Diguang International Development Co., Ltd.

 

Form 10-Q

 

For the Quarter Ended September 30, 2010

 

Table of Contents

 

				Page
Part I -   Financial Information				4
	Item 1. Financial Statements			4
		Consolidated Balance Sheets		5
		Consolidated Statements of Income and Comprehensive Income		6
		Consolidated Statements of Cash Flows		7
		Notes to Consolidated Financial Statements		8
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
	Item 4. Controls and Procedures			25
Part II -  Other Information				25
	Item 1. Legal Proceedings			25
	Item 1A. Risk Factors.			25
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25
	Item 3. Defaults Upon Senior Securities			26
	Item 4. Reserved			26
	Item 5. Other Information			26
	Item 6. Exhibits			27
	Signatures			28
	Certifications

 

3

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		December 31,				September 30,
		2009				2010
		(Unaudited)				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	6,190,513			$	5,244,308
Restricted cash			4,341,112				3,030,857
Accounts receivable, net of allowance for doubtful accounts $1.5 million and $1.4 million			13,972,086				17,290,322
Inventories, net of provision $3.5 million and $3.6 million			7,439,287				10,921,816
Other receivables, net of provision $69,032 and $69,736			465,013				513,637
VAT recoverable			82,497				269,286
Advance to suppliers			900,328				1,270,769
Total current assets			33,390,836				38,540,995
Investment, net of impairment $1,500,000 and $1,500,000			-				-
Plant, property and equipment, net			17,736,766				17,695,328
Construction in process			132,079				6,247,549
Long-term prepayments			439,502				381,137
Total assets		$	51,699,183			$	62,865,009
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Bank loans		$	10,213,683			$	7,660,318
Accounts payable			15,446,721				22,149,847
Advance from customers			325,165				874,619
Accruals and other payables			2,510,206				2,030,277
Accrued payroll and related expense			712,206				824,202
Income tax payable			394,989				404,879
Amount due to stockholders – current			943,378				358,052
Total current liabilities			30,546,348				34,302,194
Long-term bank loans			-				8,639,115
Research funding advanced			952,255				688,476
Total non-current liabilities			952,255				9,327,591
Total liabilities			31,498,603				43,629,785
Equity：
Common stock, par value $0.001 per share, 50 million shares authorized, 22,593,000 and 22,593,000 shares issued, 22,072,000 and 22,072,000 shares outstanding			22,593				22,593
Additional paid-in capital			20,881,635				20,915,290
Treasury stock at cost			(674,455	)			(674,455	)
Appropriated earnings			802,408				798,928
Accumulated deficit			(7,644,254	)			(8,945,894	)
Translation adjustment			4,338,891				4,668,489
Total stockholders’ equity			17,726,818				16,784,951
Non-controlling interest			2,473,762				2,450,273
Total equity			20,200,580				19,235,224
Total liabilities and stockholders’ equity		$	51,699,183			$	62,865,009

 

See accompanying notes to financial statements

 

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DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

 

CONSOLIDATED STATEMENTS OF INCOME

 

AND COMPREHENSIVE INCOME

 

 (In US Dollars)

 

		Nine Months Ended September 30,								Three Months Ended September 30,
		2009				2010				2009				2010
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues:
Revenues, net		$	29,659,356			$	48,577,772			$	13,456,366			$	19,050,932
Cost of sales			27,699,850				43,822,467				12,518,206				17,539,034
Gross profit			1,959,506				4,755,305				938,160				1,511,898
Selling expense			1,653,102				2,036,485				714,206				784,572
Research and development costs			1,486,377				725,070				460,946				391,103
General and administrative expenses			3,185,343				2,830,203				997,932				889,226
Loss on disposing assets			30,487				10,787				10,308				8,480
Loss from operations			(4,395,803	)			(847,240	)			(1,245,232	)			(561,483	)
Interest income (expense), net			(285,759	)			(585,112	)			(126,251	)			(226,099	)
Investment income (expense)			800				-				-				-
Other income (expense)			197,937				83,690				87,744				(63,375	)
Loss before income tax			(4,482,825	)			(1,348,662	)			(1,283,739	)			(850,957	)
Income tax provision			30,927				29,028				(646	)			16,199
Net loss			(4,513,752	)			(1,377,690	)			(1,283,093	)			(867,156	)
Net loss attributable to non-controlling interest			(248,609	)			(72,570	)			(65,543	)			(12,067	)
Net loss attributable to common shares		$	(4,265,143	)		$	(1,305,120	)		$	(1,217,550	)		$	(855,089	)
Weighted average common shares outstanding – basic			22,072,000				22,072,000				22,072,000				22,072,000
Losses per share – basic			(0.19	)			(0.06	)			(0.06	)			(0.04	)
Weighted average common shares outstanding – diluted			22,072,000				22,072,000				22,072,000				22,072,000
Losses per shares – diluted			(0.19	)			(0.06	)			(0.06	)			(0.04	)
Comprehensive loss:
Net loss			(4,513,752	)			(1,377,690	)			(1,283,093	)			(867,156	)
Translation adjustment			(194,471	)			378,679				8,346				282,519
Comprehensive loss			(4,708,223	)			(999,011	)			(1,274,747	)			(584,637	)
Comprehensive income (loss) attributable to non-controlling interest			(250,033	)			(23,489	)			(64,179	)			21,082
Comprehensive loss attributable to common shares		$	(4,458,190	)		$	(975,522	)		$	(1,210,568	)		$	(605,719	)

