CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
September
22, 2009
Date of
Report (date of Earliest Event Reported)
Zoom
Technologies, Inc.
(Exact
Name of Registrant as Specified in its Charter)
Delaware
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0-18672
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51-0448969
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(Commission
File No.)
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(I.R.S.
Employer Identification No.)
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207
South Street
Boston,
Massachusetts
(Address
of principal executive offices and zip code)
(617)
423-1072
(Registrant’s
telephone number, including area code)
N/A
(Former
name or former address, if changed from last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation to the registrant under any of the following
provisions:
¨
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Written
communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
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¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form 8-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These include statements about the Registrant’s expectations,
beliefs, intentions or strategies for the future, which are indicated by words
or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “the
Registrant believes,” “management believes” and similar words or phrases. The
forward-looking statements are based on the Registrant’s current expectations
and are subject to certain risks, uncertainties and assumptions. The
Registrant’s actual results could differ materially from results anticipated in
these forward-looking statements. All forward-looking statements included in
this document are based on information available to the Registrant on the date
hereof, and the Registrant assumes no obligation to update any such
forward-looking statements.
Item 2.01
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Completion of Acquisition of
Assets
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Item 3.02
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Unregistered Sale of Equity
Securities
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Item 5.01
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Changes in Control of
Registrant
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Item 5.02
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Departure of Directors or
Principal Officers; Election of Directors; Appointment of Principal
Officers
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CONSUMMATION
OF THE MERGER WITH GOLD LION HOLDING LIMITED AND SPIN-OFF OF ASSETS
On
January 28, 2009, (and later amended on May 12, 2009) Zoom Technologies, Inc.
(“Zoom” or the “Registrant”) entered in a share exchange agreement to acquire
all the outstanding shares of Gold Lion Holding Limited, a company organized and
existing under the laws of the British Virgin Islands (“Gold
Lion”). In connection with the share exchange agreement, the
Registrant agreed to spin off its then-current business to its stockholders, by
distributing and transferring all assets and liabilities to subsidiary and
issuing a dividend to its stockholders as further described below.
The
parties to the share exchange agreement were: (1) Zoom Technologies, Inc., (2)
Tianjin Tong Guang Group Digital Communication Co., Ltd., (“TCB Digital”) a
company organized under the laws of the People’s Republic of China, (“PRC”); (3)
Zoom Telephonics, Inc., or Zoom Telephonics, a wholly owned subsidiary of Zoom;
(4) Gold Lion, (5) Lei (Leo) Gu, a citizen of the PRC; and (6) Songtao Du, a
citizen of the PRC.
Gold Lion
owns 100% of the outstanding capital stock of Jiangsu Leimone Electronics Co.,
Ltd., (“Jiangsu Leimone”), a foreign investment enterprise organized under the
laws of the PRC that engages in the manufacturing, research and development, and
sales of electronic components for 3rd generation mobile phones, wireless
communication circuitry, GPS equipment, and related software products. Jiangsu
Leimone owned 51.03% of the outstanding capital stock of TCB Digital that the
Registrant acquired on September 22, 2009. Gold Lion also owns 100% of Profit
Harvest Corporation Ltd, (“Profit Harvest”), which is a marketing and sales
company organized and existing under the laws of Hong Kong.
Mr. Gu
owns 70.6% of the outstanding capital stock of Gold Lion and holds an option
indirectly to acquire an additional 28.97% of the outstanding capital stock of
TCB Digital.
Mr. Du
owns 29.4% of the outstanding capital stock of Gold Lion, which was pledged to
Mr. Cao Wei.
TCB
Digital is a high technology company engaged in electronic and telecommunication
product design, development, and manufacturing. TCB Digital started its business
in 1999 and was originally established as an Electronic Manufacturing Service
(EMS) factory for mobile phone vendors. TCB Digital was Motorola’s first
independent outsource manufacturing vendor responsible for producing Motorola
mobile phones in China. Moreover, TCB Digital was the first EMS factory in China
receiving Motorola’s International Quality Product and Qualification
certificate. Since 2004, TCB Digital developed and produced GSM and CDMA mobile
phones, wireless data modules and GPS equipment. TCB Digital is headquartered in
Tianjin, China. TCB Digital’s two main business operations are EMS for Original
Equipment Manufacturer (OEM) customers and the design and production of mobile
phone products.
TCB
Digital offers high quality and comprehensive EMS to both domestic and global
customers, including, Samsung, Tianyu, CCT, Danahar and Spreadtrum. TCB
Digital’s primary products include mobile phones, wireless telecommunication
modules, digital cameras, cable TV set-top boxes and GPS equipment. In addition,
TCB Digital has developed various state-of-the-art mobile phones and Smartphones
based on both of the main network technologies: Global System for Mobile
Communications, or GSM, and Code Division Multiple Access, or CDMA. Presently,
TCB Digital markets its mobile phone products through distributors in China and
also supplies GSM and CDMA mobile phones to major customers, including China
Mobile Communications Corporation, or CMCC, China UNICOM and China Telecom. See
“Information about TCB Digital” for more information.
On
September 22, 2009, pursuant to the share exchange agreement and the approval of
the majority of the stockholders of the Registrant, the Registrant acquired from
the Gold Lion shareholders 100% of Gold Lion in exchange for 4,225,219 shares of
the Registrant’s common stock. The result of this issuance is that the former
Gold Lion shareholders own approximately 69.3% of the outstanding stock of the
Registrant. As discussed above, Mr. Gu holds an option to
acquire an additional 28.97% of the outstanding capital stock of TCB Digital.
Pursuant to the share exchange agreement and the approval of the majority of the
stockholders of the Registrant, we have agreed to provide Mr. Gu the option
to exchange the additional 28.97% interest in TCB Digital for the issuance of an
additional 2,402,576 shares of our common stock.
Upon the
closing of the acquisition, the officers of the Registrant are Leo Gu – Chief
Executive Officer and Anthony K. Chan – Chief Financial Officer. The
members on the board of directors of the Registrant are Leo Gu, Frank Manning,
Augustine Lo, Kit H. Choy and Chang Shan.
Approximately
ten days following the closing of the merger, the Registrant intends to issue a
dividend consisting of 100% of the issued and outstanding capital stock of Zoom
Telephonics to its stockholders of record immediately prior to the closing. We
refer to this as the “spin-off.” In connection with the spin-off, the Registrant
distributed and transferred all of its current and future assets and liabilities
related to the business of Zoom prior to the closing of the merger to Zoom
Telephonics, subject to certain licensing rights discussed below. Zoom’s
stockholders immediately prior to the closing would retain their existing shares
in Zoom and would also receive an equal number of new shares in Zoom
Telephonics.
After the
merger and the spin-off, the Registrant and Zoom Telephonics each will be
independent companies. We expect, but cannot guarantee, that Zoom Telephonics’
common stock to be traded on the OTC Bulletin Board.
TCB
Digital and Zoom Telephonics will enter into a license agreement granting TCB
Digital licensing rights for “Zoom” and “Hayes” trademarks for certain products
and geographic regions. Zoom and Zoom Telephonics have also entered into a
separation and distribution agreement that allocates responsibility for
obligations arising before and after the spin-off, including, among others,
obligations relating to taxes.
Our
former directors, Frank Manning and Peter Kramer, entered into founder lock-up
agreements pursuant to which they will agree that during the one-year period
commencing on the date of closing that each will not sell, transfer, assign,
pledge or hypothecate, in any calendar month, greater than 3% of the shares of
our common stock sold in the previous four calendar weeks.
Corporate
Overview
We were
incorporated in the state of Delaware under the name Zoom Technologies, Inc. Up
until the closing date of the merger, we conducted our business through our
operating subsidiary, Zoom Telephonics, Inc. Zoom Telephonics, Inc. was
originally incorporated in New York in 1977 and changed its state of
incorporation to Delaware in 1993. Up until the Closing Date, our
business was in the design, production, marketing, sales, and support of
broadband and dial-up modems, Voice over Internet Protocol or "VoIP" products
and services, Bluetooth® wireless products, and other communication-related
products.
In September 2009, the transactions as
described above were approved by a majority of our stockholders and completed,
resulting in a change on control.
In connection with the merger with Gold
Lion, and the spin-off of Zoom Telephonics, Inc. the historical financial
statements of Gold Lion will be the financial statements of the Registrant, and
the business of the Registrant consists solely of the business of Gold Lion. The
risks factors set forth on page 4 regarding our business relates to risks of
Gold Lion.
RISK
FACTORS
You
should carefully consider the following risk factors, together with all of the
other information included in this current report on Form 8-K.
In
assessing these risks, you should also refer to the other information included
in current report, including the consolidated financial statements and the
accompanying notes. You should note that Zoom would become a holding company
with substantial operations in the PRC. As a result, Zoom would be subject to
legal and regulatory environments that differ in many respects from those of the
United States. Zoom’s business, financial condition or results of operations
could be affected materially and adversely by any of the risks discussed
below.
Risks
Related to Gold Lion’s Business
Gold
Lion’s ownership of businesses, inclusive of TCB Digital, Jiangsu Leimone and
Profit Harvest (collectively “Gold Lion Group”) including sales, results of
operations, and reputation could be materially adversely affected if it fails to
efficiently manage its manufacturing operations without interruption, or fails
to ensure that its products meet the expectations of its distributors and
end-user customers.
Operation
of Gold Lion Group requires successful execution of complex manufacturing
processes. The disruption of any of these could interrupt its revenue generation
and have a material and adverse effect on Gold Lion Group’s relationships with
distributors and end-user customers, TCB Digital and Jiangsu Leimone’s brand
names, and its financial performance. TCB Digital and Jiangsu Leimone’s
manufacturing operations involve raw material and component sourcing from third
parties, internal assembly processes, and distribution processes. These
operations are modified on a regular basis in an effort to improve manufacturing
and distribution efficiency and flexibility. Gold Lion Group may experience
difficulties in coordinating its supplies of components and raw materials to
meet the demand for its products, increasing or decreasing production at its
facilities in response to demand, adopting new manufacturing processes, finding
a timely way to develop the best technical solutions for new products, or
achieving manufacturing efficiency and flexibility. Gold Lion Group may
experience delays in adjusting or upgrading production at its facilities when it
introduces new models, delays in expanding manufacturing capacity, failure in
its manufacturing processes, or failure by its business partners to adequately
perform the services it has outsourced to them, which in turn may have a
material adverse effect on Gold Lion Group’s sales and results of operations. In
addition, a failure or an interruption could occur at any stage of Gold Lion
Group’s product development, manufacturing and delivery processes, resulting in
products not meeting the expectations of its distributors and end customers,
which could have a material adverse effect on Gold Lion Group’s sales, results
of operations, and reputation.
Gold Lion Group’s results of
operations, particularly its profitability, may be materially adversely affected
if it does not successfully manage price erosion and is not able to manage costs
related to its products and operations.
Selling
price erosion is a characteristic of the mobile handset and electronics
industries, and the products offered by Gold Lion Group are subject to natural
price erosion over time. If Gold Lion Group is not able to lower its costs at
the same rate or faster than this selling price erosion, and to introduce new
cost-efficient products with higher prices in a timely manner, as well as manage
costs related to its products and operations generally, this will have a
material adverse effect on its business and results of operations, particularly
its profitability.
Gold
Lion Group relies primarily on its distributors for marketing and sale of its
products at the provincial and local levels and for after-sales support of its
products. Because Gold Lion Group has limited influence over its distributors,
it cannot be certain that their marketing and after-sale support of its products
will be adequate to meet Gold Lion Group’s sales requirements and to protect
Gold Lion Group’s brand and reputation.
Gold Lion
Group now has distributors and after-sales service centers at the national
level, provincial level and municipal level in 31 provinces in China. Gold Lion
Group grants its distributors the right to use its brand name and logo when they
market Gold Lion Group’s products within their respective sales territories or
channels and when they provide after-sales support to Gold Lion Group’s end-user
customers. However, Gold Lion Group’s contractual arrangements with its
distributors do not provide Gold Lion Group with control over their everyday
business activities, and one or more of its distributors may engage in
activities that are prohibited under Gold Lion Group’s contractual arrangements
with them, that violate Peoples’ Republic of China (“PRC”) laws and regulations
governing the mobile handset industry or other PRC laws and regulations
generally, or that are otherwise harmful to Gold Lion Group’s business or
reputation in the industry.
Gold Lion Group
maintains inventories of raw materials, components and handsets, and its
inventories may decline in value or become obsolete.
The rapid
technological change in Gold Lion Group’s industry, the short product life cycle
of its handsets, its limited forecasting experience and processes, and the
competitive nature of its target markets make forecasting Gold Lion Group’s
future sales and operating results difficult. Gold Lion Group’s expense levels
are based, in part, on its expectations regarding future sales. In addition, to
enable Gold Lion Group to promptly fill orders, it maintains inventories of raw
materials, components and handsets. As a result, Gold Lion Group has to commit
to considerable costs in advance of anticipated sales. Any significant shortfall
of sales may result in Gold Lion Group maintaining higher levels of inventories
of raw materials, components, and finished goods than it requires, thereby
increasing its risk of inventory obsolescence and corresponding inventory
write-downs and write-offs. Gold Lion Group cannot guarantee that such
write-downs will be adequate to cover all losses resulting from inventory
obsolescence.
Gold Lion Group
plans to market its products to countries outside of China, which may subject it
to various economic, political, regulatory, legal and foreign exchange
risks.
Gold Lion
Group currently sells substantially all of its products in China. Gold Lion
Group also plans to selectively enter into markets outside China where it
identifies an opportunity to sell differentiated products and where it believes
it will be able to realize a reasonable return on investment. The marketing,
distribution and sale of its mobile handsets overseas exposes Gold Lion Group to
a number of risks, including:
·
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fluctuations
in currency exchange rates of the U.S. dollar and other foreign currencies
against the Renminbi;
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·
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difficulty
in engaging and retaining distributors and agents who are knowledgeable
about, and can function effectively in, overseas
markets;
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·
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difficulty
in designing products that are compatible with communications and product
standards in foreign countries, and in attaining the required
certifications for those products;
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longer
accounts receivable collection periods and greater difficulty in accounts
receivable collection;
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·
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increased
costs associated with maintaining marketing and sales activities in
various countries;
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difficulty
and costs relating to compliance with unexpected changes in regulatory
requirements and different commercial and legal requirements in the
jurisdictions in which Gold Lion Group offers its
products;
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inability
to obtain, maintain or enforce intellectual property rights;
and
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·
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changes
to import and export regulations, including quotas, tariffs and other
trade barriers, delays or difficulties in obtaining export and import
licenses, potential foreign exchange controls and repatriation controls on
foreign earnings, exchange rate fluctuations, and currency conversion
restrictions.
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If Gold
Lion Group is unable to effectively manage these risks, its ability to conduct
or expand its business abroad would be impaired; and this may in turn have a
material adverse effect on Gold Lion Group’s business, financial condition,
results of operations, and prospects.
Gold Lion Group’s
operating results are difficult to predict and may fluctuate significantly from
period to period in the future.
Gold Lion
Group’s operating results are difficult to predict and may fluctuate
significantly from period to period based on a number of factors such as the
launch of new products in a given period, the seasonality of its mobile handset
sales, the short life-cycle of any given handset model due to rapid
technological advances, a possible deterioration of economic conditions in
China, and potential changes to the regulation of the mobile handset industry in
China. As a result, you may not be able to rely on period-to-period comparisons
of Gold Lion Group’s operating results as an indication of its future
performance. If its revenues for a particular period are lower than Gold Lion
Group expects, its may be unable to reduce its fixed costs and operating
expenses for that period by a corresponding amount, which would negatively
impact its operating results for that period relative to its operating results
for other periods.
Gold Lion Group
has not applied for patents or registered copyrights for most of its
intellectual property; and its failure to adequately protect its intellectual
property rights may undermine its competitive position. In addition, litigation
to protect Gold Lion Group’s intellectual property rights may be
costly.
Implementation
of PRC intellectual property-related laws has historically been lacking,
primarily because of ambiguities in PRC laws and difficulties in enforcement.
Accordingly, intellectual property rights and confidentiality protections in
China may not be as effective as in the United States or other countries. Gold
Lion Group relies primarily on trade secrets and other contractual restrictions
to protect its intellectual property. Gold Lion Group has not applied for
patents or registered copyrights in China for most of its inventions, original
works of authorship, developments, and improvements relating to the mobile
handsets it produces. The actions Gold Lion Group has taken to protect its
intellectual property rights may not be adequate to provide it with meaningful
protection or commercial advantage. As a result, third parties may use the
technologies that it has developed and compete with Gold Lion Group, which could
have a material adverse effect on its business, financial condition and
operating results.
In
addition, policing unauthorized use of proprietary technology can be difficult
and expensive. Litigation may be necessary to enforce Gold Lion Group’s
intellectual property rights and the outcome of any such litigation may not be
in Gold Lion Group’s favor. Given the relative unpredictability of China’s legal
system and potential difficulties in enforcing a court judgment in China, there
is no guarantee that Gold Lion Group would be able to halt the unauthorized use
of its intellectual property through litigation in a timely manner.
Furthermore,
any such litigation may be costly and may divert management attention away from
Gold Lion Group’s business and cause it to expend significant resources. An
adverse determination in any such litigation will impair Gold Lion Group’s
intellectual property rights and may harm its business, prospects and
reputation. In addition, Gold Lion Group has no insurance coverage against
litigation costs and would have to bear all costs arising from such litigation
to the extent it is unable to recover them from other parties. The occurrence of
any of the foregoing could have a material adverse impact on Gold Lion Group’s
business, financial condition and results of operations.
Gold Lion Group
may be exposed to infringement or misappropriation claims by third parties
which, if determined adversely against it, could disrupt its business and
subject it to significant liability to third parties, as well as have a material
adverse effect on its financial condition and results of
operations.
Gold Lion
Group’s success depends, in large part, on its ability to use and develop its
technology, know-how and product designs without infringing upon the
intellectual property rights of third parties.
Gold Lion
Group’s products include increasingly complex technology and, as the amount of
such technologies and the number of parties claiming rights continue to
increase; the possibility of alleged infringement and related intellectual
property claims against it continues to rise. The holders of patents and other
intellectual property rights potentially relevant to Gold Lion Group’s product
offerings may be unknown to Gold Lion Group, or may otherwise make it difficult
for Gold Lion Group to acquire a license on commercially acceptable terms. There
may also be technologies licensed to and relied on by Gold Lion Group that are
subject to infringement or other corresponding allegations or claims by others
which could damage its ability to rely on such technologies. In addition,
although Gold Lion Group endeavors to ensure that companies that work with it
possess appropriate intellectual property rights or licenses, Gold Lion Group
cannot fully avoid the risks of intellectual property rights infringement
created by suppliers of components used in its products or by companies with
which it works in cooperative research and development activities. Since
technology standards, including those used and relied on by Gold Lion Group,
typically involve intellectual property rights, Gold Lion Group cannot fully
avoid risks of a claim for infringement of such rights due to its reliance on
such standards. Gold Lion Group believes that the number of third parties
declaring their intellectual property to be relevant to these standards - for
example, those standards related to 3G mobile communication technologies as well
as other advanced mobile communications standards - is increasing, which may
increase the likelihood that Gold Lion Group will be subject to such claims in
the future. While Gold Lion Group believes that any such intellectual property
rights declared and found to be essential to a given standard carry with them an
obligation to be licensed on fair, reasonable and non-discriminatory terms, not
all intellectual property owners agree on the meaning of that obligation and,
thus, costly and time-consuming litigation over such issues may result in the
future.
As Gold
Lion Group continues to market and sell its products throughout China, and as
litigation becomes more common in China, Gold Lion Group may face a higher risk
of becoming subject to claims for intellectual property infringement. While Gold
Lion Group has not, to date, become subject to these types of claims, it is
possible that it may, in the future, become subject to such intellectual
property infringement claims. Regardless of whether such claims have merit or
are decided in its favor, any such litigation could have a negative impact on
Gold Lion Group brand, reputation and ability to conduct its business and sell
some or all of its products.
Gold Lion Group’s
sales and profitability depend on the continued growth of the mobile
telecommunications industry, especially in China, and if the mobile
telecommunications industry does not grow as Gold Lion Group expects or grows at
a slower speed than Gold Lion Group expects, its sales and profitability may be
materially adversely affected.
Gold Lion
Group derives substantially all of its revenues from sales of mobile handsets in
China. The continued development of its business depends, in large part, on
continued growth in the mobile telecommunications industry, especially in China,
in terms of the number of existing mobile subscribers who upgrade or replace
their existing mobile handsets, the number of new subscribers, and increased
usage. Although China’s wireless telecommunication industry has grown rapidly in
the past, and although China government has granted 3G licenses to operators,
the wireless telecommunication industry may not continue to grow at the same
growth rate in the future or to grow at all.
Furthermore,
Gold Lion Group’s sales and profitability are also affected by the extent to
which there is increasing demand for, and development of, value-added services,
leading to opportunities for it to successfully market mobile handsets that
feature those services. To a certain extent, Gold Lion Group is dependent on
third-party mobile telecommunication operators to successfully introduce these
value-added services that encourage end users to upgrade or replace their mobile
handsets. For instance, mobile telecommunication operators in China are
upgrading their networks to offer 3G wireless telecommunication services, which
will lead to increased demand for enhanced wireless value-added services and,
therefore, increased demand for mobile handsets with more advanced technologies
in China. Therefore, if mobile telecommunication operators are not successful in
their attempts to introduce new services, increase the number of subscribers,
stimulate increased usage and drive replacement sales, its business and results
of operations could be materially adversely affected.
These
developments in its industry are, to a large extent, outside of Gold Lion
Group’s control; and any reduced demand for wireless voice and data services,
any other downturn, or other adverse changes in China’s wireless
telecommunication industry could severely harm its business.
Changes in the
regulatory environment for telecommunications systems and services, especially
in China, could negatively impact Gold Lion Group’s
business.
The
telecommunications industry in China is heavily regulated, and regulatory
changes may affect both Gold Lion Group and its customers. For example, changes
in regulations that impose more stringent standards for the production of mobile
handsets could adversely affect Gold Lion Group business. Similarly, tariff
regulations that affect the pricing of new services offered by mobile
telecommunication operators could also affect their ability to invest in network
infrastructure, which in turn could affect the sales of Gold Lion Group’s mobile
handsets. License fees, environmental, health and safety, privacy and other
regulatory changes may increase costs and restrict operations of mobile
telecommunication network operators and service providers. The indirect impact
of such changes could affect Gold Lion Group’s business adversely even though
the specific regulations may not directly apply to it or its
products.
China
Ministry of Industry and Information Technology (“MIIT”) has broad discretion
and authority to regulate all aspects of the telecommunications and information
technology industries in China, including managing spectrum, setting mobile
handset specifications and standards, approving the adoption of new technologies
such as 3G, and drafting laws and regulations. MIIT also determines the forms
and types of services that may be offered by telecommunication companies to the
public, the rates that are charged to subscribers for those services, and the
content of material available in China over wireless services, including
Internet content. In addition, China’s telecommunication regulatory framework is
still at a relatively early stage of development, and prone to directional
shifts and major structural changes. The PRC government is in the process of
drafting a national telecommunication law, which may include new legislation
governing the mobile handset industry. If MIIT sets standards with which Gold
Lion Group is unable to comply or which would render Gold Lion Group’s products
uncompetitive, its ability to sell products could be severely limited, resulting
in substantial harm to Gold Lion Group’s operations.
