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EX-32 - 32 RULE 13A-14(B) CERTIFICATIONS - China Digital Animation Development, Inc. | chda10k20090630ex32.htm |
EX-31.1 - RULE 13A-14(A) CERTIFICATION - CEO - China Digital Animation Development, Inc. | chda10k20090630ex31-1.htm |
EX-31.2 - RULE 13A-14(A) CERTIFICATION - CFO - China Digital Animation Development, Inc. | chda10k20090630ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
( X
)
|
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
FOR THE FISCAL YEAR ENDED JUNE 30,
2009
( )
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For the transition period from
_________ to __________
Commission
File Number 0-50441
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
(Exact
Name of Registrant as Specified in Its Charter)
New York
84-1275578
(State
or other jurisdiction
of (I.R.S.
Employer
incorporation
or
organization) Identification
No.)
15 West
39th Street,
Suite 14B, New York, NY 10018
(Address
of principal executive offices)
212-391-2688
(Issuer's
telephone number)
Securities
Registered Pursuant to Section 12(b) of the Exchange Act: NONE
Securities
Registered Pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR
VALUE
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 406 of the Securities Act. Yes __ No √
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __ No √
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes √
No __
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not 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-K or any amendment
to this Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One)
Large
accelerated filer
Accelerated filer
Non-accelerated filer
Small reporting company X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No √
As of
December 31, 2008 the aggregate market value of the common stock held by
non-affiliates was approximately $2,500,000, based upon the closing sale price
on December 31, 2008 of $.05 per share (before adjustment for 1-for-25 reverse
stock split in January 2009).
As of
October 16, 2009, there were 20,000,000 shares of common stock
outstanding.
Documents
incorporated by reference: NONE
PART
I
FORWARD-LOOKING
STATEMENTS: NO ASSURANCES INTENDED
In
addition to historical information, this Annual Report contains forward-looking
statements, which are generally identifiable by use of the words “believes,”
“expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or
similar expressions. These forward-looking statements represent Management’s
belief as to the future of China Digital Animation Development,
Inc. Whether those beliefs become reality will depend on many factors
that are not under Management’s control. Many risks and uncertainties
exist that could cause actual results to differ materially from those reflected
in these forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in the section entitled “Risk
Factors.” Readers are cautioned not to place undue reliance on these
forward-looking statements. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking
statements.
ITEM
1. BUSINESS
The Entrusted Management
Agreements
China Digital Animation Development,
Inc. (the “Company,”) ( formerly: “Maui General Store, Inc.”) was a
shell company for several years prior to 2008. In November 2008 the
Company acquired ownership of RDX Holdings Limited, an entity organized under
the laws of the British Virgin Islands in May 2006. Until June 2008
RDX Holdings had conducted no business activity. On June 27, 2008,
RDX Holdings entered into five agreements with Heilongjiang Hairong Science and
Technology Development Co., Ltd., a corporation organized in the People’s
Republic of China (“Hairong”), and with the equity owners in
Hairong. Collectively, the agreements provide RDX exclusive control
over the business of Hairong, the right to all revenues obtained by Hairong, and
responsibility for all of the expenses incurred by Hairong. The
relationship is one that is generally identified as “entrusted
management.”
The purpose of the “Entrusted
Management Agreements” is to transfer to RDX Holdings full responsibility for
the management of Hairong, as well as all of the financial benefits and
liabilities that arise from the business of Hairong. Each of the
agreements has a term of ten years. A summary of the five agreements
follows:
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§
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Consulting Services
Agreement. In this agreement RDX Holdings undertakes to
provide Hairong advice and assistance with respect to all aspects of its
business. In exchange for the services, Hairong will pay RDX
Holdings, on a quarterly basis, a fee equal to its
revenue. Payment shall be effected by causing all revenue
realized by Hairong to be paid into the bank account of RDX
Holdings. The Agreement contains covenants regarding the
operations of Hairong that are designed to assure that Hairong undertakes
no significant business activity without the consent of RDX
Holdings.
|
|
§
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Operating
Agreement. In this agreement RDX Holdings agrees to
guarantee all of the obligations, financial and otherwise, undertaken by
Hairong. At the same time, Hairong pledges all of its assets to
RDX Holdings as a counter-guarantee. To preserve the value of
the counter-guarantee, Hairong agrees not to effect any transaction that
would affect its assets without the approval of RDX
Holdings. The shareholders of Hairong agree in this Agreement
that RDX Holdings will be entitled to name all of the officers and
directors of Hairong.
|
1
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§
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Equity Pledge
Agreement. In this agreement, the shareholders of
Hairong have pledged their equity interests in Hairong as security for the
obligations of Hairong under the Consulting Services
Agreement. During the term of the pledge (which extends for two
years past the term of the Consulting Services Agreement), the
shareholders are barred from transferring any interest in the equity in
Hairong.
|
|
§
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Option
Agreement. In this agreement the shareholders of Hairong
grant to RDX Holdings an option to purchase their equity interests in
Hairong, if permitted by the laws of the People’s Republic of
China. The purchase price will equal the registered capital of
Hairong – i.e. 32,270,283 RMB (approximately
$4,717,877).
|
|
§
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Proxy
Agreement. In this agreement the shareholders of Hairong
have given to RDX Holdings a proxy to vote their shares at any meeting of
the shareholders of Hairong.
|
Heilongjiang
Hairong Science and Technology Development Co., Ltd.
Hairong
was organized in 1999. From 1999 until 2006 Hairong was engaged
exclusively in the business of developing and installing business networks and
related software. Since 2007, however, Hairong gradually transformed
the nature of its business operations. Although 27% of Hairong’s
revenue during the year ended June 30, 2009 came from its network installation
business, Hairong terminated that business at the end of the fiscal
year. Hairong now offers services in three distinct market
segments:
|
§
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Animation. Our
team of 30 animation technicians offers digital animation services to the
movie, television and Internet industries, specializing in high end
special effects, including 3-D animation. We also offer
non-media businesses animated products for advertising, branding and
education purposes.
|
|
§
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Financial Information
Delivery. With our Trans World Financial Website as the
foundation, we offer investors and issuers a wide variety of financial
data and information useful to individuals concerned with the
international capital markets.
|
|
§
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Cultural
Productions. Commencing with the Great Wall Ice Tour, a
travelling multimedia entertainment facility constructed of snow and ice,
we intend to mine the rich cultural heritage of China to produce and
distribute a wide variety of cultural
entertainments.
|
The
unifying principle among our disparate businesses is our management
style. We gather personnel with high levels of training and
intelligence, and challenge them with complex problems, be it the production of
a cutting edge video, the real-time delivery of data from around the world, or
the on-time delivery of a cultural production. Fundamentally, in each
case, the challenge is to find the efficient solution that resolves the
inefficiencies of a multi-component situation. Our skill at finding
those solutions will determine the success of our business.
2
Animation
Production
Our
Digital Animation Department originated in 2003 when Dahai Lu established the
“Nataku” studio. The core design and management team that he brought
together in 2003 joined Hairong in 2008 as the foundation for our entry into the
digital animation industry. Among the members of the team
are:
|
·
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Dahai
Lu. Prior to organizing the Nataku studio, Mr. Lu had
been working in the animation industry since 1998. In 1999 he
participated in the production of “Thru the Moebius
Strip.” Currently he serves as General Manager of our Digital
Animation Department.
|
|
·
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Zhang
Cheng. Mr. Cheng was one of the original members of the
Nataku studio. A specialist in animation production, he has
participated in the design of Blizzard’s online game, the Heroes of
JinYing online game, and the French animated
“Tiantian.” Currently he supervises our “Tritans” production
group.
|
|
·
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Yu Ming. A
specialist in pre-production modeling, Mr. Yu previously participated in
the Heroes of JinYing project and the “Farm Kids”
project.
|
|
·
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Ying Min
Zou. A specialist in post-production effects, Ms. Zou
previously participated in the French “Tiantian” and the film “Kung Fu
King.”
|
We supplement the skills of our design
team by carefully developing “partner” relations with top quality animation
design firms in China and abroad. Within the past year Beijing
Wanfang Xinxing Digital Animation, Inc. subcontracted four projects to us, in
each of which we provided post-production editing and
effects. Currently we are producing the “Tritans” animation series in
joint venture with Monstrous, a design studio located in
Singapore. These relationships permit us to leverage our skills to
participate in larger scale productions, despite our relatively modest
size.
The focus of our animation activities
is high-end special effects for film, television and Internet productions,
including online gaming. To enter this field, we invested $3.1
million in equipment and software, including such advanced devices as a motion
capture photoelectric device, a three dimensional scanner, a non-linear video
editing system, and QUADRO FX core graphics workstations. We expect
growth to come, in particular, from our capacities in 3-D animation, and we
intend to expand our present staff of 3-D experts.
During the year ended June 30, 2009 we
realized $3.5 million in revenue from our animation activities. Among
the projects that we completed during that fiscal year were:
|
·
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Post-production
effects on four episodes of “Black and White” and five episodes of “Fly a
Kite,” both produced for Harbin Pinge Culture Communications,
Inc.
|
|
·
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Production
services on ten episodes of “Animal Planet” and five episodes of “West
Life” for Harbin Renhe Spring Public
Facilities.
|
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·
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Post
production animation of 26 episodes of “Les Miserables” under subcontract
from Beijing Wanfang Xinxing Digital Animation,
Inc.
