduction. As a result of the decision to focus on digital
media and co-publishing, we were able to renegotiate our financial commitment to
Xinhua C&D and eliminate the requirement to invest a further $16,700,000 into
Xinhua C&D. As of May 31, 2006, we reduced our ownership interest in Xinhua C&D
to 7.98%. The reduction in ownership does not, however, reduce our government
granted rights to undertake the projected lucrative business of distribution of
publications. Xinhua C&D will remain focused on traditional distribution
services for Chinese book publishers throughout China, and is expected to
provide procurement services for our online e-commerce initiative. In other
words, we still have the electronic distribution rights.
CURRENT SUBSIDIARIES
PAC-POLY INVESTMENTS LIMITED
On September 14, 2004, we signed two separate share purchase agreements
(collectively, the "Share Purchase Agreements"), whereby we issued 35,000,000
shares of our restricted common stock in exchange for a 100% interest in
Pac-Poly Investments Limited, a company incorporated under the laws of the
International Companies Business Act Cap 291 of British Virgin Islands
("Pac-Poly"), and a 95% interest in Beijing Boheng Investments Limited, a
company incorporated under the laws of China ("Beijing Boheng"), respectively.
The shareholders of Pac-Poly and Beijing Boheng received 16,387,000 and
18,613,000 shares of our restricted common stock, respectively. In accordance
with the terms and provisions of the Share Purchase Agreement, one of our
shareholders returned to us 35,000,000 shares of common stock held of record by
such shareholder and the shares were cancelled and returned to treasury.
Immediately prior to consummation of the respective Share Purchase Agreements,
Pac-Poly and Beijing Boheng were under common control. Subsequently, Beijing
Boheng spun off all of its business and net assets to its president and became a
non-operating shell company. Pac-Poly had no significant operations since its
inception.
The acquisition was accounted for as a recapitalization of Pac-Poly and Beijing
Boheng because their shareholders and management have actual and effective
operating control of the combined entity after the transaction. Pac-Poly and
Beijing Boheng were jointly treated as the acquiring entity for accounting
purposes and we were the surviving entity for legal purposes, with net
liabilities of $16,371 being assumed by Pac-Poly and Beijing Boheng. The
combined company is considered to be a continuation of the operations of
Pac-Poly and Beijing Boheng. The issued and outstanding common stock of Pac-Poly
and Beijing Boheng prior to the completion of acquisition was restated to
reflect the 35,000,000 shares of stock issued by us.
As of the date of this Annual Report, we hold of record 100% of the total issued
and outstanding shares of Pac-Poly, which is our wholly-owned subsidiary and we
are completing the reversal of a past transaction, discussed below, so that we
receive back our 96.58% interest in Boheng and now own it also.
7
BEIJING JOANNES INFORMATION TECHNOLOGY CO. LT.
On May 9, 2006, we formed Beijing Joannes Information Technology Co. Lt.
("Beijing Joannes"), as our Chinese wholly owned subsidiary, to launch a digital
media content initiative. We hold of record 100% of the total issued and
outstanding shares of Beijing Joannes. Beijing Joannes was formed for the
purpose of launching a digital media content initiative. The business focus is
building online communities with connectivity to an ecommerce engine, which
allows for the online purchase of e-books, e-audio, and computer games. Hard
copies of books can also be purchased through the portal. We believe a unique
customer loyalty program and digital redemption or trade-in strategy will be a
market differentiator.
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain our registered agent's office at 101 Convention Center Drive, Suite
700, Las Vegas, Nevada 89109 and our principal executive office at YuanJia
International Apartment, Building #1, Suite 304, No. 40 Dongzhong Street,
Dongcheng District, Beijing.
ITEM 3. LEGAL PROCEEDINGS.
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. None
of our directors, officers or affiliates are (i) a party adverse to us in any
legal proceedings, or (ii) has an adverse interest to us in any legal
proceedings. Management is not aware of any other legal proceedings pending or
that have been threatened against us or our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During fiscal year ended June 30, 2008, no matters were submitted to our
stockholders for approval.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS PURCHASES OF EQUITY SECURITIES.
MARKET FOR COMMON EQUITY
Shares of our common stock are traded on the OTC Bulletin Board (OTC BB) under
the symbol XHUA. The following table sets forth the high and low sales prices
relating to our common stock on a quarterly basis for the last two fiscal years
as quoted by the OTC BB. These quotations reflect inter-dealer prices without
retail mark-up, mark-down, or commissions, and may not reflect actual
transactions.
QUARTER ENDED HIGH BID LOW BID
June 30, 2008 $0.005 $0.003
March 31, 2008 $0.004 $0.002
December 31, 2007 $0.011 $0.011
September 30, 2007 $0.03 $0.025
June 30, 2007 $0.07 $0.04
March 31, 2007 $0.23 $0.19
As of September 26, 2008, we had 30 shareholders of record, which does not
include shareholders whose shares are held in street or nominee names. We
believe that there are approximately 1,000 such beneficial owners of our common
stock. While Management has a goal of improving corporate value, share price and
liquidity, there is no guarantee this will occur.
8
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors and we do not
anticipate dividends in the near future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan, the Xinhua China Ltd. Stock Option Plan.
The purpose of the Stock Option Plan is to advance our interests and our
shareholders by affording our key personnel an opportunity for investment and
the incentive advantages inherent in stock ownership in us. Pursuant to the
provisions of the Stock Option Plan, stock options, stock awards, cash awards or
other incentives (the "Stock Options and Incentives") will be granted only to
our key personnel, generally defined as a person designated by the Board of
Directors upon whose judgment, initiative and efforts we may rely including any
of our directors, officers, employees, consultants or advisors. A maximum of
20,000,000 shares of common stock have been reserved under the Stock Option
Plan. Options may be granted for a term not exceeding ten years from the date of
grant. Under the Stock Option Plan, the Board of Directors previously authorized
the grant of 4,255,000 The entire 4,255,000 Stock Options, previously
authorized, have expired by their terms as of June 30, 2007.
The table below presents the securities authorized for issuance with respect to
the Stock Option Plan as of June 30, 2008:
EQUITY COMPENSATION PLAN INFORMATION
WEIGHTED-AVERAGE NUMBER OF SECURITIES
NUMBER OF SECURITIES TO EXERCISE PRICE OF REMAINING AVAILABLE FOR
BE ISSUED UPON EXERCISE OUTSTANDING FUTURE ISSUANCE UNDER
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS AND RIGHTS (EXCLUDING COLUMN (A))
PLAN CATEGORY (A) (B) (C)
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
Stock Options -0- 20,000,000
Total Stock Options -0- 20,000,000
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS
Warrants 622,690 $4.60 0
835,000 $0.00001 0
100,000 $1.47 0
Total warrants 1,557,690
Total 1,557,690
9
XINHUA CHINA LTD. STOCK OPTION PLAN
The Stock Option Plan is to be administered by our Board of Directors, which
shall determine (i) the persons to be granted Stock Options and Incentives; (ii)
the Fair Market Value of our shares; (iii) the exercise price per share of
options to be granted; (iv) the number of shares to be represented by each
option or incentive award; (v) the time or times at which options and incentive
awards shall be granted; (vi) the interpretation of the Stock Option Plan; (vii)
whether to prescribe, amend and rescind rules and regulations relating to the
Stock Option Plan; (viii) the term and provisions or each option and incentive
award granted (which need not be identical) and, with the consent of the grantee
thereof, modify or amend such option or incentive award; (ix) whether to
accelerate or defer (with the consent of the grantee) of the exercise date of
any option or incentive award; (x) the person to execute on our behalf any
instrument required to effectuate the grant of an option or incentive award
previously granted by the Board; (xi) whether to accept or reject the election
made by a grantee pursuant to Section 7.5 of the Stock Option Plan; and (xii)
all other determinations deemed necessary or advisable for the administration of
the Stock Option Plan. The Stock Option Plan provides authorization to the Board
of Directors to grant Stock Options and Incentives to a total number of shares
of our common stock, not to exceed Twenty Million (20,000,000) shares of our
common stock as at the date of adoption by the Board of Directors of the Stock
Option Plan.
In the event an optionee who is one of our directors, officers, employees
(employee also encompasses consultants and advisors where such is appropriate or
where such is intended by the Board or by a particular grant under the Stock
Option Plan) (each an "Employee") has his employment terminated by us, except if
such termination is voluntary or occurs due to retirement with the consent of
the Board or due to death or disability, then the Stock Option, to the extent
not exercised, shall terminate on the date on which the Employee's employment
with us is terminated. If an Employee's termination is voluntary or occurs due
to retirement with the consent of the Board, then the Employee may after the
date such Employee ceases to be one of our employees, exercises his Stock Option
at any time within three (3) months after the date he ceases to be one of our
Employees, but only to the extent that he was entitled to exercise it on the
date of such termination. To the extent that the Employee was not entitled to
exercise the Stock Option at the date of such termination, or if he does not
exercise such Stock Option (which he was entitled to exercise) within the time
specified herein, the option shall terminate. In no event may the period of
exercise in the case of Incentive Options extend more than three (3) months
beyond termination of employment.
In the event an Employee is unable to continue his employment with us as a
result of his permanent and total disability (as defined in Section 22(e)(3) of
the Internal Revenue Code), he may exercise his Stock Option at any time within
six (6) months from the date of termination, but only to the extent he was
entitled to exercise it at the date of such termination. To the extent that he
was not entitled to exercise the Stock Option at the date of termination, or if
10
he does not exercise such option (which he was entitled to exercise) within the
time specified herein, the Stock Option shall terminate. In no event may the
period of exercise in the case of an Incentive Option extend more than six (6)
months beyond the date the Employee is unable to continue employment due to such
disability.
In the event an optionee dies during the term of the Stock Option and is at the
time of his death an Employee who shall have been in continuous status as an
Employee since the date of grant of the option, the Stock Option may be
exercised at any time within six (6) months following the date of death by the
optionee's estate or by a person who acquired the right to exercise the Stock
Option by bequest or inheritance, but only to the extent that an optionee was
entitled to exercise the Stock Option on the date of death, or if the optionee's
estate, or person who acquired the right to exercise the Stock Option by bequest
or inheritance, does not exercise such Stock Option (which he was entitled to
exercise) within the time specified herein, the Stock Option shall terminate. In
no event may the period of exercise in the case of an Incentive Option extend
more than six (6) months beyond the date of the Employee's death.
Except to the extent otherwise expressly provided in an award, the right to
acquire shares or other assets under the Stock Option Plan may not be assigned,
encumbered or otherwise transferred by an optionee and any attempt by an
optionee to do so will be null and void. However Stock Options and Incentives
granted under this Stock Option Plan may be transferred by an optionee by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code or Title I of the
Employee Retirement Income Security Act, as amended, or the rules thereunder.
Unless assigned in accordance with the terms of an award, options and other
awards granted under this Stock Option Plan may not be exercised during an
optionee's lifetime except by the optionee or, in the event of the optionee's
legal incapacity, by his guardian or legal representative acting in a fiduciary
capacity on behalf of the optionee under state law and court supervision.
Our shares may be subjected to additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouses). The
broker/dealer may need to make a special suitability determination for the
purchase and have received the purchaser's written agreement to the transaction
prior to the sale. Other compliance rules may apply.
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended June 30, 2008,
we sold or issued stock in private placement offerings, issued stock in exchange
for our debts or pursuant to contractual agreements. These transactions were
conducted under one or more possible exemptions from registration such as
Section 4(2) of the Securities Act of 1933, as amended, or Regulation D of the
Commission. Securities were marked as restricted securities.
11
FORBEARANCE AND SETTLEMENT AGREEMENT
Effective December 29, 2006, we entered into a forbearance and settlement (the
"Forbearance and Settlement Agreement") with Cornell Capital Partners, L.P.