Gold Lion Group
depends on its key personnel, and its business and growth may be severely
disrupted if it loses their services. Gold Lion Group may also have difficulty
attracting and retaining qualified management and research and development
personnel.
Gold Lion
Group’s future success depends substantially on the continued services of its
key personnel. Gold Lion Group relies on key personnel’s experience in the
mobile handset manufacturing industry, in similar business operations, in sales
and marketing, and on their relationships with Gold Lion Group’s shareholders,
customers, and suppliers. If Gold Lion Group loses the services of one or more
of these key personnel, it may not be able to replace them readily, if at all,
with suitable or qualified candidates, and may incur additional expenses to
recruit and retain new officers, which could severely disrupt its business and
growth.
In
addition, if any of these key personnel joins a competitor or forms a competing
company, Gold Lion Group may lose some of its customers. Gold Lion Group has
entered into employment agreements with each of these key personnel, which
contain confidentiality and non-competition provisions. However, if any disputes
arise between these key personnel and Gold Lion Group, it is not clear what the
court decisions will be and the extent to which these court decisions could be
enforced in China, where all of these key personnel reside and hold some of
their assets. Furthermore, as Gold Lion Group expects to continue to expand its
operations and develop new products, Gold Lion Group will need to continue
attracting and retaining experienced management and key research and development
personnel.
Competition
for management and research and development personnel in the mobile handset
market in China is intense, and the availability of suitable and qualified
candidates is limited. In particular, Gold Lion Group competes to attract and
retain qualified research and development personnel with other mobile handset
manufacturers, universities and research institutions. Competition for these
individuals could cause Gold Lion Group to offer higher compensation and other
benefits in order to attract and retain them, which could have a material
adverse effect on Gold Lion Group’s financial condition and results of
operations. Gold Lion Group may also be unable to attract or retain the
personnel necessary to achieve its business objectives, and any failure in this
regard could severely disrupt its business and growth.
Fluctuations in
exchange rates could adversely affect Gold Lion Group’s
business.
Because
substantially all of its earnings are denominated in Renminbi, any appreciation
or depreciation in the value of the Renminbi relative to the U.S. dollar would
affect Gold Lion Group’s balance sheet position and financial results reported
in U.S. dollar terms without giving effect to any underlying change in its
business or results of operations. In addition, fluctuations in the exchange
rate between the U.S. dollar and the Renminbi would affect the relative
purchasing power of Gold Lion Group’s U.S. dollar denominated cash assets and
the Renminbi value of Gold Lion Group’s U.S. dollar denominated bank borrowings.
Fluctuations in the exchange rate will also affect the relative value of any
dividend Gold Lion Group may issue that will be exchanged into U.S. dollars, and
will affect the earnings from and value of any U.S. dollar-denominated
investments it makes in the future.
Gold
Lion Group’s competitive position could decline if it is unable to obtain
additional financing to acquire businesses or technologies that are strategic
for its success, or otherwise execute its business strategy.
Gold Lion
Group believes that its current cash will be sufficient to fund its working
capital and capital expenditure requirements for at least the next twelve
months. However, Gold Lion Group may need to raise additional funds to support
more rapid expansion, respond to competitive pressures, acquire complementary
businesses or technologies or respond to unanticipated requirements. Gold Lion
Group cannot assure you that additional funding will be available to it in
amounts or on terms acceptable to Gold Lion Group. If sufficient funds are not
available or are not available on acceptable terms, Gold Lion Group’s ability to
fund its expansion, take advantage of acquisition opportunities, develop or
enhance its services or products, or otherwise respond to competitive pressures
would be significantly limited. If appropriate opportunities arise, Gold Lion
Group intends to acquire businesses; technologies, services or products that it
believes are strategic.
Risks
Related to Gold Lion’s Industry
If Gold Lion Group cannot keep pace
with market changes and produce mobile phones with new technologies and features
in a timely and cost-efficient manner to meet its customers’ requirements and
preferences, the growth and success of its business will be materially adversely
affected.
The
mobile handset market in China is characterized by changing consumer preferences
with respect to style and functionality, increasing demand for new and advanced
technologies and features, rapid product obsolescence and price erosion,
evolving industry standards, intense competition and wide fluctuations in
product supply and demand. If Gold Lion Group cannot keep pace with market
changes and produce new mobile handsets in a timely and cost-efficient manner to
meet its customers’ requirements and preferences, the growth and success of its
business will be materially adversely affected.
Gold
Lion Group experiences intensive competition from its Electronics Manufacturing
Service (“EMS”) competitors; Gold Lion Group’s failure to maintain its
relationship with clients may have material adverse impact on its business and
profitability.
In recent
years, more and more EMS providers have invested heavily in the northern part of
China and particularly in the Bo Hai area where Tianjin city is located. Gold
Lion Group’s OEM customers are also giving more orders to other EMS providers to
balance their need and reduce their risk. Gold Lion Group will attempt to
provide better services and higher quality products to attract more customers
and reduce its risk from fierce competition.
Competition
in mobile phone manufacture and sales is intense. Gold Lion Group’s failure to
maintain or improve its market position and respond successfully to changes in
the competitive landscape may have a material adverse impact on its business and
results of operations.
The
mobile handset manufacturing industry in China is intensely competitive.
Industry participants compete with each other mainly on the basis of the breadth
and depth of their product portfolios, price, operational and manufacturing
efficiency, technical performance, product features, quality, customer support
and brand recognition. Gold Lion Group faces significant competition from a
number of competitors, including domestic mobile handset producers such as Bird
Ningbo Co., Ltd, Haier Telecom Co. Ltd., , Konka Group Co., Ltd, Lenovo Group
Limited, and TCL Communication Technology Holdings Limited,. and a number of
large multinational mobile handset producers, such as LG Electronics Ltd.,
Motorola Inc., Nokia Corporation, Samsung Electronics Co., Ltd., and Sony
Ericsson Mobile Communications (China) Co., Ltd.. Many of Gold Lion Group’s
competitors have longer operating histories, greater name recognition,
significantly larger market shares, access to larger customer bases and
significantly greater economies of scale and financial, sales and marketing,
manufacturing, distribution, technical and other resources than Gold Lion Group
does. Some of these competitors have used, and will probably continue to use,
more aggressive pricing strategies, greater amounts of sales incentives and
subsidies for distributors, retailers and customers, more successful design
approaches, and more advanced technologies. In addition, some competitors have
chosen to focus on building products based on commercially available components,
which may enable them to introduce these products faster and with lower levels
of research and development spending than Gold Lion Group. Furthermore,
consolidation among the industry participants in China may potentially result in
stronger competitors that are better able to compete as end-to-end suppliers as
well as competitors who are more specialized in particular areas and geographic
markets. This could have a material adverse effect on Gold Lion Group’s
business, financial condition, results of operations and
prospects.
Gold
Lion Group may be unable to manage rapid growth and a changing operating
environment, which could adversely affect its ability to serve its customers and
could harm its business.
Gold Lion
Group has experienced rapid growth over the last few years. Gold Lion Group has
limited operational, administrative and financial resources, which may be
inadequate to sustain its current growth rate. If Gold Lion Group is unable to
manage its growth effectively, the quality of its solutions could deteriorate
and its business may suffer. As its customer base increases and it enters new
end-markets, Gold Lion Group will need to:
|
·
|
increase
its investments in personnel, research and development capabilities,
facilities and other operational
areas;
|
|
·
|
continue
training, motivating and retaining its existing employees, and attract and
integrate new qualified employees;
|
|
·
|
develop
and improve its operational, financial, accounting and other internal
systems and controls; and
|
|
·
|
take
enhanced measures to protect any proprietary technology or technological
capability it develops.
|
Any
failure to manage Gold Lion Group’s growth successfully could distract
management’s attention and result in its failure to serve its customers and harm
its business.
Risks
Related to Doing Business in China
Adverse changes
in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the
demand for Gold Lion Group’s products and materially adversely affect its
competitive position.
Gold Lion
Group conducts substantially all of its operations and generates most of its
revenues in China. Accordingly, its business, financial condition, results of
operations and prospects are affected significantly by economic, political and
legal developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
|
·
|
the
higher level of government
involvement;
|
|
·
|
the
early stage of development of the market-oriented sector of the
economy;
|
|
·
|
the
higher level of control over foreign exchange;
and
|
|
·
|
the
allocation of resources.
|
While the
PRC economy has grown significantly since the late 1970s, the growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on Gold Lion Group. For
example, Gold Lion Group’s financial condition and results of operations may be
adversely affected by government control over the telecommunications industry,
capital investments or changes in tax regulations that are applicable to
it.
The PRC
economy has been transitioning from a planned economy to a more market-oriented
economy. Although the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform, the PRC
government continues to exercise significant control over economic growth in
China through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy, and imposing policies
that impact particular industries or companies in different ways. For example,
efforts by the PRC government to slow the pace of growth of the PRC economy
could result in decreased capital expenditure by mobile telecommunication
network operators, which in turn could reduce demand for its
products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level of
mobile communications investments and expenditures in China, which in turn could
lead to a reduction in demand for Gold Lion Group’s products and consequently
have a material adverse effect on its business and prospects. In particular, any
adverse change in the PRC government’s policies towards the mobile
communications industry may have a material adverse effect on Gold Lion Group’s
business.
Gold
Lion may have difficulty establishing adequate management, legal and financial
controls in the PRC.
Most PRC
companies historically have been less focused on establishing Western style
management and financial reporting concepts and practices, as well as modern
banking, computer and other internal control systems, than companies in the U.S.
and certain other Western countries. Gold Lion may have difficulty in hiring and
retaining a sufficient number of qualified internal control employees to work in
the PRC. As a result of these factors, Gold Lion may experience difficulty in
establishing management, legal and financial controls, collecting financial
data, preparing financial statements, books of account and corporate records,
and instituting business practices that meet Western standards.
Section 404
of the Sarbanes-Oxley Act of 2002 will require the Registrant to document and
test its internal controls over financial reporting in future periods. Any
delays or difficulty in satisfying these requirements could adversely affect its
future results of operations and the Registrant’s stock price.
Section 404
of the Sarbanes-Oxley Act of 2002 will require the Registrant to document and
test the effectiveness of Gold Lion’s internal control over financial reporting
in accordance with an established internal control framework and to report on
its conclusion as to the effectiveness of such internal controls. It may cost
more than it expects to comply with these control and procedure-related
requirements.
The
Registrant may discover in the future areas of internal control that need
improvement, particularly with respect to Gold Lion Group or other businesses
that it may acquire. The Registrant cannot be certain that any remedial measures
it takes will provide adequate internal control over financial
processes and reporting in the future. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation could
harm the Registrant’s operating results or cause it to fail to meet its
reporting obligations. If the Registrant is unable to conclude that it has
effective internal control over financial reporting, or if its independent
auditors are unable to provide it with an unqualified report regarding the
effectiveness of its internal control over financial reporting in future periods
as required by Section 404, investors could lose confidence in the
reliability of its financial statements, which could result in a decrease in the
value of the Registrant’s common stock. In addition, failure to comply with
Section 404 could potentially subject the Registrant to sanctions or
investigations by the SEC or other regulatory authorities.
Description
of Business
Gold
Lion’s wholly owned subsidiary, Jiangsu Leimone, owns 51.03% of TCB
Digital. TCB Digital, a subsidiary of Gold Lion, is a well
established high technology enterprise engaging in electronic and
telecommunication product design, development, and manufacturing capability and
process. TCB Digital started its business in 1999 and was originally set up as
an Electronic Manufacturing Service (EMS) factory for mobile phone vendors. TCB
Digital was Motorola’s first independent outsourcing manufacturing vendor
responsible for producing Motorola mobile phones in China. Moreover, TCB Digital
was the first EMS factory in China receiving Motorola’s International Quality
Product and Qualification Certificate. Currently TCB Digital is headquartered in
Tianjin, China. TCB Digital has two main business operations, one providing
Electronic Manufacturing Service for OEM (Original Equipment Manufacturer)
customers and the other designing and producing mobile phone
products.
TCB
Digital offers high quality and comprehensive EMS to both domestic and global
customers including Samsung, Tianyu, CCT, Palm, Danaher, Spreadtrum and SK
Telecom. Major products manufactured by TCB Digital include mobile phones,
wireless telecommunication modules, digital cameras, cable TV set-up boxes, and
GPS equipment. In addition, TCB Digital develops various state-of-art feature
mobile phones and Smartphones based on TD-SCDMA, GSM, WCDMA and CDMA
technologies. TCB Digital markets its mobile phone products through retail
distributors in China and also supply major operator customers such as China
Mobile (CMCC), China UNICOM, and China Telecom with various operator customized
2.5G or 3G mobile phones.
Competitive
Strengths
TCB
Digital believes its competitive strengths include:
Experienced
Management Team & Strong Technology Experts
TCB
Digital believes it has a well established and efficient human resource
strategy. Under this strategy, TCB Digital is able to develop and maintain a
good management team, strong technical professionals, and highly skilled
manufacturing operators. TCB Digital believes the combination of TCB Digital’s
internal development program and its hiring program has been able to provide it
adequate and stable staffing for various levels of technical and managerial
requirements. TCB Digital has a management team with expertise in manufacturing,
product development, and marketing. Many managers have working experience and
training in leading firms in the industry such as Motorola, BenQ, Samsung,
Pemstar, Mitsum, and Foxcomm. With respect to the manufacturing, TCB Digital
believes it has been able to develop and maintain a highly efficient
manufacturing operator team with strong discipline. Furthermore, TCB Digital
believes it has a strong product research and development team that has
demonstrated talent in developing state-of-art mobile devices that can meet
market needs.
Location
Advantage
TCB
Digital is located in Tianjin, China, which is located in the middle of Bo Hai
Electronic Development Base. The China central government has recently
established the “Bo Hai Economic Zone” which has been divided into several
regions with specific development directions. Bo Hai Electronic Development Base
is one of these newly identified regions, which has a well-established
transportation system and strong industrial foundation.
Advanced
manufacturing facility & Process
TCB
Digital has 10 SMT (Surface Mounting Technology) production lines, 10 assembly
and testing lines, and over $2 million worth of advanced testing
instruments to meet customers’ different levels of technical requirements. TCB
Digital’s SMT production lines can produce over 500,000 PCBA (PC board
assemblies) per month or about 6 million PCBA annually. In addition, TCB
Digital’s assembly line production capacity is about 800K units per month or
around 9.6 million annually.
Excellent
quality control system & workflow
TCB
Digital has been implementing high-quality quality control systems and workflow
systems to help ensure that it provides high-quality products to its customers.
TCB Digital has received ISO 9000, ISO 14000, and QSH 18000 quality-related
certificates
Strong
Marketing Capability
TCB
Digital has a sales and marketing team that allows it to market and promote its
mobile phones and related products in both China and markets outside
China.
Strategy
TCB
Digital’s strategy is to strengthen its position as an innovative mobile phone
producer and as an Electronic Manufacturing Service provider to customers in
China and overseas.
Strengthen
design and development capabilities in mobile phones
One of
TCB Digital’s main business strategies is to focus on developing mobile phones
based on GSM, CDMA, and TD-SCDMA core technologies for both China and overseas
markets. TCB Digital is able to design, develop, and manufacture innovative GSM,
CDMA and TD-SCDMA mobile phones by leveraging its own resources and facilities.
To meet the changing needs of its customers and to maintain the competitive
advantage of its products, TCB Digital intends to continue to improve and
strengthen its development and design capabilities. TCB Digital plans to
continue investing resources to maintain an experienced and skilled design team
to preserve competitiveness within a frequently changing and challenging
industry landscape.
Enhance
strong customer relationships into new opportunities.
TCB
Digital will continue to focus on refining its EMS processes, maintaining high
quality control processes, adding new manufacturing technology, and enhancing
its highly efficient operations team. In addition, TCB Digital will continue to
monitor market movement, including customers’ requirements, adjusting its
business model to better cope with these changes while maintaining profit
margins. TCB Digital will attempt to increase its future revenues and profits by
enhancing its strong customer relationships and expanding the range of services
it offers to its customers. TCB Digital believes that growing with its clients
will enable it to promote its reputation and expand its geographic
presence.
Further
expand market and sales channel
Currently
TCB Digital has mobile phone distributors and after-sales service centers at the
national level, provincial level and municipal level in 27 provinces in China.
Those distributors are capable of covering approximately 5% of all local
distributors and 10% of all retail stores in China. As the market potential in
tier 3 and tier 4 cities and towns, with population from 2,000,000 down to
600,000, in China has been growing significantly, TCB Digital intends to invest
in further expansion of its marketing and sales channels in these smaller cities
and rural areas.
Products
and Technology
Products
Gold
Lion’s TCB Digital subsidiary has developed and produced GSM and CDMA mobile
phones, wireless data modules and GPS equipment since 2004, and Gold Lion’s JS
Leimone subsidiary has produced this type of electronic equipment since 2008.
TCB Digital has customized and assembled two models of Smartphones for Palm Inc.
for the China market. One model was customized, with applications developed by
TCB Digital under Palm’s development and supervision guidelines, specifically
for China Mobile Communications Corporation (CMCC); and this model has
successfully entered into CMCC’s sales channels. In 2007, TCB Digital
collaborated with SK-Telecom and jointly developed a dual mode GSM-CDMA
Smartphone for China UNICOM. This dual mode GSM-CDMA Smartphone was designed and
manufactured by TCB Digital and marketed under the SK-Telecom brand
name.
In 2008,
TCB Digital developed and launched four models of 2.5G GSM mobile phones for the
China market. These GSM mobile phones have customary voice features plus data
service functions such as web browsing, short messaging, multimedia messaging,
multimedia player, games and more. TCB Digital has also developed a 2.5G GSM
mobile phone that embeds China’s “CMMB” standard for mobile digital TV, and this
phone uses Google’s Android operating system.
Technology
TCB
Digital is located in Tianjin City. TCB Digital manufactures digital
communication and consumer electronic products with 10 SMT (Surface Mount
Technology) lines and 10 assembly and test lines. Jiangsu Leimone is located in
the city of Nantong, Jiangsu Province. Jiangsu Leimone has 2 SMT lines and 2
assembly and test lines. TCB Digital produced approximately 5.3 million
sets of products, including single and multiple PCBAs and also including fully
packaged products, in 2006, about 5.5 million units in 2007, and
5.2 million units in 2008. TCB Digital periodically upgrades its SMT
facilities to further improve efficiency and quality. In 2008, its first year of
production, Jiangsu Leimone produced 0.8 million units of
products.
DIGITAL COMMUNICATION
Products by Segment as % of
Sales
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
EMS
of mobile phones
|
|
|
90.3
|
%
|
|
|
49.98
|
%
|
|
|
44.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
phone sales
|
|
|
3.64
|
%
|
|
|
26.94
|
%
|
|
|
43.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCBAs
& others
|
|
|
2.32
|
%
|
|
|
19.27
|
%
|
|
|
12.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Own
brand product sales
|
|
|
3.74
|
%
|
|
|
3.81
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Note:
Gold Lion acquired 51.03% of TCB Digital as of July 1, 2007. The above
figures represent 100% of the activities of TCB Digital including periods prior
to Gold Lion’s acquisition.
Major
Customers of TCB Digital
Customer
|
|
Customer Profile
|
|
|
|
Beijing
Tianyu
|
|
A
well-known domestic brand. Established strategic partnership in
May 2006, mainly to provide mobile phone manufacturing services.
Sales for the years 2008 and 2007 were Rmb 32.2m and 74.6m
respectively.
|
|
|
|
Other
brands incl. Wincos, Aoxin, Xingwang, Yilitong, etc.
|
|
EMS
for these various brands amounted to Rmb 271.8m in 2008 and Rmb 121.6m in
2007.
|
|
|
|
Tianjin
Tong Guang Electronic Technology Co. Ltd.
|
|
A
company, related to TCB Digital through a common shareholder, in the
business of TV set top cable boxes. Sales for the years 2008 and 2007 were
Rmb 81.7m and 16.6m respectively.
|
|
|
|
Beijing
China Electronic Guang Tong Technology (CCT)
|
|
Established
strategic partnership in December 2003, mainly to provide mobile
phone manufacturing services. Sales for the years 2008 and 2007 were Rmb
44.0m and nil respectively.
|
|
|
|
Spreadtrum
|
|
Established
strategic partnership in March 2007, mainly for manufacturing of
wireless modules. Sales for the years 2008 and 2007 were Rmb 29.4m and
2.6m respectively
|
|
|
|
SK
and Palm
|
|
We
jointly developed Smartphones with these two brands for the China market.
Sales in the years 2008 and 2007 totaled Rmb 26.6m and 39.3m
respectively.
|
|
|
|
Samsung
|
|
Established
strategic partnership in April 2006, mainly to provide digital camera
PCBAs. Sales for the years 2008 and 2007 were Rmb 12.0m and 10.4m
respectively.
|
|
|
|
Danaher
Motion
|
|
Established
Strategic Partnership in March 2007, mainly for manufacturing various
automobile driving controllers for Danaher global companies. Sales for the
years 2008 and 2007 were Rmb 5.5m and 2.8m
respectively
|
Suppliers
TCB
Digital has the following main suppliers:
·
|
Beijing Xingwang Shidai Tech
& Trading Co., Ltd.
Founded in 2002, this company focuses on
mobile phone components, electronic products, and telecommunication
products.
|
·
|
China Electronic Appliance
Corporation (CEAC).
Founded in 1964, CEAC has over 40 subsidiaries
and is one of the biggest electronic components suppliers in
China.
|
·
|
MTC (Material Trading Center)
of Motorola Singapore.
MTC was founded in 2003 and is a supplier of
various manufacturing components and materials to EMS
providers.
|
·
|
Orsus Xelent Technologies.
Orsus Xelent focuses on mobile phone and related hardware and
software product development.
|
·
|
SiChun Moba Enterprise.
Moba focuses on mobile phone and telecommunication product
development and distribution.
|
·
|
TechFaith Wireless Inc.
TechFaith is an originally developed product provider for research
and development of mobile phone
solutions
|
·
|
Tianjin Tong Guang Group
Electronics Science & Technology Co., Ltd.
This company,
related to our TCB Digital subsidiary through a common shareholder,
develops digital TV and cable TV set top boxes, and is also a supplier of
components to TCB Digital.
|
·
|
Tianjing Guosen Group Co.,
Ltd.