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|
·
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Post
production animation of 32 episodes of “Red Square” under subcontract from
Beijing Wanfang Xinxing Digital Animation,
Inc.
|
3
Currently
we are developing 39 episodes of a fantasy series named “Tritans” in joint
production with the Monstrous Studio of Singapore. The shows, which
will be distributed worldwide in three languages (Chinese, English, Malay)
presents stories involving environment heroes taking on various missions to
protect the earth. Hairong is responsible for developing the models,
and producing the animated product. Monstrous is responsible for
developing the story boards and the music.
The
demand for skilled animation technicians in China is intense. To meet
our needs, therefore, we opened a school for animation training at the beginning
of 2009. The staff of our Animation Development Department currently
train a student body of 40 in animation technology and the production of special
effects. Students pay from 6,000 to 15,000 Renminbi ($877 to $2192)
for a course of instruction lasting 30 to 60 days. Upon completion of
the course, qualified students are invited to join our own studio.
The
government of China is actively supporting the development of the animation
industry in China. Among the stimuli provided for development of the
industry:
|
·
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Heilongjiang
Province has developed an Animation Development Area, in which
participants in the industry are provided subsidized
property. We are currently the beneficiaries of 2,000 square
meters in the Animation Development Area, which we occupy rent-free until
February 2011.
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|
·
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The
local government provides subsidies for animation productions broadcast in
China, from 300 RMB per minute for broadcasts on provincial television
stations up to 50 million RMB for productions in prime time on China
Central Television or overseas mainstream
media.
|
|
·
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Animation
companies receive reductions in value-added tax, income tax, sales tax,
and import duties.
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The
animation industry is growing rapidly in China. Because we have
developed a state-of-the-art facility with personnel recognized in the industry,
we expect to be participate in that growth in a leadership
position. For that reason, we expect that animation development will
be the primary source of our revenues for the forseeable future.
Financial Information
Services
Since
2006 we have offered the Trans World Finance Website (TWFW) to investors and
issuers who need in-depth, real-time information about international capital
markets. The principal target market for the TWFW site are Chinese
businesses seeking overseas listings for their securities and Chinese investors
seeking information about such companies. Subscribers who visit the
site, which is presented in both Chinese and English, will find:
|
§
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Market
Quotations. We stream quotations and data from the
primary securities markets around the world. But we also
provide easy access to information about Chinese enterprises whose
securities are listed abroad, include analysis of market
trends.
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§
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Red Chip
Information. We provide up-to-date business and
management information about Chinese enterprises that are listed
abroad.
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§
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Membership
Column. Our market professionals provide analysis of
overseas market trends and advice for both investors and
issuers.
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4
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§
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Global Financial
Information. We offer global macroeconomic data, timely
reports on worldwide financial events, and expert
analysis.
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§
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Shareholder
School. Neophytes to the international stock markets are
provided simple, but in-depth introductions to international
investment.
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§
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China
Today. Our journalists comment on the development of
China and the changing nature of life in China, with an eye towards trends
of interest to the investment
community.
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§
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Fortune
Forum. A platform for investors to exchange ideas and
experiences regarding the investment
world.
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Access to
the TWFW site is offered on a subscription basis, which frees us from dependence
on the fickle market for online advertising. Investors who opt for a
VIP membership are provided specialized investment advice by our market
professionals.
Our plan
for the coming year is to joint venture with a Chinese Web developer to enable
3G mobile devices to access our TWFW site. When that platform is
achieved, we will focus on integrating SMS applications with our core
applications, with the goal of becoming a leader in China’s 3G Web
market.
The TWFW
site faces competition from three primary sources: Shanxi Bositon,
Finance World, and Sina Finance. Each of these provides stock prices
and summary information regarding Chinese enterprises that list
abroad. We believe, however, that the in-depth information and
analysis that we provide gives us a competitive advantage.
Cultural
Production
In April
2008 we initiated our efforts in the business of producing and distributing
cultural events. The mission of our Cultural Development Department
is to mine the rich cultural heritage of The People’s Republic of China to
produce marketable cultural events or adjuncts to the promotional programs of
our business clients. The breadth of our plans include:
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§
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Major
Exhibitions. By applying the management skills that we
developed as network designers to the logistical problems of major
cultural exhibitions, we intend to provide a more efficient path to an
audience for those enterprises. Our Great Wall Ice Tour is
exemplary of the kind of logistically complex and culturally rich projects
that we intend to undertake.
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§
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Film
Production. Our location in Harbin, the
capital of Heilongjiang, gives us access to a well-developed film and
teleplay industry, in which our own Animation Department is a major
participant. The availability of these extensive resources will
enable us to undertake film production projects for national
distribution. Our first production, on which we have already
undertaken marketing and editing, is a production for television
distribution titled “The Intangible Cultural Heritage of
China.” We expect the show to go into distribution in the
coming months.
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§
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Large Commercial
Performance. By combining the efforts of our management
consultants with those of our cultural production staff, we offer
businesses a dramatic means of attracting attention. Using our
roster of actors and production professionals, we allow our clients to cap
their promotion campaign with a public performance, be it a strictly
cultural performance with business sponsorship or, at the other end of the
spectrum, a celebration of the client’s
business.
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5
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§
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Advertising
Design. The same team of experienced designers that we
deploy to structure our cultural performances are available for our
business clientele. We offer promotional teleplay, 3-D
animation, multimedia productions – whatever is needed to bring the
client’s brand to the public’s
attention.
|
The first
major undertaking by our Cultural Development Department draws on the ancient
tradition in Heilongjiang Province of elaborate ice sculpture. The
Great Wall Ice Tour will be a monumental construction of snow and
ice. It was designed as an introduction to the art of ice sculpture,
as well as to the culture of northeastern China. Like a giant ice
castle, the sculpture will boast a variety of entertainment options to attract a
wide audience. There is the detailed carving itself, which shows the
variety of local design. But in addition, there is an ice sliding
board, ice labyrinth, and ice skating park to entertain the
young. And there is an ice bar, to refresh the
adults. To complete the visit, an ice cafeteria will offer a
full menu of frozen delights, from ice porridge to frozen
persimmons. Our staff is currently in negotiations to exhibit
the Ice Tour in conjunction with the ice sculpture project at Beijing’s Xiedao
Green Eco Park.
Employees
We
currently have 193 employees. They are associated with our several
departments as shown below. Since all of our departments are in their
infancy, we expect all of our departments to grow in the coming
year.
Administration
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24
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Animation
Development
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129
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Trans
World Finance
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20
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Cultural
Development
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20
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ITEM
1A. RISK
FACTORS
Investing
in our common stock involves risk. You should carefully consider the risks
described below together with all of the other information contained in this
Report, including the financial statements and the related notes, before
deciding whether to purchase any shares of our common stock. If any of the
following risks occurs, our business, financial condition or operating results
could materially suffer. In that event, the trading price of our common stock
could decline and you may lose all or part of your investment.
We have recently undertaken a number
of new business ventures, and cannot fully anticipate the problems they may
encounter.
Within the past twenty-four months,
Hairong’s business has been completely reformulated. We have
terminated our traditional line of business - network engineering and software
design. We are not focused on animation production, financial data
services, and cultural project management. Each of these new ventures
carries with it the risks of the untested. Until we have more
extensive experience in each of these areas, the problems that may arise and
frustrate our business plan are not readily apparent. If these
unforeseen problems become significant, the results could have a serious
negative impact on our profitability.
6
We expect to issue a substantial
portion of the Company’s equity to our employees.
The growth of Hairong was funded by our
management, but also by our employees, who contributed approximately 46% of the
capital used to develop Hairong to its current condition. The terms
of that contribution have never been made concrete; but there is an expectation
that shares in the U.S. public company that now has beneficial ownership of
Hairong will be issued to our employees in compensation. That
issuance, when it occurs, will dilute the interest of our existing shareholders
in China Digital Animation Development Inc.
We rely on contractual arrangements
with Hairong for our China operations, which may not be as effective in
providing control over Hairong as direct ownership.
Because
PRC regulations restrict our ability to provide Internet content and certain
other services in China through a directly-owned subsidiary, our business is
defined by a contractual relationship with Hairong, an entity in which China
Digital Animation Development Inc. has no equity ownership
interest. We will rely on contractual arrangements to control and
operate this business. These contractual arrangements may not be as effective in
providing control over Hairong as direct ownership. For example, if Hairong
failed to perform under its agreements with us, we would have to rely on legal
remedies under Chinese law, which we cannot be sure would be available. In
addition, we cannot be certain that the individual equity owners of Hairong
would always act in the best interests of China Digital Animation
Development.
Our business and growth will suffer if
we are unable to hire and retain key personnel that are in high
demand.
Our future success depends on our
ability to attract and retain highly skilled engineers, technical, marketing and
customer service personnel, especially qualified personnel for our operations in
China. Qualified individuals are in high demand in China, and there are
insufficient experienced personnel to fill the demand. Therefore we
may not be able to successfully attract or retain the personnel we need to
succeed.
We may be subject to penalty if the
content posted on our investor Website violates relevant laws.
The advertising laws and regulations
promulgated by the Government of China require advertisers, advertising
operators and advertising distributors, including online advertising publishers
such as us, to insure that the content of the advertisements they prepare or
distribute are fair and accurate and are in full compliance with applicable law.
Violation of these laws or regulations may result in penalties, including fines,
confiscation of advertising fees, orders to cease dissemination of the
advertisements and orders to publish an advertisement correcting the misleading
information. In circumstances involving serious violations, the PRC government
may revoke a violator’s license for advertising business
operations.