("Cornell") and Highgate House Funds, Ltd. ("Highgate"). In accordance with the
terms and provisions of the Forbearance and Settlement Agreement, we agreed to
make certain payments to Cornell and Highgate with respect to the securities
purchase agreement dated November 23, 2005, as amended on March 23, 2006 (the
"Securities Purchase Agreement") previously entered into with Cornell and
Highgate. See "Item Management's Discussion and Analysis or Plan of Operation."
In addition, Highgate may exercise its rights to purchase warrant shares
pursuant to the Warrant issued to it under the Securities Purchase Agreement on
a cashless basis. During fiscal year ended June 30, 2008, we issued an aggregate
of 44,016,843 shares of our common stock to Highgate pursuant to the exercise by
Highgate of its rights to purchase warrant shares pursuant to the Warrant.
MARKET CONSIDERATIONS
Our Company is suffering from stock price and volume volatility issues. In
simple terms, these may be attributed to a variety of factors, in our opinion,
and this may include natural, as in the case of downward trends in the stock
market, or man made, as in the case of potential profiting on our stock through
abusive short selling tactics. These factors are broad, like the market concerns
involving the economy, and more specific like the lack of any responsible
promotion and public relationships such as market awareness campaigns, mostly
non-existent, and also possibly due to stock conversion or similar debt
retirement relationships that may be driving down the stock price or potentially
not allowing upward movement. We are reviewing possible options and actions
considering the advice of lawyers and others taking into consideration the
regulatory environment, recent, seeking to stop short selling, and what may be
favorable potential judicial support in light of the many abuses small companies
face from market "players," and public and government pressure to end short
selling and seeking to stop market manipulation. We are considering our trading
history and the actions of shareholders, creditors and others on our stock
trading. While we have not completed a review, nor can we say any conclusions at
this time, we intend or at least hope to vigorously analyze prior and current
credit and stock related obligations, including those developed in the past,
current relationships, and other factors, and it may, no assurance, be a change
in circumstance through settlement, suit, government complaints against firms,
or other actions all as legally permissible and reasonable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
Effective December 31, 2006, we disposed of our approximately 95% equity
interest in our subsidiary, Beijing Boheng, which resulted in a net gain of
$2,155,519 incurred during fiscal year ended June 30, 2007. We need capital to
implement our plans. We don't expect to fund our business from cash flow until
later in the future. We are burdened with obligations but also see ourselves as
having tremendous opportunities if we can improve our plans, obtain capital and
restructure ourselves to a certain extent.
Recent Event: On August 25, 2008, the Company and the Purchaser of Boheng agreed
to terminate the consummation of acquisition of Boheng whereby the 70,500,000
shares representing 96.58% of interests in Boheng as held by the Purchaser will
be transferred back to the Company in consideration of the forbearance of Note
Receivable $1,625,000 representing the unpaid balance of the purchase price.
Please also refer to the Company Financial Statements for further details. The
statements herein regarding Boheng, the "Note" and related should be considered
in light of this recent event.
12
RESULTS OF OPERATION
FOR FISCAL YEAR ENDED JUNE 30, 2008 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2007.
REVENUES AND GROSS MARGIN
During fiscal year ended June 30, 2008, we had net revenue of $-0- as compared
to net revenue of $153,286 during fiscal year ended June 30, 2007 after taking
into account sales discounts and sales return allowances. Our cost of sales for
fiscal year ended June 30, 2008 was $-0- compared to cost of sales for fiscal
year ended June 30, 2006. Cost of sales consisted of purchased costs to
publishers and depreciation of property, plant and equipment. Net revenue and
cost of sales decreased proportionately with the decrease in revenues during
fiscal year ended June 30, 2008 compared with fiscal year ended June 30, 2007
due to the divesture of our interest in Xinhua C&D. Gross profit margin was 5.4%
for fiscal year ended June 30, 2007.
OPERATING EXPENSES
Our total operating expenses were $374,767 for fiscal year ended June 30, 2008
as compared to total operating expenses of $2,997,598 for fiscal year ended June
30, 2007. During fiscal year ended June 30, 2008, our selling, general and
administrative expenses consisted of: (i) allowance for doubtful accounts of
$-0- (2007: $1,500,000); (ii) legal and professional fees of $108,111 (2007:
$279,815); (iii) office expenses of $14,162 (2007: $91,085); (iv) salaries and
benefits of $99,117 (2007: 286,015); (v) shipping and freight of $9,557 (2007:
$241); (vi) vehicle expense of $13,595 (2007: $33,761); and (vii) other expenses
of $130,225 (2007: $806,683). The decrease in operating expenses during fiscal
year ended June 30, 2008 as compared June 30, 2007 was due to the corresponding
decrease in net revenues and decrease in scope and scale of business operations.
These associated expenses included in selling, general and administrative
expenses correspondingly decreased due to the divesture of our interest in
Xinhua C&D.
Selling, general and administrative expenses decreased based on a substantial
decrease in allowance for doubtful accounts from $1,500,000 during fiscal year
ended June 30, 2007 to $-0- during fiscal year ended June 30, 2008. Selling,
general and administrative expenses also decreased based on a decrease in legal
and professional fees from $279,815 during fiscal year ended June 30, 2007 to
$108,111 during fiscal year ended June 30, 2008. The fees represent payments to
consultants and professional in relation to our fund raising of issuance of
convertible debentures primarily to Cornell and Highgate and other legal and
financial matters. Selling, general and administrative expenses further
decreases based on a decrease in salaries and benefits from $286,015 during
fiscal year ended June 30, 2007 to $99,117 during fiscal year ended June 30,
2008.
NET GAIN ON DISPOSAL OF BEIJING BOHENG
Effective December 2006 and in accordance with the terms and provisions of the
Disposal Agreement, we disposed of our 95% equity interest in our subsidiary,
Beijing Boheng, for cash consideration in the approximate amount of $1,875,000.
The disposal of our equity interest was to assist in the repayment of funds due
and owing to Cornell and Highgate. Effective December 29, 2006, we entered into
13
the Forbearance and Settlement Agreement with Cornell and Highgate. See
"Material Commitments". This disposal provided a gain in the amount of
$2,055,947 during fiscal year ended June 30, 2007, which is calculated below:
Purchase price $1,875,000
Less: net liabilities disposed as of December 31, 2006
Fixed Assets, net 99,572
Current Assets 251,685
Current Liabilities (619,399)
___________
(268,142)
Gain on disposal of Beijing Boheng $2,143,142
Less: Imputed interest on note receivable (87,195)
___________
Net gain on disposal of Beijing Boheng $2,055,947
GAIN ON DEBT RESTRUCTURING
On December 29, 2006, we completed the debt restructuring with Cornell and
Highgate under the terms and provisions of the Forbearance and Settlement
Agreement. In accordance with the terms and provisions of the Forbearance and
Settlement Agreement, we agreed to make certain payments to Cornell and Highgate
with respect to the Securities Purchase Agreement previously entered into with
Cornell and Highgate on November 23, 2005 and as amended March 23, 2006, and
those certain convertible debentures in the amount of $1,250,000 to Highgate
dated November 23, 2005 and $2,000,000 to Cornell dated March 23, 2006
(collectively, the "Convertible Debentures"). See "Material Commitments."
As a result of the debt restructuring arrangement, during fiscal year ended June
30, 2007, our liabilities on warrants, conversions, discounts were discharged
resulting in a net gain of $1,500,132 attributable as follows:
Liabilities on Conversion Discharged $ 2,334,198
Liabilities on Warrants Discharged 891,537
Loans Discharged 225,000
Unamortized Discounts (1,950,603)
___________
$ 1,500,132
INTEREST EXPENSE
We incurred $383,928 in interest expense during fiscal year ended June 30, 2008
as compared to $1,032,448 incurred as interest expense during fiscal year ended
June 30, 2007. Interest expense of $383,928 incurred during fiscal year ended
June 30, 2008 consisted of: (i) $314,865 (2007: $961,544) in imputed interest
charged on loans from shareholders; (ii) $19,435 (2007: $70,904) in interest on
loans from related parties; and (iii) $49,628 (2007: $-0-) in interest expense
from the amortization of deferred financing cost and discount on convertible
debenture.
14
We incurred a net loss of ($690,924) for fiscal year ended June 30, 2008
compared to a net loss of ($608,630) incurred during fiscal year ended June 30,
2007.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR ENDED JUNE 30, 2008
Our financial statements have been prepared assuming that we will continue as a
going concern and, accordingly, do not include adjustments relating to the
recoverability and realization of assets and classification of liabilities that
might be necessary should we be unable to continue in operation.
As at fiscal year ended June 30, 2008, our current assets were $2,298,746 and
our current liabilities were $2,749,336, resulting in a working capital deficit
of $450,590. As at fiscal year ended June 30, 2008, current assets were
comprised of: (i) $38,733 in cash and cash equivalents; (ii) $411,782 in net
accounts receivable; (iii) $1,625,000 in note receivable; and (iv) $223,231 in
other receivables and prepayments. The note receivable represents the sales
proceeds receivable from the disposal of Beijing Boheng in accordance with the
terms and provisions of the Disposal Agreement. Pursuant to the provisions of
the Disposal Agreement, the sales proceeds are receivable in five installments
and are due in full no later than July 31, 2008. As of the date of this Annual
Report, the scheduled payments of $375,000, $375,000, $250,000, $625,000 due
September 30, 2007, October 31, 2007, January 31, 2008 and July 31, 2008,
respectively, remain unpaid. The balance is unsecured and interest-free. As at
fiscal year ended June 30, 2008, our current liabilities were comprised of: (i)
$1,095,538 in accounts payable and accrued liabilities; (ii) $1,635,443 in
current portion of loans payable; and (iii) $18,355 in deferred revenue. See " -
Material Commitments."
As at fiscal year ended June 30, 2008, our total assets were $2,372,532
comprised of: (i) $2,298,746 in current assets; and (ii) $73,786 in net
property, plant and equipment. The increase in total assets during fiscal year
ended June 30, 2008 from fiscal year ended June 30, 2007 was primarily due to
the long-term portion of note receivable in the amount of $1,625,000.
As at fiscal year ended June 30, 2008, our total liabilities were $9,217,853
comprised of: (i) $2,749,336 in current liabilities; (ii) $1,058,261 in loans
payable; and (iii) $5,410,256 in loans from shareholders. The slight increase in
total liabilities during fiscal year ended June 30, 2008 from fiscal year ended
June 30, 2007 was primarily due to the increase in loans from shareholders.
Stockholders' deficit decreased from ($6,664,709) for June 30, 2007 to
($6,845,321) for June 30, 2008.
OPERATING ACTIVITIES
We have not generated positive cash flows from operating activities. During
fiscal year ended June 30, 2008, net cash flow used in operating activities was
($111,775) compared to net cash flow used in operating activities of
($2,908,974) during fiscal year ended June 30, 2007. Net cash flow used in
15
operating activities during fiscal year ended June 30, 2008 consisted primarily
of a net loss of ($690,924) adjusted by $466,703 in imputed interest expense and
$13,768 in amortization of deferred imputed interest from note receivable.
Changes in assets and liabilities consisted of an increase of $226,536 in
accounts receivable, $22,045 in other receivables and prepayments and $55,072 in
deferred revenue, and a decrease of $402,331 in accounts payable and accrued
liabilities. Net cash flowed used in operating activities during fiscal year
ended June 30, 2007 consisted primarily of a net loss of ($608,030) adjusted by
$24,834 in stock based compensation, $265,080 in net gain on deconsolidation of
a subsidiary, $1,032,448 in imputed interest expense, $1,500,000 in allowance
for doubtful accounts, $1,500,000 in loss on discontinuance of Vancouver office
and ($2,055,947) in net gain on deconsolidation of a subsidiary. Changes in
assets and liabilities consisted of an increase of $185,246 in accounts
receivable, $1,625,000 in note receivable and $140,270 in other receivables and
prepayments, and a decrease of $125,703 in accounts payable and accrued
liabilities and $73,427 in deferred revenue.