This company has been in the wireless industry since 1993. It
offers various technologies and electronic components to mobile phone
manufacturers.
|
·
|
Westing Green (Tianjin)
Plastic Co., Ltd. (WGP)
This company is a subsidiary of Taiwan
based Green Point Group (GPG). WGP is a leading supplier of plastic
components for manufacturing mobile phones, MP3, Walkie-talkies,
automobile electronic devices and other consumer electronic
products.
|
A cost
based analysis of our major suppliers from 2006 to 2008 is as
follows:
|
|
Percentage of Purchases
|
|
|
|
|
|
Supplier
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
MTC
(Material Trading Center) of Motorola Singapore
|
|
|
59
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westing
Green (Tianjin) Plastic Co., Ltd. (WGP)
|
|
|
8
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Guosen Group Co., Ltd.
|
|
|
6
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Electronic Appliance Corporation (CEAC)
|
|
|
—
|
|
|
|
10
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
—
|
|
|
|
26
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orsus
Xelent Technologies
|
|
|
—
|
|
|
|
11
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TechFaith
Wireless Inc.
|
|
|
—
|
|
|
|
10
|
%
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
|
—
|
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spreadtrum
Communications (Shanghai) Co., Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLP
Guangtong Beijing Science and Technology Co., Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wincos
Technology (HK) Co., Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xi
Long
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jie
Ying Electronics
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tai
Ke Yuan of Hong Kong
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An
Fu Li
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
73
|
%
|
|
|
65
|
%
|
|
|
62
|
%
|
Note:
Gold Lion acquired 51.03% of TCB Digital as of July 1, 2007. The above
figures represent 100% of the activities of TCB Digital including periods prior
to Gold Lion’s acquisition.
Profit
Harvest
Profit
Harvest is a wholly own subsidiary of Gold Lion that functions as a sales and
marketing arm for TCB Digital. The major customers of Profit Harvest for 2008
were:
Customer over 5% of sales
|
|
|
|
|
|
|
|
Gold
Profit Communication and Commerce Ltd.
|
|
|
16
|
%
|
|
|
|
|
|
Jet
On Company Ltd.
|
|
|
14
|
%
|
|
|
|
|
|
UK
Kingbond International (HK) Group Co. Ltd.
|
|
|
11
|
%
|
|
|
|
|
|
Pengxiang
Huateng Electronics Co., Ltd.
|
|
|
8
|
%
|
|
|
|
|
|
Hong
Kong Mingyan Digital Co., Ltd.
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
Sub-total
of customers over 5% of sales
|
|
|
56
|
%
|
Sale
and Marketing
Mobile
Phone Business
TCB
Digital markets its mobile phone products via two different strategies. One
approach is to develop and manufacture mobile phones for mobile phone OEM
customers. In this approach, based on a customer’s requirements and
specifications TCB Digital develops, manufactures and ships the finished mobile
product to the customer under the customer’s brand. TCB Digital has developed
several strategic mobile phone OEM customers in China including SK Telecom,
CECT, Daxian, and Orsus Xelent.
TCB
Digital’s second approach is to sell its mobile phones under its Leimone brand
name. For sales of its Leimone-branded mobile phone handsets, TCB Digital has
distributors and after-sales service centers at the national level, provincial
level and municipal level in 31 locations in China. Those distributors cover
approximately 5% of all local distributors and 10% of all retail stores in
China.
The
market potential in tier 3 and tier 4 cities (population from 2,000,000 down to
600,000) in China has been growing significantly. TCB Digital has adjusted its
distribution strategy to directly sell products not only to distributors at the
provincial level, but also to agents at the municipal level in some provinces.
TCB Digital believes these municipal agents are better adapted than the
provincial distributors to extend their distribution networks into tier 3 and
tier 4 markets.
TCB
Digital has commenced the export of mobile phones to overseas markets by setting
up a sales office in Hong Kong to promote sales of mobile phones in those
countries. TCB Digital is also actively participating in bids held by China
Mobile, China Telecom and China Unicom in order to directly sell a large volume
of mobile phones to these large mobile operators.
EMS
Business
TCB
Digital started providing EMS services to electronic product and mobile phone
product OEM customers in 1999. Over the past 9 years, TCB Digital has been
providing EMS to many domestic and global customers. TCB Digital believes is has
a well-established sales and support network throughout the country that
provides effective and comprehensive after-sales services.
Competition
The
market for mobile phone product is intensely competitive. Most of TCB Digital’s
competition comes from Chinese mobile phone manufacturers. TCB Digital believes
that its competitive advantages include its experience in the telecommunications
terminal area, its distribution network, its in-house and external research and
development capacity, and its reputation. For the EMS business area, competition
is from other EMS providers based in Northern China. TCB Digital believes that
its competitive advantage include its quality control and wide range of
customized services.
Employees
Currently
TCB Digital has approximately 1,200 total employees, mostly based in Tianjin
city, including approximately 700 EMS manufacturing operators, 100 sales
executives, 80 research and development engineers, 90 after-sales service
technicians, and other support staff and management personnel. JS Leimone
currently has approximately 200 persons in Nantong, Jiangsu
Province.
Properties
TCB
Digital leases properties with a total area of 18,678 square meters in Tianjin
City, China. TCB Digital believes its existing facilities and equipment are well
maintained and in good operating condition, and are sufficient to meet its needs
for the foreseeable future. Jiangsu Leimone currently leases properties with a
total area of approximately 1,300 square meters in Nantong, Jiangsu Province,
and plans to increase to 2,300 square meters of production facilities within
2009.
Legal
Proceedings
We are
not a party to any material legal proceedings nor are we aware of any
circumstance that may reasonably lead a third party to initiate legal
proceedings against us.
Market
for Common Equity
Our
common stock trades on the Nasdaq Capital Market under the symbol "ZOOM". The
following table sets forth, for the periods indicated, the high and low sale
prices per share of common stock, as reported by the Nasdaq Capital Market. All
common stock information prior to August 7, 2008 and presented herein was
restated to reflect the reverse stock split.
Interim Periods for Fiscal 2009
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
2.09
|
|
|
0.46
|
|
Second Quarter
|
|
2.68
|
|
|
1.01
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2008
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
4.25
|
|
|
$
|
1.75
|
|
Second
Quarter
|
|
$
|
2.85
|
|
|
$
|
1.60
|
|
Third
Quarter
|
|
$
|
3.62
|
|
|
$
|
1.09
|
|
Fourth
Quarter
|
|
$
|
1.52
|
|
|
$
|
.30
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2007
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
$
|
9.00
|
|
|
$
|
5.40
|
|
Second
Quarter
|
|
$
|
9.45
|
|
|
$
|
5.75
|
|
Third
Quarter
|
|
$
|
6.50
|
|
|
$
|
3.60
|
|
Fourth
Quarter
|
|
$
|
6.50
|
|
|
$
|
2.65
|
|
As of
September 22, there are 6,205,377 shares of our common stock outstanding
and 216 holders of record of our common stock. As of September
22, 2009, the closing price of our stock was $8.10.
Changes
in and Disagreements with Accountants
None.
Indemnification
of Directors and Officers
In
connection with the Share Exchange, the Registrant did not amend its Articles of
Incorporation or Bylaws.
Our
Certificate of Incorporation and Bylaws authorize us to indemnify our directors,
officers, employees and agents against expenses (including attorneys' fees),
liabilities and other matters incurred in connection with any action, suit or
proceeding, to the fullest extent permitted by Section 145 of Delaware
General Corporation Law. In addition, our Certificate of Incorporation provides
our directors shall not be personally liable to us or its stockholders for
monetary damages for any breach of fiduciary duty by such director as a
director. Notwithstanding the foregoing, a director shall be liable to the
extent provided by applicable law (i) for breach of the director’s duty of
loyalty to us or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal
benefit.
We
may also advance all reasonable expenses which were incurred by or on behalf of
a present director or officer in connection with any proceeding to the fullest
extent permitted by applicable law.
The
Bylaws also permit us to enter into indemnity agreements with individual
directors, officers, employees, and other agents. Any such agreements, together
with the Bylaws and Certificate of Incorporation, may require us, among other
things, to indemnify directors or officers against certain liabilities that may
arise by reason of their status or service as directors (other than liabilities
resulting from willful misconduct of a culpable nature), to advance expenses to
them as they are incurred, and to obtain and maintain directors' and officers'
insurance if available on reasonable terms.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Security
Ownership of the Registrant after the Acquisition
The
following table sets forth information with respect to the beneficial ownership
of the our common stock as of the date hereof by each person who is known by us
to beneficially own more than 5% of Registrant’s common stock and each officer,
each director and officers and directors as a group.
Common
stock which an individual or group has a right to acquire within 60 days
pursuant to the exercise or conversion of options, warrants or other similar
convertible or derivative securities are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person shown in the
table.
Name and Address of Beneficial Owner (1)
|
|
Common stock if
Zoom acquires
Gold Lion (and not
the additional 28.97%
interest in TCB Digital)
and does not issue the
NASDAQ Additional
Consideration Shares
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Percent
|
|
Lei
Gu
|
|
|
2,786,271
|
|
|
|
44.9
|
%
|
Wei
Cao
|
|
|
1,160,288
|
|
|
|
18.7
|
%
|
Anthony
K. Chan
|
|
|
0
|
|
|
|
0
|
%
|
Frank
Manning
|
|
|
157,249
|
|
|
|
2.5
|
%
|
Augustine
Lo
|
|
|
0
|
|
|
|
0
|
%
|
Kit
H. Choy
|
|
|
0
|
|
|
|
0
|
%
|
Chang
Shan
|
|
|
0
|
|
|
|
0
|
%
|
All
directors and executive officers as a group (of 6 persons)
|
|
|
2,943,520
|
|
|
|
47.4
|
%
|
(1)
|
Unless
otherwise indicated, the address for each stockholder listed in the above
table is c/o Gold Lion Holding Ltd., No.6 Zhongguancun South Street, Suite
608, Haidian District, Beijing, China
100086.
|
GOLD
LION’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion contains forward-looking statements. Forward looking
statements are identified by words and phrases such as “anticipate”, “intend”,
“expect”, and words and phrases of similar import. We caution investors that
forward-looking statements are only predictions based on our current
expectations about future events and are not guarantees of future performance.
Actual results, performance or achievements could differ materially from those
expressed or implied by the forward-looking statements due to risks,
uncertainties and assumptions that are difficult to predict. We encourage you to
read those risk factors carefully along with the other information provided in
this current report on Form 8-K and in our other filings with the SEC before
deciding to invest in our stock or to maintain or change your investment. We
undertake no obligation to revise or update any forward-looking statement for
any reason, except as required by law.
You
should read this Management’s Discussion and Analysis in conjunction with the
Consolidated Financial Statements and Related Notes.
Overview
Gold Lion
was founded by Mr. Gu Lei in September 2002 in the British Virgin
Islands, and Gu was the sole owner of one issued and outstanding share of common
stock. Through a resolution of Gold Lion on November 26, 2008, Gold Lion
issued 705 shares to Gu and 294 shares to Mr. Du Songtao, resulting in a
total of 1,000 issued and outstanding shares of common stock. Pursuant to a
pledge agreement dated November 26, 2008, Du pledged his 294 shares to
Mr. Cao Wei, with all rights to such shares including voting rights.
Consequently, Gu and Cao jointly control 100% of Gold Lion.
On
August 2, 2007, Gu founded Profit Harvest in Hong Kong, and in
December 2008, 100% ownership of Profit Harvest was transferred to Gold
Lion. Profit Harvest is engaged in sale of mobile phone products and components
to retailers and other wholesalers.
Pursuant
to a capital injection agreement (the “Agreement”) by and among Tianjin
Communication and Broadcasting Group Co., Ltd. (“TCBGCL”), TCBGCL Labour Union,
Hebei Leimone Science and Technology Co., Ltd.(“Hebei Leimone”), Tianjin 712
Communication and Broadcasting Co., Ltd.(“712”), Beijing Depu Investment Co.,
Ltd. and other natural person shareholders on May 8, 2007 and a resolution
of the shareholder’s meeting on June 30, 2007, Hebei Leimone, a company
controlled by Gu, acquired 25.1333% of TCB Digital from TCBGCL Labour Union and
various natural person shareholders for cash consideration of RMB9,000,000.
Pursuant to this Agreement, Hebei Leimone and Beijing Depu Investment Co., Ltd.,
a company controlled by Cao, were to invest additional RMB15,928,700 and
RMB10,377,600 respectively in TCB Digital, bringing the total investment from
Hebei Leimone and Beijing Depu Investment Co., Ltd to $4,679,111
(RMB35,306,300). After this additional investment was made as of June 30,
2007, Hebei Leimone and Beijing Depu held 36.03% and 15% equity interests
respectively of TCB Digital, a total of 51.03% ownership in TCB Digital.
Pursuant to an agreement dated June 30, 2007, Cao irrevocably pledged his 15%
equity interest in TCB Digital to Gu in exchange for a 29.4% stake in Gu’s
company. TCB Digital is mainly engaged in research & development,
processing, manufacturing, servicing and marketing of mobile handsets,
electronic products and communication equipment.
On
November 30, 2007, Gold Lion and GD Industrial Company signed a share
transfer agreement pursuant to which GD Industrial Company transferred 60%
equity of Nantong Zong Yi Kechuang Digital Camera Technology Co., Ltd. for cash
consideration of $10,273 to Gold Lion. In July 2008, the company’s name was
changed to Jiangsu Leimone Electronic Co., Ltd., or Jiangsu Leimone. In
January 2008, Gold Lion invested $5,074,226 (HK$38,800,000) in Jiangsu
Leimone to increase Gold Lion’s ownership in Jiangsu Leimone to 80%. Pursuant to
the share transfer agreement by and between Gold Lion and Nantong Zong Yi
Investment Co., Ltd. dated November 26, 2008, Gold Lion acquired the
remaining 20% equity interest of Jiangsu Leimone from Nantong Zong Yi Investment
Co., Ltd. for cash consideration of $103,214 (HK$800,000). After this
transaction, Gold Lion obtained 100% ownership of Jiangsu Leimone. Jiangsu
Leimone is engaged in the R&D and production of electronic assemblies, 3G
mobile handsets, wireless communication modules, GPS receivers and computer
software.
Pursuant
to the share transfer agreement by and among Hebei Leimone, Beijing Depu
Investment Co., Ltd and Jiangsu Leimone dated December 15, 2008, Hebei
Leimone and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity
interest of TCB Digital to Jiangsu Leimone on December 30,
2008.
Plan
of Operation
During
the next twelve months, Gold Lion expects to take the following steps in
connection with the development of its business and the implementation of our
plan of operations:
·
|
Gold
Lion intends to continue with its marketing strategies to deliver its
products and services in China;
|
·
|
Gold
Lion will gradually shift its focus to the 2.5G-3G mobile communications
business;
|
·
|
Gold
Lion will develop high-end smart mobile phones in cooperation with
international mobile communications companies, such as Palm Co., SK
Telecom, and others.
|
Critical
Accounting Policies and Estimates
The
preparation of Gold Lion’s consolidated financial statements in conformity with
accounting principles generally accepted in the United States (“US GAAP”)
requires it to make estimates and judgments that affect its reported assets,
liabilities, revenues, and expenses, and the disclosure of contingent assets and
liabilities. Gold Lion based its estimates and judgments on historical
experience and on various other assumptions that it believes to be reasonable
under the circumstances. Future events, however, may differ markedly from
current expectations and assumptions. While there are a number of significant
accounting policies affecting Gold Lion’s consolidated financial statements;
Gold Lion believes the following critical accounting policies involve the most
complex, difficult and subjective estimates and judgments: allowance for
doubtful accounts; income taxes; asset impairment.
Revenue
Recognition
In
accordance with US GAAP, revenue is recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the service is
performed, and collection of the resulting receivable is reasonably assured.
Noted below are brief descriptions of the product or service revenues that Gold
Lion recognizes in the financial statements contained herein.
Sale
of goods
Revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of Gold Lion exists and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as advances from customers.
Allowance
for doubtful accounts
Gold Lion
maintains an allowance for doubtful accounts to reduce amounts to their
estimated realizable value. A considerable amount of judgment is required when
Gold Lion assesses the realization of accounts receivables, including assessing
the probability of collection and the current credit-worthiness of each
customer. If the financial condition of customers were to deteriorate, resulting
in an impairment of their ability to make payments, an additional provision for
doubtful accounts could be required. Gold Lion initially records a provision for
doubtful accounts based on its historical experience, and then adjust this
provision at the end of each reporting period based on a detailed assessment of
its accounts receivable and allowance for doubtful accounts. In estimating the
provision for doubtful accounts, Gold Lion considers: (i) the aging of the
accounts receivable; (ii) trends within and ratios involving the age of the
accounts receivable; (iii) the customer mix in each of the aging categories and
the nature of the receivable; (iv) its historical provision for doubtful
accounts; (v) the credit worthiness of the customer; and (vi) the economic
conditions of the customer’s industry as well as general economic conditions,
among other factors.
Income
taxes
Gold Lion
accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes”. Under this method, deferred income taxes are recognized for the
estimated tax consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts and each
year-end based on enacted tax laws and statutory rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances are established to reduce deferred tax assets to the amount expected
to be realized when, in management’s opinion; it is more likely than not that
some portion of the deferred tax assets will not be realized. The provision for
income taxes represents current taxes payable net of the change during the
period in deferred tax assets and liabilities. Gold Lion adopted FIN 48,
Accounting for Uncertainty in Tax Positions.
Asset
Impairment
Gold Lion
periodically evaluates the carrying value of other long-lived assets, including,
but not limited to, property and equipment and intangible assets, when events
and circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flows from
such asset is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Significant
estimates are utilized to calculate expected future cash flows utilized in
impairment analyses. Gold Lion also utilizes judgment to determine other factors
within fair value analyses, including the applicable discount
rate.
Results
of Operations for the years ended December 31, 2008 & 2007
GOLD
LION HOLDING LTD
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
Increase /
(Decrease)
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
80,611,981
|
|
|
|
42,496,458
|
|
|
$
|
38,115,523
|
|
|
|
90
|
%
|
Cost
of sales
|
|
|
(72,410,992
|
)
|
|
|
(37,789,130
|
)
|
|
|
34,621,862
|
|
|
|
92
|
%
|
Gross
profit
|
|
|
8,200,989
|
|
|
|
4,707,328
|
|
|
|
3,493,661
|
|
|
|
74
|
%
|
Selling,
general and administrative expenses
|
|
|
(1,952,961
|
)
|
|
|
(716,791
|
)
|
|
|
1,236,170
|
|
|
|
172
|
%
|
Research
and development expense
|
|
|
(871,238
|
)
|
|
|
(1,957,194
|
)
|
|
|
(1,085,956
|
)
|
|
|
(55
|
%)
|
Other
income/(expenses)-net
|
|
|
(1,367,555
|
)
|
|
|
(316,416
|
)
|
|
|
1,051,139
|
|
|
|
332
|
%
|
Profit
before income taxes and
minority
interest
|
|
|
4,009,235
|
|
|
|
1,716,927
|
|
|
|
2,292,308
|
|
|
|
134
|
%
|
Income
tax expense
|
|
|
(611,586
|
)
|
|
|
(120,949
|
)
|
|
|
490,637
|
|
|
|
406
|
%
|
Minority
interest
|
|
|
(330,721
|
)
|
|
|
(626,576
|
)
|
|
|
(295,855
|
)
|
|
|
(47
|
%)
|
Income
from continuing operations
|
|
|
3,066,928
|
|
|
|
969,402
|
|
|
|
2,097,526
|
|
|
|
216
|
%
|
Gain/(loss)
from discontinued operations
|
|
|
(246,654
|
)
|
|
|
(214,117
|
)
|
|
|
32,537
|
|
|
|
15
|
%
|
Net
income attributable to stockholders
|
|
|
2,820,274
|
|
|
|
755,285
|
|
|
|
2,064,989
|
|
|
|
273
|
%
|
Other
comprehensive income
|
|
|
8,708
|
|
|
|
234,917
|
|
|
|
(226,209
|
)
|
|
|
96
|
%
|
Comprehensive
income
|
|
$
|
2,828,982
|
|
|
|
990,202
|
|
|
$
|
1,838,780
|
|
|
|
186
|
%
|
Other key indicators
|
|
Years Ended December 31
|
|
|
|
|
(Percent of Net Sales)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
90
|
%
|
|
|
89
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
expenses
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
Revenues
Gold
Lion’s revenues were $80,611,981 for 2008, an increase of 90% or $38,115,523 as
compared to $42,496,458 in the corresponding period in 2007. The increase of
revenues as compared to the 2007 period last year was mainly due to Jiangsu
Leimone Electronics Co., Ltd. and Profit Harvest being combined into Gold Lion
in 2008.
Cost
of sales
For 2008,
Gold Lion’s cost of sales was $72,410,992 or 90% of revenues. The ratio of cost
of sales to revenues increased by 19% from 2007.
Selling,
general and administrative expenses
Sales and
marketing expenses mainly represent salaries of sales personnel, and marketing
and transportation costs.
General
and administrative expenses primarily consisted of compensation for personnel,
depreciation, travel expenses, rental, materials expenses related to ordinary
administration, and fees for professional services.
For 2008,
selling, general and administrative expenses were $1,952,961, or 2% of revenues,
an increase of 172% from $716,791 or 2% of revenues for the corresponding period
in 2007. This increase was mainly due to the increase in sales
activities.
Research
and development expense
Gold
Lion’s R&D expenses were $871,238 or 1% of revenues for 2008, which
represent a 55% decrease from $1,957,194 or 5% of total revenues in 2007. The
decrease was due to decreased spending in research and development
of advanced mobile modules.
Other
income/(expenses)-net
Gold
Lion’s other expenses-net were $1,367,555 for 2008, which represents a 332%
increase from other expenses-net of $316,416 in 2007. Other expenses mainly
consisted of interest expense that the company incurred for its loans in
2008.
Net
income
For 2008,
Gold Lion’s net income was $2,820,274 or 3% of sales, or an increase of
$2,064,989 or 273% from $755,285 or 2% of sales in 2007. The increase in net
income is mainly due to the addition of new business units and better control on
costs including reduced R&D activities in 2008.
Other
comprehensive income
For 2008,
Gold Lion’s other comprehensive income was $8,708, a decrease of $226,209 from
$234,917 in the comparable period of 2007. Other comprehensive income resulted
from foreign currency exchange changes particularly the Renminbi’s appreciation
against the U.S. dollar. If this trend persists, Gold Lion may continue to
report such a gain, but other comprehensive income may be negative if the trend
reverses.
Liquidity
and Capital Resources
Gold Lion
generally finances its operations from cash flow generated internally and
short-term loans from domestic banks. As of December 31, 2008, Gold Lion
had cash and cash equivalents of $812,769. This represented a decrease of
$3,167,815 from $3,980,584 as of December 31, 2007.
The net
cash used in operating activities in 2008 was $8,454,880 as compared to the cash
used in operating activities for 2007 of $19,442,480. The net cash outflow from
operating activities in 2008 was mainly due to the increase in advance to
suppliers of $16,037,819, accounts payable of $1,543,164 and related parties of
$721,332.
Net cash
used for investing activities was $3,550,959 in 2008 which primarily consisted
of cash used for the purchase of property and equipment of $2,895,299 and
restricted cash of $2,890,163.
There
were cash proceeds from the disposal of discontinued operations of $1,749,258
and proceeds from notes receivable of $475,622.
Net cash
provided by financing activities was $8,572,267 in 2008 which included an
outflow due to the net repayment of short-term loans of $1,612,984, a net inflow
from related parties of $1,837,082 and the net proceeds from notes payable of
$7,199,115 and net proceeds from long-term loan of $1,149,054.
Subsequent
to 2008, Gold Lion received $1,360,000 from accounts receivable, and its cash
flow from operations also provided sufficient cash for its working needs. On
going forward basis over the next 12 months, Gold Lion intends to continue to
rely on short-term loans to fund its operational cash needs.
Off
Balance Sheet Arrangements
As of
December 31, 2008, Gold Lion had no off balance sheet
arrangements.