Under the
PRC advertising laws and regulations, we are obligated to monitor the
advertising content posted on our website. In addition, where a special
government review is required for specific categories of advertisements before
posting, we are obligated to confirm that such review has been performed and
approval has been obtained. Our reputation could be hurt and our results of
operations could be adversely affected if advertisements shown on our websites
are provided to us by our advertising clients in violation of relevant PRC
advertising laws and regulations, or if the supporting documentation and
government approvals provided to us by our advertising clients in connection
with such advertising content are not complete.
7
We have limited business insurance
coverage.
The insurance industry in China is
still at an early stage of development. Insurance companies in China offer
limited business insurance products, and do not, to our knowledge, offer
business liability insurance. As a result, we do not have any business liability
insurance coverage for our operations. Moreover, while business disruption
insurance is available, we have determined that the risks of disruption and cost
of the insurance are such that we do not require it at this time. Any business
disruption, litigation or natural disaster might result in substantial costs and
diversion of resources.
Our bank deposits are not
insured.
There is no insurance program in the
PRC that protects bank deposits, in the way that bank deposits in the U.S. are
given limited protection by the FDIC. If the bank in which we
maintain our cash assets were to fail, it is likely that we would lose most or
all of our deposits.
We may have difficulty establishing
adequate management and financial controls in China.
The People’s Republic of China has only
recently begun to adopt the management and financial reporting concepts and
practices with which investors in the United States are familiar. We
may have difficulty in hiring and retaining employees in China who have the
experience necessary to implement the kind of management and financial controls
that are expected of a United States public company. If we cannot
establish such controls, we may experience difficulty in collecting financial
data and preparing financial statements, books of account and corporate records
and instituting business practices that meet U.S. standards.
We are
also subject to the rules and regulations of the United States, including the
SEC. We expect to incur significant costs associated with our public
company reporting requirements, costs associated with applicable corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002 and other rules implemented by the SEC. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, investor confidence and share value may be negatively
impacted.
Our
operations are subject to PRC laws and regulations that are sometimes vague and
uncertain. Any changes in such PRC laws and regulations, or the interpretations
thereof, may have a material and adverse effect on our business.
Our
principal operating subsidiary, Hairong is required to comply with PRC laws and
regulations. Unlike the common law system prevalent in the United States,
decided legal cases have little value as precedent in China. There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing our business and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy or criminal proceedings. The Chinese government has been developing a
comprehensive system of commercial laws. However, because these laws and
regulations are relatively new, and because of the limited volume of published
cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant
uncertainties. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. If the relevant authorities find us in violation of PRC laws or
regulations, they would have broad discretion in dealing with such a
violation.
8
Capital outflow policies in China
may hamper our ability to pay dividends to shareholders in the United
States.
The People’s Republic of China has
adopted currency and capital transfer regulations. These regulations require
that we comply with complex regulations for the movement of capital. Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of RMB into foreign currency for current account items,
conversion of RMB into foreign exchange for capital items, such as foreign
direct investment, loans or securities, requires the approval of the State
Administration of Foreign Exchange. We may be unable to obtain all of the
required conversion approvals for our operations, and Chinese regulatory
authorities may impose greater restrictions on the convertibility of the RMB in
the future. Because most of our future revenues will be in RMB, any inability to
obtain the requisite approvals or any future restrictions on currency exchanges
will limit our ability to fund our business activities outside China or to pay
dividends to our shareholders.
Our business development would be
hindered if we lost the services of our Chairman.
Fu Qiang is the Chief Executive Officer
of China Digital Animation Development and of its operating subsidiary,
Hairong. Mr. Fu is responsible for strategizing not only our business
plan but also the means of financing it. If Mr. Fu were to leave
Hairong or become unable to fulfill his responsibilities, our business would be
imperiled. At the very least, there would be a delay in the
development of Hairong until a suitable replacement for Mr. Fu could be
retained.
China Digital Animation Development is
not likely to hold annual shareholder meetings in the next few
years.
Management does not expect to hold
annual meetings of shareholders in the next few years, due to the expense
involved. The current members of the Board of Directors were
appointed to that position by the previous directors. If other
directors are added to the Board in the future, it is likely that the current
directors will appoint them. As a result, the shareholders of China
Digital Animation Development will have no effective means of exercising control
over the operations of the Company.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
Not Applicable.
9
ITEM
2. DESCRIPTION
OF PROPERTY
Our
executive offices are located at #69 Ganshui Road, Xiangfang District, City of
Harbin, P.R. China. The facility, which we own, has 661 m2 of
office space.
We have
also been provided 2,000 m2 of
office space in the Harbin Cultural Development Area. Our Animation
Development Department occupies this space rent-free until 2010, through a
program of the Heilongjiang Provincial Government.We expect that our current
facilities will be adequate for our operations for the forseeable future, except
that we are currently developing an education facility for the training center
associated with our Animation Development Department.
ITEM
3. LEGAL
PROCEEDINGS
None.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a)
Market Information
On
January 30, 2009 we implemented a 1-for-25 reverse split of our common
stock. All references in this Report to a number of shares issued or
outstanding prior to January 30, 2009 have been adjusted to retroactively
reflect the effect of the reverse split.
Our
common stock is listed for quotation on the OTC Bulletin Board system under the
symbol “CHDA.” The following table sets forth for the respective
periods indicated the prices of the common stock, as reported by the OTC
Bulletin Board. Such prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions, or adjustments and may not
represent actual transactions.
Bid
|
||||||||
Quarter
Ending
|
High
|
Low
|
||||||
September
30, 2007
|
$ | 2.00 | $ | 0.50 | ||||
December
31, 2007
|
$ | 1.50 | $ | 0.50 | ||||
March
31, 2008
|
$ | 1.25 | $ | 0.50 | ||||
June
30, 2008
|
$ | 4.50 | $ | 0.50 | ||||
September
30, 2008
|
$ | 4.00 | $ | 1.25 | ||||
December
31, 2008
|
$ | 3.25 | $ | .75 | ||||
March
31, 2009
|
$ | 3.00 | $ | 1.00 | ||||
June
30, 2009
|
$ | 3.00 | $ | 1.50 |
10
(b)
Shareholders
On October 15, 2009 there were
approximately 2,932 holders of record of our common stock.
(c) Dividends
Since the Company’s incorporation, no
dividends have been paid on our Common Stock. We intend to retain any earnings
for use in our business activities, so it is not expected that any dividends on
our common stock will be declared and paid in the foreseeable
future.
(d) Securities Authorized
for Issuance Under Equity Compensation Plans
The
information set forth in the table below regarding equity compensation plans
(which include individual compensation arrangements) was determined as of June
30, 2009.
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans
|
|
Equity
compensation plans approved by security holders
|
0
|
N.A.
|
0
|
Equity
compensation plans not approved by security holders
|
0
|
N.A.
|
0
|
Total
|
0
|
N.A.
|
0
|
(e) Sale
of Unregistered Securities
China Digital Animation did not effect
any unregistered sales of equity securities during the quarter ended June 30,
2009.
(f)
Repurchase of Equity Securities
China
Digital Animation did not repurchase any of its equity securities that were
registered under Section 12 of the Securities Act during the quarter ended June
30, 2009.
ITEM
6. SELECTED
FINANCIAL DATA
Not
applicable.
11
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Results of
Operations
The
reformation of our operations from a focus on network integration to a focus on
animation development had an immediate positive impact on our results of
operations. Our revenue for the year ended June 30, 2009 were 34%
greater than our revenue in the year ended June 30, 2008. Moreover,
because animation development is primarily a service industry, the 34% increase
in revenue was achieved with 2% lower cost of goods sold. Our gross
margin, therefore, was 73% in the 2009 fiscal year, compared to 63% in fiscal
2008.
Network
engineering still contributed 27% of our revenue in fiscal 2009. At
the end of the year, we terminated all of our network engineering activities,
and sold the related property and equipment. The primary reason for
abandoning this line of business was the level of competition in the Chinese IT
industry. Chinese educational institutions have produced a plethora
of graduates with training in network and software design. The result
is intense competition, which leads to reduced margins. Given the opportunity to
refocus in the animation industry, which is growing rapidly in China, we
determined that the future would be more profitable in that area. The
greater portion of our revenue in future periods will come from animation
development. As a result, we expect our gross margin ratio to remain
high.
Hairong’s
expansion into new business areas resulted in a significant increase in our
operating expenses, which rose from $1,064,779 (24% of revenue) in fiscal 2008
to $1,529,106 (25% of revenue) in fiscal year 2009. The increase in
expenses reflects the expenses that attend entry into new business
ventures. In addition, during November 2008 we established ourselves
as a U.S. public company and opened an office in New York City. The
expenses of those initiatives also increased our operating costs. As
we expand in these new areas, we expect our operating expenses to increase as
well. However, the ratio of operating expenses to revenue should
decrease as our new operations experience the efficiencies of size.
The
transformation of our business operations also resulted in additional income for
the year ended June 30, 2009. We realized a gain of $239,746 when we
sold the building and equipment associated with our network engineering business
- this is recorded on our Statements of Income as “Gains on Disposal of Fixed
Assets.” This was partially offset, however, by the loss of $104,005
that we incurred on the sale of the inventory we carried for the network
engineering business, which is included in “Other Expense” on our Statements of
Income. On the other hand, during the year we also sold our
management consulting subsidiary, Fortune Global Investment Advisory Co., Ltd.
(“FGIA”). FGIA had been contributed to Hairong by Fu Qiang, our
Chairman, and was carried on our books at zero basis. For that
reason, we recorded the entire sales price - $219,036 - as a “Gain from
Investment.”