INVESTING ACTIVITIES
During fiscal year ended June 30, 2008, net cash flow used in investing
activities was ($59,692) compared to net cash flow used in investing activities
of $-0- for fiscal year ended June 30, 2007. Net cash flow used in investing
activities during fiscal year ended June 30, 2008 was primarily the result of
the purchase of plant and equipment in the amount of $59,692.
FINANCING ACTIVITIES
During fiscal year ended June 30, 2008, net cash flow sourced from financing
activities was $178,067 compared to net cash flow sourced from financing
activities of $2,723,151 for fiscal year ended June 30, 2007. Net cash flow from
financing activities during fiscal year ended June 30, 2008 pertained primarily
to $329,826 received as loans from shareholders and $441 received as proceeds
from convertible debenture offset by ($152,200) in repayment of loan payable.
Net cash flow from financing activities during fiscal year ended June 30, 2007
pertained primarily to $2,902,247 received as loans from shareholders offset by
($179,096) in repayment of loan payable.
PLAN OF OPERATION
The local and regional distribution business for books is competitive and
fragmented in China. Estimates range up to 500 as to the number of entrants in
this field. It is our plan that economy of scale, relationships with Chinese
publishers and also with sub-distributors and retailers and our nationwide scope
which allows us the flexibility to distribute books in any region should assist
us in creating, maintaining and enhancing our competitive position.
Our goal is to expand our business to include electronic sales, delivery and
distribution of media contents. We also plan to partner with foreign publishers
to provide foreign media contents in China. We seek to achieve our goal on a
national scale to maximize opportunities in one of the largest and fastest
growing economies in the world.
16
To execute on our strategy to become a digital media company we formed our new
subsidiary, Beijing Joannes. Beijing Joannes is intended to facilitate our
digital media business and it is expected to distribute all digital content for
Xinhua C&D and others. Beijing Joannes has anticipated in operating its business
to consumer (B2C) e-commerce portal as www.geezip.com, and expects to allow
customers to purchase electronic and hard copies of books on-line.
We expect to also establish a co-publishing company which anticipates on
co-publishing agreements with both domestic and foreign publishers, publishing
both hard copy and digital works.
Existing working capital, further advances and possible debt instruments,
warrant exercises, further private placements, monetization of existing assets,
and anticipated cash flow are being considered. We have no lines of credit or
other bank financing arrangements. Generally, we have financed operations to
date through the proceeds of the private placement of equity and debt securities
and loans from our shareholders. In connection with our business plan,
Management will delay additional increases in operating expenses and capital
expenditures. We intend to utilize our best efforts to settle current finance
accounts payables and liabilities with further issuances of securities, debt and
or advances, monetization of existing assets, and revenues, if any, from
operations. We will need to raise additional capital and revenues to meet both
short term and long-term operating requirements.
We have undertaken certain actions and continue to implement changes designed to
improve our financial results and operating cash flows. The actions involve
certain cost-saving initiatives and growing strategies, including: (i)
reductions in headcounts and corporate overhead expenses; and (ii) continue to
develop e-commerce business through Beijing Joannes. We believe that these
actions will enable us to improve future profitability and cash flow in our
continuing operations through June 30, 2009. The report of the independent
registered public accounting firm that accompanies our June 30, 2008 and June
30, 2007 consolidated financial statements contains an explanatory paragraph
expressing substantial doubt about our ability to continue as a going concern.
The consolidated financial statements have been prepared "assuming that we will
continue as a going concern," which contemplates that we will realize our assets
and satisfy our liabilities and commitments in the ordinary course of business.
MATERIAL COMMITMENTS
LOANS PAYABLE/CONVERTIBLE DEBENTURE
During 2008/9, a material commitment for us relates to the Forbearance and
Settlement Agreement with Cornell and Highgate. On December 29, 2006, we
completed the debt restructuring with Cornell and Highgate under the Forbearance
and Settlement Agreement. Pursuant to the Forbearance and Settlement Agreement,
we agreed to make certain payments to Cornell and Highgate with respect to the
Securities Purchase Agreement previously entered into by us with Cornell and
Highgate dated November 23, 2005 and amended on March 23, 2006, and the two
convertible debentures in the amounts of $1,250,000 to Highgate dated November
23, 2005 and $2,000,000 to Cornell dated March 23, 2006 (collectively, the
"Convertible Debentures") in accordance with the terms and conditions set forth
in the Forbearance and Settlement Agreement.
17
In further accordance with the Forbearance and Settlement Agreement, we agreed
to use the proceeds from the disposal of Beijing Boheng to repay the principal
and interest due to Cornell and Highgate under the Convertible Debentures in
exchange for the agreement of Cornell and Highgate to: (i) waive on a one-time
basis only any accrued liquidated damages owing to Cornell and Highgate; (ii) no
application of the redemption premium on the scheduled repayments; (iii)
conversion of the Convertible Debentures in an amount equal to at least the
amount of a scheduled repayment subject to certain conditions; (iv) no
additional liquidated damages accruing during the term of the Forbearance and
Settlement Agreement; (v) permitting us to withdraw the registration statement
filed on March 28, 2006 with the Securities and Exchange Commission in
connection with the Convertible Debentures; (vi) during the term of the
Forbearance and Settlement Agreement, waiving the requirement for us to receive
written consent of Cornell and Highgate for any organizational change (as
defined in the Securities Purchase Agreement) to be directly or indirectly
consummated by us, and that we will not effectuate any stock splits for at least
nine months without the consent of Cornell and Highgate; and (vii) terminating
the provisions for security shares as set forth in Section 9 of the Securities
Purchase Agreement and in Section 2 of the transfer agent instructions upon
receipt by Cornell and Highgate of the first scheduled repayment amount.
The payment plan under the Forbearance and Settlement Agreement is as follows:
Conversion of
Payment Date Cash Payment Debenture
________________ ______________________ _____________________
March 10, 2007 $ 250,000 250,000
June 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
______________________ _____________________
$ 1,875,000 1,875,000
====================== =====================
As of June 30, 2007, we paid $250,000 for the payment due March 10, 2007 and
issued 100,000 shares and 125,000 shares of our common stock on March 1, 2007
and April 18, 2007, respectively, pursuant to exercise rights. During fiscal
year ended June 30, 2008, Cornell and Highgate converted 44,016,843 shares
against the outstanding amount at a total conversion price of $152,200.
LOANS FROM SHAREHOLDERS
A material commitment for us relates to the loans from shareholders. The
outstanding amount of $5,410,256 represents cash advanced to us from our
shareholders. These shareholder loans are unsecured, interest-free and not
repayable within the next twelve months. For fiscal year ended June 30, 2008, we
calculated imputed interest expense of $961,544 in relation to interest-free
shareholders loans at its effective interest rate and accounted for it in the
consolidated financial statements.
18
PURCHASE OF SIGNIFICANT EQUIPMENT
We do not intend to purchase any significant equipment during the next twelve
months.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements require us to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
presented. Refer to Note 3 to the Consolidated Financial Statements. The
following paragraphs include a discussion of the critical areas that required a
higher degree of judgment or are considered complex.
BASIS OF CONSOLIDATION
The interest of the Company in the subsidiaries was acquired by means of
exchange of shares in the Company pursuant to a share exchange agreement on
September 14, 2004. The transaction is considered a transfer between entities
under common control, within the meaning of US GAAP. Accordingly, the assets and
liabilities transferred have been accounted for at historical cost or at their
"fair value" at the date of their original acquisition and have been included in
the foregoing financial statements as of the beginning of the periods presented.
The consolidated financial statements include the financial statements of the
Company and its subsidiaries. Subsidiaries are those entities in which the
Company, directly or indirectly, controls more than one half of the voting
power; has the power to govern the financial and operating policies; to appoint
or remove the majority of the members of the board of directors; or to cast
majority of votes at the meeting of directors. All significant inter-company
balances and transactions within the Company have been eliminated on
consolidation.
INVESTMENT IN UNCONSOLIDATED ENTITIES
The investments in and the operating results of 50%-or-less-owned entities not
required to be consolidated are included in the consolidated financial
statements on the basis of the equity method of accounting or the cost method of
accounting, depending on specific facts and circumstances.
The Company has an investment in a privately held entity in the form of equity
instruments that are not publicly traded and for which fair values are not
readily determinable. The Company records its investment in a private entity
under the cost method of accounting and assesses the net realizable value of
this entity on a quarterly basis to determine if there has been a decline (other
than temporary) in the fair value of the entity, under Statement of Financial
Accounting Standards ("SFAS") No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES".
19
REVENUE RECOGNITION
Sales revenue is recognized when persuasive evidence of an arrangement exists,
the price is fixed and final, delivery has occurred and there is reasonable
assurance of collection of the sales proceeds. The Company generally obtains
purchase authorizations from its customers for a specified amount of products at
a specified price and considers delivery to have occurred when the customer
takes possession of the products. The net sales incorporate offsets for
discounts and sales returns. Revenue is recognized upon delivery, risk and
ownership of the title is transferred and a reserve for sales returns is
recorded even though invoicing may not be completed. The Company has
demonstrated the ability to make reasonable and reliable estimates of products
returns in accordance with SFAS No. 48, "REVENUE RECOGNITION WHEN RIGHT OF
RETURN EXISTS".
Shipping and handling fees billed to customers are included in sales. Costs
related to shipping and handling are part of selling, general, and
administrative expenses in the consolidated statements of operations. EITF No.
00-10, "ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS" allows for the
presentation of shipping and handling expenses in line items other than cost of
sales. For the year ended June 30, 2007, $0 (2006 and 2005 $149,173 and $70,666,
respectively) related to shipping and handling costs was included in selling,
general and administrative expenses in the accompanying consolidated statements
of operations.
EQUITY BASED COMPENSATION
The Company adopts SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" using
the fair value method.
The Company uses the Black-Scholes Option Pricing Model to estimate the fair
value of options. The weighted average fair value of options granted during the
years ended June 30, 2007, 2006, and 2005 was $0.32, $1.02, and $1.54 per share,
respectively. Weighted average assumptions used in the valuation for the years
ended June 30, are summarized below:
2007 2006 2005
____ ____ ____
Risk free interest rate (%) 4.07% 5.01% 3.26%
Dividend yield (%) 0.00% 0.00% 0.00%
Expected life of option grants (years) 2.38% 5.00% 3.77%
Expected volatility of option grants (%) 1,181% 80.00% 80.00%
The Company has issued stock options to directors, officers, employees, and
consultants. As such, the Company records compensation expense for stock options
and awards only if the exercise price is less than the fair market value of the
stock on the measurement date.
Detailed movement of stock-based compensation has been disclosed in the note 14
to consolidated financial statements.
20
CONVERTIBLE DEBENTURE ISSUED WITH STOCK PURCHASE WARRANTS
The Company accounts for the issuance of and modifications to the convertible
debt issued with stock purchase warrants in accordance with APB No. 14,
ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS ,
EITF No. 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION
FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIOS, and EITF No. 00-27,
APPLICATION OF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS and SFAS No.
15, ACCOUNTING BY DEBTORS AND CREDITORS FOR TROUBLED DEBT RESTRUCTURINGS.
Due to the indeterminate number of shares, which might be issued under the
embedded convertible host debt conversion feature of these debentures, the
Company is required to record a liability relating to both the detachable
warrants and embedded convertible feature of the notes payable (included in the
liabilities as a "derivative liability").