Gold
Lion Holding Ltd. Management’s Discussion and Analysis of Financial
Condition and Results of Operations for
the
Quarterly Period Ended June 30, 2009
The
following discussion contains forward-looking statements. Forward looking
statements are identified by words and phrases such as “anticipate”, “intend”,
“expect”, and words and phrases of similar import. We caution investors that
forward-looking statements are only predictions based on our current
expectations about future events and are not guarantees of future performance.
Actual results, performance or achievements could differ materially from those
expressed or implied by the forward-looking statements due to risks,
uncertainties and assumptions that are difficult to predict. We encourage you to
read those risk factors carefully along with the other information provided in
this current report on Form 8-K and in our other filings with the SEC before
deciding to invest in our stock or to maintain or change your investment. We
undertake no obligation to revise or update any forward-looking statement for
any reason, except as required by law.
You
should read this Management’s Discussion and Analysis in conjunction with the
Consolidated Financial Statements and Related Notes.
Results
of Operations for the Quarter ended June 30, 2009
Revenues
Gold
Lion’s revenues were $53,133,461 for the quarter ended June 30, 2009, an
increase of 354% or $41,436,322 compared to $11,697,139 in the corresponding
period in 2008. The increase of revenues as compared to 2009 was mainly due to
the addition of activities from Jiangsu Leimone Electronics Co., Ltd. and Profit
Harvest, and a significant increase in orders from one of Gold Lion’s existing
customers, a major mobile communications original equipment manufacturer in
China.
Cost
of sales
For the
second quarter of 2009, Gold Lion’s cost of sales was $49,973,216 or 94% of
revenues, while cost of sales for the corresponding period in 2008 was
$10,416,031 or 89% of revenues.
Gross
Profit
Gross
profit for the second quarter of 2009 rose 147% to $3,160,245 compared to
$1,281,108 for the 2008 quarter. Gross profit as a percentage of revenue for the
second quarter of 2009 was 6%, compared to 11% for the 2008
quarter. The decline in gross margins is primarily due to the low
gross margin of the increased business volume from a large existing customer as
mentioned above.
Selling,
general and administrative expenses
Sales and
marketing expenses mainly represent salaries of sales personnel, and marketing
and transportation costs; and this was $304,696 for the second quarter in 2009
compared to $50,103 for the 2008 period. The increase is attributed
to the increase in business activities.
General
and administrative expenses primarily consisted of compensation for personnel,
depreciation, travel expenses, rental, materials expenses related to ordinary
administration, and fees for professional services; and this amounted to
$116,229 for the second quarter of 2009 compared to $330,531 for the 2008
period.
For the
second quarter of 2009, selling, general and administrative expenses were
$420,925 or 1% of revenues, which was an increase of $40,291 from $380,634 but a
reduction from 3% of revenues for the 2008 period. This was a result of
management’s continued emphasis on cost control and operational
efficiency.
Research
and development expense
Gold
Lion’s R&D expenses were zero and $173,980 for the quarters ended
June 30, 2009 and 2008. We did not itemize R&D expenses for
the second quarter of 2009 due to recent PRC tax rules which stipulate that
pre-approved R&D expenses can be applied as a credit against taxes, and we
did not have such R&D expenses during the quarter. Beginning with
the third quarter of 2009, management plans to set up internal accounting
guidelines to more appropriately reflect R&D activities for U.S. financial
reporting.
Other
income/(expenses)-net
Gold
Lion’s other expenses-net was $361,447 for the second quarter of 2009, which was
mainly comprised of interest expense of $331,602. For the corresponding
2008 period, other expenses-net was $440,521 which mainly included interest
expense of $420,227.
Net
income
For the
quarter ended June, 2009, Gold Lion’s net income from operations was $1,699,725
or 3% of revenues, as compared to a net loss of 126,445 for the 2008
period.
Other
comprehensive income/(loss)
For the
second quarter of 2009, Gold Lion’s other comprehensive loss was $961, while
there was a gain of $379,699 for the 2008 period. Other comprehensive
income/(loss) in 2009 resulted from foreign currency exchange changes
particularly the Renminbi’s appreciation against the U.S. dollar. The
comparison from a loss in this quarterly period in 2009 to a gain in the 2008
period demonstrates a reversal in the trend of the exchange rate of the Reminbi
to the U.S. dollar.
Liquidity
and Capital Resources
Gold Lion
generally finances its operations from cash flow generated internally and
short-term loans from domestic banks. As of June 30, 2009, Gold Lion had cash
and cash equivalents of $1,032,013. This represented an increase of 219,244 from
$812,769 as of December 31, 2008.
Net cash
used in operating activities for the six months ended June 30, 2009 was
$3,337,741 as compared to net cash used in operating activities for the 2008
period of $714,035. In the first six months of 2009, we had an increase in
accounts receivable of $28,462,538 while offset by an increase in accounts
payable of $31,742,430. Other operational uses of cash included
increase in advances to suppliers of $7,795,231 and advances to related parties
of $7,565,773; while there was an inflow of cash from advance from customers in
the amount of $3,045,886.
Net cash
used for investing activities was to $11,073,278 in the second quarter of 2009
which consisted of cash used as deposits in the amount of $3,214,856 for
securing interest free credit facilities such as banker acceptances and
advance to related parties in the amount of $7,795,149.
Net cash
provided by financing activities was $14,632,289 in the quarter ended
June 30, 2009 which included proceeds from short-term loans of $15,489,762
and proceeds from notes payable of $6,429,712 and also collection on advances to
related parties in the amount of $8,199,422. During this period, there was an
outflow due to the repayment of short-term loans of $14,320,723 and also an
outflow of $1,169,039 for repayment of long-term loans.
On a
going-forward basis over the next 12 months, Gold Lion intends to continue to
rely on short-term loans and notes to fund its operational cash
needs. Following the merger with and the change of control of Zoom,
the Registrant intends to raise additional funds via equity financing for future
expansion purposes.
Off
Balance Sheet Arrangements
As of
June 30, 2009, Gold Lion had no off balance sheet
arrangements.
DIRECTORS
AND EXECUTIVE OFFICERS
Our
current board of directors and executive officers shall be as
follows:
Directors and Executive Officers
|
|
Age
|
|
Position / Title
|
|
|
|
|
|
Lei
Gu
|
|
46
|
|
Chairman,
Director and Chief Executive Officer
|
Anthony
K. Chan
|
|
54
|
|
Chief
Financial Officer
|
Frank
Manning
|
|
60
|
|
Director
|
Augustine
Lo
|
|
54
|
|
Director
|
Kit
H. Choy
|
|
40
|
|
Director
|
Chang
Shan
|
|
50
|
|
Director
|
Lei (Leo) Gu, Chairman of the Board,
Director and Chief Executive Officer
. Mr. Gu has served as our
Chairman of the Board and CEO since May 2004 and as the Chairman of TCB
Digital since July 2007. He worked for CEC Telecom Company Ltd. from 2000
to 2004, joining the company among its first employees and became its COO. CEC
Telecom was sold to Qiao Xing Mobile Communication which currently trades on
NYSE under the symbol “QXM”. From 1999 to 2000, Mr. Gu was the President of
Xin Tian Di Technology Group Company, Ltd. Mr. Gu was Associate Professor
at the Beihang University in Beijing, China from 1993 to 1999. He received his
Ph.D. degree in engineering from the Beihang University in 1993.
Anthony K. Chan, Chief Financial
Officer
. Mr. Chan has served as our CFO since March 2009.
Mr. Chan was stationed as an expatriate managing the Beijing headquarters
for the Eisenberg Group for four years from 1984. His corporate finance
experience in the last 20 years included CEO and CFO positions of public
companies in the U.S., and advisory positions of various Chinese entities in the
areas of medical equipment, energy, diary products, apparel, and building
materials; some of these companies include Beijing Wandong Medical Equipment
Company, China Natural Gas Company of Xian, Rodobo International of Harbin and
Dehai Cashmere Company of Yinchuan. From 2005 to 2008, Mr. Chan was the CFO of
HereUare, an internet software startup company in California. He
holds both MBA and BA degrees from the University of California at
Berkeley.
Frank B. Manning, Director
.
Mr. Manning is a co-founder of Zoom. Mr. Manning has been Zoom’s
president, chief executive officer, and a director since May 1977. He has
served as Zoom’s chairman of the board from 1986 to September 2009. He earned
his BS, MS and Ph.D. degrees in Electrical Engineering from the Massachusetts
Institute of Technology, where he was a National Science Foundation Fellow. From
1998 through late 2006, Mr. Manning was also a director of the
Massachusetts Technology Development Corporation, a public purpose venture
capital firm that invests in seed and early-stage technology companies in
Massachusetts. From 1999 to 2005, Mr. Manning was a Director of Intermute,
a company that Zoom co-founded and that was sold to Trend Micro Inc., a
subsidiary of Trend Micro Japan. Mr. Manning has been a director of Unity
Business Networks, a hosted VoIP service provider, since Zoom’s investment in
July 2007.
Augustine Lo, Director
.
Mr. Lo has been an independent director since September 2009 (and
independent director for Gold Lion since January 2009) and he will serve as
the Chairperson of the Company’s Audit and Compensation Committees. During the
1970s, Mr. Lo was the Controller of the Disk Drive Division for Qume
Corporation. During the 1980s, Mr. Lo worked for Apple International Inc.
as the Director of Finance & Administration, overseeing operations in Hong
Kong and Japan. In 1989, Mr. Lo formed PacRim Technologies Ltd. with
operations in Singapore, Taiwan and China distributing software products
including Adobe, Macromedia, Handspring and Umax. PacRim merged into GrandTech
of Taiwan in 1999 which later went public in 2001. He remained on GrandTech’s
board and headed up its operations in Hong Kong, China, Korea and the
Philippines until 2005. Mr. Lo received his MBA and BS degrees from the
University of California at Berkeley.
Kit H. Choy, Director
.
Mr. Choy has been an independent director since September 2009 (and
independent director for Gold Lion since January 2008). Mr. Choy was
the Greater China General Manager for Palm Inc. from 2005 to 2008 responsible
for marketing and sales of PDA and smart phones in China, Hong Kong and Taiwan.
From 2004 to 2005, he was the vice president for Fortune Telecom Limited of Hong
Kong with its shares listed on the HKSE. Mr. Choy was the COO for the
Holley Telecommunication Company Ltd. of China from 2002 to 2004. Prior to that,
he had worked in the capacities of product management and engineering for Nortel
Networks from 1997 to 2002, and for Atmel Inc. from 1993 to 1997. Mr. Choy
was also a lecturer at San Jose State University in California and City College
of San Francisco. He is currently a visiting professor at the Guangzhou
University of China. Mr. Choy holds a Bachelor’s degree in electrical
engineering and a Master’s degree in computer science from Illinois University,
and also an MBA degree from Golden Gate University in San
Francisco.
Chang Shan, Director
.
Mr. Shan has been an independent since September 2009 (and independent
director for Gold Lion since August 2008). Mr. Shan is currently the
President of the China Institute of Geotechnical Investigation and Survey, at
which he has been employed since 1998. He is the Chairman of the Board of
Directors from 1999 to present, of the China Infrastructure Holdings Ltd., a
company in the construction business with a particular emphasis on toll bridges,
and has its shares listed on the Singaporean Stock Exchange. Mr. Shan is
also a director of the Bank of Tianjin, China since 2007. Mr. Shan holds a
Bachelor’s degree in Engineering from the Shanghai Tong Ji University, a
Master’s degree in Engineering from the China Academy of Railway Sciences and an
EMBA from the Tsinghua University.
Independence
of Directors
Our board
of directors consists of Lei (Leo) Gu, Frank B. Manning, Augustine Lo, Kit H.
Choy and Chang Shan. Directors Lo, Choy and Shan are independent directors as
such term is defined in the NASDAQ Stock Market Rules, and meet the independence
standards set forth in Rule 10A-3 of the Exchange Act.
Board
Committees
The
Registrant expects its audit committee and compensation committee to consist
solely of independent directors as such term is defined in the NASDAQ Stock
Market Rules, and with respect to its audit committee members, to meet the
independence standards set forth in Rule 10A-3 of the Exchange
Act.
The
Registrant’s audit committee and compensation committee consists of all three
independent directors, with Director Lo serving as the “financial expert” and
Chairperson of the audit committee, and also Chairperson of the compensation
committee.
EXECUTIVE
COMPENSATION
Compensation
Discussion And Analysis
Overview
The
following is a discussion of Gold Lion’s program for compensating its
executives, which has been adopted by the Registrant as of the date of the
closing of the merger with Gold Lion. As of April 2009, Gold Lion formed a
compensation committee comprising three independent directors and this committee
is responsible for determining the compensation of the company’s executive
officers and directors on a going forward basis.
Compensation
Program Objectives and Philosophy
The
primary goals of Gold Lion’s policy of executive compensation are to attract and
retain the most talented and dedicated executives possible, to assure that its
executives are compensated effectively in a manner consistent with its strategy
and competitive practice and to align executives compensation with the
achievement of Gold Lion’s short-term and long-term business
objectives.
Gold
Lion’s board of directors considers a variety of factors in determining
compensation of executives, including their particular background and
circumstances, such as their training and prior relevant work experience, their
success in attracting and retaining savvy and technically proficient managers
and employees, increasing its revenues, broadening its product line offerings,
managing its costs and otherwise helping to lead the company through a period of
rapid growth.
The board
of directors of Zoom will, following the consummation of the merger, form a
compensation committee charged with the oversight of executive compensation
plans, policies and programs of the company and with the full authority to
determine and approve the compensation of its chief executive officer and make
recommendations with respect to the compensation of its other executive
officers. It is expected that the compensation committee will continue to follow
the general approach to executive compensation that Gold Lion has followed to
date, rewarding superior individual and company performance with commensurate
cash compensation.
Elements
of Compensation
Gold
Lion’s compensation program for its named executive officers consists of two
elements: base salary and bonus. The base salary provided is intended to
equitably compensate the named executive officers based upon their level of
responsibility, complexity and importance of role, leadership and growth
potential, and experience. Gold Lion offers bonuses as a vehicle by which the
named executive officers can earn additional compensation depending on
individual, business unit and company performance. Gold Lion did not provide any
other type of compensation to its named executive officers in 2008.
Base Salary
.
Gold Lion’s named
executive officers receive base salaries commensurate with their roles and
responsibilities. Subject to any applicable employment agreements, base salaries
and subsequent adjustments, if any, are reviewed and approved by Gold Lion’s
board of directors annually, based on an informal review of relevant market data
and each executive’s performance for the prior year, as well as each executive’s
experience, expertise and position. The base salaries paid to the named
executive officers in 2008 are reflected in the Summary Compensation Table
below.
Incentive Bonus
.
Gold Lion’s named
executive officers are eligible for an annual performance-based cash bonus in
accordance with the Company’s unwritten incentive bonus plan. Gold Lion provides
this bonus opportunity as a way to attract and retain highly skilled and
experienced executive officers and to motivate them to achieve annual corporate,
departmental and individual goals which consist of various revenue, cost and
operational targets established by the board of directors. The bonus amounts are
determined following the end of the fiscal year based on Gold Lion’s performance
and the performance of its executives. The bonus amounts paid to the named
executive officers in 2008 are reflected in the Summary Compensation Table
below.
Stock-Based
Awards under the Equity Incentive Plan
Historically,
Gold Lion has not granted equity awards as a component of compensation, and
presently does not have an equity-based incentive program. After the completion
of the Gold Lion acquisition, Zoom will likely adopt and establish an equity
incentive plan pursuant to which equity awards may be granted to eligible
employees, including each of Gold Lion’s named executive officers, if Zoom’s
board of directors determines that it is in the best interest of the company and
its stockholders to do so.
Retirement
Benefits
Currently,
Gold Lion does not provide any company sponsored retirement benefits to any
employee, including the named executive officers.
Perquisites
Historically,
Gold Lion has provided certain of its named executive officers with minimal
perquisites and other personal benefits. Gold Lion does not view perquisites as
a significant element of its compensation structure, but believes that
perquisites can be useful in attracting, motivating and retaining the executive
talent for which the company competes. It is expected that historical practices
regarding perquisites will continue and will be subject to periodic review by
Zoom’s board of directors.
Summary
Compensation Table
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the following persons for services
performed for Gold Lion and its subsidiaries during 2008 in all
capacities.
Name
|
|
Principal Position
|
|
Salary ($)
|
|
Bonus($)
|
|
|
Stocks
Awards($)
|
|
|
Options
Awards($)
|
|
Gu
Lei
|
|
Chairman
& CEO
|
|
US$0
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Yin
Zuohua
|
|
General
Manager of
TCB
Digital
|
|
US$28,300
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Wang
Shancheng
|
|
General
Manager of
Jiangsu
Leimone
|
|
US$31,100
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Feng
Kai
|
|
Director
of Sales
|
|
US$6,900
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Bonuses
and Deferred Compensation
Gold Lion
does not have any bonus, deferred compensation or retirement plan. At the time
2008 compensation was determined, Gold Lion did not have a compensation
committee. All decisions regarding compensation are determined by its entire
board of directors.
Stock
Option and Stock Appreciation Rights
Gold Lion
does not currently have a stock option plan or stock appreciation rights plan.
No stock options or stock appreciation rights were awarded during
2008.
Director
Compensation
Historically,
Gold Lion has not paid its directors fees for attending scheduled and special
meetings of its board of directors. In the future, Gold Lion may adopt a policy
of paying independent directors a fee for their attendance at board and
committee meetings. Gold Lion does reimburse directors for reasonable travel
expenses related to attendance at board of director meetings.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
See Note
16 Related Party Balance and Transactions, of the accompanying Notes to Gold
Lion’s financial statements for a description of its related party
transactions.
Review,
Approval or Ratification of Transactions with Related Persons
Gold Lion
has not adopted procedures for review of, or standards for approval of, these
transactions, but instead reviews such transactions on a case-by-case
basis.
DESCRIPTION
OF THE REGISRANT’S COMMON STOCK
The
following description summarizes the material terms and provisions of the
Registrant’s common stock. The following summary description of the common stock
is based on the provisions of the Registrant’s Certificate of Incorporation and
Bylaws, which are incorporated herein by reference and the applicable provisions
of Delaware General Corporation Law. This information is only a summary and is
qualified in its entirety by reference to Registrant’s Certificate of
Incorporation and Bylaws and the applicable provisions of Delaware General
Corporation Law.
The
Registrant is authorized to issue 25,000,000 shares of common stock. As of the
close of business on September 22, 2009, there were outstanding:
6,205,377 shares
of common stock;
397,200
shares issuable upon the exercise of options issued pursuant to our current
stock option plans; and
627,589
shares issuable upon the exercise of options available for future grant under
our stock option plans.
The
holders of Zoom’s common stock are entitled to receive dividends out of legally
available assets at such times and in such amounts as Zoom’s Board of Directors
may from time to time determine. Each stockholder is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. Cumulative voting for the election of directors is not
authorized.
Zoom’s
common stock is not subject to conversion or redemption and holders of Zoom’s
common stock are not entitled to preemptive rights. Upon the liquidation,
dissolution or winding up of the company, the remaining assets legally available
for distribution to stockholders, after payment of claims or creditors, are
distributable ratably among the holders of the common stock outstanding at that
time. Each outstanding share of common stock is fully paid and
nonassessable.
Anti-Takeover
Effects of Provisions of Delaware Law
Provisions
of Delaware law and Zoom’s Certificate of Incorporation, as amended, and Bylaws
could make the acquisition of Zoom through a tender offer, a proxy contest or
other means more difficult and could make the removal of incumbent officers and
directors more difficult. Zoom’s expects these provisions to discourage coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the company to first negotiate with Zoom’s Board of
Directors. Zoom’s believes that the benefits provided by its ability to
negotiate with the proponent of an unfriendly or unsolicited proposal outweigh
the disadvantages of discouraging these proposals. Zoom’s believes the
negotiation of an unfriendly or unsolicited proposal could result in an
improvement of its terms.
Anti-Takeover
Effects of Provisions of Zoom’s Charter Documents
Zoom’s
Bylaws do not permit stockholders to call a special meeting of stockholders.
Zoom’s Bylaws provide that special meetings of the stockholders may be called
only by a majority of the members of the Board of Directors or Zoom’s President.
Zoom’s Bylaws require that all stockholder actions be taken by a vote of the
stockholders at an annual or special meeting, and do not permit stockholders to
act by written consent without a meeting. Zoom’s Bylaws provide for an advance
notice procedure for stockholder proposed nominations of persons for election to
the Board of Directors. At an annual meeting, stockholders may only consider
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board of Directors. Zoom’s Bylaws may have the effect
of precluding the conduct of business at a meeting if the proper procedures are
not followed. These provisions may also discourage or deter a potential acquirer
from conducting a solicitation of proxies to elect the acquirer's own slate of
directors or otherwise attempting to obtain control of the company.
Listing
The
Registrant’s common stock is listed on the NASDAQ Capital Market under the
symbol “ZOOM.”
Transfer
Agent
The
transfer agent for the common stock is Computershare located at 1745 Gardena
Avenue, Glendale CA 91204
Item
9.01. Financial Statements and Exhibits.
(a)
Financial statements of
business acquired
.
Audited
consolidated financial statements of the Company as of December 31, 2008 and
2007 and for the years then ended and unaudited consolidated financial
statements as of June 30, 2009 and 2008 and for the quarters then ended, appear
elsewhere herein, commencing on page F-1.
(b)
Pro forma financial
information
.
Unaudited
pro forma consolidated financial statements of the Company appear elsewhere
herein.
(c)
Exhibits
.
Exhibit
No.
|
Description
|
2.1
|
Share
Exchange Agreement by and among Zoom, ZTI, Gu, Gold Lion and TCB Digital
dated January 28, 2009 (filed as exhibit 2.1 to the Current Report on Form
8-K on February 3, 2009).
|
2.2
|
Amendment
to Share Exchange Agreement by and among Zoom, ZTI, Gu, Du, Gold Lion and
TCB Digital dated May 12, 2009 (incorporated by reference to annex A-1 of
the preliminary proxy statement filed May 13, 2009)
|
10.1
|
Form
of Lock-Up and Voting Agreement entered into between Zoom and each of its
executive officers and directors (filed as exhibit 10.1 to the Current
Report on Form 8-K on February 3, 2009).
|
10.2
|
Form
of License Agreement to be entered into between ZTI and TCB Digital (filed
as exhibit 10.2 to the Current Report on Form 8-K on February 3,
2009).
|
10.3
|
Separation
and Distribution Agreement by and among Zoom and ZTI (incorporated by
reference to annex B of the preliminary proxy statement filed May 13,
2009)
|
This
Current Report on Form 8-K may contain, among other things, certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, without limitation, (i) statements
with respect to the Company’s plans, objectives, expectations and intentions;
and (ii) other statements identified by words such as “may”, “could”, “would”,
“should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”
or similar expressions. These statements are based upon the current beliefs and
expectations of the Company’s management and are subject to significant risks
and uncertainties. Actual results may differ from those set forth in the
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties that are subject to change based on various factors
(many of which are beyond the Company’s control).
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned hereunto duly
authorized.