 

See accompanying notes to financial statements.

 

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DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Increase (Decrease) in Cash and Cash Equivalents

 

(In US Dollars)

 

		Nine Months Ended September 30,
		2009				2010
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net loss		$	(4,513,752	)		$	(1,377,690	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			1,219,618				1,483,654
Bad debts allowance			-				(108,420	)
Inventory provision			568,265				(33,619	)
Loss on disposing assets			30,487				10,787
Share-based compensation			301,480				33,655
Research and development costs offset by funding advanced			-				(516,156	)
Deferred tax asset			28,485				-
Changes in operating assets and liabilities:
Accounts receivable			(3,294,841	)			(3,147,437	)
Inventory			(2,953,544	)			(3,374,239	)
Other receivables			110,788				(46,814	)
VAT recoverable			(256,989	)			(183,117	)
Prepayments and other assets			(371,720	)			(371,260	)
Accounts payable			238,456				4,156,825
Accruals and other payable			(64,672	)			(362,591	)
Advance from customers			(11,404	)			557,944
Accrued interest payable to related parties			57,103				-
Taxes payable			(17,492	)			9,928
Net cash used in operating activities			(8,929,732	)			(3,268,550	)
Cash flows from investing activities:
Purchase of fixed assets investment in construction			(87,631	)			(4,738,704	)
Proceeds from disposal of fixed assets			29,152				11,805
Net cash used in investing activities			(58,479	)			(4,726,899	)
Cash flows from financing activities:
Due to related parties			(800,912	)			(597,568	)
Proceeds from (repayments for) short-term bank facilities			8,741,354				(1,253,804	)
Repayments for import financing loans			-				(1,356,660	)
Restricted cash released from (pledged for) import financing loans			(4,340,769	)			1,310,255
Proceeds from long-term loan facilities			-				8,639,115
Research funding advanced			-				248,603
Net cash received from financing activities			3,599,673				6,989,941
Effect of changes in foreign exchange rates			(187,961	)			59,303
Net decrease in cash and cash equivalents			(5,576,499	)			(946,205	)
Cash and cash equivalents, beginning of the period			15,024,363				6,190,513
Cash and cash equivalents, end of the period		$	9,447,864			$	5,244,308
Supplemental disclosures of cash flow information:
Cash paid for interest		$	233,986			$	588,700
Cash paid for income taxes			14,821				24,174

 

See accompanying notes to financial statements

 

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DIGUANG INTERNATIONAL DEVELOPMENT CO., LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS

 

Diguang International Development Co., Ltd., formerly known as Online Processing, Inc., “Online”, the “Company”, was organized under the laws of the State of Nevada in 2000.  On January 10, 2006, Online entered into a stock exchange agreement with Diguang International Holdings Limited., “Diguang Holdings.”  On March 17, 2006, Online issued 2.4 million shares of its common stock in exchange for the gross proceeds of $12 million and issued 18,250,000 shares of its common stock in exchange for 100% equity interest in Diguang Holdings, making Diguang Holdings a wholly owned subsidiary of Online.  One of the conditions to closing the transaction was changing the name from Online Processing, Inc. to “Diguang International Development Co., Ltd.,” and the name was changed on February 28, 2006.