The accompanying consolidated financial statements comply with current
requirements relating to warrants and embedded derivatives as described in SFAS
133 as follows:
o The Company treats the full fair market value of the derivative and
warrant liability on the convertible secured debentures as a discount
on the debentures (limited to their face value). The excess, if any,
is recorded as an increase in the derivative liability and warrant
liability with a corresponding increase in loss on adjustment of the
derivative and warrant liability to fair value.
o Subsequent to the initial recording, the change in the fair value of
the detachable warrants, determined under the Black-Scholes option
pricing formula and the change in the fair value of the embedded
derivative (utilizing the Black-Scholes option pricing formula) in the
conversion feature of the convertible debentures are recorded as
adjustments to the liabilities as of June 30, 2006.
o The expense relating to the change in the fair value of the Company's
stock reflected in the change in the fair value of the warrants and
derivatives is included in interest expense in the accompanying
consolidated statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS 115"
(SFAS No. 159), which allows for the option to measure financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. The
objective of SFAS 159 is to provide opportunities to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply hedge accounting provisions. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. We do not expect the
adoption of SFAS No. 159 to have a material impact on its financial statements.
21
In December 2007, the FASB issued SFAS 141 (revised 2007), BUSINESS
COMBINATIONS, ("SFAS 141(R)"). SFAS 141(R) retains the fundamental requirements
of the original pronouncement requiring that the purchase method be used for all
business combinations, but also provides revised guidance for recognizing and
measuring identifiable assets and goodwill acquired and liabilities assumed
arising from contingencies, the capitalization of in-process research and
development at fair value, and the expensing of acquisition-related costs as
incurred. SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. In the event that the Company completes acquisitions subsequent to its
adoption of SFAS 141 (R), the application of its provisions will likely have a
material impact on our results of operations, although we are not currently able
to estimate that impact.
In December 2007, the FASB issued SFAS 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS - AN AMENDMENT OF ARB NO. 51. SFAS 160
requires that ownership interests in subsidiaries held by parties other than the
parent (previously referred to as minority interests), and the amount of
consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
We do not expect the adoption of SFAS 160 to have a material impact on its
financial condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and related hedged
items accounted for under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 161 requires entities to provide
greater transparency about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). Statement 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles."
22
In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis.
We are currently evaluating the potential impact, if any, of the adoption of the
above recent accounting pronouncements on our consolidated results of operations
and financial condition.
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse change in foreign currency
and interest rates.
EXCHANGE RATE
Our reporting currency is United States Dollars ("USD"). The Chinese Renminbi
("RMB") has been informally pegged to the USD. However, China is under
international pressure to adopt a more flexible exchange rate system. If the RMB
were no longer pegged to the USD, rate fluctuations may have a material impact
on the Company's consolidated financial reporting and make realistic revenue
projections difficult. Recently (July 2005) the Renminbi was allowed to rise 2%.
This has not had an appreciable effect on our operations and seems unlikely to
do so.
As Renminbi is the functional currency of Xinha C&D and Boheng, the fluctuation
of exchange rates of Renminbi may have positive or negative impacts on the
results of operations of the Company. However, since all sales revenue and
expenses of these two subsidiary companies are denominated in Renminbi, the net
income effect of appreciation and devaluation of the currency against the US
Dollar will be limited to the net operating results of the subsidiary companies
attributable to us.
INTEREST RATES
Interest rates in China are low and stable and inflation is well controlled, due
to the habit of the population to deposit and save money in the banks (among
with other reasons, such as the People's Republic of China's perennial balance
of trade surplus). Our loans relate mainly to trade payables and are mainly
short-term. However our debt is likely to rise with physical plant in connection
with expansion and, were interest rates to rise at the same time, this could
become a significant impact on our operating and financing activities.
We have not entered into derivative contracts either to hedge existing risks or
for speculative purposes.
23
ITEM 7. FINANCIAL STATEMENTS
INDEX TO THE FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm..
Consolidated Balance Sheet as of June 30, 2008.
Consolidated Statement of Income For the Year Ended June 30, 2008.
Consolidated Statement of Stockholders' Equity as of June 30, 2008.
Consolidated Statement of Cash Flows For the Year Ended June 30, 2008.
Notes to Consolidated Financial Statements.
XINHUA CHINA LTD.
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008 and 2007
(STATED IN US DOLLARS)
XINHUA CHINA LTD.
CONTENTS PAGES
Report of Registered Independent Public Accounting Firm F1
Consolidated Balance Sheet F2 - F3
Consolidated Statement of Income F4
Consolidated Statement of Stockholders' Equity F5
Consolidated Statement of Cash Flows F6
Notes to the Financial Statements F7 - F24
24
SAMUEL H. WONG & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Xinhua China Ltd.
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Xinhua China Ltd.
and its subsidiaries ("the Company") as of June 30, 2008 and 2007, and the
related consolidated statement of operations, stockholders' equity and
comprehensive income and cash flows for the years then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of the
Company's internal control over financial reporting. Our audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of June 30, 2008 and 2007 and the consolidated results of operations
and cash flows for the years then ended 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 has incurred substantial losses
and has a working capital deficit, all of which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regards to
these matters are also described in Note 2. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ SAMUEL H. WONG & CO., LLP
______________________________
South San Francisco, California Samuel H. Wong & Co., LLP
July 12, 2008 Certified Public Accountants
________________________________________________________________________________
400 Oyster Point Boulevard, Suite 122, South San Francisco, CA 94080
Tel: (415) 732-1288 Fax: (415) 397-9028
E-mail: Info@swongcpa.com Website: www.swongcpa.com
F-1
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
NOTES 2008 2007
____________ ____________
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3D 38,733 $ 2,733
Accounts receivable, NET 3E 411,782 185,246
Receivable from trustee - -
Note receivable 4 1,625,000 1,000,000
Other receivables and prepayments 5 223,231 201,186
____________ ____________
Total Current Assets 2,298,746 $ 1,389,165
LONG-TERM ASSETS
Property, plant & equipment, NET 3F,6 73,786 14,094
Note receivable, long-term portion - 625,000
____________ ____________
Total Long-term Assets 73,786 639,094
____________ ____________
Total Assets $ 2,372,532 $ 2,028,259
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 7 1,095,538 693,207
Deferred revenue 18,355 73,427
Current portion of loans payable 3S,8 1,635,443 1,787,643
____________ ____________
Total Current Liabilities 2,749,336 2,554,277
LONG-TERM LIABILITIES
Loans payable 3S,8 1,058,261 1,058,261
Loans from related parties 3Q - -
Loans from shareholders 9 5,410,256 5,080,430
____________ ____________
Total Long-term Liabilities 6,468,517 6,138,691
Total Liabilities 9,217,853 8,692,968
____________ ____________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-2
XINHUA CHINA LTD.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
NOTE 2008 2007
____________ ____________
Minority Interest - -
STOCKHOLDERS' EQUITY
Common Stock $0.00001 Par Value
500,000,000 Shares Authorized;
98,655,733, and 54,638,890
shares issued and outstanding at June 30,
2008 and 2007 respectively. 10 987 546
Additional paid in capital 10,903,997 10,423,526
Accumulated other comprehensive income 38,149 8,749
Accumulated deficit (17,788,454) (17,097,530)
____________ ____________
Total Stockholders' (Deficit)/Equity (6,845,321) (6,664,709)
____________ ____________
Total Liabilities & Stockholders' Equity $ 2,372,532 $ 2,028,259
============ ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-3
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
NOTE
2008 2007
____________ ____________
REVENUE
Revenue, NET $ - $ 153,286
Revenue, NET - related parties - -
Cost of Sales, NET 3H - 144,982
Cost of Sales, NET - related parties 3I - -
____________ ____________
Gross Profit - 8,304
OPERATING EXPENSES
Selling, General, and Administrative
Expenses 14 374,767 2,997,598
Rental Expenses - related parties - -
____________ ____________
Total Operating Expense 374,767 2,997,598
____________ ____________
Operating Income/(Loss) (374,767) (2,989,294)
____________ ____________
OTHER INCOME (EXPENSES)
Other Income 55,127 -
Interest Income - 41,792
Net gain from deconsolidation of a
subsidiary 25 - -
Gain on disposal of Beijing BoHeng 15 - 2,055,947
Gain on debt restructuring 17 12,644 1,500,132
Interest Expense 18 (383,928) (1,032,448)
____________ ____________
Loss before minority interest and income tax (690,924) (423,871)
Loss on discontinued Operations:
Loss on discontinued operation of
Vancouver office, NET OF TAX - (184,159)
____________ ____________
Income/(Loss) before minority interest and (690,924) (608,030)
income tax
Minority interest in net loss of
consolidated subsidiaries - -
____________ ____________
Loss before Income Tax (690,924) (608,030)
Income Tax 3M,19 - -
____________ ____________
Net Loss $ (690,924) $ (608,030)
============ ============
Basic & Diluted Earnings Per Share 3N,23 $ (0.011) $ ( 0.011)
============ ============
Weighted Average Shares Outstanding 65,400,512 57,723,668
____________ ____________
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-4
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
ADDITIONAL OTHER
NUMBER OF COMMON PAID IN COMPREHENSIVE COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL INCOME (LOSS) INCOME (LOSS) DEFICIT TOTAL
___________ ______ __________ ____________ _____________ ___________ _________
Balance, July 1, 2006 61,779,765 618 9,684,907 (16,470,021) 19,478 (16,489,500) (6,784,497)
Additional Paid-in
Capital - - 738,619 - - - 738,619
Cancellation of
outstanding shares (10,000,000) (100) - - - - (100)
Issuance of shares to
Highgate 2,859,125 28 - - - - 28
Foreign Currency
translation - - - (10,729) (10,729) - (10,729)
Net Loss for year - - - (608,030) - (608,030) (608,030)
___________ ______ __________ ____________ _______ ___________ ___________
Balance, June 30, 2006 54,638,890 546 10,423,526 (17,088,780) 8,749 (17,097,530) (6,664,709)
=========== ====== ========== ============ ======= =========== ===========
Balance, July 1, 2007 54,638,890 546 10,423,526 (17,088,780) 8,749 (17,097,530) (6,664,709)
Additional Paid-in
Capital - - 151,760 - - - 151,760
Imputed interest on
interest free
advances from
related party - - 328,711 - - - 328,711
Issuance of shares to
Highgate 44,016,843 441 - - - - 441
Foreign Currency
translation - - - 29,400 29,400 - 29,400
Net Loss for year - - - (690,924) - (690,924) (690,924)
___________ ______ __________ ____________ _______ ___________ ___________
Balance, June 30, 2007 98,655,733 987 10,903,997 (17,750,304) 38,149 (17,788,454) (6,845,321)
=========== ====== ========== ============ ======= =========== ===========
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-5
XINHUA CHINA LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
2008 2007
__________ ____________
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss/(Loss) $ (690,924) $ (608,030)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation - 24,834
Stock-based compensation - 265,080
Net gain on deconsolidation of a subsidiary - (2,055,947)
Minority interest in net loss of consolidated subsidiaries - -
Amortization of deferred financing costs and fair value
conversion feature - -
Imputed interest expense 466,703 1,032,448
Allowance for doubtful accounts - 1,500,000
Loss on Vancouver office discontinuation - 184,159
Provision on slow moving inventories - -
Amortization of deferred imputed interest from note receivable 13,768 -
Changes in assets and liabilities:
Decrease/(Increase) Accounts receivable (226,536) (185,246)
Decrease/(Increase) Note Receivable - (1,625,000)
Decrease/(Increase) Other receivables and prepayments (22,045) (140,270)
Decrease/(Increase) Accounts Payable and accrued liabilities 402,331 125,703
Decrease/(Increase) in Deferred Revenue (55,072) 73,427
__________ ____________
Cash Sourced/(Used) in Operating Activities (111,775) (2,908,974)
__________ ____________
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with acquisition of Xinhua C&D - -
Advances to trustee - -
Purchase of plant and equipment (59,692) -
__________ ____________
-
Cash Used/(Sourced) in Investing Activities (59,692) -
__________ ____________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debenture 441 -
Repayment of Loan Payable (152,200) (179,096)
Loans from shareholders 329,826 2,902,247
__________ ____________
Cash Sourced/(Used) in Financing Activities 178,067 2,723,151
__________ ____________
NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS FOR THE YEAR 6,600 (185,823)
EFFECT OF CURRENCY TRANSLATION 29,400 (35,636)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 2,733 224,192
__________ ____________
CASH & CASH EQUIVALENTS AT END OF YEAR $ 38,733 $ 2,733
========== ============
Cash paid for interest expenses $ 55,217 $ 70,904
========== ============
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
F-6
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
1. ORGANIZATION AND BUSINESS BACKGROUND
Xinhua China Ltd. (the "Company", formerly Camden Mines Limited) was
incorporated in the State of Nevada, United States of America, on September
14, 1999. Until September 2004, the Company was a non-operating shell
company and considered as a development stage enterprise since its
inception. Effective from October 12, 2004, the Company changed to its
current name. The Company established an office in Vancouver, Canada;
however, this office was closed down in December 2006. The Company
established its principal executive office at Suite 304, Building #1,
YuanJia International Apartment, No. 40 Dongzhong St., Dongcheng District,
Beijing 100027 People's Republic of China.