September
25, 2009
|
ZOOM
TECHNOLOGIES, INC.
|
|
|
|
By:
|
/s/
Anthony K. Chan
|
|
|
Name:
Anthony K. Chan
|
|
|
Title:Chief
Financial Officer
|
HISTORICAL
FINANCIAL INFORMATION
OF
GOLD LION HOLDING LTD.
Index
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets at December 31, 2008 and 2007
|
F-2
|
For
the years ended December 31, 2008 and 2007:
|
|
Consolidated
Statements of Income and Other Comprehensive Income
|
F-3
|
Consolidated
Statements of Cash Flows
|
F-4
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
|
|
|
Consolidated
Balance Sheets at June 30, 2009 (Unaudited) and December 31,
2008
|
F-32
|
For
the periods ended June 30, 2009 and 2008:
|
|
Consolidated
Statements of Operations and Other Comprehensive Income
(Unaudited)
|
F-33
|
Consolidated
Statements of Cash Flows (Unaudited)
|
F-34
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-35
|
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders of
Gold Lion
Holding, Ltd.
We have
audited the accompanying consolidated balance sheets of Gold Lion Holding, Ltd.
Affiliates and Subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of income and other comprehensive income, stockholders'
equity, and cash flows for the years ended December 31, 2008 and
2007. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined consolidated financial statements based on our audits.
We
conducted our audits in accordance with the 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
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of 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 includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 Gold Lion
Holding, Ltd., Affiliates and Subsidiaries as of December 31, 2008 and 2007 and
the combined consolidated results of their operations and their consolidated
cash flows for the years ended December 31, 2008 and 2007, in conformity with
U.S. generally accepted accounting principles.
The
accompanying financial statements referred to above were combined and
consolidated as described in Note 1 to the financial statements.
/s/ Goldman
Parks Kurland Mohidin LLP
Goldman
Parks Kurland Mohidin LLP
Encino,
California
March 27
2009
GOLD
LION HOLDING LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
812,769
|
|
|
$
|
3,980,584
|
|
Restricted
cash
|
|
|
8,753,757
|
|
|
|
5,452,203
|
|
Notes
receivable
|
|
|
—
|
|
|
|
452,742
|
|
Accounts
receivable, net
|
|
|
12,366,814
|
|
|
|
12,669,242
|
|
Other
receivables, net of allowance for doubtful accounts
|
|
|
1,119,881
|
|
|
|
2,598,614
|
|
Advance
to suppliers
|
|
|
24,275,313
|
|
|
|
12,309,764
|
|
Inventories,
net
|
|
|
3,742,046
|
|
|
|
7,216,945
|
|
Due
from related parties
|
|
|
6,069,842
|
|
|
|
18,148,353
|
|
Total
current assets
|
|
|
57,140,422
|
|
|
|
62,828,447
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
7,054,892
|
|
|
|
5,002,685
|
|
Long-term
investments
|
|
|
65,653
|
|
|
|
229,391
|
|
Due
from related parties-long term
|
|
|
247,294
|
|
|
|
—
|
|
Deferred
tax assets
|
|
|
612,835
|
|
|
|
438,938
|
|
Goodwill
|
|
|
103,057
|
|
|
|
10,273
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
65,224,153
|
|
|
$
|
68,509,734
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
18,893,525
|
|
|
$
|
19,240,918
|
|
Notes
payable
|
|
|
17,507,514
|
|
|
|
9,553,870
|
|
Accounts
payable
|
|
|
3,580,720
|
|
|
|
4,857,342
|
|
Advance
from customers
|
|
|
3,785,462
|
|
|
|
2,721,406
|
|
Dividends
payable
|
|
|
578,142
|
|
|
|
541,789
|
|
Taxes
payable
|
|
|
775,315
|
|
|
|
645,925
|
|
Accrued
expenses and other payables
|
|
|
2,832,599
|
|
|
|
2,845,673
|
|
Due
to related parties
|
|
|
5,161,169
|
|
|
|
16,207,276
|
|
Deferred
tax liabilities
|
|
|
11,879
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
53,126,325
|
|
|
|
56,614,199
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans
|
|
|
1,167,168
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
54,293,493
|
|
|
|
56,614,199
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTERESTS
|
|
|
6,489,032
|
|
|
|
5,776,086
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
shares, issued and outstanding; 1,000 shares,
par
value $0.001 per share
|
|
|
1
|
|
|
|
4,630,213
|
|
Additional
paid-in capital
|
|
|
3,553,292
|
|
|
|
1
|
|
Statutory
surplus reserve
|
|
|
569,193
|
|
|
|
257,078
|
|
Accumulated
other comprehensive income
|
|
|
243,625
|
|
|
|
234,917
|
|
Retained
earnings
|
|
|
75,517
|
|
|
|
997,240
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
4,441,628
|
|
|
|
6,119,449
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
65,224,153
|
|
|
$
|
68,509,734
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
GOLD
LION HOLDING LTD.
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
|
Years
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
80,611,981
|
|
|
$
|
42,496,458
|
|
Cost
of sales
|
|
|
(72,410,992
|
)
|
|
|
(37,789,130
|
)
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
8,200,989
|
|
|
|
4,707,328
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
267,076
|
|
|
|
159,576
|
|
General
and administrative expenses
|
|
|
1,685,885
|
|
|
|
557,215
|
|
Research
and development expenses
|
|
|
871,238
|
|
|
|
1,957,194
|
|
|
|
|
2,824,199
|
|
|
|
2,673,985
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
5,376,790
|
|
|
|
2,033,343
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Equity
in earnings in investee
|
|
|
3,191
|
|
|
|
—
|
|
Interest
income
|
|
|
176,102
|
|
|
|
9,860
|
|
Government
grant income
|
|
|
176,747
|
|
|
|
79,933
|
|
Other
income
|
|
|
4,121
|
|
|
|
63,879
|
|
Interest
expense
|
|
|
(1,599,139
|
)
|
|
|
(449,873
|
)
|
Exchange
loss
|
|
|
(91,071
|
)
|
|
|
(449,873
|
)
|
Other
expenses
|
|
|
(37,506
|
)
|
|
|
(17,983
|
)
|
|
|
|
(1,367,555
|
)
|
|
|
(316,416
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interests
|
|
|
4,009,235
|
|
|
|
1,716,927
|
|
Income
tax expense
|
|
|
(611,586
|
)
|
|
|
(120,949
|
)
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
3,397,649
|
|
|
|
1,595,978
|
|
Minority
interest
|
|
|
(330,721
|
)
|
|
|
(626,576
|
)
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
3,066,928
|
|
|
|
969,402
|
|
Loss
from discontinued operation
|
|
|
(246,654
|
)
|
|
|
(214,117
|
)
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
2,820,274
|
|
|
|
755,285
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
8,708
|
|
|
|
234,917
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,828,982
|
|
|
$
|
990,202
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
GOLD
LION HOLDING LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,820,274
|
|
|
$
|
755,285
|
|
Adjustments
to reconcile net income to cash used by operating
activities:
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
330,721
|
|
|
|
626,576
|
|
Depreciation
and amortization
|
|
|
1,231,707
|
|
|
|
437,188
|
|
Provision
for inventory obsolescense
|
|
|
(173,528
|
)
|
|
|
416,931
|
|
Provision
for doubtful receivables
|
|
|
(86,390
|
)
|
|
|
55,505
|
|
Loss
on disposal of fixed assets
|
|
|
497
|
|
|
|
––
|
|
Investment
income
|
|
|
(3,191
|
)
|
|
|
––
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
(130,508
|
)
|
|
|
(427,702
|
)
|
Accounts
receivable
|
|
|
266,411
|
|
|
|
(6,290,050
|
)
|
Inventories
|
|
|
3,292,582
|
|
|
|
(4,486,960
|
)
|
Advances
to suppliers
|
|
|
(16,037,819
|
)
|
|
|
(9,462,401
|
)
|
Prepaid
expenses and other assets
|
|
|
1,541,259
|
|
|
|
(2,537,207
|
)
|
Accounts
payable
|
|
|
(1,543,164
|
)
|
|
|
2,320,802
|
|
Advance
from customers
|
|
|
867,776
|
|
|
|
—
|
|
Related
parties
|
|
|
(721,332
|
)
|
|
|
(1,190,725
|
)
|
Accrued
expenses and other current liabilities
|
|
|
(110,174
|
)
|
|
|
340,278
|
|
Net
cash used by operating activities
|
|
|
(8,454,880
|
)
|
|
|
(19,442,480
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(2,890,163
|
)
|
|
|
(5,312,627
|
)
|
Cash
paid for long- term investment
|
|
|
—
|
|
|
|
(10,273
|
)
|
Purchase
of property & equipment and other long-term assets
|
|
|
(2,895,299
|
)
|
|
|
(1,919,288
|
)
|
Cash
proceeds from disposal of fixed assets
|
|
|
9,623
|
|
|
|
445
|
|
Cash
proceeds from disposal of discontinued operations
|
|
|
1,749,258
|
|
|
|
––
|
|
Cash
proceeds from notes receivable
|
|
|
475,622
|
|
|
|
360,779
|
|
Cash
increase due to acquisition of subsidiaries
|
|
|
—
|
|
|
|
5,151,367
|
|
Net
cash used for investing activities
|
|
|
(3,550,959
|
)
|
|
|
(1,729,597
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
|
18,600,309
|
|
|
|
17,416,130
|
|
Proceeds
from long-term loan
|
|
|
1,149,054
|
|
|
|
—
|
|
Advance
to related parties
|
|
|
(5,649,111
|
)
|
|
|
(17,810,945
|
)
|
Repayment
on borrowing from related parties
|
|
|
(37,884,458
|
)
|
|
|
18,039,538
|
|
Proceeds
from notes payable
|
|
|
7,199,115
|
|
|
|
9,309,291
|
|
Dividend
distribution
|
|
|
––
|
|
|
|
(519,566
|
)
|
Collection
on advance to related parties
|
|
|
18,484,740
|
|
|
|
1,395,920
|
|
Receipt
on related parties
|
|
|
26,885,911
|
|
|
|
(546,402
|
)
|
Repayments
on short-term loan
|
|
|
(20,213,293
|
)
|
|
|
(2,531,221
|
)
|
Net
cash provided by financing activities
|
|
|
8,572,267
|
|
|
|
24,752,745
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
265,756
|
|
|
|
181,332
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,167,815
|
)
|
|
|
3,762,000
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning balance
|
|
|
3,980,584
|
|
|
|
218,584
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
812,769
|
|
|
$
|
3,980,584
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
1,489,630
|
|
|
$
|
416,580
|
|
Income
tax paid
|
|
$
|
931,854
|
|
|
$
|
189,735
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
GOLD
LION HOLDING LTD.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS
ENDED DECEMBER 31, 2008 AND 2007
|
|
Shares
|
|
|
Common
stock
|
|
|
Additional
paid-in
capital
|
|
|
Statutory
surplus
reserve
|
|
|
Other
compre-hensive
income (loss)
|
|
|
Accumulated
surplus/
(deficit)
|
|
|
Total
|
|
Balance
December 31, 2006
|
|
|
1,000
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,770
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,917
|
|
|
|
—
|
|
|
|
234,917
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
755,285
|
|
|
|
755,285
|
|
Appropriated
statutory surplus reserve
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
65,293
|
|
|
|
|
|
|
|
(65,293
|
)
|
|
|
—
|
|
Contribution
of equity in affiliates
|
|
|
|
|
|
|
4,630,213
|
|
|
|
—
|
|
|
|
191,785
|
|
|
|
|
|
|
|
309,018
|
|
|
|
5,131,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
|
1,000
|
|
|
$
|
4,630,214
|
|
|
$
|
—
|
|
|
$
|
257,078
|
|
|
$
|
234,917
|
|
|
$
|
997,240
|
|
|
$
|
6,119,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
due to consolidation
|
|
|
|
|
|
|
(4,630,213
|
)
|
|
|
3,553,292
|
|
|
|
(257,078
|
)
|
|
|
|
|
|
|
(3,172,804
|
)
|
|
|
(4,506,803
|
)
|
Foreign
currency translation
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
8,708
|
|
|
|
—
|
|
|
|
8,708
|
|
Net
income
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
2,820,274
|
|
|
|
2,820,274
|
|
Appropriated
statutory surplus reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
569,193
|
|
|
|
—
|
|
|
|
(569,193
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2008
|
|
|
1,000
|
|
|
$
|
1
|
|
|
$
|
3,553,292
|
|
|
$
|
569,193
|
|
|
$
|
243,625
|
|
|
$
|
75,517
|
|
|
$
|
4,441,628
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
GOLD
LION HOLDING LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS
Gold Lion
Holding Ltd ("Gold Lion" or “the Company”) was founded by Mr. Gu Lei (“Gu”)
in September 2002 in the British Virgin Islands. Pursuant to an agreement
dated June 30, 2007, Mr. Cao Wei (“Cao”), purchased from Gu 29.4%
shares in the Company. Through a resolution of the Company on
November 26, 2008, the Company issued 705 shares to Gu and 294 shares to
Mr. Du Songtao (“Du”), resulting in a total of 1,000 issued and outstanding
shares of Common Stock. Pursuant to a pledge agreement dated November 26,
2008, Du pledged his 294 shares to Cao, including all rights to such shares. As
such, Gu and Cao jointly control 100% of Gold Lion.
On
August 2, 2007, Gu founded Profit Harvest Corporation Ltd.
(“Profit Harvest”) in Hong Kong, and in December 2008, 100% ownership of
Profit Harvest was transferred to Gold Lion.
Pursuant
to the capital injection agreement (“the Agreement”) by and among Tianjin
Communication and Broadcasting Group Co., Ltd. (“TCBGCL”), TCBGCL Labour Union,
Hebei Leimone Science and Technology Co., Ltd. (“Hebei Leimone”), Tianjin 712
Communication and Broadcasting Co., Ltd. (“712”), Beijing Depu Investment Co.,
Ltd. (“Beijing Depu”) and other natural person shareholders on May 8, 2007
and a resolution of the shareholder’s meeting on June 30, 2007, Hebei
Leimone, a company controlled by Gu, acquired 25.13% of Tianjin Tong Guang Group
Digital Communication Co., Ltd. (“TCB Digital”) from TCBGCL Labour Union
and various natural person shareholders for cash of RMB9,000,000, approximately
$1,286,000. Pursuant to this Agreement, Hebei Leimone and Beijing Depu, the
companies controlled by Gu and Cao respectively, were to invest additional
RMB15,928,700 and RMB10,377,600 respectively to TCB Digital, bringing the total
investment from Hebei Leimone and Beijing Depu to $4,679,111 (RMB35,306,300).
After this additional investment was made as of June 30, 2007, Hebei
Leimone and Beijing Depu held 36.03% and 15% equity interests respectively of
TCB Digital, amounting to 51.03% ownership in TCB Digital. Pursuant to an
agreement dated June 30, 2007, Cao irrevocably pledged his 15% equity
interest in TCB Digital through his ownership in Beijing Depu to Gu in
exchange for a 29.4% stake in Gold Lion.
On
November 30, 2007, Gold Lion and GD Industrial Company signed a share
transfer agreement, pursuant to which, GD Industrial Company transferred 60%
equity of Nantong Zong Yi Kechuang Digital Camera Technology Co., Ltd. (“Nantong
Zong Yi”) for cash of $10,273 to the Company. In July 2008, Nantong Zong Yi
changed its name to Jiangsu Leimone Electronic Co., Ltd. (“JS Leimone”).
Before the acquisition date, JS Leimone did not have any operating
activities. In January 2008, the Company invested $5,074,226
(HK$38,800,000) to JS Leimone to increase the Company’s ownership in JS Leimone
to 80%. Pursuant to the share transfer agreement by and between Gold Lion and
Nantong Zong Yi Investment Co., Ltd. dated November 26, 2008, the Company
acquired the remaining 20% equity interest of JS Leimone from Nantong Zong Yi
Investment Co., Ltd. for cash of $103,214 (HK$800,000). After this transaction,
the Company owned 100% of JS Leimone.
Pursuant
to the share transfer agreement by and among Hebei Leimone, Beijing Depu
Investment Co., Ltd and JS Leimone dated December 15, 2008, Hebei Leimone
and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity interest
of TCB Digital to JS Leimone on December 30, 2008.
Per the
fact that TCB Digital and Profit Harvest are under common control with the
Company since July 2007 and August 2007, respectively, we combined
their financials at historical cost into the Company from the date the Company
acquires control. Acquisition method is used when the Company has actual equity
investment in TCB Digital and Profit Harvest.
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Gold Lion
Holding Ltd, its 100%-owned subsidiary Profit Harvest, its 100%-owned subsidiary
JS Leimone and its 51.03%-owned joint venture TCB Digital as of and for the year
ended December 31, 2008. As the Company acquired 60% of JS Leimone on
November 30, 2007, the operating results from December 1, 2007 through
December 31, 2007 and the balance sheet of JS Leimone were included in the
combination for the year ended December 31, 2007. As of June 30, 2007,
Gu and Cao jointly acquired 51.03% equity of TCB Digital through Hebei Leimone
and Beijing Depu, entities they controlled, and Gu controlled 100% of Profit
Harvest in 2007. The consolidated financial statements for 2007
included
the combination of 100% operation results of TCB Digital from July1, 2007
through December 31, 2007 and 100% of the operating results of Profit
Harvest for 2007. As Gu and Cao transferred their 51.03% equity interest of TCB
Digital into JS Leimone on December 30, 2008, and 100% equity interest of
Profit Harvest was transferred to Gold Lion on December 22, 2008, the
consolidated financial statements as of December 31, 2008 include the
consolidation of balance sheets of TCB Digital and Profit Harvest and
combination of 100% operating results of TCB Digital and 100% operating results
of Profit Harvest of 2008. The difference of shareholder’s equity between 2007
and 2008 resulted from the change of consolidation method is presented as
changes due to consolidation on the face of consolidated statements of
shareholder’s equity. The common stock from contribution of equity in affiliates
by the shareholders in 2007 was the 51.03% paid-in capital of TCB Digital, which
was $4,630,212, and 100% paid-in capital of Profit Harvest, which was $1. The
accumulated surplus from recapitalization on reverse acquisition in 2007 was the
51.03% retained earning of TCB Digital and 100% retained earning of Profit
Harvest amounting to $309,018 and nil respectively. The common stock from
changes due to consolidation was the reclassification in 2008 of 51.03% paid-in
capital of TCB Digital, which was $4,630,212, and 100% paid-in capital of Profit
Harvest, which was $1. The additional paid-in capital from changes due to
consolidation amounted to $3,553,292 in 2008 was the excess of the net assets
over the purchase price for the acquisition of 51.03% of TCB Digital and 100% of
Profit Harvest from related parties amounting to $1,610,957 and $1,942,335
respectively. The statutory surplus reserve from changes due to consolidation
amounted to $(257,078) in 2008 was the net figure of statutory surplus reserve
amounting to $257,078. The accumulated deficit from changes due to consolidation
amounted to $(3,172,804) in 2008 was the 51.03% of accumulated retained earning
of TCB Digital as of Dec.31, 2008 which amounted to $1,230,469 and the 100% of
accumulated retained earning of Profit Harvest as of December 31, 2008
which amounted to $1,942,335.
Basis
of Presentation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP"). The Company’s functional currency is the Chinese Renminbi; however
the accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with US GAAP
requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period.
Significant items subject to such estimates and assumptions include the
recoverability of the carrying amount of property and equipment and intangible
assets; the allocation of the purchase price for the Company’s acquisitions; the
collectability of accounts receivable; the fair value of share-based
compensation; the useful lives and salvage values of property and equipment; the
realizability of inventories; and amounts recorded for contingencies. These
estimates are often based on complex judgments and assumptions that management
believes to be reasonable but are inherently uncertain and unpredictable. Actual
results may differ from those estimates.
Foreign
Currency Translation
The
Company’s financial records are maintained in its local currency, the Renminbi
(“RMB”), which is the functional currency. Assets and liabilities are translated
at the exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates and stockholders’ equity is translated
at historical exchange rates. Any translation adjustments resulting are not
included in determining net income but are included in foreign exchange
adjustment to other comprehensive income, a component of stockholders’
equity.
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
The
reporting currency of the Company is the US dollar. Transactions denominated in
currencies other than US dollars are translated into US dollars at the average
rate for the period. Monetary assets and liabilities denominated in currencies
other than US dollars are translated into US dollars at the rates of exchange at
the balance sheet date. The resulting exchange differences are recorded in other
expenses in the statement of income and comprehensive income.
RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People’s Bank of China (the “PBOC”) or
other institutions authorized to buy and sell foreign exchange. The exchange
rates adopted for the foreign exchange transactions are the rates of exchange
quoted by the PBOC, which are determined largely by supply and
demand.
Fair
Value of Financial Instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, marketable securities, trade, bills and other
receivables, deposits, trade, bills and other payables approximate their fair
values due to the short-term maturity of such instruments. The carrying amounts
of bank borrowings approximate their fair values because the applicable interest
rates approximate current market rates.
It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.
The
Company is exposed to foreign currency risk arising from import purchase
transactions and trade payables as they affect the future operating results of
the Company. The Company did not have any hedging transactions during 2008 or
2007.
Risks
and Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Cash
and Cash Equivalents
Cash
consists of cash on hand, cash in bank accounts and interest-bearing savings
accounts. Cash deposits that are restricted as to withdrawal or pledged as
security, are disclosed separately on the consolidated balance sheet, and not
included in cash for the purpose of the consolidated statements of cash
flows.
Accounts
Receivable
Allowances
for doubtful accounts are maintained against accounts receivable for estimated
losses resulting from the inability of customers to make required payments.
These allowances are based on both recent trends of certain customers estimated
to be a greater credit risk as well as general trends of the entire customer
pool. Accounts are written off against the allowance when it becomes evident
collection will not occur.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined on a weighted
average basis and includes all expenditures incurred in bringing the goods to
the point of sale and putting them in a saleable condition. In assessing the
ultimate realization of inventories, the management makes judgments as to future
demand requirements compared to current or committed inventory levels. Our
reserve requirements generally increase as our projected demand requirements; or
decrease due to market conditions and product life cycle changes. The Company
estimates the demand requirements based on market conditions, forecasts prepared
by its customers, sales contracts and orders in hand.
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
Inventories
(continued)
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down the
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions. Historically, the
actual net realizable value has been close to management’s
estimate.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation is calculated on a straight-line basis over estimated
useful lives of 30 years for buildings and improvements, 10 years for
machinery and equipment, 4-5 years for electronic equipment, 5 years for
workshop reconstruction and assembling line reconstruction, and 5 years for
transportation equipment. Expenditures for maintenance and repairs are charged
to expense as incurred. Major renewals and betterments are charged to the
property accounts while replacements, maintenance and repairs, which do not
improve or extend the lives of the respective assets, are expensed to the
current period.
Capitalized
Interest
Interest
associated with major development and construction projects is capitalized and
included in the cost of the project. When no debt is incurred specifically for a
project, interest is capitalized on amounts expended on the project using
weighted-average cost of the Company’s outstanding borrowings. Capitalization of
interest ceases when the project is substantially complete or development
activity is suspended for more than a brief period.
Impairment of Long-Lived
Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
reviews the carrying values of long-lived assets, including property, plant and
equipment and other intangible assets, whenever facts and circumstances indicate
that the assets may be impaired. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If an asset is
considered impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs of disposal. For 2008, the Company performed an annual impairment review
of long-lived assets and concluded that there was no impairment
loss.