 

The Company specializes in the design, production and distribution of Light Emitting Diode, “LED,” and Cold Cathode Fluorescent Lamp, “CCFL,” backlights for various Thin Film Transistor Liquid Crystal Displays, “TFT-LCD,” and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD,” Twisted Nematic Liquid Crystal Display, “TN-LCD,” and Mono LCDs.  Taken together, these applications are referred to as “LCD” applications.  Those applications include color displays for cell phones, car televisions and navigation systems, digital cameras, televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the like.  In late 2009, the Company started a trial run of producing LED TV sets in two different sizes.

 

The Company’s headquarter is located in Shenzhen, China. The Company owns its subsidiaries through Diguang Holdings.  Diguang Holdings was established under the law of the British Virgin Islands on July 27, 2004 and holds equity interests in the following entities:

 

·	Well Planner Limited, a Hong Kong based entity;

·	Diguang Science and Technology (HK) Limited, a British Virgin Islands based entity;

·	Shenzhen Diguang Electronics Co., Ltd., a China based entity;

·	North Diamond;

·	Wuhan Diguang Electronics Co., Ltd.;

·	Dongguan Diguang Electronics Science and Technology Co., Ltd.; and

·	Shenzhen Optimum Electronics Co., Ltd.

 

Well Planner Limited, “Well Planner,” was established under the laws of Hong Kong Special Administrative Region on April 20, 2001 and has been doing the majority of its business in custom forwarding related to export and import activities conducted by Diguang Electronics for a service fee based on a service agreement, pursuant to which service fees should not be less than 2% of the goods Well Planner has sold.  Well Planner mainly sells to Diguang Science and Technology (HK) Limited and has minimal sales to third-party customers.

 

Diguang Science and Technology (HK) Limited, “Diguang Technology,” was established under the laws of the British Virgin Islands on August 28, 2003 and has handled all sales to international customers and procurements of electronic components and materials for Diguang Electronics.

 

Both Well Planner and Diguang Technology do not have any office space leased in Hong Kong or the British Virgin Islands.

 

Shenzhen Diguang Electronics Co. Ltd., “Diguang Electronics,” was established as an equity joint venture in Shenzhen under the laws of the People’s Republic of China, the “PRC,” on January 9, 1996 with an operating life of 20 years starting on that date.  As of December 31, 2006, its registered capital was RMB85 million, equivalent to approximately $10,573,615.  Diguang Electronics designs, develops and manufactures LED and CCFL backlight units.  These backlight units are essential components used in illuminating display panels such as TFT-LCD and color STN-LCD panels.  These display panels are used in products such as mobile phones, PDAs, digital cameras, liquid crystal computer or television displays and other household and industrial electronic devices.  Diguang Electronics’ customers are located in both China and overseas.

 

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NOTE 1 ─ ORGANIZATION AND OVERVIEW OF BUSINESS (Continued)

 

Diguang Holdings acquired 65% interest of North Diamond on January 3, 2007.  North Diamond is a holding company of Dihao (Yangzhou) Co., Ltd., “Dihao,” an operating entity, which is registered in the Yangzhou City Development Zone, Jiangsu Province, China.  Dihao conducts primary business is in developing, manufacturing and marketing backlight products for large electronic display devices, and provides relevant technical services in China.

 

Diguang Electronics and Diguang Holdings jointly set up Wuhan Diguang Electronics Co., Ltd., “Wuhan Diguang,” in Wuhan, Hubei Province, China, with a registered capital of $1 million, of which 70% was infused by Diguang Electronics and the remaining 30% by Diguang Holdings.  Wuhan Diguang was established on March 13, 2007 and its business license issued by Wuhan Municipal Administrative Bureau for Industry and Commerce is valid for 20 years expiring on March 12, 2027.  Wuhan Diguang manufactures and sells LED and CCFL backlight units in the south central region of China.  Wuhan Diguang started operation on July 1, 2007.

 

Dongguan Diguang Electronics Science and Technology Co. Ltd., “Dongguan Diguang S&T,” was established under the laws of the People’s Republic of China on February 16, 2004 and has been used by Diguang Electronics as a production base since its inception.  On December 29, 2007, Diguang Holdings acquired 100% of the equity interest of Dongguan Diguang S&T.  On January 1, 2008, Diguang Holdings assigned 70% of it interest in Dongguan Diguang S&T to Diguang Electronics.  Dongguan Diguang S&T started its own manufacturing activities in 2008.

 

On April 30, 2009, Well Planner established a wholly owned entity named Shenzhen Optimum Electronics Co., Ltd, “Shenzhen Optimum,” a China based entity.  Shenzhen Optimum concentrates on the sale of large-size LED TV sets manufactured by Diguang Electronics to domestic customers throughout China.