As of May 31, 2006, the Company reduced its equity interest in Xinhua C&D
from 56.14% to 7.98%. Subsequent to the deconsolidation of Xinhua C&D, the
Company commenced the internet book distribution business through Beijing
Joannes Information Technology Co., Ltd. ("Joannes").
Details of the Company's subsidiaries as of June 30, 2008 are described
below:
PLACE OF
INCORPORATION PARTICULARS OF EFFECTIVE
AND KIND OF PRINCIPAL ACTIVITIES ISSUED/REGISTERED INTEREST
NAME LEGAL ENTITY AND PLACE OF OPERATION SHARE CAPITAL HELD
Pac-Poly Investment Ltd. British Virgin Islands, a Investment holding, 10,000,000 ordinary 100%
company with limited PRC shares of US$1 par
liability value
Beijing Joannes Information PRC, a company with Sales and Registered capital 100%
Technology Co., Ltd. limited liability distribution of US$1,250,000
books, PRC
2. GOING CONCERN UNCERTAINTIES
These consolidated financial statements have been prepared assuming that
Company will continue as a going concern, which contemplates the
realization of assets and the discharge of liabilities in the normal course
of business for the foreseeable future.
As of June 30, 2008, the Company had no working capital but current
liabilities exceeding current assets by $450,590 and an accumulated deficit
of $17,788,454 due to the fact that the Company continued to incur losses
over the past several years. Management has taken certain action and
continues to implement changes designed to improve the Company's financial
results and operating cash flows. The actions involve certain cost-saving
initiatives and growing strategies, including (a) reductions in headcount
and corporate overhead expenses; and (b) development of e- commerce
business. Management believes that these actions will enable the Company to
improve future profitability and cash flow in its continuing operations
through June 30, 2009. As a result, the financial statements do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of the
Company's ability to continue as a going concern.
F-7
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A.) BASIS OF PRESENTATION
These accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
in the United States of America ("US GAAP").
(B.) USE OF ESTIMATES
In preparing these consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets
and liabilities in the balance sheets and revenues and expenses during
the year reported. Actual results may differ from these Estimates.
(C.) BASIS OF CONSOLIDATION
The interest of the Company in the subsidiaries was acquired by means
of exchange of shares in the Company pursuant to a share exchange
agreement on September 14, 2004. The transaction is considered a
transfer between entities under common control, within the meaning of
US GAAP. Accordingly, the assets and liabilities transferred have been
accounted for at historical cost or at their "fair value" at the date
of their original acquisition and have been included in the foregoing
financial statements as of the beginning of the periods presented.
The consolidated financial statements include the financial statements
of the Company and its subsidiaries. Subsidiaries are those entities
in which the Company, directly or indirectly, controls more than one
half of the voting power; has the power to govern the financial and
operating policies; to appoint or remove the majority of the members
of the board of directors; or to cast majority of votes at the meeting
of directors. All significant inter-company balances and transactions
within the Company have been eliminated on consolidation.
(D.) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried at cost and represent cash on
hand, demand deposits placed with banks or other financial
institutions and all highly liquid investments with an original
maturity of three months or less as of the purchase date of such
investments.
(E.) ACCOUNTS RECEIVABLE, NET
Accounts receivable are recorded at the invoiced amount and do not
bear interest. The Company extends unsecured credit to its customers
in the ordinary course of business, but mitigates the associated risks
by performing credit checks and actively pursuing past due accounts.
An allowance for doubtful accounts is established and determined based
on managements' assessment of known requirements, aging of
receivables, payment history, the customer's current credit
worthiness, and the economic environment.
F-8
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
(F.) PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment are stated at cost less accumulated
depreciation and accumulated impairment losses, if any. Depreciation
is calculated on the straight-line basis over the following expected
useful lives from the date on which they become fully operational.
ASSET CLASSIFICATION DEPRECIABLE LIFE
Land Use right 50 years
Buildings 50 years
Motor vehicles 8 - 10 years
Equipment and machinery 5 - 8 years
Leasehold improvement 2 years
Expenditure for maintenance and repairs is expensed as incurred. The
gain or loss on the disposal of property, plant, and equipment is the
difference between the net sales proceeds and the carrying amount of
the relevant assets and is recognized in the consolidated statement of
operations.
(G.) IMPAIRMENT OF LONG-LIFE ASSETS
In accordance with SFAS No. 121, "Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of', a
long-lived assets and certain identifiable intangible assets held and
used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For the purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows related to the long-lived
assets. The Company reviews long-lived assets, if any, to determine
whether the carrying values are not impaired.
(H.) REVENUE RECOGNITION
Sales revenue is recognized when persuasive evidence of an arrangement
exists, the price is fixed and final, delivery has occurred and there
is reasonable assurance of collection of the sales proceeds. The
Company generally obtains purchase authorizations from its customers
for a specified amount of products at a specified price and considers
delivery to have occurred when the customer takes possession of the
products. Net sales incorporate offsets for discounts and sales
returns. Revenue is recognized upon delivery, risk and ownership of
the title is transferred and a reserve for sales returns is recorded
even though invoicing may not be completed. The Company has
F-9
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
demonstrated the ability to make reasonable and reliable estimates of
products returns in accordance with SFAS No. 48, "REVENUE RECOGNITION
WHEN RIGHT OF RETURN EXISTS".
Shipping and handling fees billed to customers are included in sales.
Costs related to shipping and handling are part of selling, general,
and administrative expenses in the consolidated statements of
operations. EITF No. 00-10, "Accounting for Shipping and Handling Fees
and Costs" allows for the presentation of shipping and handling
expenses in line items other than cost of sales. For the year ended
June 30, 2008, there were no shipping and handling costs included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
(I.) COST OF SALES
Cost of sales includes depreciation of property, plant, and equipment
and purchase costs to publishers.
(J.) VALUE-ADDED TAX
The Company is subject to value added tax ("VAT") imposed by the PRC
on sales. The output VAT is charged to customers who purchase books
from the Company and the input VAT is paid when the Company purchases
books from publishers. The VAT rate is 13%. The input VAT can be
offset against the output VAT.
(K.) ADVERTISING EXPENSES
The Company expenses advertising costs as incurred in accordance with
the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-7, "Reporting for Advertising Costs". For the
period ended June 30, 2008, advertising expenses amount to zero.
(L.) COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for reporting and display of comprehensive income, its components, and
accumulated balances. Comprehensive income as defined includes all
changes in equity during a period from non-owner sources. Accumulated
comprehensive income, as presented in the accompanying statement of
changes in owners' equity consists of changes in unrealized gains and
losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.
(M.) INCOME TAXES
The Company accounts for income tax using SFAS No. 109 "ACCOUNTING FOR
INCOME TAXES", which requires the asset and liability approach for
financial accounting and reporting for income taxes. Under this
F-10
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
approach, deferred income taxes are provided for the estimated future
tax effects attributable to temporary differences between financial
statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from
loss carry-forwards and provisions, if any. Deferred tax assets and
liabilities are measured using the enacted tax rates expected in the
years of recovery or reversal and the effect from a change in tax
rates is recognized in the statement of operations and comprehensive
(loss) income in the period of enactment. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is
considered more likely than not that some portion of, or all of the
deferred tax assets will not be realized.
(N.) LOSS PER SHARE
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings per Share". Basic loss per share is computed by dividing the
net loss by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share,
except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potential common stock equivalents had been issued and if the
additional common shares were dilutive. The effect of outstanding
stock options, stock purchase warrants and convertible debenture,
which could result in the issuance of 98,655,733 of common stock at
June 30, 2008 is antidilutive. As a result, diluted loss per share
data does not include the assumed exercise of outstanding stock
options, stock purchase warrants, or conversion of convertible
debenture and has been presented jointly with basic loss per share.
(O.) FOREIGN CURRENCIES TRANSLATION
The functional and reporting currency of the Company is the United
States dollars ("U.S. dollars"). The accompanying consolidated
financial statements have been expressed in
U.S. dollars. The functional currency of the Company's foreign
subsidiaries is the Renminbi Yuan ("RMB"). The balance sheet is
translated into United States dollars based on the rates of exchange
ruling at the balance sheet date. The statement of operations is
translated using a weighted average rate for the year. Translation
adjustments are reflected as cumulative translation adjustments in
stockholders' equity.
EXCHANGE RATES 6/30/2008 6/30/2007
__________ _________
Period end RMB : US$ exchange rate 6.8718 7.6248
Average period RMB : US$ exchange rate 7.0726 7.8160
F-11
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
(P.) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which
include cash and cash equivalents, accounts receivables, other payable
and accrued liabilities, approximate their fair values due to the
short-term maturity of these instruments.
(Q.) RELATED PARTIES
For the purposes of these financial statements, parties are considered
to be related if one party has the ability, directly or indirectly, to
control the party or exercise significant influence over the party in
making financial and operating decisions, or vice versa, or where the
Company and the party are subject to common control or common
significant influence. Related parties may be individuals or other
entities.
All material related part transactions have been disclosed in Note 16
- Related Party Transactions.
(R.) EQUITY-BASED COMPENSATION
The Company adopts SFAS No. 123, "Accounting for Stock-Based
Compensation" using the fair value method.
The Company uses the Black-Scholes Option Pricing Model to estimate
the fair value of options.
The Company has issued stock options to directors, officers,
employees, and consultants. As such, the Company records compensation
expense for stock options and awards only if the exercise price is
less than the fair market value of the stock on the measurement date.
The weighted average fair value of options granted during the years
ended June 30, 2007, and 2006, was $0.32, and $1.02 per share,
respectively. Weighted below:
2007 2006
______ ______
Risk free interest rate (%) 4.07% 5.01%
Dividend yield (%) 0.00% 0.00%
Expected life of option grants (years) 2.38 5.00
Expected volatility of option grants (%) 1,181% 80.00%
No options were granted during the year ended June 30, 2008.
Detailed movement of stock-based compensation has been disclosed in
the Note 11-Stock Option Plan.
F-12
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
(S.) CONVERTIBLE DEBENTURE ISSUED WITH STOCK PURCHASE WARRANTS
The Company accounts for the issuance of and modifications to the
convertible debt issued with stock purchase warrants in accordance
with APB No. 14, Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants , EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments and SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings.
Due to the indeterminate number of shares, which might be issued under
the embedded convertible host debt conversion feature of these
debentures, the Company is required to record a liability relating to
both the detachable warrants and embedded convertible feature of the
notes payable (included in the liabilities as a "derivative
liability").