Goodwill
The
Company recognizes goodwill for the excess of the purchase price over the fair
value of the identifiable net assets of the business acquired. As required by
SFAS No. 142, “Goodwill and Other Intangible Assets,” an impairment test
for goodwill is undertaken by the Company at the reporting unit level annually,
or more frequently if events or changes in circumstances indicate that goodwill
might be impaired. As of December 31, 2008, the Company did not incur any
impairment loss for goodwill.
Revenue
Recognition
The
Company recognizes sales in accordance with the United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101,
“Revenue Recognition in Financial Statements” and SAB No. 104, “Revenue
Recognition.” The Company recognizes revenue when the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services were rendered, (iii) the price to the customer is fixed or
determinable and (iv) collection of the resulting receivable is reasonably
assured. Revenue is not recognized until title and risk of loss is transferred
to the customer, which occurs upon delivery of goods, and objective evidence
exists that customer acceptance provisions were met. Provisions for discounts
and returns are provided for at the time the sale is recorded, and are recorded
as a reduction of sales. The Company bases its
estimates
on historical experience taking into consideration the type of products sold,
the type of customer, and the type of specific transaction in each arrangement.
Revenues represent the invoiced value of goods, net of value
added
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
Revenue
Recognition (continued)
The
Company does not offer promotional payments, customer coupons, rebates or other
cash redemption offers to its customers. Deposits or advance payments from
customers prior to delivery of goods and passage of title of goods are recorded
as advanced from customers.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under this method, deferred income taxes are
recognized for the estimated tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts and each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce deferred tax
assets to the amount expected to be realized when, in management’s opinion; it
is more likely than not that some portion of the deferred tax assets will not be
realized. The provision for income taxes represents current taxes payable net of
the change during the period in deferred tax assets and
liabilities.
Operating
Leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company that do not meet the capitalization criteria of SFAS 13, are
accounted for as operating leases. Rental payables under operating leases are
recognized as expenses on the straight-line basis over the lease
term.
Comprehensive
Income
The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders'
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.
SFAS
No.130, “Reporting Comprehensive Income,” establishes standards for reporting
and displaying comprehensive income and its components in the consolidated
financial statements. Accumulated other comprehensive income (loss) includes
foreign currency translation adjustments.
Long-Term
Investments
The
Company accounted for its 9% investment in Tianjin Tong Guang
Microelectronics Co., Ltd using the cost method.
Recent
Accounting Pronouncements
In
July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN
48”). This interpretation requires we recognize in our financial statements, the
impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of 2007. The adoption of
FIN 48 had no material effect on our financial statements.
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
Recent
Accounting Pronouncements (continued)
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. This
Statement was effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application was encouraged, provided the
reporting entity
has not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. The
provisions of this statement should be applied prospectively as of the beginning
of the fiscal year in which this Statement is initially applied, except in some
circumstances where the statement shall be applied retrospectively. The adoption
of SFAS 157 had no material effect on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value.
Entities that elect the fair value option will report unrealized gains and
losses in earnings at each subsequent reporting date. The fair value option may
be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159
also establishes presentation and disclosure requirements to facilitate
comparisons between companies that choose different measurement attributes for
similar assets and liabilities. The requirements of SFAS 159 were effective for
2008. The adoption of SFAS 159 had no material effect on our financial
statements.
In
June 2007, the FASB issued FASB Staff Position No. EITF 07-3,
“Accounting for Nonrefundable Advance Payments for Goods or Services Received
for use in Future Research and Development Activities” (“FSP EITF 07-3”), which
addresses whether nonrefundable advance payments for goods or services that used
or rendered for research and development activities should be expensed when the
advance payment is made or when the research and development activity has been
performed. The adoption of FASB Staff Position No. EITF 07-3 had no
material effect on our financial statements.
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance became
effective for the fiscal year beginning after December 15, 2008. Our
management is in the process of evaluating the impact that SFAS 160 will have on
the Company’s financial statements upon adoption.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business
Combinations”. SFAS 141 (Revised) establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The guidance became effective for the fiscal year beginning after
December 15, 2008. Our management is in the process of evaluating the
impact that SFAS 141 (Revised) will have on the Company’s financial statements
upon adoption.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133.” SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles.” SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP (the GAAP hierarchy). SFAS 162 will
not have an offset on the Company’s financial statements.
NOTE
1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)
Recent
Accounting Pronouncements (continued)
In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial
Guarantee Insurance Contracts, an interpretation of FASB Statement
No. 60.” The scope of SFAS 163 is limited to financial guarantee
insurance (and reinsurance) contracts, as described in this Statement, issued by
enterprises included within the scope of Statement 60. Accordingly, SFAS 163
does not apply to financial guarantee contracts issued by enterprises excluded
from the scope of Statement 60 or to some insurance contracts that seem similar
to financial guarantee insurance contracts issued by insurance enterprises (such
as mortgage guaranty insurance or credit insurance on trade receivables). SFAS
163 also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will
not have an impact on the Company’s financial statements.
NOTE
2 MERGER AND ACQUISITION
The
Company acquired 60% of equity of JS Leimone on November 30, 2007. As of
November 30, 2007, the net assets of JS Leimone were Nil. The agreed
purchase consideration was $10,273 which was higher than 60% of total net assets
of JS Leimone and resulted in goodwill of $10,273. On January 1, 2008, the
Company invested $4,971,056 (HK$38,800,000) into JS Leimone. After this
investment, the net assets of JS Leimone were $4,976,051 and the Company owned
80% of JS Leimone. The fair value of the 80% of equity interest of JS
Leimone Electronic Co., Ltd on January 1, 2008 was $3,981,085. The agreed
purchase consideration was $4,971,012 (HK$38,800,000) which was higher than 80%
of total net assets of JS Leimone and resulted in goodwill of $989,927. The
Company acquired the remaining 20% of equity of JS Leimone on November 30,
2008. As of November 30, 2008, the net assets of JS Leimone were $5,001,783
and therefore 20% of total assets of JS Leimone was $1,000,357. The agreed
purchase consideration was $103,214 which was lower than 20% of total net assets
of JS Leimone and resulted in negative goodwill of $897,143. Therefore, the
total goodwill resulted from the acquisition of JS Leimone was $103,057. As
of December 31, 2008 and 2007, goodwill was $103,057 and $10,273
respectively. There was no impairment of goodwill for 2008.
The
following table summarizes goodwill resulting from the acquisition of JS
Leimone:
November 30,
2007
|
|
$
|
10,273
|
|
January 1,
2008
|
|
|
989,927
|
|
November 30,
2008
|
|
|
(897,143
|
)
|
|
|
|
|
|
Total
goodwill
|
|
$
|
103,057
|
|
NOTE
2 MERGER AND ACQUISITION (continued)
The
following table summarizes the fair values of the assets acquired and
liabilities assumed from JS Leimone as of the date of acquisition.
|
|
November 30,
2007
|
|
|
January 1,
2008
|
|
|
November 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39,231
|
|
|
$
|
5,010,704
|
|
|
$
|
79,411
|
|
Accounts
receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
18,475
|
|
Other
receivables
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,750
|
)
|
Advance
to suppliers
|
|
|
—
|
|
|
|
—
|
|
|
|
4,665,134
|
|
Inventories
|
|
|
—
|
|
|
|
—
|
|
|
|
246,854
|
|
Due
from related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
45,431
|
|
Other
assets
|
|
|
—
|
|
|
|
—
|
|
|
|
217,569
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
1,708,102
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
(388,235
|
)
|
Advance
from customers
|
|
|
|
|
|
|
|
|
|
|
(115,716
|
)
|
Salary
payable
|
|
|
|
|
|
|
(21,401
|
)
|
|
|
(52,961
|
)
|
Taxes
payable
|
|
|
|
|
|
|
|
|
|
|
(5,138
|
)
|
Other
Payable
|
|
|
|
|
|
|
|
|
|
|
(1,111,614
|
)
|
Due
to related parties
|
|
|
(39,231
|
)
|
|
|
(39,648
|
)
|
|
|
|
|
Affect
from foreign currency translation
|
|
|
—
|
|
|
|
200
|
|
|
|
(258,357
|
)
|
Purchase
price
|
|
$
|
—
|
|
|
$
|
4,949,855
|
|
|
$
|
5,001,783
|
|
NOTE
3 RESTRICTED CASH
Restricted
cash as of December 31, 2008 and 2007, was $8,753,757 and $5,452,203
respectively. Restricted cash was deposits in banks representing collateral for
the banks to issue banker’s acceptances. Restricted cash may not be
recovered when the secured notes payable cannot be paid.
NOTE
4 NOTES RECEIVABLE
All
Company’s notes receivable are non-interest bearing bank acceptances issued
by Beijing Beny Wave Science and Technology Co., Ltd. and honored by local
banks, which were Nil and $452,742, at December 31, 2008 and 2007,
respectively. As of December 31, 2007, the balance of notes receivable were
due from January 2008 through February 2008.
NOTE
5 ACCOUNTS RECEIVABLE
As of
December 31, 2008 and 2007, the Company’s accounts receivable consisted of
the following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
12,383,724
|
|
|
$
|
13,015,913
|
|
Less:
Allowance for doubtful accounts
|
|
|
(16,910
|
)
|
|
|
(346,671
|
)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
12,366,814
|
|
|
$
|
12,669,242
|
|
NOTE
6 INVENTORIES
Inventories,
by major categories, as of December 31, 2008 and 2007 are as
follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
3,704.758
|
|
|
$
|
6,531,972
|
|
Work
in progress
|
|
|
17,672
|
|
|
|
111,744
|
|
Low
value consumables
|
|
|
5,591
|
|
|
|
—
|
|
Finished
goods
|
|
|
382,488
|
|
|
|
1,001,114
|
|
|
|
|
4,096,227
|
|
|
|
7,644,830
|
|
Less:
Allowance for obsolete inventories
|
|
|
(368,463
|
)
|
|
|
(427,885
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Inventories,
net
|
|
$
|
3,742,046
|
|
|
$
|
7,216,945
|
|
NOTE
7 ADVANCE TO SUPPLIERS
As of
December 31, 2008 and 2007, the Company’s advance to suppliers consisted of
the following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Suzhou
Moben Communication Technology Ltd.
|
|
$
|
200,039
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Shenzhen
Yingqiongxing Trading Company
|
|
|
455,852
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Beijing
Xingwang Time Commercial Trading Co., Ltd.
|
|
|
7,737,737
|
|
|
|
6,856,638
|
|
|
|
|
|
|
|
|
|
|
China
Electronic Appliance Corporation
|
|
|
—
|
|
|
|
2,531,549
|
|
|
|
|
|
|
|
|
|
|
Spreadtrum
Communications (shanghai) Co., Ltd.
|
|
|
—
|
|
|
|
127,808
|
|
|
|
|
|
|
|
|
|
|
Shenzhen
HANTEL Communication Co., Ltd.
|
|
|
—
|
|
|
|
600,211
|
|
|
|
|
|
|
|
|
|
|
WINCOS
|
|
|
—
|
|
|
|
1,409,488
|
|
|
|
|
|
|
|
|
|
|
CEC
CoreCast Corporation Limited
|
|
|
7,305,206
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Beijing
Orsus Xelent Technologies Inc.
|
|
|
6,000,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HK
HYWIN TECHNOLOGY Co., Ltd.
|
|
|
—
|
|
|
|
154,725
|
|
|
|
|
|
|
|
|
|
|
Derong
|
|
|
1,312,336
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
ECE
Telecom Technology Limited
|
|
|
377,085
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Liantuo Electronic Technology Co., Ltd.
|
|
|
382,247
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
T.L.Y.
(Hong Kong) Limited
|
|
|
104,840
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
399,346
|
|
|
|
629,345
|
|
|
|
|
|
|
|
|
|
|
Total
advance to suppliers, net
|
|
$
|
24,275,313
|
|
|
$
|
12,309,764
|
|
NOTE
8 OTHER RECEIVABLES
As of
December 31, 2008 and 2007, the Company’s other receivables and prepaid
expenses consist of the following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Advance
to employees
|
|
$
|
177,068
|
|
|
$
|
276,616
|
|
|
|
|
|
|
|
|
|
|
Loans
to third parties
|
|
|
476,963
|
|
|
|
832,529
|
|
|
|
|
|
|
|
|
|
|
Deposit
for rental of equipment lease
|
|
|
43,769
|
|
|
|
115,065
|
|
|
|
|
|
|
|
|
|
|
Payment
on behalf of other companies
|
|
|
—
|
|
|
|
836,517
|
|
|
|
|
|
|
|
|
|
|
Receivable
for disposal of long-term assets
|
|
|
297,628
|
|
|
|
278,913
|
|
|
|
|
|
|
|
|
|
|
Others
|
|
|
83,605
|
|
|
|
243,251
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
40,848
|
|
|
|
15,723
|
|
|
|
|
|
|
|
|
|
|
Total
other receivables, net
|
|
$
|
1,119,881
|
|
|
$
|
2,598,614
|
|
The loans
to third parties bear no interest.
The
deposit for rental of equipment lease will be recovered in one
year.
NOTE
9 PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment as of December 31, 2008 and 2007 consisted of the
following:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and Equipment
|
|
$
|
8,479,599
|
|
|
$
|
5,467,660
|
|
|
|
|
|
|
|
|
|
|
Electronic
Equipment
|
|
|
1,581,014
|
|
|
|
1,336,720
|
|
|
|
|
|
|
|
|
|
|
Transportation
Equipment
|
|
|
169,235
|
|
|
|
115,305
|
|
|
|
|
|
|
|
|
|
|
Workshop
reconstruction
|
|
|
58,606
|
|
|
|
54,921
|
|
|
|
|
|
|
|
|
|
|
Assembling
line reconstruction
|
|
|
119,173
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
at cost
|
|
|
10,407,627
|
|
|
|
6,974,606
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(3,352,735
|
)
|
|
|
(1,971,921
|
)
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$
|
7,054,892
|
|
|
$
|
5,002,685
|
|
Depreciation
for 2008 and 2007 was $1,231,707 and $437,188 respectively.
NOTE
10 LONG-TERM INVESTMENTS
As of
December 31, 2008 and 2007, the Company’s long-term investment consisted of
the following:
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Jiaotong Group Guang Tong Information Tech Construction
Co., Ltd. (“TJGGTIT”)
|
|
—
|
|
$
|
—
|
|
25%
|
|
$
|
167,865
|
|
Tianjin
Tong Guang Microelectronics Co., Ltd.
|
|
9%
|
|
|
65,653
|
|
9%
|
|
|
61,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
65,653
|
|
|
|
$
|
229,391
|
|
TJGGTIT
was established on April 27, 2006 with total registered capital of $622,836
(RMB5,000,000). The Company sold the investment in TJGGTIT for $178,620 in
2008.
Tianjin
Tong Guang Microelectronics Co., Ltd. was established on April 19, 2006
with total registered capital of $622,549 (RMB5,000,000). Tianjin Tong
Guang Microelectronics Co., Ltd.’s principal activities are development,
manufacturing and sale of electronic information products and related technical
consulting services.
NOTE 11
SHORT-TERM LOANS
Short-term
loans represent amounts due to various financial institutions which are normally
due within one year. As of December 31, 2008 and 2007, the Company’s short
term loans consisted of the followings:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
From
Shanghai Pudong Development Bank Tianjin Pucheng Branch, due
from May 30, 2007 to May 29, 2008, with interest at
6.8985%, guaranteed by Huamiao Industrial Co.,
Ltd.
|
|
$
|
—
|
|
|
$
|
1,367,222
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Shenyi Street Branch, due from
August 3, 2007 to April 25, 2008, with interest at 6.84%,
guaranteed by TCBGCL
|
|
|
—
|
|
|
|
4,101,667
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Shenyi Street Branch, due from
August 16, 2007 to July 15, 2008, with interest at 6.84%,
guaranteed by TCBGCL
|
|
|
—
|
|
|
|
8,203,333
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Shenyi Street Branch, due from
September 17, 2007 to September 16, 2008, with interest at
8.019%, secured by the Company’s fixed assets
|
|
|
—
|
|
|
|
2,597,722
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Shenyi Street Branch, due from
November 15, 2007 to November 14, 2008, with interest at
8.019%, secured by the Company’s fixed assets
|
|
|
—
|
|
|
|
1,162,139
|
|
|
|
|
|
|
|
|
|
|
From
China Merchants Bank Tianjin Branch, due from November 12, 2007
to February 5, 2008, with interest at 5.832%, pledged by
Company’s notes receivable
|
|
|
—
|
|
|
|
441,613
|
|
|
|
|
|
|
|
|
|
|
From
Northern International Trust & Investment Co., LTD, due from
December 17, 2007 to December 16, 2008, with interest at
8.019%, guaranteed by Hebei Leimone
|
|
|
—
|
|
|
|
1,367,222
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
SHORT-TERM LOANS (continued)
|
|
2008
|
|
|
2007
|
|
From
Bank of Communications Tianjin Branch, due from April 25, 2008 to
March 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the
common shareholder of TCB Digital, paid March 25, 2009
|
|
$
|
4,376,878
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Branch, due from May 26, 2008 to
April 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the
common shareholder of TCB Digital, paid on April 27, 2009
(Unaudited)
|
|
|
2,917,919
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Branch, due from June 25, 2008 to
June 13, 2009 with interest at 8.217%, guaranteed by
TCBGCL
|
|
|
2,917,919
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Branch, due from July 15, 2008 to
May 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the
common shareholder of TCB Digital
|
|
|
2,917,919
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Branch, due from September 17, 2008 to
September 16, 2009 with interest at 7.92%, secured by the
Company’s fixed assets
|
|
|
2,772,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
Bank of Communications Tianjin Branch, due from November 17, 2008 to
November 16, 2009 with interest at 7.326%, secured by the
Company’s fixed assets
|
|
|
1,240,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From
Northern International Trust & Investment Co., LTD, due from
December 23, 2008 to October 23, 2009 with interest at
8.7000%, guaranteed by small and medium enterprises credit guaranty
center.
|
|
|
1,750,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term loans
|
|
$
|
18,893,525
|
|
|
$
|
19,240,918
|
|
NOTE
12 NOTES PAYABLE
These
notes were payable in 3 or 6 months and bear no interest. The balance of notes
payable as of December 31, 2008 and 2007 consisted of the
following which all were banker’s acceptances:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
To
Beijing Orsus Xelent Technology & Trading Company Limited, honored by
the Bank of Communications Tianjin Shenyi Street Branch, from
December 14, 2007 to June 14, 2008, secured by $1,367,222 of
cash in bank
|
|
$
|
—
|
|
|
$
|
2,734,444
|
|
|
|
|
|
|
|
|
|
|
To China
Electronic Appliance Co., Ltd, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from December 20, 2007 to
June 20, 2008, secured by $1,367,222 of cash in bank
|
|
|
—
|
|
|
|
2,734,444
|
|
|
|
|
|
|
|
|
|
|
To China
Electronic Appliance Co., Ltd, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from December 21, 2007 to
June 21, 2008, secured by $1,367,222 of cash in bank
|
|
|
—
|
|
|
|
2,734,445
|
|
|
|
|
|
|
|
|
|
|
To Techfaith
Intelligent Handset Technology(Beijing) Limited, honored by the Bank of
Communications Tianjin Shenyi Street Branch, from December 21,
2007 to March 31, 2008, secured by $1,350,537 of cash in
bank
|
|
|
—
|
|
|
|
1,350,537
|
|
NOTE
12 NOTES PAYABLE (continued)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
To Beijing
Orsus Xelent Technology & Trading Company Limited, honored by the Bank
of Communications Tianjin Shenyi Street
Branch, from September 11, 2008 to March 11, 2009,
secured by $729,480 of cash in bank, paid on March 11,
2009
|
|
$
|
1,458,960
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To CEC
CoreCast Corporation Limited, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from September 10,
2008 to March 10, 2009, secured by $2,188,439 of cash in bank,
paid on March 10, 2009
|
|
|
4,376,878
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To CEC
CoreCast Corporation Limited, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from September 16, 2008 to
March 16, 2009, secured by $2,188,439 of cash in bank, paid on
March 16, 2009
|
|
|
4,376,878
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To CEC
CoreCast Corporation Limited, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from September 17, 2008 to
March 17, 2009, secured by $583,584 of cash in bank, paid on
March 17, 2009
|
|
|
1,167,168
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To CEC
CoreCast Corporation Limited, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from September 22, 2008 to
March 22, 2009, secured by $875,376 of cash in bank, paid on
March 22, 2009
|
|
|
1,750,751
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To CEC
CoreCast Corporation Limited, honored by the Bank of Communications
Tianjin Shenyi Street Branch, from September 09, 2008 to
March 09, 2009, secured by $1,458,959 of cash in bank, paid on
March 9, 2009
|
|
|
2,917,919
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To Beijing
Orsus Xelent Technology & Trading Company Limited, honored by the Bank
of Communications Tianjin Shenyi Street Branch, from
October 17, 2008 to April 17, 2009, secured by $291,792 of cash
in bank, paid on April 17, 2009 (Unaudited)
|
|
|
583,584
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
To Beijing
Orsus Xelent Technology & Trading Company Limited, honored by the Bank
of Communications Tianjin Shenyi Street Branch, from
December 18, 2008 to June 18, 2009, secured by $437,688 of cash
in bank
|
|
|
875,376
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
17,507,514
|
|
|
$
|
9,553,870
|
|
NOTE
13 ACCRUED EXPENSES AND OTHER PAYABLES
As of
December 31, 2008 and 2007, the accrued expenses and other liabilities of
the Company are summarized as follows:
|
|
200
8
|
|
|
200
7
|
|
|
|
|
|
|
|
|
Accrued
machinery rent
|
|
$
|
1,158,189
|
|
|
$
|
1,842,312
|
|
Accrued
plant rent
|
|
|
807,404
|
|
|
|
428,142
|
|
Accrued utility
|
|
|
608,480
|
|
|
|
174,790
|
|
Accrued
others
|
|
|
46,451
|
|
|
|
22,887
|
|
Warranty
deposit
|
|
|
—
|
|
|
|
205,083
|
|
Welfare
& salary payable
|
|
|
53,702
|
|
|
|
21,401
|
|
Others
|
|
|
158,373
|
|
|
|
1
5
1,
058
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses and other payables
|
|
$
|
2,832,599
|
|
|
$
|
2,845,673
|
|
NOTE
14 LONG-TERM LOANS
As of
December 31, 2008, the Company’s long-term loans consisted of the
followings:
Loan
from Nantong Zong Yi Investment Co., Ltd., due from January 29, 2008
to January 28, 2010, with interest at same period secured bank
lending rate of 7.56% plus 0.756%, secured by the Company’s
fixed assets
|
|
$
|
729,480
|
|
|
|
|
|
|
Loan
from Nantong Zong Yi Investment Co., Ltd., due from March 5, 2008 to
March 4, 2010, with interest at same period secured bank
lending rate of 7.56% plus 0.756%, secured by the Company’s
fixed assets
|
|
|
437
,688
|
|
|
|
|
|
|
Total
long-term loans
|
|
$
|
1,167,168
|
|
NOTE
15 DIVIDEND PAYABLE
In
June 2007, before the Company acquired 51.03% of TCB Digital, TCB
Digital decided to distribute cash dividends to its original shareholders
of $1,074,068 (RMB7,862,700). The Company paid dividends of $495,926
(RMB3,900,000) in July 2007 to its original shareholders. The balance
of dividends payable was $578,142 and $541,789 as of December 31, 2008 and
2007 respectively, representing the dividend payable to TCBGCL amounting to
RMB3,962,700. The Company has no plan to pay this amount in the first two
quarters of 2009. The specific due date of the dividend will be negotiated
between the current shareholders and original shareholders of the Company. The
fluctuation of the balance of dividend payable represents the fluctuation of
currency exchange rate.