Our
revenue less expenses for year ended June 30, 2009 yielded a net income before
taxes of $3,274,757, almost double the net pre-tax income of $1,768,392 during
the year ended June 30, 2008. For 2008 and subsequent years, the Government of
China reduced the corporate tax rate from 33% to 25%. In preparing
our financial statements for the years ended June 30, 2009 and 2008, we applied
the new tax rate retroactively to July 1, 2007. As a result, we
recorded net income of $2,451,614 ($.12 per share) for the 2009 fiscal year, and
net income of $1,246,777 ($06 per share) for the 2008 fiscal year.
12
Our
business operates in Chinese Renminbi, but we report our results in our SEC
filings in U.S. Dollars. The conversion of our accounts from RMB to
Dollars results in translation adjustments, which are reported as a middle step
between net income and comprehensive income. The net income is added
to the retained earnings on our balance sheet; while the translation adjustment
is added to a line item on our statement of stockholders equity labeled
“accumulated other comprehensive income,” since it is more reflective of changes
in the relative values of U.S. and Chinese currencies than of the success of our
business. During the year ended June 30, 2009, the unrealized gain on
foreign currency translations added $116,491 to our accumulated other
comprehensive income. In the prior fiscal year, when the changes in
value between the Dollar and the Renminbi were more dramatic, we added
$1,070,501 to our shareholders equity by reason of foreign currency translation
adjustments.
Liquidity
and Capital Resources
To date,
our operations have been funded by capital contributions from Hairong’s
management and employees. Approximately 54% of the capital
contribution has been made by members of management and their business
associates. The remaining 46% was contributed by the employees,
acting through a trustee. The Company expects that in the future it
will issue equity to the employees to compensate them for their financial
contributions to the growth of Hairong, and to incentivize them for future
loyalty to Hairong.
This
program of internal financing has left us with a balance sheet that, at June 30,
2009, included no debt, either short-term or long-term, other than a $5,000
loan. It also left us with working capital of $4,947,393 at June 30,
2009, including $2,282,786 in cash. Since our operations have been
cash positive in each of the past two fiscal years - providing $819,226 in cash
during the 2009 fiscal year and $2,030,233 in cash during the 2008 fiscal year -
we believe that our cash resources are adequate to fund our operations for the
forseeable future.
We expect
to fund several significant capital improvement during the next twelve
months:
|
·
|
a
significant upgrade to our Website’s infrastructure, in order to
facilitate a rapid expansion of the user
base;
|
|
·
|
acquisition
of specialized equipment for our Ice
Tour;
|
|
·
|
additional
animation equipment; and
|
|
·
|
a
dedicated education facility for the training center associated with our
animation department.
|
We expect the overall cost of these
capital improvements to be approximately 3 million RMB ($439,000). At
present, we anticipate that we will finance these projects from our capital
resources. However, if we are able to obtain financing on favorable
terms, we may use external financing for one or more of the
projects. Currently we have fixed assets with a book value of
$5,036,127 on which there is no lien. This provides us the ability to
obtain secured debt financing, if we decided to preserve our working capital.
Based on this experience, we anticipate that our capital resources will be
adequate to fund our operations for the foreseeable future.
13
Critical
Accounting Policies and Estimates
In
preparing our financial statements we are required to formulate working policies
regarding valuation of our assets and liabilities and to develop estimates of
those values. In our preparation of the financial statements for
2009, there was one estimate made which was (a) subject to a high degree of
uncertainty and (b) material to our results. These was the
determination, explained in Note 3 to the Consolidated Financial Statements, to
record a bad debt reserve of $15,464 as of June 30, 2009. This
determination was based on application of our standard evaluation of accounts
receivable, which resulted in a high level of confidence regarding the
collectability of our receivables.
Impact of Accounting
Pronouncements
There were no recent accounting
pronouncements that have had a material effect on the Company’s financial
position or results of operations.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
Applicable.
Index
to the Consolidated Financial Statements
Page
F-1
|
Report
of Independent Registered Public Accounting
Firm.
|
F-2
|
Consolidated
Balance Sheets as of June 30, 2009 and
2008.
|
F-4
|
Consolidated
Statements of Income for the Fiscal Years Ended June 30, 2009 and
2008.
|
F-5
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended
June 30, 2009 and 2008.
|
F-6
|
Consolidated
Statements of Cash Flows for the Fiscal Years Ended June 30, 2009 and
2008.
|
F-8 to F-18 | Notes to Consolidated Financial Statements. |
14
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of China Digital Animation Development,
Inc.
We have
audited the accompanying consolidated balance sheets of China Digital Animation
Development, Inc. and Subsidiaries as of June 30, 2009 and 2008 and the related
consolidated statements of income, stockholders’ equity, and cash flows for the
years 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 audits.
We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of China Digital
Animation Development, Inc. and Subsidiaries as of June 30, 2009 and 2008, and
the results of its consolidated operations and its cash flows for years ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/
P.C.LIU, CPA, P.C.
P.C.LIU,
CPA, P.C.
Flushing,
NY
September
1, 2009
F-1
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
FOR
THE YEARS ENDED JUNE 30, 2009 AND, 2008
JUNE
30,
|
||||||||
ASSETS
|
2009
|
2008
|
||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,282,786 | $ | 4,740,675 | ||||
Accounts
Receivable, net
|
1,388,599 | 815,933 | ||||||
Employee
advances
|
2,234 | 236,950 | ||||||
Advanced
to suppliers
|
1,443,440 | 680,522 | ||||||
Inventory
|
- | 77,028 | ||||||
Interest
Receivable
|
54,786 | - | ||||||
Prepaid
Expenses
|
84,202 | 16,881 | ||||||
Total
Current Assets
|
5,256,047 | 6,567,989 | ||||||
Non-current
Assets
|
||||||||
Property,
Plant & Equipment, net
|
3,929,257 | 3,662,019 | ||||||
Land
use right and other intangible assets, net
|
1,106,870 | 416,138 | ||||||
Long
Term Investment
|
2,191,457 | - | ||||||
Total
Non-current Assets
|
7,227,584 | 4,078,157 | ||||||
Total
Assets
|
$ | 12,483,631 | $ | 10,646,146 |
"Continued on
next page"
"The
accompanying notes are an integral part of these financial
statements"
F-2
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
FOR
THE YEARS ENDED JUNE 30, 2009 AND, 2008
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
JUNE
30,
|
||||||||
2009
|
2008
|
|||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 29,219 | $ | 88,280 | ||||
Advance
from customers
|
- | 27,606 | ||||||
Payroll payable
|
- | 9,254 | ||||||
Tax
Payable
|
214,471 | 485,493 | ||||||
Accrued
expenses and other payable
|
64,964 | 369,382 | ||||||
Total
Current Liabilities
|
308,654 | 980,015 | ||||||
Long-Term
Liabilities:
|
||||||||
Loan
Payable
|
5,000 | - | ||||||
Total
Long-Term Liabilities
|
5,000 | - | ||||||
Total
Liabilities
|
313,654 | 980,015 | ||||||
Stockholders'
Equity:
|
||||||||
Common
Stock, par value $0.001, 500,000,000 authorized
20,000,000 shares issued and outstanding
|
20,000 | 20,000 | ||||||
Additional
Paid in Capital
|
6,223,717 | 6,223,717 | ||||||
Accumulated
other comprehensive income
|
1,761,978 | 1,645,487 | ||||||
Reserved
Fund
|
341,524 | 112,241 | ||||||
Retained
Earnings
|
3,822,758 | 1,600,427 | ||||||
Minority
Interest
|
- | 64,259 | ||||||
Total
Stockholders' Equity
|
12,169,977 | 9,666,131 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 12,483,631 | $ | 10,646,146 |
"The
accompanying notes are an integral part of these financial
statements"
F-3
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
JUNE
30,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 6,014,045 | $ | 4,497,335 | ||||
Cost
of Goods Sold
|
1,638,764 | 1,675,643 | ||||||
Gross
Profit
|
4,375,281 | 2,821,692 | ||||||
Operating
Expenses:
|
||||||||
Sales
Expenses
|
342,488 | 536,402 | ||||||
General
and Administrative Expenses
|
1,186,617 | 528,377 | ||||||
Total
Operating Expenses
|
1,529,106 | 1,064,779 | ||||||
Income
from Operations before other Income and (expenses)
|
2,846,175 | 1,756,913 | ||||||
Other
Income and (Expense):
|
||||||||
Interest
income
|
73,516 | 11,864 | ||||||
Gains
from Disposal of Fixed Assets
|
239,745 | - | ||||||
Gain
from Investment
|
219,036 | - | ||||||
Other
expense
|
(103,715 | ) | (385 | ) | ||||
Total
Other Income and (Expense)
|
428,581 | 11,479 | ||||||
Income
Before Income Taxes
|
3,274,757 | 1,768,392 | ||||||
Provision
For Income Taxes
|
823,142 | 457,640 | ||||||
Income
After Provision for Income Taxes
|
2,451,614 | 1,310,752 | ||||||
Minority
Interest
|
- | 63,975 | ||||||
Net
Income
|
$ | 2,451,614 | $ | 1,246,777 | ||||
Basic
and diluted income per share
|
0.12 | 0.06 | ||||||
Weighted
average common shares outstanding
|
20,000,000 | 20,000,000 |
"The
accompanying notes are an integral part of these financial
statements"
F-4
CHINA DIGITAL ANIMATION DEVELOPMENT,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock | Additional |
Accumulated
Other
|
Total
|
||||||||||||||
par value $.0001 |
Paid
in
|
Comprehensive
|
Retained
|
Reserved
|
Comprehensive
|
Minority
|
Stockholders'
|