The accompanying consolidated financial statements comply with current
requirements relating to warrants and embedded derivatives as
described in SFAS 133 as follows:
o The Company treats the full fair market value of the
derivative and warrant liability on the convertible secured
debentures as a discount on the debentures (limited to their
face value). The excess, if any, is recorded as an increase
in the derivative liability and warrant liability with a
corresponding increase in loss on adjustment of the
derivative and warrant liability to fair value.
o Subsequent to the initial recording, the change in the fair
value of the detachable warrants, determined under the
Black-Scholes option pricing formula and the change in the
fair value of the embedded derivative (utilizing the
Black-Scholes option pricing formula) in the conversion
feature of the convertible debentures are recorded as
adjustments to the liabilities as of September 30, 2006.
o The expense relating to the change in the fair value of the
Company's stock reflected in the change in the fair value of
the warrants and derivatives is included in interest expense
in the accompanying consolidated statements of operations.
(T.) RECENTLY ISSUED ACCOUNTING STANDARD
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an
Amendment of SFAS 115" (SFAS No. 159), which allows for the option to
measure financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. The objective of SFAS 159
is to provide opportunities to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply hedge accounting provisions. SFAS
159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company does not expect
the adoption of SFAS No. 159 to have a material impact on its
financial statements.
F-13
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
In December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations, ("SFAS 141(R)"). SFAS 141(R) retains the fundamental
requirements of the original pronouncement requiring that the purchase
method be used for all business combinations, but also provides
revised guidance for recognizing and measuring identifiable assets and
goodwill acquired and liabilities assumed arising from contingencies,
the capitalization of in-process research and development at fair
value, and the expensing of acquisition-related costs as incurred.
SFAS 141(R) is effective for fiscal years beginning after December 15,
2008. In the event that the Company completes acquisitions subsequent
to its adoption of SFAS 141 (R), the application of its provisions
will likely have a material impact on the Company's results of
operations, although the Company is not currently able to estimate
that impact.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51.
SFAS 160 requires that ownership interests in subsidiaries held by
parties other than the parent (previously referred to as minority
interests), and the amount of consolidated net income, be clearly
identified, labeled and presented in the consolidated financial
statements. It also requires once a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required
to clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners as components of
equity. It is effective for fiscal years beginning after December 15,
2008, and requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other
requirements are applied prospectively. The Company does not expect
the adoption of SFAS 160 to have a material impact on its financial
condition or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133" ("SFAS 161"). SFAS 161 applies to all derivative
instruments and related hedged items accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 161 requires entities to provide greater transparency
about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial
position, results of operations and cash flows. SFAS 161 is effective
for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles" ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles (the GAAP hierarchy).
Statement 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles."
F-14
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
In May 2008, the FASB issued FSP Accounting Principles Board ("APB")
14-1 "Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB
14-1"). FSP APB 14-1 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB
14-1 is effective for fiscal years beginning after December 15, 2008
on a retroactive basis.
The Company is currently evaluating the potential impact, if any, of
the adoption of the above recent accounting pronouncements on its
consolidated results of operations and financial condition.
4. NOTE RECEIVABLE
The amount represents the sales proceeds receivable from the disposal of
Boheng. Pursuant to the Disposal Agreement, the sales proceeds are
receivable in 5 installments and are due in full, no later than July 31,
2008.
SCHEDULED RECEIPT DATE APPROXIMATELY EQUAL TO RMB
March 10, 2007 $ 250,000 2,000,000
September 30, 2007 375,000 3,000,000
October 31, 2007 375,000 3,000,000
January 31, 2008 250,000 2,000,000
July 31, 2008 625,000 5,000,000
_______________ __________
Total $ 1,875,000 15,000,000
LESS: Paid (250,000) (2,000,000)
_______________ __________
Balance at June 30, 2008 $ 1,625,000 13,000,000
_______________ __________
The schedule payments of $375,000, $375,000, $250,000 on September 30,
2007, October 31, 2007, and January 31, 2008, respectively, were still
unpaid through June 30, 2008. The balance is unsecured and
interest-free. The Company calculated the imputed interest income of
$13,768 at the current effective rate of 4.82% per annum and reduced
from the gain on disposal of a subsidiary. The amount is recognized as
deferred revenue and will be amortized as interest income over the
terms of repayment period.
F-15
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
5. OTHER RECEIVABLES AND PREPAYMENT
2008 2007
_________ _________
Advances to employee $ - $ -
Goods and service tax receivable - -
Other receivables - -
Prepayments 223,231 201,186
_________ _________
$ 223,231 $ 201,186
========= =========
The carrying amounts of other receivables approximate their fair value.
6. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment as of June 30, 2008 and 2007 consists of the
following:
2008 2007
_________ _________
Equipment and machinery $ 53,108 $ 38,928
Motor vehicles 39,458 -
Leasehold Improvement 16,211 -
_________ _________
108,777 38,928
LESS: Accumulated Depreciation (34,991) (24,834)
_________ _________
$ 73,786 $ 14,094
========= =========
Depreciation expense for 2008 was $10,157.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of June 30, 2008 and
2007 consist of the followings:
2008 2007
___________ _________
Accounts payable $ 1,095,538 $ 693,207
Other payables - -
Income and business taxes payable - -
Accrued expenses - -
Salaries and benefits payable - -
___________ _________
$ 1,095,538 $ 693,207
=========== =========
F-16
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
8. LOANS PAYABLE/CONVERTIBLE DEBENTURE
On November 23, 2005, the Company entered into a debt financing agreement
(the "Agreement") with an institutional investor, and on March 23, 2006,
the Agreement was modified to include an additional institutional investor,
who is an affiliate of the original institutional investor (both
institutional investors collectively referred to as "the Investors"). The
Investors committed to purchase up to $4,000,000 of a secured convertible
debenture ("the debenture") that shall be convertible into shares of the
Company's common stock.
After two closings on December 13, 2005 and March 23, 2006, the Company
received gross proceeds of $3,250,000 (net proceeds $2,989,460) for the
secured convertible debenture. The Company and debenture-holders entered
into a Forbearance and Settlement Agreement on December 29, 2006 because of
default in debt service, whereby the Company agreed to make cash payment
and to grant rights to the creditors to cashless purchase the Company's
common stock by exercising the warrant at 200,000 shares in every three
month period beginning on December 29, 2006 according to the following
payment plan:
CONVERSION OF
DEBENTURE
PAYMENT DATE CASH PAYMENT
March 10, 2007 $ 250,000 250,000
September 30, 2007 375,000 375,000
October 31, 2007 375,000 375,000
January 31, 2008 250,000 250,000
July 31, 2008 625,000 625,000
___________ __________
$ 1,875,000 1,875,000
============ ===========
The Company paid $250,000 for the payment due March 10, 2007 and the
debenture holders exercised 100,000 shares and 125,000 shares on March 1,
2007 and April 18, 2007, respectively. During the year ended June 30, 2008,
the debenture holders converted 44,016,843 shares against outstanding loan
at a total conversion price of $152,200.
Loans Payable outstanding as of June 30, 2008 amount to $2,693,704 of which
$1,635,443 and $1,058,261 were attributed to current portion and long-term,
respectively.
F-17
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
9. LOANS FROM SHAREHOLDERS
The total outstanding amount of $5,410,256 represents cash advanced from
shareholders of the Company.
These shareholders' loans are unsecured and not repayable within the next
twelve months. For the year ended June 30, 2008, there was $328,711 imputed
interest, at 6.00% per annum, recorded. For the year ended June 30, 2007
the Company calculated the imputed interest expense of $961,544 in relation
to interest-free shareholders' loans at its effective interest rate and
accounted for it in the consolidated statements of stockholders' equity.
10. COMMON STOCK AND WARRANTS
A. COMMON STOCK
During 2005, the authorized capital stock of the Company increased
from $1,000 consisting of 100,000,000 shares of common stock of par
value $0.00001 each to $5,000 consisting of 500,000,000 shares of
common stock of par value $0.00001 each.
B. WARRANTS
(1) The Company completed a private placement in 2005 with certain
individuals for 622,690 units at $3.25 per unit for total cash
proceeds of $2,023,800. Each unit consists of one share of common
stock and one-half of one non-transferable share purchase
warrant. The warrant will expire on the earlier of:
(i) two years from the date of issuance; and
(ii) fifteen business days from date that the Company provides
notice in writing to the subscriber that the Company's
common shares have been trading or traded at a price of $7
or more for a period of ten days.
The warrant shares shall have an exercise price of $4.50 per
warrant share for the first twelve months, and if still available
after twelve months, the warrant shares shall have an exercise
price of $4.60 per warrant share starting on the first day of the
second twelve month period and increasing by $0.10 on the first
day of each subsequent month thereafter until expiration of the
warrants.
F-18
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
(2) SHARE PURCHASE WARRANT ISSUED FROM CONVERTIBLE DEBENTURE
On December 13, 2005, the Company issued to the holder of the
convertible debenture 1,035,000 warrants. One share purchase
warrants is exercisable for one common share at $0.00001 per
share, until expiration on November 22, 2010. As of June 30,
2008, 835,000 warrants issued to convertible debenture holders
were outstanding which will lead to the issuance of a total of
213,554,987 additional shares of common stock if fully exercised
at June 30, 2008.
(3) SHARE WARRANT ISSUED FOR SERVICE
On May 1, 2006, the Company issued 100,000 warrants at $1.47 per
share to Mr. Peter Shandro, the VP Business Strategy of the
Company, in association with the planning and execution of the
on-line ecommerce initiative of the Company. Compensation expense
of $94,775 was recorded with the issuance of these warrants.
11. STOCK OPTION PLAN
The board of directors approved a Stock Option Plan (the "Plan") effective
on September 4, 2004 pursuant to which directors, officers, employees and
consultants of the Company are eligible to receive grants of options for
the Company's common stock. The plan has a life of ten (10) years and
expires on September 4, 2014. A maximum of 20,000,000 common shares have
been reserved under the plan. Each stock option entitles its holder to
purchase one common share of the Company. Options may be granted for a term
not exceeding ten years from the date of grant. The plan is administered by
the board of directors.
Under the Plan, the Board of Directors authorized to grant 4,255,000
options to the employees and consultants of the Company, respectively
basically on September 23, 2004 and October 27, 2004 with an estimated
value of $1.00 per share, using the Black-Scholes Option Pricing Model with
the weighted average assumptions. However, the whole of the 4,255,000
options have been expired as of June 30, 2007.
12. CHINA CONTRIBUTION PLAN
Full-time employees of the Company are entitled to staff welfare benefits
including medical care, welfare subsidies, unemployment insurance and
pension benefits through a China government- mandated multi-employer
defined contribution plan. The Company is required to accrue for these
benefits based on certain percentages of the employees' salaries. The total
contributions made for such employee benefits were $23,854 and $31,527 for
the years ended 2008 and 2007, respectively.
F-19
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
13. STATUTORY RESERVES
The Company is required to make appropriations to reserves funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on after-tax net income determined in
accordance with generally accepted accounting principles of the People's
Republic of China (the "PRC GAAP"). Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net income determined in
accordance with the PRC GAAP until the reserve is equal to 50% of the
Company's registered capital. Appropriation to the statutory public welfare
fund is 10% of the after-tax net income determined in accordance with the
PRC GAAP. Appropriations to the discretionary surplus reserve are made at
the discretion of the Board of Directors. The statutory public welfare fund
is established for providing employee facilities and other collective
benefits to the employees and is non-distributable other than in
liquidation. The Company made no appropriations to the statutory reserve,
as it did not have a pre-tax profit.
14. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2008 2007
_________ ___________
Allowance for doubtful accounts $ - $ 1,500,000
Legal and professional fees 108,111 279,815
Allowance for slow moving inventories - -
Office expenses 14,162 91,085
Salaries and benefits 99,117 286,015
Shipping and freight 9,557 241
Stock-based compensation - -
Vehicle expense 13,595 33,761
Other expenses 130,225 806,681
_________ ___________
$ 374,767 $ 2,997,598
========= ===========
15. GAIN ON DISPOSAL OF A SUBSIDIARY, BOHENG
On December 29, 2006, the Company completed a debt restructuring with its
Investors, namely Cornell Capital Partners, L.P. ("Cornell") and Highgate
House Funds, Ltd. ("Highgate") under the Forbearance and Settlement
Agreement (the "Forbearance and Settlement Agreement"). Pursuant to the
Forbearance and Settlement Agreement, the Company agreed to make certain
payments to the Investors, with respect to the Securities Purchase
Agreement (the "Securities Purchase Agreement") entered into between the
Company and the Investors on November 23, 2005, as amended on March 23,
2006, on the convertible debentures in the amounts of $1,250,000 (to
Highgate on November 23, 2005) and $2,000,000 (to Cornell on March 23,
2006) (the "Convertible Debentures") in accordance with the terms and
conditions set forth in the Forbearance and Settlement Agreement.
F-20
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
In accordance with the Forbearance and Settlement Agreement, the Company
agrees to use the proceeds from the disposal of Boheng to repay the
principal and interest due to the Investors under the Convertible
Debentures in exchange for the Investors agreeing to:
(i) Waive on a one-time basis only any accrued liquidated damages
owing to the Investors;
(ii) Not apply the redemption premium on the scheduled repayments;
(iii)Converting the Convertible Debentures in an amount equal to at
least the amount of a scheduled repayment subject to certain
conditions;
(iv)No additional liquidated damages accruing during the term of the
Forbearance and Settlement Agreement;
(v) Permitting the Company to withdraw the Registration Statement
filed on March 28, 2006 with the SEC in connection with the
Convertible Debentures;
(vi)During the term of the Forbearance and Settlement Agreement,
waiving the requirement for the Company to receive written
consent of each Buyer for any organizational change (as defined
in the Securities Purchase Agreement) to be directly or
indirectly consummated by the Company, and that the company will
not effectuate any stock splits for at least nine months without
the consent of the Investors; and
(vii) Terminate the provisions for security shares as set forth in
Section 9 of the Securities Purchase Agreement and in Section 2
of the Transfer Agent Instructions upon receipt by the Investors
of the first scheduled repayment amount.
As a result of the debt restructuring arrangement, the Company's
liabilities on warrants, conversions, discounts were discharged resulting
to a net gain of $1,500,132 attributable as follows:
o Liabilities on Conversion discharged $ 2,334,198
o Liabilities on Warrants discharged 891,537
o Loans discharged 225,000
o Unamortized discounts (1,950,603)
___________
$ 1,500,132
===========
F-21
XINHUA CHINA LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
16. INTEREST EXPENSE
2008 2007
__________ __________
Interest expense from the amortization of
deferred financing cost and discount on
convertible debenture $ 49,628 $ -
Imputed interest charged 314,865 961,544
Interest on loans from related parties 19,435 70,904
__________ __________
$ 383,928 1,032,448
17. INCOME TAX
The Company is subject to U.S. corporate taxes at a rate of 35%. Pac-Poly
is a BVI company and is not subject to income taxes. Pursuant to the PRC
Income Tax Laws, the PRC subsidiaries are generally subject to enterprise
income tax ("EIT") at a statutory rate of 33% (30% national income tax plus
3% local income tax). Effective January 1, 2008, PRC government adopted a
new uniform tax rate of 25% applicable to domestic and foreign enterprise.
F-22
XINHUA CHINA LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
Neither the Company nor its subsidiaries had any assessable income for the
period and so neither provision nor benefit for EIT was recorded for the
year ended June 30, 2008.
Subject to the approval of the relevant tax authorities, the Company had
tax losses carry-forward against future years' taxable income.
As of June 30, 2008, valuation allowance of $690,924 was provided to the
deferred tax assets due to the uncertainty surrounding their realization.
18. CONCENTRATION OF RISK
(A). Major Customers and Vendors
100% of the Company's revenues were derived from customers located in
the PRC, and there are no customers and vendors who account for 10% or
more of revenues and purchases. The Company's assets are all located
in the PRC.
(B). Credit Risk
There are no concentrations of credit risk because the Company, while
in operation, entered into large number of cash sale transactions
without deploying financial instruments, which may potentially drive
to significant concentrations.
19. COMMITMENT AND CONTINGENCIES
The Company leases an office premise under a non-cancelable operating lease
for a term of two years from January 1, 2008 to December 31, 2009. The cost
incurred under this operating lease is recorded as rental expense and
totaled $51,261 for the year ended June 30, 2008. Future minimum rental
payments due according to the operating lease until termination at December
31, 2009 are:
Within one year $ 60,026
Within year two until termination 45,020
________
$105,046
========
F-23
XINHUA CHINA LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
20. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of
the ordinary shares outstanding during the year. Diluted net loss per share
is computed using the weighted average number of ordinary shares and
ordinary share equivalents outstanding during the year.
The following table sets forth the computation of basic and diluted net
loss per share for the year indicated:
2008 2007
Basic and diluted net loss per share
calculation:
(a). Numerator:
Net loss used in computing basic net
loss per share 690,924 608,030
(b). Denominator:
Weighted average ordinary shares
outstanding 65,400,512 57,723,668
Basic and diluted net loss per share $ 0.011 $ 0.011
For the year ended June 30, 2008 in which the Company had a net loss,
inclusion of warrants outstanding would have been anti-dilutive and
therefore not included in the computation of diluted losses per share.
21. COMPARATIVE AMOUNTS
Certain amounts included in prior years' consolidated balance sheet and the
consolidated statements of operations and cash flows have been reclassified
to conform to the current year's presentation. These reclassifications had
no effect on reported total assets, liabilities, stockholders' equity, or
net income.
F-24
XINHUA CHINA LTD.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
(STATED IN US DOLLARS)
22. SUBSEQUENT EVENT
On August 25, 2008, the Company and the Purchaser of Boheng agreed to
terminate the consummation of acquisition of Boheng whereby the 70,500,000
shares representing 96.58% of interests in Boheng as held by the Purchaser
will be transferred back to the Company in consideration of the forbearance
of Note Receivable $1,625,000 representing the unpaid balance of the
purchase price. Please also refer to Note 4 Note Receivable.
F-25
ITEM 8A(T). CONTROLS AND PROCEDURES
FINANCIAL DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 , as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our president (also our principal
executive officer) and our secretary, treasurer and chief financial officer
(also our principal financial and accounting officer) to allow for timely
decisions regarding required disclosure.
As of June 30, 2009, the end of our fiscal year covered by this Annual Report,
we carried out an evaluation, under the supervision and with the participation
of our president (also our principal executive officer), and our chief financial
officer (also our principal financial and accounting officer) of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our president and chief financial officer
concluded that our disclosure controls and procedures were not effective in
providing reasonable assurance in the reliability of our corporate reporting as
of the end of the period covered by this annual report due to certain
deficiencies that existed in the design or operation of our internal controls
over financial reporting as disclosed below and that may be considered to be
material weaknesses.
EVALUATION OF INTERNAL CONTROLS AND PROCEDURES OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as required by Sarbanes-Oxley (SOX) Section
404 A. Our internal control over financial reporting is a process designed under
the supervision of our Chief Executive Officer/Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
As of June 30, 2009, management assessed the effectiveness of our internal
control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") and SEC guidance on conducting such assessments. Based on
that evaluation, we concluded that, during the period covered by this report,
such internal controls and procedures were somewhat effective but not by all
criteria utilized. Therefore conclusions were that internal control over
financial reporting was not effective to detect the inappropriate application of
US GAAP rules as more fully described below. This was due to deficiencies that
existed in the design or operation of our internal control over financial
reporting that adversely affected our internal controls and that may be
considered to be material weaknesses. To some degree however, a mitigating
factor was the relatively minor scale of operations during the year that did not
warrant a more elaborate system to reduce risks further.
The matters involving internal controls and procedures that our management
considered to be continuing material weaknesses under COSO and SEC rules were:
(1) inadequate segregation of duties consistent with control objectives;
(2) insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and
SEC disclosure requirements;
(3) infrequent ongoing monitoring and a lack of separate evaluations when an
effective monitoring and evaluative system is deemed necessary for
corporate integrity;
(4) a lack of country specific controls and written protocols leading to timely
reporting of previously budgeted expenditures.
25
(5) ineffective controls over period end financial close and reporting
processes.
The aforementioned material weaknesses were identified by our Chief Executive
Officer / Chief Financial Officer in connection with the preparation of our
financial statements as of June 30, 2009 and communicated the matters to our
management and board of directors.
Management believes that the material weaknesses set forth in items (1) to (5)
above did not have a material affect on our financial results due to our current
scale and scope of operations.
We are committed to improving our financial organization. As part of this
commitment, we intend to create control situations resulting in the segregation
of duties consistent with control objectives and will increase our personnel
resources and technical accounting expertise within the accounting function when
funds are available to us to:
i) define, document, implement, and monitor written policies and
procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP , and create country specific
controls and protocols,
ii) prepare and implement sufficient written policies and checklists which
will set forth procedures for accounting and financial reporting with
respect to the requirements and application of US GAAP and SEC
disclosure requirements, and
iii) ineffective controls over period end financial close and reporting
processes.
In addition, management believes that preparing and implementing sufficient
written policies and checklists will remedy the following material weaknesses
(i) insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements; and (ii) These procedures coupled with the appointment
of additional outside directors will greatly decrease any control and procedure
issues the Company may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our internal
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no significant changes in our internal controls over financial
reporting that occurred during fiscal year ended June 30, 2009 that have
materially or are reasonably likely to materially affect, our internal controls
over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Internal control over financial reporting has inherent limitations which include
but is not limited to the use of independent professionals for advice and
guidance, interpretation of existing and/or changing rules and principles,
segregation of management duties, scale of organization, and personnel factors.
Internal control over financial reporting is a process which involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements on a timely basis, however these inherent limitations
are known features of the financial reporting process and it is possible to
design into the process safeguards to reduce, though not eliminate, this risk.
Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
26
This Annual Report does not include an attestation report of our registered
public accounting firm, Wong & Co., regarding internal control over financial
reporting. Management's report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Security and Exchange
Commission that permit us to provide only management's report in this Annual
Report.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
All of our Directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
As of the date of this Annual Report our directors and executive officers, their
ages, positions held are as follows:
NAME AGE POSITION WITH THE COMPANY
_____________ ___ _________________________________________________
Xianping Wang 47 President, Chief Executive Officer, Interim Chief
Financial Officer and a Director
Mr. Peter Shandro resigned as a director and our Vice-President effective August
1, 2007.
Mr. Clement Wu resigned as a director and our Chief Financial Officer, Secretary
and Treasurer effective August 6, 2007.
BACKGROUND OF OUR OFFICERS AND DIRECTORS
XIANPING WANG. Mr. Wang has been one of our Directors since August 5, 2004 and
has been our President and Chief Executive Officer since September 4, 2004. In
addition, Mr. Wang is the President of Asia-Durable (Beijing) Investments Co.,
Ltd. from 2002 to 2004, which is a company that has successfully invested in
construction and development projects as well as biotechnology research. From
1997 to 2002, Mr. Wang was the President of Beijing New Fortune Investment Co.,
Ltd., which is a company that has invested in real estate and other profitable
projects such as Chongqing Wanli Storage Battery Co., Ltd. and Shenzhen
Technology Co., Ltd. Mr. Wang helped Chongqing Wanli Storage Battery Co., Ltd.
and Shenzhen Technology Co., Ltd. to become publicly listed companies on Chinese
stock markets in Shanghai and Shenzhen. Mr. Wang received an Engineering
Bachelor Degree from Navy Engineering Institute in 1978 and an Economics Master
Degree from Tsinghua University in 1990.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors and officers, and the
persons who beneficially own more than ten percent of our common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Copies of all filed reports are required to be furnished to us
pursuant to Rule 16a-3 promulgated under the Exchange Act. Based solely on the
reports received by us and on the representations of the reporting persons, we
believe that these persons have complied with all applicable filing requirements
during the fiscal year ended June 30, 2008.