NOTE
16 RELATED PARTY BALANCES AND TRANSACTIONS
Due
from related parties
As of
December 31, 2008 and 2007, due from related parties were:
|
|
200
8
|
|
|
200
7
|
|
|
|
|
|
|
|
|
Due
from related parties-short term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
$
|
673,380
|
|
|
$
|
1,001,571
|
|
Hebei
Leimone
|
|
|
745,943
|
|
|
|
416,530
|
|
Shanghai
Spreadbridge Information Technology Co., Ltd.
|
|
|
2,111,460
|
|
|
|
771,113
|
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd.
|
|
|
561,699
|
|
|
|
830,353
|
|
Gu
Lei
|
|
|
575,710
|
|
|
|
478,528
|
|
Leimone
(Tianjin) Industrial Co., Ltd.
|
|
|
582,096
|
|
|
|
14,649,850
|
|
Beijing
Leimone Shengtong Cultural Development Co., Ltd.
|
|
|
14,590
|
|
|
|
|
|
TCBGCL
|
|
|
74,484
|
|
|
|
—
|
|
712
|
|
|
51,990
|
|
|
|
—
|
|
Zhejiang
Leimone Electronics Co., Ltd.
|
|
|
678,489
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
40
6
|
|
|
|
|
|
|
|
|
|
|
Total
due from related parties-short term
|
|
|
6,069,842
|
|
|
|
18,148,353
|
|
|
|
|
|
|
|
|
|
|
Due
from related parties – long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd.
|
|
|
247,294
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
due from related parties
|
|
$
|
6,317,136
|
|
|
$
|
18,148,353
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co., Ltd.
(“Electronics Science & Tech”), an entity related to the Company
through a common shareholder of TCB Digital, purchased products from
the Company. For 2008 and 2007, the Company recorded net revenues of $11,839,003
and $2,307,822 from sales to Electronics Science & Tech
respectively.
Hebei
Leimone is controlled by Gu, the majority shareholder of the
Company.
|
a.
|
Hebei
Leimone sells certain handsets to the Company. For 2008 and 2007, the
Company recorded total purchases from Hebei Leimone of nil and
$1,290,829 respectively. The balances due from Hebei Leimone
represented advances to Hebei Leimone which were $68,206 and
$63,918 respectively;
|
|
b.
|
The
Company sells certain products and provides some technical services to
Hebei Leimone. For 2008 and 2007, the Company recorded net revenues of
$407,116 and $537,086 respectively from sales to Hebei Leimone; and
as of December 31, 2008 and 2007, the balances of due from Hebei
Leimone regarding such sales were $437,009 and
$352,612 respectively;
|
|
c.
|
Additionally,
Hebei Leimone borrowed money from the Company. The borrowings bear no
interest and had a maturity of 12 months. As of
December 31, 2008, the balance of such loans was $240,728, among
which $43,768 is due on October 20, 2009 and $196,960
is due on December 25,
2009.
|
NOTE
16 RELATED PARTY BALANCE AND TRANSACTIONS (continued)
Shanghai
Spreadbridge Information Technology Co., Ltd. (“Shanghai Spreadbridge”) is
controlled by Gu, the majority shareholder of the Company.
|
a.
|
Shanghai
Spreadbridge borrows money from the Company. The borrowings bear no
interest and had a maturity of 14 months. As of December 31,
2008 and 2007, the balances of loans were $393,919 and $546,889
respectively, of which $393,919 was due on December 31,
2008 and $14,590 was subsequently received on February 19,
2009;
|
|
b.
|
The
Company sells certain products to Shanghai Spreadbridge. For 2008 and
2007, the Company recorded net revenues of $4,112,767 and $184,019 from
sales to Shanghai Spreadbridge respectively. As of December 31, 2008
and 2007, the balances of due from Shanghai Spreadbridge related to such
sales was $1,263,007 and $224,224
respectively;
|
|
c.
|
Additionally,
Shanghai Spreadbridge sells raw materials to the Company. For 2008 and
2007, the Company recorded total purchases from Shanghai Spreadbridge of
$1,515,113 and nil respectively. The amount due from Shanghai Spreadbridge
represented advances made and the amount was $454,534 as of
December 31, 2008.
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd. (“Beijing Leimone”) was founded
by Gu, the majority shareholder of the Company.
|
a.
|
Beijing
Leimone borrows money from the Company. The borrowings bear no
interest and had a maturity of 12 months or more. As of
December 31, 2007, the balance of such loans was $830,353 which
was subsequently repaid in April 2008. As of
December 31, 2008, the balance of such loans was $247,294 and is due
on March 30, 2010.
|
|
b.
|
TCB
Digital transferred a project to Beijing Leimone on June 25, 2008 and
as of December 31, 2008, the balance related to this business was
$561,699, which was received on March 11,
2009.
|
The
majority shareholder of the Company Gu borrowed money from the Company,
these borrowings bear no interest and had a two-year repayment term. As of
December 31, 2008 and 2007, the balances of such
loans were $510,634 and $478,528 respectively; and the amount
outstanding as of December 31, 2008 is due on August 5,
2009.
The
amount due from Leimone (Tianjin) Industrial Co., Ltd. (“Tianjin Leimone”)
represented short term loans granted by the Company. Tianjin Leimone
is controlled by Gu. The borrowing bears no interest and had a one-year
repayment term. As of December 31, 2008, the balance of loans was $551,458
among with bulk due on May 12, 2009 and $30,638 due on December 25,
2009. Additionally, the Company made an advance payment to Tianjin Leimone on
December 18, 2007; and as of December 31, 2008 and 2007, the
balances of advance payments amounted to nil and $14,649,850
respectively.
The
amount due from Beijing Leimone Shengtong Cultural Development Co., Ltd.
(“Beijing Leimone Cultural”) represented a short term loan granted by the
Company. Beijing Leimone Cultural was controlled by Gu. The borrowing bears no
interest and no maturity date.
The
amount due from TCBGCL represented an advance payment. TCBGCL is a
shareholder of TCB Digital.
712 is
a minority shareholder of TCB Digital. 712 purchases raw materials from the
Company. For 2008 and 2007, the Company recorded total revenues from such sales
to 712 of $906,178 and nil respectively.
NOTE
16 RELATED PARTY BALANCE AND TRANSACTIONS (continued)
Zhejiang
Leimone Electronics Co., Ltd. (“Zhejiang Leimone”) was controlled by Gu.
Zhejiang Leimone acquired Personal Phone System Electronic Manufacturing
Service from the Company in 2008. The acquisition cost was $627,353 and had not
been paid as at December 31, 2008. Additionally, the Company purchases raw
materials from Zhejiang Leimone. For 2008, the Company recorded total purchases
of nil. The amount due from Zhejiang Leimone represented the advance payment of
$51,136 as of December 31, 2008.
Due
to related parties
As of
December 31, 2008 and 2007, due to related parties were:
|
|
200
8
|
|
|
200
7
|
|
|
|
|
|
|
|
|
|
|
TCBGCL
|
|
|
—
|
|
|
$
|
1,599,422
|
|
Hebei
Leimone
|
|
$
|
233,434
|
|
|
|
39,648
|
|
Zhejiang
Leimone
|
|
|
37,002
|
|
|
|
|
|
Gu
|
|
|
4,879,889
|
|
|
|
14,565,884
|
|
Others
|
|
|
10,844
|
|
|
|
2
,
322
|
|
|
|
|
|
|
|
|
|
|
Total
due to related parties
|
|
$
|
5,161,169
|
|
|
$
|
16,207,276
|
|
The
balance of due to related parties under TCBGCL which is a shareholder of TCB
Digital represented rentals payable for the lease of
machinery properties and plants. The balances of due to TCBGCL related to
such lease amounted to nil and $1,599,422 at December 31 2008 and 2007,
respectively.
The
Company borrowed money from Hebei Leimone. The borrowing bears no interest
and had a two-year repayment term. As of December 31, 2008 and 2007, the
balances of such loans amounted to $233,434 and $39,648 respectively; and the
outstanding amount as of December 31, 2008 is due on November 21,
2009.
Zhejiang
Leimone transferred some fixed assets to the Company which amounted to $37,002
which the Company has not yet paid as at December 31, 2008.
Gu
provides fund to the Company with no interest and repayment term. As of
December 31, 2008 and 2007, the balances of funds provided by Gu was
$4,879,889 and $14,565,884 respectively.
NOTE
17 DISCONTINUED OPERATION
On
May 6, 2008, the Company entered into a project transfer agreement
and transferred the digital project department to 712. Such agreement
was implemented before June 30, 2008. For the period before
June 30, 2008, the statements of operations of the Company
reported the results of operations of the digital project department as
discontinued operations. The digital project department was sold at
its net book value, of $1,669,674.
NOTE
18 GOVERNMENT GRANT INCOME
In 2007,
TCB Digital received a $79,933 subsidy from Tianjin Municipal Bureau of Finance
for the development of ERP. In 2008, TCB Digital received a $43,089 subsidy from
Tianjin Municipal Bureau of Finance for research and development and a $133,658
subsidy from Tianjin Municipal Hebei District Science and Technology Commission
for research and development.
NOTE
19 MINORITY INTERESTS
Minority
interests on the consolidated statement of income and comprehensive income of
$330,721 and $626,576 for 2008 and 2007 respectively represents the
minority shareholders’ proportionate share of the net income/(loss) of the
Company.
NOTE
20 INCOME TAX
TCB
Digital and JS Leimone are governed by the Income Tax Law of the PRC
concerning private-run enterprises, which are generally subject to tax at a
statutory rate of 25% (33% before 2008) on income reported in the statutory
financial statements after appropriate tax adjustments.
JS
Leimone is exempt from income tax in PRC for two years starting from the first
profitable year or the year 2008, whichever is earlier, and is subject to a 50%
discount on normal income tax rate for the following three
years.
TCB
Digital had operating profit of approximately $654,000 and $1,813,000 for 2008
and 2007, respectively, while JS Leimone had operating profit of approximately
$486,000 and operating loss of approximately $299,000 for 2008 and 2007,
respectively, while Profit Harvest had operating profit of approximately
$1,942,000 and Nil for 2008 and 2007, respectively. A 100% valuation
allowance was established due to the uncertainty of its realization. The
additional deducted expenses in 2007 was the additional 50% of R&D expenses
deducted before income tax.
The
following table summarizes the temporary differences which result in deferred
tax assets and liabilities:
|
|
200
8
|
|
|
200
7
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Inventory
impairment
|
|
$
|
92,116
|
|
|
$
|
106,971
|
|
Buy-back
reverse
|
|
|
290,550
|
|
|
|
331,967
|
|
Expenses
deductible in next year
|
|
|
171,490
|
|
|
|
—
|
|
Understated
cost and expenses
|
|
|
58,679
|
|
|
|
—
|
|
Total
deferred tax assets
|
|
|
612,835
|
|
|
|
438,938
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Understated
sales
|
|
|
(11,879
|
)
|
|
|
—
|
|
Net
deferred tax assets
|
|
$
|
600,956
|
|
|
$
|
438,938
|
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
US
statutory rates
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
Tax
rate difference
|
|
|
14.6
|
%
|
|
|
3.7
|
%
|
Effect
of tax holiday
|
|
|
3.1
|
%
|
|
|
(0.5
|
%)
|
Additional
deducted expenses
|
|
|
0.0
|
%
|
|
|
22.7
|
%
|
Other
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
Tax
per financial statements
|
|
|
(15.3
|
%)
|
|
|
(7.1
|
%)
|
NOTE
2
1
STATUTORY
RESERVES
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the PRC (the “PRC GAAP”).
Appropriations to the statutory surplus reserve should be at least 10% of the
after tax net income determined in accordance with the PRC GAAP until the
reserve equals 50% of the entities’ registered capital or members’ equity.
Appropriations to the statutory public welfare fund are at least 5% of the after
tax net income determined in accordance with PRC GAAP. Commencing on
January 1, 2006, new PRC regulations waived the requirement for
appropriating retained earnings to a welfare fund. As of June 30, 2007, TCB
Digital accumulatively appropriated the statutory surplus reserve amounted
to $375,827. We appropriated $127,951 to the statutory surplus reserve in the
second half year of 2007. After this appropriation, TCB Digital’s statutory
surplus reserve amounted to $503,778 and the Company’s statutory surplus reserve
amounted to $257,078 as of December 31, 2007. In 2008, we appropriated
10% of 2008’s net income of TCB Digital, which amounted to $65,415 to the
statutory reserve accordingly. As of December 31, 2008, the Company’s
statutory surplus reserve amounted to $569,193.
NOTE
22 CONCENTRATION DISCLOSURE
The
following table set forth the Company’s major customers whose purchases from the
Company represent over 10% of the Company’s sales for the years ended
December 31, 2008 and 2007:
2008
|
|
2007
|
|
Customers
|
|
Sales
revenue
|
|
|
% of total
revenue
|
|
Customers
|
|
Sales
Revenue
|
|
|
% of total
revenue
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
$
|
11,850,174
|
|
|
|
15
|
%
|
Beijing
Orsus Xelent Technology & Trading Co., Limited.
|
|
$
|
8,101,324
|
|
|
|
19
|
%
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
11,524,309
|
|
|
|
14
|
%
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
|
6,107,810
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
5,529,669
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Beijing
Beny Wave Science and Technology Co., Ltd.
|
|
|
5,300,006
|
|
|
|
12
|
%
|
Total
|
|
$
|
23,374,483
|
|
|
|
29
|
%
|
Total
|
|
$
|
25,038,809
|
|
|
|
58
|
%
|
The
following table set forth the Company’s major suppliers whose sales to
the Company represent over 10% of the Company’s purchases for 2008 and
2007:
2008
|
|
|
2007
|
|
Suppliers
|
|
Purchase
|
|
|
%
of total
purchase
|
|
|
Suppliers
|
|
Purchase
|
|
|
%
of total
purchase
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
$
|
13,044,908
|
|
|
|
19
|
%
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
$
|
21,724,530
|
|
|
|
54
|
%
|
Beijing
Orsus Xelent Technology & Trading Co., Limited.
|
|
|
11,024,042
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
|
7,169,310
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,238,260
|
|
|
|
45
|
%
|
|
Total
|
|
$
|
21,724,530
|
|
|
|
54
|
%
|
NOTE
23 OPERATING RISK
The
industry in which we compete is a rapidly evolving, highly competitive and
fragmented market driven by consumer preferences and quickly evolving
technology. Increased competition may result in price reductions, reduced gross
margin and loss of market share. Failure to compete successfully against current
or future competitors could have a material adverse effect on the Company’s
business, operating results and financial condition.
|
(b)
|
Product
risk of obsolescence
|
From the
second half of year 2007, the Company began to involve in the agent business of
some famous high-end smart phones. Because of the restructure of China Unicom,
one type of smart phones could not be sold as expected and inventory impairment
loss arose. Such uncertain and unpredictable events could take significant
effect on the profits that the Company will make in the future.
The
Company can not guarantee the current exchange rate will remain steady,
therefore the Company could post the same profit for two comparable periods and
because of a fluctuating exchange rate actually post higher or lower profit
depending on exchange rate of Renminbi and US dollars on that date. The exchange
rate could fluctuate depending on changes in the political and economic
environments without notice.
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company does not have
any derivative financial instruments as of December 31, 2008 and 2007 and
believes its exposure to interest rate risk is not material.
NOTE
24 COMMITMENT
Operating
lease commitment
The
Company has operating leases and the lessor of the premises for TCB Digital is
TCBGCL, a common shareholder of TCB Digital. Pursuant to these leases which
rates of rent are all at Rmb 8 per square meter per month for both production
facilities and dormitory space, the commitment of the Company as of December 31,
2008 is as follows:
Year
Ended December 31
|
|
|
|
2009
|
|
$
|
249,867
|
|
2010
|
|
|
201,369
|
|
2011
|
|
|
200,678
|
|
2012
|
|
|
111,128
|
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
763,042
|
|
UNAUDITED
PRO FORMA CONDENSED COMBINED
FINANCIAL
DATA OF ZOOM
Unaudited
Pro Forma Condensed Combined Balance Sheet As of December 31,
2008
|
|
As of December 31, 2008
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
|
|
Zoom
|
|
|
Gold Lion
|
|
|
Adjustment
|
|
|
Combined
|
|
|
Spin-out
(1)
|
|
|
Combined
|
|
|
|
(in
thousands, except per share data)
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,205
|
|
|
$
|
813
|
|
|
$
|
—
|
|
|
$
|
2,018
|
|
|
$
|
(1,205
|
)
|
|
$
|
813
|
|
Restricted
cash
|
|
|
—
|
|
|
|
8,754
|
|
|
|
—
|
|
|
|
8,754
|
|
|
|
—
|
|
|
|
8,754
|
|
Accounts
receivable
|
|
|
1,163
|
|
|
|
12,367
|
|
|
|
—
|
|
|
|
13,530
|
|
|
|
(1,163
|
)
|
|
|
12,367
|
|
Other
receivables, net
|
|
|
234
|
|
|
|
1,120
|
|
|
|
—
|
|
|
|
1,354
|
|
|
|
(234
|
)
|
|
|
1,120
|
|
Advance
to suppliers
|
|
|
—
|
|
|
|
24,275
|
|
|
|
—
|
|
|
|
24,275
|
|
|
|
—
|
|
|
|
24,275
|
|
Inventories,
net
|
|
|
2,903
|
|
|
|
3,742
|
|
|
|
—
|
|
|
|
6,645
|
|
|
|
(2,903
|
)
|
|
|
3,742
|
|
Due
from related parties
|
|
|
—
|
|
|
|
6,070
|
|
|
|
—
|
|
|
|
6,070
|
|
|
|
—
|
|
|
|
6,070
|
|
Total
current assets
|
|
|
5,505
|
|
|
|
57,141
|
|
|
|
—
|
|
|
|
62,646
|
|
|
|
(5,505
|
)
|
|
|
57,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
103
|
|
|
|
7,055
|
|
|
|
—
|
|
|
|
7,158
|
|
|
|
(103
|
)
|
|
|
7,055
|
|
Long-term
investments
|
|
|
960
|
|
|
|
66
|
|
|
|
—
|
|
|
|
1,026
|
|
|
|
(960
|
)
|
|
|
66
|
|
Due
from related parties-long term
|
|
|
—
|
|
|
|
247
|
|
|
|
—
|
|
|
|
247
|
|
|
|
—
|
|
|
|
247
|
|
Deferred
tax assets
|
|
|
—
|
|
|
|
613
|
|
|
|
—
|
|
|
|
613
|
|
|
|
—
|
|
|
|
613
|
|
Goodwill
|
|
|
—
|
|
|
|
103
|
|
|
|
—
|
|
|
|
103
|
|
|
|
—
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
6,568
|
|
|
$
|
65,225
|
|
|
$
|
—
|
|
|
$
|
71,793
|
|
|
$
|
(6,568
|
)
|
|
$
|
65,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
—
|
|
|
$
|
18,894
|
|
|
$
|
—
|
|
|
$
|
18,894
|
|
|
$
|
—
|
|
|
$
|
18,894
|
|
Notes
payable
|
|
|
—
|
|
|
|
17,508
|
|
|
|
—
|
|
|
|
17,508
|
|
|
|
—
|
|
|
|
17,508
|
|
Accounts
payable
|
|
|
1,211
|
|
|
|
3,581
|
|
|
|
—
|
|
|
|
4,792
|
|
|
|
(1,211
|
)
|
|
|
3,581
|
|
Advance
from customers
|
|
|
—
|
|
|
|
3,785
|
|
|
|
—
|
|
|
|
3,785
|
|
|
|
—
|
|
|
|
3,785
|
|
Dividends
payable
|
|
|
—
|
|
|
|
578
|
|
|
|
—
|
|
|
|
578
|
|
|
|
—
|
|
|
|
578
|
|
Taxes
payable
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
|
|
775
|
|
Accrued
expenses and other payables
|
|
|
399
|
|
|
|
2,833
|
|
|
|
—
|
|
|
|
3,232
|
|
|
|
(399
|
)
|
|
|
2,833
|
|
Due
to related parties
|
|
|
—
|
|
|
|
5,161
|
|
|
|
—
|
|
|
|
5,161
|
|
|
|
—
|
|
|
|
5,161
|
|
Deferred
tax liabilities
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
|
|
—
|
|
|
|
12
|
|
Total
current liabilities
|
|
|
1,610
|
|
|
|
53,127
|
|
|
|
—
|
|
|
|
54,737
|
|
|
|
(1,610
|
)
|
|
|
53,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans
|
|
|
—
|
|
|
|
1,167
|
|
|
|
—
|
|
|
|
1,167
|
|
|
|
—
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,610
|
|
|
|
54,294
|
|
|
|
—
|
|
|
|
55,904
|
|
|
|
(1,610
|
)
|
|
|
54,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTERESTS
|
|
|
—
|
|
|
|
6,489
|
|
|
|
—
|
|
|
|
6,489
|
|
|
|
—
|
|
|
|
6,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares, issued and
outstanding;
par value
|
|
|
94
|
|
|
|
—
|
|
|
|
42
|
(2)
|
|
|
136
|
|
|
|
—
|
|
|
|
136
|
|
Additional
paid-in capital
|
|
|
31,786
|
|
|
|
3,553
|
|
|
|
(42
|
)
|
|
|
35,297
|
|
|
|
(31,873
|
)—
|
|
|
3,424
|
|
Statutory
surplus reserve
|
|
|
—
|
|
|
|
569
|
|
|
|
—
|
|
|
|
569
|
|
|
|
—
|
|
|
|
569
|
|
Accumulated
other comprehensive
income
|
|
|
345
|
|
|
|
244
|
|
|
|
—
|
|
|
|
589
|
|
|
|
(345
|
)—
|
|
|
244
|
|
Accumulated
retained earning
|
|
|
(27,260
|
)
|
|
|
76
|
|
|
|
—
|
|
|
|
(27,184
|
)
|
|
|
27,260
|
|
|
|
76
|
|
Treasury
stock
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
4,958
|
|
|
|
4,442
|
|
|
|
—
|