||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Earnings
|
Fund
|
Income
|
Interest
|
Equity
|
|||||||||
Balance
- July 1, 2007
|
20,000,000
|
$ 20,000
|
$ 6,223,717
|
$ 574,986
|
$ 342,271.00
|
$ 112,241
|
$ -
|
$ -
|
$ 7,273,215
|
||||||||
|
|||||||||||||||||
Additional
Capital
|
|
||||||||||||||||
Comprehensive
income
|
|
||||||||||||||||
Net
income for the year
|
1,258,156
|
1,258,156
|
1,258,156
|
||||||||||||||
Other
comprehensive income, net of tax
|
|||||||||||||||||
Foreign
currency translation adjustment
|
1,070,501
|
1,070,501
|
1,070,501
|
||||||||||||||
Comprehensive
income
|
2,328,657
|
|
|||||||||||||||
Minority
interest
|
64,259
|
64,259
|
|||||||||||||||
Balance
- June 30, 2008
|
20,000,000
|
20,000
|
6,223,717
|
1,645,487
|
1,600,427
|
112,241
|
64,259
|
9,666,131
|
|||||||||
Comprehensive
income
|
|||||||||||||||||
Net
income for the twelve months
|
2,451,614
|
|
2,451,614
|
2,451,614
|
|||||||||||||
Reserved
Fund
|
(229,283)
|
229,283
|
-
|
||||||||||||||
Other
comprehensive income, net of tax
|
|||||||||||||||||
Foreign
currency translation adjustment
|
116,491
|
116,491
|
116,491
|
||||||||||||||
Decrease
in Minority Interest
|
(64,259)
|
(64,259)
|
|||||||||||||||
Comprehensive
income
|
2,568,105
|
||||||||||||||||
Balance
- June 30, 2009
|
20,000,000
|
$ 20,000
|
$ 6,223,717
|
$ 1,761,978
|
$ 3,822,758
|
$ 341,524
|
$ -
|
$12,169,977
|
"The
accompanying notes are an integral part of these financial
statements"
F-5
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
JUNE
30,
|
||||||||
Cash
Flows From Operating Activities:
|
2009
|
2008
|
||||||
Net
Income
|
$ | 2,451,614 | $ | 1,246,777 | ||||
Adjustments
To Reconcile Net Income To Net Cash Provided
By Operating Activities:
|
||||||||
Depreciation
and Amortization Expense
|
424,664 | 239,108 | ||||||
Gains
from Disposal of Fixed Assets
|
(239,745 | ) | ||||||
(Increase)
or Decrease in Current Assets:
|
||||||||
Accounts
Receivable
|
(572,666 | ) | (213,341 | ) | ||||
Inventories
|
77,028 | 407,307 | ||||||
Prepaid
Expenses
|
(67,321 | ) | (16,881 | ) | ||||
Advanced
to Suppliers
|
(762,918 | ) | (66,175 | ) | ||||
Interest
Receivable
|
(54,786 | ) | - | |||||
Employee
Advanced
|
234,716 | (135,486 | ) | |||||
Increase
or (Decrease) in Current Liabilities:
|
||||||||
Accounts
Payable
|
(59,061 | ) | (110,655 | ) | ||||
Unearned
Revenue
|
(27,606 | ) | (17,021 | ) | ||||
Taxes
Payable
|
(271,022 | ) | 357,321 | |||||
Payroll payable
|
(9,254 | ) | (6,708 | ) | ||||
Accrued
Expenses and Other Payables
|
(304,418 | ) | 345,987 | |||||
Net
Cash Provided by Operating Activities
|
819,226 | 2,030,233 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Purchases
of Property and Equipment
|
(2,419,341 | ) | (339,887 | ) | ||||
Proceeds
from Sale of Fixed Assets
|
1,969,390 | - | ||||||
Purchases
of Intangible Assets
|
(757,198 | ) | - | |||||
Investment-Long
Term
|
(2,191,457 | ) | - | |||||
Net
Cash Used in Investing Activities
|
(3,398,606 | ) | (339,887 | ) |
"Continued on next page"
"The
accompanying notes are an integral part of these financial
statements"
F-6
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2009 AND 2008
JUNE
30,
|
||||||||
Cash
Flows From Financing Activities:
|
2009
|
2008
|
||||||
Proceeds
from Borrowing
|
5,000 | - | ||||||
Net
Cash Used in Financing Activities
|
5,000 | - | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
116,491 | 657,137 | ||||||
Increase
(Decrease) in Cash and Cash Equivalents
|
(2,457,889 | ) | 2,347,483 | |||||
Cash
and Cash Equivalents -Beginning Balance
|
4,740,675 | 2,393,202 | ||||||
Cash
and Cash Equivalents - Ending Balance
|
$ | 2,282,786 | $ | 4,740,675 | ||||
Supplemental
Disclosures of Cash Flow Information:
|
||||||||
Cash
Paid During The Years for:
|
||||||||
Interest
Paid
|
- | - | ||||||
Income
Taxes Paid
|
$ | 1,394,046 | $ | 189,500 |
"The
accompanying notes are an integral part of these financial
statements"
F-7
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
1.
ORGANIZATION AND BASIS OF
PRESENTATION
On
January 30, 2009, Maui General Store, Inc. (the “Company”) changed its name to
“China Digital Animation Development, Inc.” to reflect the reverse merger of
Heilongjiang Hairong Science and Technology Development Co., Ltd. (“Hairong”)
into the Company.
On
November 12, 2008 the Company acquired the outstanding capital stock of RDX
Holdings Limited ("RDX"), a corporation organized under the laws of the British
Virgin Islands. The acquisition was effected by a share exchange between Fu
Qiang and Su Jianping, the shareholders of RDX, and the Company (the "Share
Exchange"). In exchange for the capital stock of RDX, the Company issued
14,400,000 shares of its common stock to the Messrs. Fu and Su, the issued
shares represented 72% of the outstanding shares of the Company.
RDX is
engaged in the business of managing the assets and operations of Hairong, a
joint stock company organized under the laws of The People's Republic of China.
Hairong is primarily engaged in software design and the production and
presentation of cultural events. In the last quarter of this financial year,
Hairong was also engaged in the IT construction business and primarily engaged
in animation design and development. Hairong operates its business primarily in
the PRC with its headquarters in Harbin city, Heilongjiang
province.
On
October 1, 2007, Hairong purchased 70% of the shareholders’ equity of an
advisory consulting firm, Fortune Global Investment Advisory Co., Ltd (the
“FGIA”). On January 1, 2009 the Company purchased the remaining 30% of the
shareholders’ equity of FGIA without any consideration or currency equivalents
under a transfer agreement. On May 13, 2009, Hairong sold 100% of
FGIA for the cash amount of $219,036. Hairong is responsible for all the debt
and liabilities incurred up to the transferring date, May 13, 2009.
On June
27, 2008, RDX Holdings entered into five agreements with Hairong and with the
equity owners in Hairong. Collectively, the agreements provide RDX exclusive
control over the business of Hairong, the right to all revenues obtained by
Hairong, and responsibility for all of the expenses incurred by Hairong. The
relationship is one that is generally identified as "entrusted
management."
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Reclassification
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications had no effect on reported total assets,
liabilities, stockholders’ equity or net income.
F-8
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of
inventories. Actual results could differ from those
estimates.
Cash
and cash equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
The
Company maintains cash and cash equivalents with financial institutions in the
PRC. The Company performs periodic evaluation of the relative credit standing of
financial institutions that are considered in the Company’s investment
strategy.
Bad
debt reserves
The
carrying amount of accounts receivable is reduced by a valuation allowance. The
Company's policy is that for accounts receivable amounts that are aged between 6
months and 12 months, the Company records a 3% bad debt reserve. If
the receivable is aged over 12 months, the Company reserves 5% of the account as
a bad debt allowance. In addition, the Company reviews balances in excess of
payment terms. Based on this review, which includes customer credit
worthiness and history, general economic conditions and changes in customer
payment patterns, the Company estimates the portion, if any, of the balance that
will not be collected and records that amount as an additional reserve.
Management reviews its valuation allowance on a semi-annual basis.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents and accounts and other
receivables. As of June 30, 2009, major banks located in the PRC held
substantially all the Company’s cash and cash equivalents. Hairong’s management
believes they are all of high credit quality. With respect to accounts
receivable, the management extends credit based on an evaluation of the
customer’s financial condition and customer payment practices to minimize
collection risk on accounts receivable.
Inventories
Inventories
are stated at lower of cost, as determined on a weighted average basis, or
market value.
F-9
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Construction
in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
The useful life is 20 years.
Property
and equipment
Property
and equipment are stated at cost, net of accumulated
depreciation. Maintenance, repairs and betterments, including
replacement of minor items, are charged to expense; major additions to physical
properties are capitalized. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives:
Buildings
and improvements
|
40
years
|
Machinery,
equipment and automobiles
|
5-10
years
|
Intangible
assets
Intangible
assets consist of “rights to use land” and “animation software.” According to
the law of China, the government owns all the land in China. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by
the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of 50 years. The method to amortize
intangible assets is a 50-year straight-line method. The Company also evaluates
intangible assets for impairment, at least on an annual basis and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable from its estimated future cash flows. Recoverability of
intangible assets, other long-lived assets and goodwill is measured by comparing
their net book value to the related projected undiscounted cash flows from these
assets, considering a number of factors including past operating results,
budgets, economic projections, market trends and product development cycles. If
the net book value of the asset exceeds the related undiscounted cash flows, the
asset is considered impaired, and a second test is performed to measure the
amount of impairment loss.