27
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
As of the date of this Annual Report, we do not have any members on our audit
committee due to the resignations of Messrs. Shandro and Wu. We have not
appointed additional members to the audit committee and, therefore, the
respective role of an audit committee has been conducted by our board of
directors. When new members are to be appointed to the audit committee, the
audit committee's primary function will be to provide advice with respect to our
financial matters and to assist our board of directors in fulfilling its
oversight responsibilities regarding finance, accounting, and legal compliance.
The audit committee's primary duties and responsibilities will be to: (i) serve
as an independent and objective party to monitor our financial reporting process
and internal control system; (ii) review and appraise the audit efforts of our
independent accountants; (iii) evaluate our quarterly financial performance as
well as our compliance with laws and regulations; (iv) oversee management's
establishment and enforcement of financial policies and business practices; and
(v) provide an open avenue of communication among the independent accountants,
management and the board of directors.
Our Board of Directors has considered whether the provision of such non-audit
services would be compatible with maintaining the principal independent
accountant's independence. Our Board of Directors considered whether our
principal independent accountant was independent, and concluded that the auditor
for the fiscal year ended June 30, 2008 was independent.
CODE OF ETHICS
We have adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code.
DISCLOSURE COMMITTEE AND CHARTER
We have a disclosure committee and disclosure committee charter. Our disclosure
committee is comprised of our officers and directors. The purpose of the
committee is to provide assistance to the Chief Executive Officer and the Chief
Financial Officer in fulfilling their responsibilities regarding the
identification and disclosure of material information about us and the accuracy,
completeness and timeliness of our financial reports.
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ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation paid by
us to the Chief Executive Officer and the other highest paid executive officers
(the Named Executive Officer) during the three most recent fiscal years.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
(A) (B) (C) (D) (E) (F) (G) (H) (I)
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/SARS LTIP COMPENSATION
POSITION YEAR ($) ($) ($) AWARD(S)($) (#) PAYOUTS ($) ($)
Xianping Wang (1) 2008 120,000 0 0 0 0 0 0
President, CEO and 2007 120,000 0 0 0 0 0 0
Director 2006 120,000 0 0 0 0 0 0
Clement Wu (3) 2008 -0- 0 0 0 0 0 0
CFO, Secretary, Treasurer 2007 45,231 0 0 0 0 0 0
and Director 2006 35,625 0 0 0 150,000 0 0
Peter Shandro (5) 2008 -0- 0 0 0 0 0 0
VP Business Strategy and 2007 71,121 0 0 0 0 0 0
Director 2006 18,000 0 0 0 50,000 0 100,000
warrants
(1) Mr. Xianping Wang was appointed as a Director on August 5, 2004 and as our
President and Chief Executive Officer on September 4, 2004.
(2) Mr. Xianping Wang was to receive $10,000 per month starting Feb. 2005.
However, this amount has been accrued by Mr. Wang. Therefore, for the
fiscal years ended June 30, 2008, June 30, 2007 and June 30, 2006, we have
outstanding obligations of $120,000 owing to Mr. Wang each year.
(3) Mr. Clement Wu was appointed a director and our Chief Financial Officer on
January 1, 2006 and as our Secretary and Treasurer on May 19, 2006. Mr. Wu
resigned as a director and as our Chief Financial Officer on August 6,
2007.
(4) Mr. Clement received $5,938 per month starting on January 1, 2006 and
received a total of $45,231 as compensation for the fiscal year ended June
30, 2007.
(5) Mr. Peter Shandro was appointed a director on September 3, 2004 and as our
Vice-President for Business Strategy on April 1, 2006. Mr. Shandro resigned
from both positions on August 1, 2007.
(6) Mr. Peter Shandro received a total of $71,121 as compensation for the
fiscal year ended June 30, 2007. In addition, as part of Mr. Peter
Shandro's compensation for acting as Vice President Business Strategy, Mr.
Shandro was issued 100,000 warrants at an exercise price of $1.47 per share
and having an expiry date of May 1, 2009.
No long term incentive plan awards were made to any executive officer during the
fiscal years ended June 30, 2008 and June 30, 2007.
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Our officers and directors may be reimbursed for any out-of-pocket expenses
incurred by them on our behalf. As of the date of this Annual Report, none of
our officers or directors are a party to employment agreements with us. We
presently have no pension, health, annuity, insurance, profit sharing or similar
benefit plans.
There were no formal arrangements under which our directors were compensated by
us during the most recently completed fiscal year for their services solely as
directors.
We reserve the right to cancel shares or otherwise act with respect to
shareholders otherwise disclosed herein which may result in a change in the
ownership of our Company.
STOCK OPTIONS/GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2006
The following table sets forth information as at June 30, 2008 relating to
options that have been granted to the Named Executive Officers during fiscal
year ended June 30, 2008:
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
Equity
Equity Incentive
Incentive Plan Awards:
Market Plan Awards: Market or
Equity Value of Number of Payout Value
Number of Number of Incentive Plan Number of Shares Unearned of Unearned
Securities Securities Awards: Number Shares or or Units Shares, Units Shares, Units
Underlying Underlying of Securities Units of of Stock or Other or Other
Unexercised Unexercised Underlying Option Stock That That Rights That Rights That
Options Options Unexercised Exercise Option Have Not Have Not Have Not Have Not
Exercisable Unexercisable Unearned Options Price Expiration Vested Vested Vested Vested
Name (#) (#) (#) ($) Date (#) ($) (#) (#)
Xianping Wang,
Chief Executive
Officer/President -0- -0- -0- -- -- -- -- -0- -0-
Clement Wu, prior
Chief Financial -0- -0- -0- -- -- -- -- -0- -0-
Officer/Treasurer
Peter Shandro,
prior Vice
President Business -0- -0- -0- -- -- -- -- -0- -0-
Strategy
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The following table sets forth information relating to compensation paid to our
directors during fiscal year ended June 30, 2008:
DIRECTOR COMPENSATION TABLE
Change in
Pension
Value and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred All
Paid in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
Xianping Wang -0- -0- -0- -0- -0- -0- -0-
Clement Wu -0- -0- -0- -0- -0- -0- -0-
Peter Shandro -0- -0- -0- -0- -0- -0- -0-
INDEMNIFICATION
Pursuant to the articles of incorporation and bylaws of the corporation, we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the state of Nevada.
Regarding indemnification for liabilities arising under the Securities Act of
1933, as amended, which may be permitted to directors or officers pursuant to
the foregoing provisions, we are informed that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy, as
expressed in the Act and is, therefore unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information with respect to the
beneficial ownership of our common stock by each stockholder known by us to be
the beneficial owner of more than 5% of our common stock and by each of our
current directors and executive officers. Each person has sole voting and
investment power with respect to the shares of common stock, except as otherwise
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indicated. Beneficial ownership consists of a direct interest in the shares of
common stock, except as otherwise indicated. As of the June 20, 2008, the date
of this Annual Report, there are 98,655,733 shares of common stock issued and
outstanding.
AMOUNT AND NATURE
NAME OF BENEFICIAL OF BENEFICIAL PERCENT
OWNER OWNER POSITION OF CLASS
Xianping Wang 10,00,000(1) President, Chief Executive 10.14%
B-26F Oriental Kenzo, a director
No. 48
Dongzhimenwai, Dongcheng
District, Beijing, China
Jianmin Zhou 8,760,865(1) 10% beneficial owner 8.88%
South Construction St.,
No. 7
Qiaodong District,
Shijiazhuang, China
Hongxing Li 4,852,135(1) 10% beneficial owner 4.92%
Room 702, Block 19
Capital Normal University
Haidian District,
Beijing China
Derrick Luu 5,267,438(1) 10% beneficial owner 5.34%
12 B Merlin Champagne
Town No. 6 Liyuan St.,
Tianzhu Shunyi District,
Beijing China 101312
Lily Wang 6,119,562 (1) 10% beneficial owner 6.20%
300 Murchison Drive,
#202 Millbrae, CA
94030
ALL OFFICERS AND
DIRECTORS AS A GROUP
(1 PERSON) 10,000,000 (1) 10.14%
(1) These are restricted shares of common stock. Under Rule 13d-3, a beneficial
owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship, or
otherwise has or shares: (i) voting power, which includes the power to
vote, or to direct the voting of shares; and (ii) investment power, which
includes the power to dispose or direct the disposition of shares. Certain
shares may be deemed to be beneficially owned by more than one person (if,
for example, persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire the shares (for example, upon
exercise of an option) within 60 days of the date as of which the
information is provided. In computing the percentage ownership of any
person, the amount of shares outstanding is deemed to include the amount of
shares beneficially owned by such person (and only such person) by reason
of these acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in this table does not necessarily reflect
the person's actual ownership or voting power with respect to the number of
shares of common stock actually outstanding as of the date of this Annual
Report.
32
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation
of which may at a subsequent date result in a change of control.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
None of our directors, officers or principal stockholders, nor any associate or
affiliate of the foregoing, have any interest, direct or indirect, in any
transaction to the date of this Annual Report, or in any proposed transactions,
which has materially affected or which we believe will materially affect us.
It is possible, however, that debts owed to Mr. Wang, a Director and officer,
could be demanded and cause us serious harm if we are unable to pay and must
settle in some manner. The total amount owed to Mr. Wang up to June 30 2008 is
$3,426,444 (not including his salary of $120,000 in 2008 which is pending). The
shareholders loan is interest free, but the Company's accrued the interest at 6%
annually and recorded it as additional paid in capital. Adjustments, conversions
or other action could be taken as to his debt. Note: Mr. Xianping Wang was to
receive $10,000 per month starting Feb. 2005. However, this amount has been
accrued by Mr. Wang. Therefore, for the fiscal years ended June 30, 2008, June
30, 2007 and June 30, 2006, we have outstanding obligations of $120,000 owing to
Mr. Wang each year.
ITEM 13. EXHIBITS
Exhibit
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification under Rule 13a-14(a).
31.2 Certification under Rule 13a-14(a).
32.1 Certification under Section 1350.
32.2 Certification under Section 1350.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for our audit of annual financial
statements and review of financial statements included in our Form 10-Q/10-QSB
or services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years was:
2008: $55,000 to Samuel Wong.
2007: $71,693 to Zhong Yi (Hong Kong) CPA Company Limited and $57,195 to Samuel
Wong, CPA.
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AUDIT RELATED FEES
The aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported in the preceding paragraph:
2008: $0 to Samuel Wong, CPA.
2007: $0 to Zhong Yi (Hong Kong) CPA Company Limited and nil to Samuel Wong,
CPA.
TAX FEES
The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning was:
2008: $0 to Samuel Wong.
2007: $0 to Zhong (Hong Kong) CPA Company Limited and nil to Samuel Wong, CPA.
ALL OTHER FEES
The aggregate fees billed in each of the last two fiscal years for the products
and services provided by the principal accountant, other than the services
reported in paragraphs (1), (2), and (3) was:
2008: $0 to Samuel Wong.
2007: $0 to Zhong Yi (Hong Kong) CPA Company Limited and nil to Samuel Wong,
CPA.
When existing, our audit committee's pre-approval policies and procedures
described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the
audit committee pre-approve all accounting related activities prior to the
performance of any services by any accountant or auditor.
The percentage of hours expended on the principal accountant's engagement to
audit our financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full time, permanent employees was 0%.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
XINHUA CHINA LTD.
Dated: October 7, 2009
By: /s/ XIANPING WANG
_______________________________
Xianping Wang, President
(principal executive officer)
Dated: October 7, 2009
By: /s/ XIANPING WANG
_______________________________
Xianping Wang
Chief Financial Officer
(principal financial officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
/s/ XIANPING WANG President, Chief Executive Officer October 7, 2009
_________________ and a Director
Xianping Wang
35