 

NOTE 2 ─RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Recently Issued Accounting Pronouncements Adopted

 

FASB ASU 2009-05

 

Effective January 1, 2010, the Company adopted Accounting Standards Update ("ASU") No. 2009-05, "Measuring Liabilities at Fair Value," which amends the guidance in ASC 820, Fair Value Measurements and Disclosures, to provide guidance on fair value measurement of liabilities.  If a quoted price in an active market is not available for an identical liability, ASU 2009-05 requires companies to compute fair value by using quoted prices for an identical liability when traded as an asset, quoted prices for similar liabilities when traded as an asset or another valuation technique that is consistent with the guidance in ASC 820.  ASU 2009-05 will be effective for interim and annual periods beginning after its issuance.  The adoption of ASU 2009-05 did not have any impact on the Company’s financial statements.

 

FASB ASU 2009-17

 

Effective January 1, 2010, the Company adopted ASU No. 2009-17, “Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R).”  This ASU changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.  The adoption of ASU 2009-05 did not have any impact on the Company’s financial statements.

 

FASB ASU 2010-01

 

Effective January 1, 2010, the Company adopted ASU No. 2010-01 ─ “Accounting for Distributions to Shareholders with Components of Stock and Cash.”  The amendments in this update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share).  The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis.  The adoption of this ASU did not have a material impact on its consolidated financial statements.

 

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NOTE 2 ─RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

 

Recently Issued Accounting Pronouncements Adopted (Continued)

 

FASB ASU 2010-02

 

Effective January 1, 2010, the Company adopted ASU No. 2010-02 – “Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification.”  The amendments in this update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity.  The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity.  The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.”  If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2010-09

 

In February 2010, FASB issued ASU No. 2010-9 – “Amendments to Certain Recognition and Disclosure Requirements.”  This update addresses certain implementation issues related to an entity’s requirement to perform and disclose subsequent-events procedures, removes the requirement that public companies disclose the date of their financial statements in both issued and revised financial statements.  According to the FASB, the revised statements include those that have been changed to correct an error or conform to a retrospective application of U.S. GAAP.  The amendment is effective immediately.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Adopted Yet

 

FASB ASU 2009-13

 

In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition: Multiple-Deliverable Revenue Arrangements” (ASU 2009-13).  This update removes the criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables and provides entities with a hierarchy of evidence that must be considered when allocating arrangement consideration.  The new guidance also requires entities to allocate arrangement consideration to the separate units of accounting based on the deliverables’ relative selling price.  The provisions will be effective for revenue arrangements entered into or materially modified beginning January 1, 2011.  The Company is currently evaluating the impact of the provisions of ASU 2009-13.

 

FSAB ASU 2010-06

 

In January 2010, FASB issued ASU No. 2010-06 – “Improving Disclosures about Fair Value Measurements.”  This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and 2) Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number).  In addition, this update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation.  A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities.  A class is often a subset of assets or liabilities within a line item in the statement of financial position.  A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and 2) Disclosures about inputs and valuation techniques.  A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements.  These disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company is currently evaluating the impact of this ASU.  However, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

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NOTE 2 ─RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)

 

Recently Issued Accounting Pronouncements Not Adopted Yet (Continued)

 

FASB ASU 2010-13

 

In April 2010, the FASB issued Accounting Standards Update ("ASU") No. 2010-13, “Compensation - Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” which addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades.  Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition.  Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification.  The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings.  The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award.  ASU 2010-13 is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

NOTE 3 ─ ALLOWANCE FOR ACCOUNTS RECEIVABLES

 

During the normal course of business, the Company extends unsecured credit to its customers.  Typically, credit terms require payment to be made within 90 days of the invoice date. The Company does not require collateral from its customers.  The Company maintains its cash accounts at credit worthy financial institutions and closely monitors the movements of its cash positions.

 

The Company regularly evaluates and monitors the creditworthiness of each customer on a case-by-case basis.  The Company includes any accounts balances that are determined to be uncollectible in the allowance for doubtful accounts.  After all attempts to collect a receivable have failed, the receivable is written off against the allowance.  Based on the information available to management, the Company believes that its allowance for doubtful accounts as of December 31, 2009 and September 30, 2010 was adequate, respectively.  However, actual write-off might exceed the recorded allowance.

 

The following table presents allowance activities in accounts receivable.