Income
taxes
Hairong
accounted for income tax under the provisions of SFAS No.109 "Accounting for
Income Taxes", which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, whenever necessary,
against net deferred tax assets when it is more likely than not that some
portion or the entire deferred tax asset will not be realized. There are no
deferred tax amounts at June 30, 2009 or June 30, 2008.
F-10
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized when the services
are provided and the contracts are performed.
Fair
value of financial instruments
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable, advances to suppliers, other receivables, accounts payable, accrued
expenses, taxes payable, notes payable and other loans payable. Management has
estimated that the carrying amounts approximate their fair value due to the
short-term nature.
Foreign
currency translation
Hairong’s
functional currency is the Renminbi (“RMB”). Foreign currency transactions are
translated at the applicable rates of exchange in effect at the transaction
dates. Monetary assets and liabilities denominated in foreign currencies at the
balance sheet date are translated at the applicable rates of exchange in effect
at that date. Revenues and expenses are translated at the average exchange rates
in effect during the reporting period. Translation adjustments arising from the
use of different exchange rates from period to period are included as a
component of stockholders' equity as "Accumulated Other Comprehensive
Income". Gains and losses resulting from foreign currency
translations are included in Accumulated Other Comprehensive
Income.
Statement
of cash flows
In
accordance with Statement of Financial Accounting Standards No.95, “Statement of
Cash Flows,” cash flows from the Company’s operations are calculated based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Earnings
(Loss) per share
Basic
earnings (loss) per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed similar to basic earnings 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 shares had been issued and if the additional common shares were dilutive.
There are no common stock equivalents available in the computation of earnings
(loss) per share at June 30, 2009.
F-11
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Reserve
Fund
Before
June 20, 2006, Hairong was required to transfer 15% of its profit after
taxation, as determined in accordance with Chinese accounting standards and
regulations, to the surplus reserve fund. Subject to certain restrictions set
out in the Chinese Companies Law, the surplus reserve fund may be distributed to
stockholders in the form of share bonus issues and/or cash dividends. After June
30, 2006, such reserve is no longer mandatory under the Chinese
Law.
Comprehensive
Income
Comprehensive
income is defined to include changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. Comprehensive income includes net income and the foreign currency
translation gain, net of tax.
New
accounting pronouncements
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” which changes the approach to determining the primary beneficiary of a
variable interest entity (“VIE”) and requires companies to more frequently
assess whether they must consolidate VIEs. SFAS 167 is effective for annual
periods beginning after November 15, 2009. The Company does not expect the
adoption of SFAS No. 167 will have a material effect on the Company’s financial
condition, results of operations or cash flows.
In May
2009, the FASB issued SFAS no. 165, “Subsequent Events,” which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. SFAS No. 165 is effective for interim reporting periods
ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material
effect on the Company’s financial condition, result of operations or cash
flows.
In April
2008, the FASB issued Staff Position (“FSP”) No. FAS 142-3, “Determination of
the Useful Life of Intangible Assets,” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.” The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS no. 141R. FSP No. 142-3 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. The
adoption of FSP No. 142-3 did not have an effect on the Company’s financial
condition, results of operations or cash flows.
F-12
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New
accounting pronouncements
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of financial Instruments,” which requires quarterly disclosures of
the fair value of all financial instruments that are not reflected at fair value
in the financial statements, as well as additional disclosures about the
method(s) and significant assumptions used to estimate the fair value. Prior to
the issuance of this FSP, such disclosures, including quantitative and
qualitative information about fair value estimates, were only required on an
annual basis. FSP No. FAS 107-1 and APB 28-1 is effective for interim reporting
periods ending after June 15, 2009. The adoption of FSP No. FAS 107-1 and APE
28-1 did not have a material effect on the Company’s disclosures. See “- Note 3
– Long-term Debt” for disclosures required by this FSP.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” The current GAAP hierarchy, as set forth in the American
Institute of Certified Public Accountants (AICPA) Statement on Auditing
Standards No. 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles, has been criticized because (1) it is directed
to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB
Statements of Financial Accounting Concepts. The FASB believes that the GAAP
hierarchy should be directed to entities because it is the entity (not its
auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. Accordingly, the FASB
concluded that the GAAP hierarchy should reside in the accounting literature
established by the FASB and is issuing this Statement to achieve that result.
This Statement is 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. The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial position.
In
December 2007, the Financial Accounting Standards Board (“FASB”) simultaneously
issued SFAS No. 141R, “Business Combinations (2007 Amendment),” and SFAS 160,
Non-controlling Interests in Consolidated Financial Statements, an Amendment of
ARB 51.” Both standards update United States guidance on accounting
for “non-controlling interests,” sometimes referred to as minority interests,
which interests represent a portion of a subsidiary not attributable, directly
or indirectly, to a parent. FASB and the International Accounting Standards
Board (“IASB”) have been working together to promote international convergence
of accounting standards. Prior to promulgation of these new standards there were
specific areas in accounting for business acquisitions in which conversion was
not achieved. The objective of both standards is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in “business combinations” and consolidated financial statements
by establishing accounting and reporting standards. In business combinations it
is accomplished by establishing principles and requirements concerning how an
“acquirer” recognizes and measures identifiable assets acquired, liabilities
assumed, and non-controlling interest in the acquiree, as well as goodwill
acquired in the combination or gain from a bargain purchase; and determines
information to be disclosed to enable users to evaluate the nature and effects
of business combinations. In consolidated financial statements the standards
require: identification of ownership interests held in subsidiaries by parties
other than the parent be clearly identified, labeled and presented in
consolidated financial position within equity (rather than “mezzanine” between
liabilities and equity) separately from amounts attributed to the parent, with
net income attributable to the parent and to the minority interest clearly
identified and presented on the face of consolidated statements of income. The
standards also provide guidance in situations where the parent’s ownership
interest in a subsidiary changes while the parent retains its controlling
financial interest. The standard also provides guidance on recording a gain or
loss based on fair value in situations involving deconsolidation of a
subsidiary. Entities must provide sufficient disclosures that distinguish
between interests of the parent and that of the non-controlling
interest.
F-13
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
Both
standards are effective for fiscal years and interims beginning on or after
December 15, 2008. Earlier adoption is prohibited. The standards shall be
applied prospectively as of the beginning of the fiscal year in which initially
applied, except for the presentation and disclosure requirements, which shall be
applied retrospectively for all periods presented. The Company does not
anticipate that the adoption of SFAS No. 141R and No. 160 will have an impact on
the Company's overall results of operations or financial position, unless the
Company makes a business acquisition in which there is a non-controlling
interest.
3.
ACCOUNTS RECEIVABLE
Accounts
receivable are uncollateralized, non-interest bearing customer obligations
typically due under terms requiring payment from the invoice
date. Payments of accounts receivable are allocated to the specific
invoices identified on the customer’s remittance advice or, if unspecified, are
applied to the oldest unpaid invoices. As of June 30, 2009 and 2008, the net
accounts receivable were $1,443,440 and $680,522, respectively. The bad debt
reserve for the current fiscal year is $15,464.
4.
ADVANCED TO SUPPLIERS
Hairong
makes advance payments to certain suppliers which provide services to the
company for animation design and development. The advances to suppliers were
$1,443,440 and $680,522 as of June 30, 2009 and June 30, 2008,
respectively.
5.
INVENTORIES
Inventory
consisted of the following:
F-14
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
5.
INVENTORIES (continued)
June
30, 2009
|
June
30, 2008
|
|||||||
Raw
Materials
|
$ | - | $ | 35,598.00 | ||||
Work
in Progress
|
41,430 | |||||||
Total
|
$ | - | $ | 77,028.00 |
The
Company changed its primary operations from IT construction to animation
development during the year. As a result, the Company sold its entire inventory,
which was not usable for animation development.
6
. PROPERTY, PLANT & EQUIPMENT, NET
Property,
Plant & Equipment consisted of the following:
June
30, 2009
|
June
30, 2008
|
|||||||
|
|
|||||||
Building
and Improvement
|
$ | 1,785,983 | $ | 2,022,438 | ||||
Machinery
& Equipment
|
- | 831,180 | ||||||
Office
Furniture & Equipment
|
612,105 | 121,495 | ||||||
Vehicles
|
352,099 | 260,720 | ||||||
Construction
in progress
|
1,459,975 | 1,454,231 | ||||||
Total
Property
|
4,210,162 | 4,690,064 | ||||||
Accumulated
depreciation
|
(280,905 | ) | (1,028,045 | ) | ||||
Total
Property, net
|
$ | 3,929,257 | $ | 3,662,019 |
Depreciation
expense for the years ended June 30, 2009 and 2008 was $443,698 and $207,574,
respectively.
During
the fiscal year, Hairong disposed of a large sum of old assets that cannot be
used in the company’s production operations. At the same time, Hairong purchases
a large quantity of software for animation production and computer related
equipment.
7.
LAND USE RIGHT AND OTHER INTANGIBLES
The
changes in intangible assets for fiscal 2009 and the net book value of
intangible assets at June 30, 2009 and 2008 were as follows:
F-15
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
7.
LAND USE RIGHT AND OTHER INTANGIBLES (continued)
June
30, 2009
|
June
30, 2008
|
|||||||
Cost
of land use right and other intangibles
|
$ | 1,382,114 | $ | 710,417 | ||||
Less:
accumulated amortization
|
(275,244 | ) | (294,278 | ) | ||||
Land
use right and other intangibles, net
|
$ | 1,106,870 | $ | 416,139 |
Total
amortization expense related to intangible assets was ($19,034)
and $31,534 in fiscal 2009 and 2008, respectively. The
negative amortization expense during the 2009 fiscal year was due to the
disposal of the intangible asset and write off of the accumulated
amortization.