 

		December 31,				September 30,
		2009				2010
		(Unaudited)				(Unaudited)
Beginning balance		$	655,893			$	1,529,505
Additions charged to expense			927,704				-
Recovery			-				(112,284	)
Write-off			(54,092	)			(2,353	)
Ending balance		$	1,529,505			$	1,414,868

 

NOTE 4 ─ INVENTORIES

 

The inventories are as follows:

 

		December 31,				September 30,
		2009				2010
		(Unaudited)				(Unaudited)
Raw materials		$	5,661,873			$	6,914,873
Work in progress			1,504,063				3,067,240
Finished goods			3,092,724				4,489,063
Consignment goods			699,751				6,909
		$	10,958,411			$	14,478,085
Provision			(3,519,124	)			(3,556,269	)
Inventories, net		$	7,439,287			$	10,921,816

 

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NOTE 5 ─PROPERTY, PLANT, AND EQUIPMENT

 

A summary of property, plant and equipment at cost is as follows:

 

		December 31,				September 30,
		2009				2010
		(Unaudited)				(Unaudited)
Land usage rights		$	3,199,461			$	3,264,210
Plant and office buildings			11,493,931				11,726,542
Machinery			5,282,122				5,818,182
Office equipment			1,425,128				1,805,714
Vehicles			277,171				307,776
Software			153,309				174,527
Leasehold improvement			2,096,803				2,201,142
		$	23,927,925			$	25,298,093
Accumulated depreciation			(6,191,159	)			(7,602,765	)
		$	17,736,766			$	17,695,328

 

The depreciation and amortization for the three months ended September 30, 2009 and 2010 were $362,126 and $543,542, and for the nine months ended September 30, 2009 and 2010 were $1,219,618 and $1,483,654, respectively.

 

NOTE 6 ─ CONSTRUCTION IN PROCESS

 

The Company is constructing a manufacturing facility for the production of large-size LED products in Guangming District of Shenzhen City.  The total budgeted capital investment for this facility is estimated to be $10.5 million, excluding cost of land usage right.  As of September 30, 2010, the cost of construction in process was $6,247,549.  The construction of the plants and buildings will be completed at the end of 2010.

 

NOTE 7 ─ RELATED PARTY TRANSACTIONS

 

Related Party Relationships

 

Name of Related Parties		Relationship with the Company
Mr. Yi Song		One of the shareholders of the Company
Mr. Hong Song		One of the shareholders of the Company
Shenzhen Diguang Engine & Equipment Co., Ltd., a China based entity		100% owned by Mr. Yi Song and Mr. Hong Song
Sino Olympics Industrial Limited		The representative of Song’s brothers

 

 

The break-down details of due to related parties were summarized as follows:

 

Amount due to		Stockholders
Balance at December 31, 2009		$	943,378
Accrued interest			28,114
Payments made			(613,440	)
Balance at September 30, 2010		$	358,052

 

Prior to Diguang Holdings acquiring 100% of the equity interest of Dongguan Diguang S&T, Sino Olympics Industrial Limited, “Sino Olympics,” owns 92% of the interest and Shenzhen Diguang Engine & Equipment owns the remaining 8% of the interest of Dongguan Diguang S&T.  Accordingly, the entire consideration of $4.2 million from Diguang Holdings was allocated $3,864,000 to Sino Olympics and $336,000 to Shenzhen Diguang Engine & Equipment.  Based on the fact that Mr. Yi Song and Mr. Hong Song are the owners of both Sino Olympics and Shenzhen Diguang Engine & Equipment, the entire consideration of the $4.2 million was treated as an amount due to Mr. Yi Song and Mr. Hong Song.  Of the $4.2 million acquisition price, $2 million was paid in cash before the end of 2007 and the remaining balance of $2.2 million should have been repaid through four installment payments on June 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009, respectively.  The balance of $358,052 was overdue as of September 30, 2010.

 

12

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NOTE 8 ─ BANK LOANS

 

 

Short term loans from Shenzhen Ping’an Bank

 

Diguang Electronics renewed bank loans of RMB30 million with Shenzhen Ping’an Bank.  RMB10 million, equivalent to $1,494,657, and RMB20 million, equivalent to $2,989,313, were received on December 25, 2009 and January 6, 2010, respectively.  The renewed bank loan will mature in one year.  Pursuant to the renewed loan agreements, the plant owned by Dongguan Diguang S&T, with a net book value of $4,295,734, was put as pledge and the prevailing annual standard rate was 5.47% under the stipulation from the People's Bank of China.