8.
LONG TERM INVESTMENT
On April
24, 2009, the Company deposited $ 2,191,457 with an investment management
company and signed an agreement for a rate of 15% annual interest on this
deposit. The interest is payable semiannually, and the Company accrued interest
in the amount of
$
54,786 during the period from April 25, 2009 to June 30, 2009
9.
INCOME TAXES
Effective
on January 1, 2007 a new Chinese Tax Law was enacted. Hairong has been subject
to income tax at an effective rate of 25% on income reported in the statutory
financial statements after appropriate tax adjustments.
The
Company’s provisions for income taxes for the fiscal years ended June 30, 2009
and June 30, 2008 as follows:
PRC
only:
|
June
30, 2009
|
June
30, 2008
|
||||||
Current
|
$ | 823,142 | $ | 457,640 | ||||
Deferred
|
- | - | ||||||
Total
|
$ | 823,142 | $ | 457,640 |
F-16
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
10
. STOCKHOLDERS’ EQUITY
As of
June 30, 2009, 500,000,000 shares have been authorized and 20,000,000 shares are
outstanding.
The
Company implemented a 1-for-25 reverse split on January 30, 2009. Retroactive
effect is being given to the reverse split in these financial
statement. Income statements have retroactively used the new
outstanding shares to calculate the EPS. Stated par value in the stockholders’
equity section has been reduced accordingly.
11.
SEGMENT INFORMATION
Segment
revenue and operating income was as follows:
June
30,
|
||||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
Internet
Design and Development
|
$ | 25,934 | $ | 167,708 | ||||
IT
Construction
|
1,598,032 | 2,027,174 | ||||||
Software
Selling
|
- | 845,871 | ||||||
Membership
Fees
|
751,965 | 674,310 | ||||||
Animation
Design and Development
|
3,589,051 | - | ||||||
Consulting
Service
|
- | 769,001 | ||||||
Other
|
49,064 | 13,270 | ||||||
Consolidated
|
$ | 6,014,045 | $ | 4,497,335 | ||||
|
June
30,
|
|||||||
2009 | 2008 | |||||||
Operating
Income:
|
||||||||
Internet
Design and Development
|
12,273 | 65,516 | ||||||
IT
Construction
|
756,276 | 791,929 | ||||||
Software
Selling
|
- | 330,445 | ||||||
Membership
Fees
|
355,871 | 263,423 | ||||||
Animation
Design and Development
|
1,698,536 | - | ||||||
Consulting
Service
|
- | 300,415 | ||||||
Other
|
23,220 | 5,184 | ||||||
Consolidated
|
$ | 2,846,175 | $ | 1,756,913 |
F-17
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009 & JUNE 30, 2008
11.
SEGMENT INFORMATION
SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about operating
segments. This standard requires segmentation based on our internal organization
and reporting of revenue and operating income based upon internal accounting
methods. Our financial reporting systems present various data for management to
operate the business, including internal profit and loss statements prepared on
a basis not consistent with U.S. GAAP. The segments are designed to allocate
resources internally and provide a framework to determine management
responsibility. Amounts for prior periods have been recast to conform to the
current management view. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Our
chief operating decision maker is our Chief Executive Officer.
12.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, and by the general state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
Concentration
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents. As of June 30, 2009 and
2008, substantially all of the Company’s cash and cash equivalents were held by
major banks located in the PRC of which the Company’s management believes are of
high credit quality. With respect to accounts receivable, the Company extends
credit based on an evaluation of the customer’s financial condition and customer
payment practices to minimize collection risk on account
receivable.
The
Company had two major customers who accounted for 11% and 30% of the total sales
for the year ended June 30, 2009. Accounts receivable from these customers were
$853,207. That amount represented 61% of the total accounts
receivable as of June 30, 2009.
For the
year ended June 30, 2008, the Company had three major
customers. Accounts receivable from these customers were
$547,522. That amount represented 67% of the total accounts
receivable as of June 30, 2008.
F-18
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
ITEM
9A.
CONTROLS
AND PROCEDURES
(a) Evaluation of Disclosure Controls and
Procedures.
The term “disclosure controls and
procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files under the Securities
Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and
reported within required time periods. “Disclosure controls and procedures”
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
The
Company’s management, with the participation of the Chief Executive Officer and
the Chief Financial Officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by this
annual report (the “Evaluation Date”). Based on that evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded that, as of
the Evaluation Date, such controls and procedures were effective.
(b) Changes in Internal
Controls.
The term “internal control over
financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a
company that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company’s management, with the participation of the Chief
Executive Officer and Chief Financial Officer, has evaluated any changes in the
Company’s internal control over financial reporting that occurred during the
fourth quarter of the year covered by this annual report, and they have
concluded that there was no change to the Company’s internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
(c)
Management’s Report on Internal
Control over Financial Reporting.
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934. We have assessed the effectiveness
of those internal controls as of June 30, 2009, using the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control –
Integrated Framework as a basis for our assessment.
Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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 and procedures may deteriorate. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
33
A
material weakness in internal controls is a deficiency in internal control, or
combination of control deficiencies, that adversely affects the Company’s
ability to initiate, authorize, record, process, or report external financial
data reliably in accordance with accounting principles generally accepted in the
United States of America such that there is more than a remote likelihood that a
material misstatement of the Company’s annual or interim financial statements
that is more than inconsequential will not be prevented or detected. In the
course of making our assessment of the effectiveness of internal controls over
financial reporting, we identified one material weaknesses in our internal
control over financial reporting. This material weakness consisted
of:
a. Lack of expertise in U.S accounting
principles among the personnel in our Chinese
headquarters. Our books are maintained and our financial
statements are prepared by the personnel employed at our executive offices in
the City of Jiamusi. Few of our employees have experience or
familiarity with U.S accounting principles. The lack of personnel in
our Jiamusi office who are trained in U.S. accounting principles is a weakness
because it could lead to improper classification of items and other failures to
make the entries and adjustments necessary to comply with U.S.
GAAP.
Management
is currently reviewing its staffing and their training in order to remedy the
weaknesses identified in this assessment. To date, we are not aware
of significant accounting problems resulting from these weaknesses; so we have
to weigh the cost of improvement against the benefit of strengthened
controls. However, because of the above conditions, management’s
assessment is that the Company’s internal controls over financial reporting were
not effective as of June 30, 2009.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
ITEM
9B.
OTHER
INFORMATION
On October 12, 2009 Fu Zhiguo resigned
from his position as a member of the Board of Directors of China Digital
Animation Development, Inc.
34
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
officers and directors of the Company are:
Position/Title
|
Age
|
Director
Since
|
|
Fu
Qiang
|
Chairman,
Chief Executive Officer, Director
|
33
|
2008
|
Zong
Guoqing
|
Director
|
33
|
2008
|
Hu
Yumei
|
Chief
Financial Officer
|
41
|
--
|
Huo
Hong
|
President
(Chief Operations Officer)
|
36
|
--
|
The
following sets forth biographical information regarding the Company’s
directors.
Fu Qiang. Mr. Fu
has been employed since 2003 as the President of our subsidiary, Heilongjiang
Hairong Science and Technology Development Co Ltd.
(“Hairong”). Previously Fu Qiang was employed as Vice General Manager
by Heilongjiang Guangsha Group, a construction company, where he was responsible
for business development and new construction management. In 1998 Fu
Qiang earned a Bachelor’s Degree in Business Administration from Beijing Union
University. In 1996 he earned a Bachelor’s Degree in Law from
Heilongjiang Political Management and Law College.
Zong
Guoqing. Mr. Zong joined Hairong this year as
General Manager. In 2006 and 2007 Mr. Zong was employed as Manager of
the Marketing Department of Sweden SINO, an international transportation
logistics company. From 2003 to 2006 Mr. Zong was employed as Manager
of the International Department of Harbin Sihai CNC Group, which manufactured
CNC systems for the production of H-steel. Previously Mr. Zong had
been employed as Assistant Manager of Canada Sefon Investment Co., Ltd., an
investment consultant, and as the Supervisor of Development of Harbin
Landscaping & Development Co., which provided landscaping design and
equipment for the construction industry in China. In 2002 Mr. Zong
was awarded a B.A. in computer science by QGI Institute of Information
Technology in Vancouver, British Columbia. He has also received a
diploma in computer information from the Southern Alberta Technology
Institute.
Hu Yumei. Ms.
Hu has been employed as Chief Financial Officer of Hairong and its predecessor
since 2006, with responsibilities for both the accounting and the finance
departments. From 1986 to 2003 Ms. Hu served as Chief Financial
Officer of Harbin XinYang Group, which was engaged in the construction
industry. In 1986 Ms. Hu was awarded a Bachelor’s Degree with a
concentration in Economics by the Heilongjiang Province Economy Institute of
Cadres Management.
35
Huo Hong. Ms. Huo
has been employed by Hairong as its U.S. agent since 2008. Since 2006
Ms. Huo has also been employed as Producer, Financial Reporter, and Marketing
Director by Wall Street Multimedia, which provides financial news content in the
U.S. and China. Since 2004 Ms. Huo has also been employed as a
Correspondent by The
Global Times. From 2004 to 2006 Ms. Huo was employed as a
Marketing Executive by Jam-Aimee Jewelry, and from 2002 to 2004 Ms. Huo was
employed as Assistant to the President of American Jewelry Design,
Inc. In 2006 Ms. Huo was awarded a Masters Degree in Marketing by
Baruch University; in 2002 she was awarded a B.A. with a concentration in
Business Administration by the University of Colorado.
All of
our directors hold offices until the next annual meeting of the shareholders of
the Company, and until their successors have been qualified after being elected
or appointed. Officers serve at the discretion of the board of
directors.
Audit
Committee; Compensation Committee; Nominating Committee.
Due to the small size of our Board of
Directors, we have not constituted an audit committee, a compensation committee
or a nominating committee. Decisions regarding nominations to the
Board will be made by all currently-serving members of the Board. For
the same reason, we do not have an audit committee financial expert among the
members of our Board of Directors.
Code of
Ethics
The Board of Directors has not adopted
a code of ethics applicable to the Company’s executive officers. The
Board believes that the small number of individuals involved in the Company’s
management makes such a code unnecessary.
Section 16(a) Beneficial
Ownership Reporting Compliance
None of
the officers, directors or beneficial owners of more than 10% of the Company’s
common stock failed to file on a timely basis the reports required by Section
16(a) of the Exchange Act during the year ended June 30, 2009, except that
Ligang Shang was late in filing his Form 3.
ITEM
11. EXECUTIVE
COMPENSATION
The
following table sets forth all compensation awarded to, earned by, or paid by
the companies that are currently subsidiaries of China Digital Animation to Fu
Qiang, the Company’s Chief Executive Officer, and to Hu Yumei, its Chief
Financial Officer, for services rendered in all capacities to the Company during
the years ended June 30, 2009, 2008 and 2007. There were no other
executive officers whose total salary and bonus for the fiscal year ended June
30, 2009 exceeded $100,000.
36
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Other
Compensation
|
|
Fu
Qiang
|
2009
|
$8,772
|
--
|
--
|
--
|
(1)
|
2008
|
$8,772
|
--
|
--
|
--
|
(1)
|
|
2007
|
$14,692
|
--
|
--
|
--
|
(1)
|
|
Hu
Yumei
|
2009
|
$5,263
|
--
|
--
|
--
|
--
|
2008
|
$4,386
|
--
|
--
|
--
|
--
|
_______________________________
(1)
|
Hairong
has permitted Fu Qiang to use for personal business an automobile
purchased by Hairong for $168,621.
|
Employment
Agreements
All of our officers and directors serve
on an at-will basis.
Compensation of
Directors
The Board of Directors has not adopted
any policy regarding the compensation of directors. Both of the
current directors are employees of Hairong, and receive no separate compensation
for service on the Board of Directors.
Equity
Grants
The
following tables set forth certain information regarding the stock options
acquired by the Company’s Chief Executive Officer and Chief Financial Officer
during the year ended June 30, 2009 and those options held by him and her on
June 30, 2009.
Option Grants in the Last
Fiscal Year
Number
of
securities
underlying
option
|
Percent
of
total
options
granted
to
employees
in
fiscal
|
Exercise
Price
|
Expiration
|
Potential
realizable
value
at assumed
annual
rates of
appreciation
for
option term
|
||
granted
|
year
|
($/share)
|
Date
|
5%
|
10%
|
|
Fu
Qiang
|
--
|
--
|
--
|
--
|
--
|
--
|
Hu
Yumei
|
--
|
--
|
--
|
--
|
--
|
--
|
37
The
following tables set forth certain information regarding the stock grants
received by the executive officers named in the table above during the year
ended June 30, 2009 and held by them unvested at June 30, 2009.
Unvested Stock Awards in the
Last Fiscal Year
Number
of
Shares
That
Have
Not
Vested
|
Market
Value
of
Shares That
Have
Not
Vested
|
|
Fu
Qiang
|
--
|
--
|
Hu
Yumei
|
--
|
--
|
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of the date of this prospectus by
the following:
|
·
|
each
shareholder known by us to own beneficially more than 5% of our common
stock;
|
|
·
|
Fu
Qiang, our Chief Executive Officer
|
|
·
|
each
of our directors; and
|
|
·
|
all
directors and executive officers as a
group.
|
There are
20,000,000 shares of our common stock outstanding on the date of this
report. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below have sole voting power and investment
power with respect to their shares, subject to community property
laws where applicable. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange
Commission.
In
computing the number of shares beneficially owned by a person and the percent
ownership of that person, we include shares of common stock subject to options
or warrants held by that person that are currently exercisable or will become
exercisable within 60 days. We do not, however, include these “issuable” shares
in the outstanding shares when we compute the percent ownership of any other
person.
Name and
Address of
Beneficial
Owner
|
Amount
and Nature of
Beneficial
Ownership(3)
|
Percentage
of
Class
|
Fu
Qiang(1)
|
5,000,000
|
25.0%
|
Zong
Guoqing(2)
|
30,000
|
0.2%
|
Hu
Yumei(2)
|
0
|
--
|
All
officers and directors as
a group (4 persons)
|
5,030,000
|
25.0%
|
Fu
Zhiguo(1)
|
1,300,000
|
6.5%
|
|
________________________________
|
|
(1)
|
The
address for Fu Qiang and Fu Zhiguo is 15 West 39th
Street, Suite 14A, New York, NY
10018.
|
|
(2)
|
The
address for Zong Guoqing and Hu Yumei is Hairong’s address in
Harbin.
|
|
(3)
|
All
shares are owned both of record and
beneficially.
|
38
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Certain Relationships and
Related Transactions
On October 1, 2007 Fu Qiang, the
Chairman of Hairong, contributed to Hairong 70% of the ownership interest in
Fortune Global Investment Advisory Co., Ltd. In January 2009 Mr. Fu
contributed the remaining 30%. Mr. Fu made the contribution without
payment by Hairong.
Other
than the aforesaid relationship, none of the officers or directors of China
Digita Animation has engaged in any transaction with China Digital Animation or
its subsidiaries during the past two fiscal years or the current
fiscal year that had a transaction value in excess of $120,000.
Director
Independence
None of the members of the Company’s
Board of Directors is an independent director, pursuant to the definition of
“independent director” under the Rules of The NASDAQ Stock Market.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
P.C. Liu, CPA P.C. has been the
independent accountant for Hairong since 2007. In November 2008, when
China Digital Animation acquired Hairong, P.C. Liu, CPA P.C. became the
independent accountant for China Digital Animation.
Audit Fees
P.C. Liu, CPA P.C. billed $45,000 to
the Company for professional services rendered for the audit of financial
statements for the fiscal year ended June 30, 2009.
Audit-Related Fees
P.C. Liu, CPA P.C. billed $0 to the
Company during 2009 for assurance and related services that are reasonably
related to the performance of the 2009 audit or review of the quarterly
financial statements. .
Tax Fees
P.C. Liu, CPA P.C. billed $0 to the
Company during fiscal 2009 for professional services rendered for tax
compliance, tax advice and tax planning.
All Other Fees
P.C. Liu, CPA P.C. billed $0 to the
Company in fiscal 2009 for services not described above.
It
is the policy of the Company that all services other than audit, review or
attest services must be pre-approved by the Board of Directors. No
such services have been performed by P.C. Liu, CPA P.C..
39
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
Exhibit List
|
3-a
|
Certificate
of Incorporation, as amended through 2003 - Filed as an exhibit to the
Company’s Registration Statement on Form 10-SB (File No. 000-50441) and
incorporated herein by reference.
|
3-a(1)
|
Certificate
of Amendment of Certificate of Incorporation, filed on January 30, 2009 -
filed as an exhibit to the Current Report on Form 8-K dated January 30,
2009 and filed on February 4, 2009 and incorporated herein by
reference.
|
|
3-b
|
Bylaws
- Filed as an exhibit to the Company’s Registration Statement on Form
10-SB (File No. 000-50441) and incorporated herein by
reference.
|
10-a
|
Consulting
Services Agreement dated June 27, 2008 between RDX Holdings Limited and
Heilongjiang Hairong Science and Technology Development Co., Ltd. (1)
|
10-b
|
Operating
Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang
Hairong Science and Technology Development Co., Ltd., and the shareholders
of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
|
10-c
|
Equity
Pledge Agreement dated June 27, 2008 between RDX Holdings Limited and the
shareholders of Heilongjiang Hairong Science and Technology Development
Co., Ltd.(1)
|
10-d
|
Option
Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang
Hairong Science and Technology Development Co., Ltd., and the shareholders
of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
|
10-e
|
Proxy
Agreement dated June 27, 2008 among RDX Holdings Limited, Heilongjiang
Hairong Science and Technology Development Co., Ltd., and the shareholders
of Heilongjiang Hairong Science and Technology Development Co., Ltd.(1)
|
|
21
|
Subsidiaries
– RDX Holdings Limited , British Virgin
Islands corporation
|
31.1
|
Rule
13a-14(a) Certification – CEO
|
31.2
|
Rule
13a-14(a) Certification - CFO
|
32
|
Rule
13a-14(b) Certifications
|
_____________________________________
|
(1)
|
Filed
as an Exhibit to the Current Report on Form 8-K dated November 12, 2008
and filed on November 12, 2008, and incorporated herein by
reference.
|
40
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CHINA
DIGITAL ANIMATION DEVELOPMENT, INC.
|
Date:
October 20, 2009
|
By:
/s/ Fu
Qiang
|
|
Fu
Qiang, Chief Executive Officer
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Fu
Qiang
|
October
20, 2009
|
|
Fu
Qiang
|
||
Director,
Chief Executive Officer
|
||
/s/ Hu
Yumei
|
October
20, 2009
|
|
Hu
Yumei
|
||
Chief
Financial and Accounting Officer
|
||
/s/ Zong
Guoqing
|
October
20, 2009
|
|
Zong
Guoqing, Director
|
41