|
|
|
9,400
|
|
|
|
(4,958
|
)
|
|
|
4,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$
|
6,568
|
|
|
$
|
65,225
|
|
|
$
|
—
|
|
|
$
|
71,793
|
|
|
$
|
(6,568
|
)
|
|
$
|
65,225
|
|
Unaudited
Pro Forma Condensed Combined Balance Sheet
|
|
As
of June 30, 2009
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Pro-Forma
|
|
|
|
Zoom
|
|
|
Gold
Lion
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Spin-out
|
|
|
Combined
|
|
|
|
(in
thousands, except per share data)
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
711
|
|
|
$
|
1,032
|
|
|
$
|
-
|
|
|
$
|
1,743
|
|
|
$
|
(711
|
)
|
|
$
|
1,032
|
|
Restricted
cash
|
|
|
-
|
|
|
|
11,980
|
|
|
|
-
|
|
|
|
11,980
|
|
|
|
-
|
|
|
|
11,980
|
|
Notes
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable
|
|
|
1,615
|
|
|
|
40,821
|
|
|
|
-
|
|
|
|
42,435
|
|
|
|
(1,615
|
)
|
|
|
40,821
|
|
Other
receivables, net
|
|
|
178
|
|
|
|
390
|
|
|
|
-
|
|
|
|
569
|
|
|
|
(178
|
)
|
|
|
390
|
|
Advance
to suppliers
|
|
|
-
|
|
|
|
32,103
|
|
|
|
-
|
|
|
|
32,103
|
|
|
|
-
|
|
|
|
32,103
|
|
Inventories,
net
|
|
|
2,522
|
|
|
|
2,915
|
|
|
|
-
|
|
|
|
5,437
|
|
|
|
(2,522
|
)
|
|
|
2,915
|
|
Prepaid
expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due
from inter-company
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Due
from related parties
|
|
|
-
|
|
|
|
13,481
|
|
|
|
-
|
|
|
|
13,481
|
|
|
|
-
|
|
|
|
13,481
|
|
Total
current assets
|
|
|
4,380
|
|
|
|
102,721
|
|
|
|
-
|
|
|
|
107,100
|
|
|
|
(4,380
|
)
|
|
|
102,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
77
|
|
|
|
6,332
|
|
|
|
-
|
|
|
|
6,409
|
|
|
|
(77
|
)
|
|
|
6,332
|
|
Long-term
investments
|
|
|
960
|
|
|
|
66
|
|
|
|
-
|
|
|
|
1,026
|
|
|
|
(960
|
)
|
|
|
66
|
|
Due
from related parties-long term
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
tax assets
|
|
|
-
|
|
|
|
504
|
|
|
|
-
|
|
|
|
504
|
|
|
|
-
|
|
|
|
504
|
|
Goodwill
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
5,416
|
|
|
$
|
109,727
|
|
|
$
|
-
|
|
|
$
|
115,144
|
|
|
$
|
(5,416
|
)
|
|
$
|
109,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
-
|
|
|
$
|
20,088
|
|
|
$
|
-
|
|
|
$
|
20,088
|
|
|
$
|
-
|
|
|
$
|
20,088
|
|
Notes
payable
|
|
|
-
|
|
|
|
23,960
|
|
|
|
-
|
|
|
|
23,960
|
|
|
|
-
|
|
|
|
23,960
|
|
Accounts
payable
|
|
|
1,151
|
|
|
|
35,321
|
|
|
|
-
|
|
|
|
36,472
|
|
|
|
(1,151
|
)
|
|
|
35,321
|
|
Advance
from customers
|
|
|
-
|
|
|
|
6,836
|
|
|
|
-
|
|
|
|
6,836
|
|
|
|
-
|
|
|
|
6,836
|
|
Dividends
payable
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
579
|
|
Taxes
payable
|
|
|
-
|
|
|
|
1,071
|
|
|
|
-
|
|
|
|
1,071
|
|
|
|
-
|
|
|
|
1,071
|
|
Accrued
expenses and other payables
|
|
|
408
|
|
|
|
2,936
|
|
|
|
-
|
|
|
|
3,344
|
|
|
|
(408
|
)
|
|
|
2,936
|
|
Due
to related parties
|
|
|
-
|
|
|
|
5,160
|
|
|
|
-
|
|
|
|
5,160
|
|
|
|
-
|
|
|
|
5,160
|
|
Deferred
tax liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
1,559
|
|
|
|
95,951
|
|
|
|
-
|
|
|
|
97,510
|
|
|
|
(1,559
|
)
|
|
|
95,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,559
|
|
|
|
95,951
|
|
|
|
-
|
|
|
|
97,510
|
|
|
|
(1,559
|
)
|
|
|
95,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares, issued and outstanding; par value
|
|
|
20
|
|
|
|
-
|
|
|
|
42
|
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
Additional
paid-in capital
|
|
|
32,064
|
|
|
|
3,553
|
|
|
|
(42
|
)
|
|
|
35,575
|
|
|
|
(32,076
|
)
|
|
|
3,499
|
|
Statutory
surplus reserve
|
|
|
-
|
|
|
|
612
|
|
|
|
-
|
|
|
|
612
|
|
|
|
-
|
|
|
|
612
|
|
Accumulated
other comprehensive income
|
|
|
369
|
|
|
|
259
|
|
|
|
-
|
|
|
|
629
|
|
|
|
(369
|
)
|
|
|
259
|
|
Accumulated
retained earning
|
|
|
(28,589
|
)
|
|
|
2,653
|
|
|
|
-
|
|
|
|
(25,936
|
)
|
|
|
28,589
|
|
|
|
2,653
|
|
Treasury
stock
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
3,857
|
|
|
|
7,077
|
|
|
|
-
|
|
|
|
10,934
|
|
|
|
(3,856
|
)
|
|
|
7,078
|
|
Noncontrolling
Interest
|
|
|
-
|
|
|
|
6,699
|
|
|
|
-
|
|
|
|
6,699
|
|
|
|
-
|
|
|
|
6,699
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,416
|
|
|
$
|
109,727
|
|
|
$
|
-
|
|
|
$
|
115,144
|
|
|
$
|
(5,416
|
)
|
|
$
|
109,729
|
|
Unaudited
Pro Forma Condensed Combined Statement
of
Operations For the Twelve Months Ended December 31, 2008
|
|
Twelve Months Ended December 31, 2008
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
|
|
Zoom
|
|
|
Gold Lion
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Spin-out
|
|
|
Combined
|
|
|
|
(in thousands, except per share data)
|
|
Net
revenue
|
|
$
|
14,459
|
|
|
$
|
80,612
|
|
|
$
|
—
|
|
|
$
|
95,071
|
|
|
$
|
(14,459
|
)
|
|
$
|
80,612
|
|
Cost
of sales
|
|
|
(11,467
|
)
|
|
|
(72,411
|
)
|
|
|
—
|
|
|
|
(83,878
|
)
|
|
|
11,467
|
|
|
|
(72,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
profit
|
|
|
2,992
|
|
|
|
8,201
|
|
|
|
—
|
|
|
|
11,193
|
|
|
|
(2,992
|
)
|
|
|
8,201
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
(2,932
|
)
|
|
|
(267
|
)
|
|
|
—
|
|
|
|
(3,199
|
)
|
|
|
2,932
|
|
|
|
(267
|
)
|
General
and administrative expenses
|
|
|
(2,280
|
)
|
|
|
(1,686
|
)
|
|
|
—
|
|
|
|
(3,966
|
)
|
|
|
2,280
|
|
|
|
(1,686
|
)
|
Research
and development expenses
|
|
|
(1,722
|
)
|
|
|
(871
|
)
|
|
|
—
|
|
|
|
(2,593
|
)
|
|
|
1,722
|
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(3,942
|
)
|
|
|
5,377
|
|
|
|
—
|
|
|
|
1,435
|
|
|
|
3,942
|
|
|
|
5,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
—
|
|
|
|
(1,599
|
)
|
|
|
—
|
|
|
|
(1,599
|
)
|
|
|
—
|
|
|
|
(1,599
|
)
|
Other
income (expenses)
|
|
|
(205
|
)
|
|
|
232
|
|
|
|
—
|
|
|
|
27
|
|
|
|
205
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and
minority
interests
|
|
|
(4,147
|
)
|
|
|
4,010
|
|
|
|
—
|
|
|
|
(137
|
)
|
|
|
4,147
|
|
|
|
4,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
—
|
|
|
|
(331
|
)
|
|
|
—
|
|
|
|
(331
|
)
|
|
|
—
|
|
|
|
(331
|
)
|
Income
tax expenses
|
|
|
(13
|
)
|
|
|
(612
|
)
|
|
|
––
|
|
|
|
(625
|
)
|
|
|
13
|
|
|
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
(2)
|
|
$
|
(4,160
|
)
|
|
$
|
3,067
|
|
|
$
|
—
|
|
|
$
|
(1,093
|
)
|
|
$
|
4,160
|
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations per share - basic and
diluted
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted*
|
|
|
1,869
|
|
|
|
|
|
|
|
4,225
|
|
|
|
6,094
|
|
|
|
|
|
|
|
6,094
|
|
*
|
Zoom
has a de minimis number of stock option shares that are “in the money.”
Gold Lion does not have any stock options. There is no material difference
between basic and diluted net income per
share.
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
|
|
Six
Months Ended June 30, 2009
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
|
|
Zoom
|
|
|
Gold
Lion
|
|
|
Adjustments
|
|
|
Combined
|
|
|
Spin-out
|
|
|
Combined
|
|
|
|
(in
thousands, except per share data)
|
|
Net
revenue
|
|
$
|
5,414
|
|
|
$
|
81,950
|
|
|
$
|
-
|
|
|
$
|
87,364
|
|
|
$
|
(5,414
|
)
|
|
$
|
81,950
|
|
Cost
of sales
|
|
|
(3,938
|
)
|
|
|
(76,105
|
)
|
|
|
-
|
|
|
|
(80,043
|
)
|
|
|
3,938
|
|
|
|
(76,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,477
|
|
|
|
5,845
|
|
|
|
-
|
|
|
|
7,322
|
|
|
|
(1,477
|
)
|
|
|
5,845
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
(938
|
)
|
|
|
(1,353
|
)
|
|
|
-
|
|
|
|
(2,291
|
)
|
|
|
938
|
|
|
|
(1,353
|
)
|
General
and administrative expenses
|
|
|
(1,253
|
)
|
|
|
(904
|
)
|
|
|
-
|
|
|
|
(2,157
|
)
|
|
|
1,253
|
|
|
|
(904
|
)
|
Research
and development expenses
|
|
|
(653
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(653
|
)
|
|
|
653
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
(1,366
|
)
|
|
|
3,588
|
|
|
|
-
|
|
|
|
2,222
|
|
|
|
1,366
|
|
|
|
3,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
-
|
|
|
|
(653
|
)
|
|
|
-
|
|
|
|
(653
|
)
|
|
|
-
|
|
|
|
(653
|
)
|
Other
income (expenses)
|
|
|
38
|
|
|
|
493
|
|
|
|
|
|
|
|
531
|
|
|
|
(38
|
)
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and minority interests
|
|
|
(1,329
|
)
|
|
|
3,429
|
|
|
|
-
|
|
|
|
2,100
|
|
|
|
1,329
|
|
|
|
3,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
|
(210
|
)
|
|
|
-
|
|
|
|
(210
|
)
|
|
|
-
|
|
|
|
(210
|
)
|
Income
tax expenses
|
|
|
(0
|
)
|
|
|
(599
|
)
|
|
|
-
|
|
|
|
(599
|
)
|
|
|
0
|
|
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operation
|
|
$
|
(1,329
|
)
|
|
$
|
2,620
|
|
|
$
|
-
|
|
|
$
|
1,291
|
|
|
$
|
1,329
|
|
|
$
|
2,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share-basic and diluted
|
|
$
|
(0.68
|
)
|
|
|
|
|
|
$
|
-
|
|
|
$
|
0.21
|
|
|
|
|
|
|
$
|
0.42
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted*
|
|
|
1,945
|
|
|
|
|
|
|
|
4,225
|
|
|
|
6,170
|
|
|
|
|
|
|
|
6,170
|
|
* Zoom
has a diminimus number of stock option shares that are "in the
money." Gold Lion does not have any stock options. There is no
material difference between basic and diluted net income per
share.
NOTES
TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED
FINANCIAL STATEMENTS
(1)
|
Description
of Transaction
|
On
January 28, 2009, Zoom and Gold Lion entered into a reverse merger agreement in
which Zoom will merge with Gold Lion, a foreign investment enterprise organized
under the laws of the PRC, that engages in the manufacturing, research and
development, and sales of electronic components for 3
rd
generation mobile phones, wireless communication circuitry, GPS equipment, and
related software products. A proposal to approve: (a) the acquisition by Zoom by
the issuance of 4,225,219 shares of Zoom common stock (aggregate value based on
per share price as of June 17, 2009: $5,957,558.79) for 100% of Gold Lion, which
is a holding company that owns (i) 100% of Jiangsu Leimone Electronics Co.,
Ltd., or Jiangsu Leimone, a foreign investment enterprise organized under the
laws of the People’s Republic of China, or PRC, which owns 51.03% of Tianjin
Tong Guang Group Digital Communication Co., Ltd., or TCB Digital, a company
organized under the laws of the PRC, and (ii) 100% of Profit Harvest Corporation
Ltd., or Profit Harvest, a company organized under the laws of Hong Kong, and
(b) the future acquisition by Zoom by the issuance of an additional 2,402,576
shares of Zoom common stock of additional shares of TCB Digital such that Zoom
would own up to 80% of the outstanding shares of TCB Digital; subject to an
upward adjustment that could provide for a maximum of 9,126,963 shares of Zoom
common stock being issued for the acquisition of both Gold Lion and the
additional 28.97% interest in TCB Digital. The acquisition is made pursuant to
the Share Exchange Agreement, dated January 28, 2009, as amended on May
12, 2009, between Zoom, Gold Lion, TCB Digital, Zoom Telephonics, Inc., a
wholly owned subsidiary of Zoom, and the Gold Lion shareholders. The completion
of the proposed acquisition will result in the change of control of Zoom under
the NASDAQ Stock Market Rules.
In this
reverse merger the legal acquirer is Zoom and the accounting acquirer is Gold
Lion. For purposes of preparing the unaudited pro forma condensed consolidated
balance sheet and statements of operations, therefore the issuance of the least
amount of shares by Zoom, which will result in the issuance of 4,225,219 shares
(aggregate value based on per share price as of June 17, 2009: $5,957,558.79) to
acquire 100% of Gold Lion and Jiangsu Leimone and 51.03% of TCB
Digital.
Prior to
the reverse merger, the Zoom Telephonics operating company of Zoom Technologies
will be separated from Zoom Technologies to become an independent
company. The remaining Zoom Technologies entity to be merged with
Gold Lion will be a Nasdaq-listed holding company with no operating entities.
The remaining assets and liabilities of Zoom, if any, will be recorded at the
acquisition date, at their respective fair values, and consolidated with the
historical values of Gold Lion.
This
information has been derived from the audited financial statements of Zoom and
Gold Lion as of and for the year ended December 31, 2008 and the
unaudited financial statements of Zoom and Gold Lion as of and for the quarter
ended June 30, 2009. The financial statements of Zoom Technologies are included
in the Zoom 2008 10-K which was filed with the S.E.C. on March 12, 2009 and the
Zoom Q2 2009 10-Q which was filed with the S.E.C.on August 18,
2009. The financial statements of Gold Lion are included elsewhere in
this proxy. The pro forma adjustments are based on available information and
assumptions that are believed to be are reasonable. The unaudited pro forma
condensed financial information does not purport to represent the results of
operations that would have occurred had such transactions been consummated on
the dates indicated or the financial position for any future date or period.
Zoom and Gold Lion do not assume any responsibility for the accuracy or
completeness of the information provided by the other party. This information
should be read together with the audited financial statements of Zoom included
in the Form 10-K and the unaudited financial statements of Zoom
including in the Form Q2 2009 10-Q, referred to above and Gold Lion audited
financial statements and related notes included elsewhere in this proxy
statement.
(2)
|
Gold
Lion Discontinued Operations
|
On May 6,
2008, Gold Lion entered into a project transfer agreement under which it will
transfer the digital project department to Tianjin 712 Communication &
Broadcasting Co., Ltd. Such an agreement was implemented before June 30, 2008.
For the period before June 30, 2008, the statements of operation of Gold
Lion reported the results of operations of the digital project department as
discontinued operations. The digital project department was sold at its net book
value, which amounted to $1,669,674. Consistent with Article 11 of Regulation
S-X, for the purposes of the unaudited pro-forma condensed consolidated balance
sheet and statements of operations, only the financial results of the continuing
operations are shown.
(3)
|
Pro
Forma Adjustments
|
Adjustments
are related to the following:
(1) The
spin-out of Zoom Telephonics from Zoom Technologies, Inc.
The basis
for this adjustment is that the operating entity, Zoom Telephonics, which
contains 100% of the transactions, assets, and liabilities of Zoom Technologies,
will be separated from Zoom Technologies coincident with the acquisition
transaction. The removal of 100% of the Zoom Technologies sales, costs and
expenses, assets, and liabilities is shown in the Spin-out column on the
Pro-Forma.
(2) Equity
adjustments
The
equity adjustments reflect the issuance of 4,225,219 shares of Zoom common stock
(aggregate value based on per share price as of June 17, 2009: $5,957,558.79)
for 100% of the equity of Gold Lion.
GOLD
LION HOLDING LTD.
CONSOLIDATED
BALANCE SHEETS
|
|
June
30, 2009
|
|
|
December
31, 2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,032,013
|
|
|
$
|
812,769
|
|
Restricted
cash
|
|
|
11,979,897
|
|
|
|
8,753,757
|
|
Accounts
receivable
|
|
|
40,820,840
|
|
|
|
12,366,814
|
|
Other
receivables, net of allowance for doubtful accounts
|
|
|
390,426
|
|
|
|
1,119,881
|
|
Advance
to suppliers
|
|
|
32,102,094
|
|
|
|
24,275,313
|
|
Inventories,
net
|
|
|
2,914,896
|
|
|
|
3,742,046
|
|
Due
from related parties
|
|
|
13,480,694
|
|
|
|
6,069,842
|
|
Total
current assets
|
|
|
102,720,860
|
|
|
|
57,140,422
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
6,333,225
|
|
|
|
7,054,892
|
|
Long-term
investments
|
|
|
65,743
|
|
|
|
65,653
|
|
Due
from related parties-long term
|
|
|
-
|
|
|
|
247,294
|
|
Deferred
tax assets
|
|
|
504,388
|
|
|
|
600,956
|
|
Goodwill
|
|
|
103,057
|
|
|
|
103,057
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
109,727,273
|
|
|
$
|
65,212,274
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
20,088,242
|
|
|
$
|
18,893,525
|
|
Notes
payable
|
|
|
23,959,794
|
|
|
|
17,507,514
|
|
Accounts
payable
|
|
|
35,321,423
|
|
|
|
3,580,720
|
|
Advance
from customers
|
|
|
6,835,827
|
|
|
|
3,785,462
|
|
Dividends
payable
|
|
|
578,936
|
|
|
|
578,142
|
|
Taxes
payable
|
|
|
1,071,291
|
|
|
|
775,315
|
|
Accrued
expenses and other payables
|
|
|
2,935,728
|
|
|
|
2,832,599
|
|
Due
to related parties
|
|
|
5,159,735
|
|
|
|
5,161,169
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
95,950,976
|
|
|
|
53,114,446
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans
|
|
|
-
|
|
|
|
1,167,168
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
95,950,976
|
|
|
|
54,281,614
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Comon
shares, issued and outstanding; 1,000 shares, par value $0.001 per
share
|
|
|
1
|
|
|
|
1
|
|
Additional
paid-in capital
|
|
|
3,553,292
|
|
|
|
3,553,292
|
|
Statutory
surplus reserve
|
|
|
612,042
|
|
|
|
569,193
|
|
Accumulated
other comprehensive income
|
|
|
259,332
|
|
|
|
243,625
|
|
Retained
earnings
|
|
|
2,652,765
|
|
|
|
75,517
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
7,077,432
|
|
|
|
4,441,628
|
|
Noncontrolling
interests
|
|
|
6,698,865
|
|
|
|
6,489,032
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
109,727,273
|
|
|
$
|
65,212,274
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
LION HOLDING LTD.
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME
|
|
For
the six months ended June 30
|
|
|
For
the three months ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
81,950,018
|
|
|
$
|
22,980,642
|
|
|
$
|
53,133,461
|
|
|
$
|
11,697,139
|
|
Cost
of sales
|
|
|
(76,105,167
|
)
|
|
|
(19,575,671
|
)
|
|
|
(49,973,216
|
)
|
|
|
(10,416,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
5,844,851
|
|
|
|
3,404,971
|
|
|
|
3,160,245
|
|
|
|
1,281,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing expenses
|
|
|
(1,353,019
|
)
|
|
|
(204,209
|
)
|
|
|
(304,696
|
)
|
|
|
(50,103
|
)
|
General
and administrative expenses
|
|
|
(903,711
|
)
|
|
|
(1,082,258
|
)
|
|
|
(116,229
|
)
|
|
|
(330,531
|
)
|
Research
and development expenses
|
|
|
-
|
|
|
|
(857,641
|
)
|
|
|
-
|
|
|
|
(173,980
|
)
|
|
|
|
(2,256,730
|
)
|
|
|
(2,144,108
|
)
|
|
|
(420,925
|
)
|
|
|
(554,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,588,121
|
|
|
|
1,260,863
|
|
|
|
2,739,320
|
|
|
|
726,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings in investee
|
|
|
-
|
|
|
|
3,141
|
|
|
|
-
|
|
|
|
45
|
|
Interest
income
|
|
|
165,546
|
|
|
|
105,766
|
|
|
|
11,376
|
|
|
|
90,566
|
|
Other
income
|
|
|
425,318
|
|
|
|
-
|
|
|
|
280
|
|
|
|
-
|
|
Interest
expense
|
|
|
(652,509
|
)
|
|
|
(775,947
|
)
|
|
|
(331,602
|
)
|
|
|
(420,227
|
)
|
Exchange
loss
|
|
|
(29,191
|
)
|
|
|
(172,096
|
)
|
|
|
(4,288
|
)
|
|
|
(106,573
|
)
|
Other
expenses
|
|
|
(68,773
|
)
|
|
|
(13,507
|
)
|
|
|
(37,213
|
)
|
|
|
(4,332
|
)
|
|
|
|
(159,609
|
)
|
|
|
(852,643
|
)
|
|
|
(361,447
|
)
|
|
|
(440,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, noncontrolling interests and discontinued
operations
|
|
|
3,428,512
|
|
|
|
408,220
|
|
|
|
2,377,873
|
|
|
|
285,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(598,582
|
)
|
|
|
(76,877
|
)
|
|
|
(451,401
|
)
|
|
|
(69,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before noncontrolling interests and discontinued
operations
|
|
|
2,829,930
|
|
|
|
331,343
|
|
|
|
1,926,472
|
|
|
|
216,353
|
|
Loss
from discontinued operation
|
|
|
-
|
|
|
|
(242,804
|
)
|
|
|
-
|
|
|
|
(242,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations including noncontrolling
interests
|
|
|
2,829,930
|
|
|
|
88,539
|
|
|
|
1,926,472
|
|
|
|
(26,451
|
)
|
Less:
Net income attributable to noncontrolling interests
|
|
|
(209,833
|
)
|
|
|
(104,731
|
)
|
|
|
(226,747
|
)
|
|
|
(99,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
2,620,097
|
|
|
|
(16,192
|
)
|
|
|
1,699,725
|
|
|
|
(126,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$
|
15,707
|
|
|
$
|
989,214
|
|
|
$
|
(961
|
)
|
|
$
|
379,699
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
GOLD
LION HOLDING LTD.
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the six months ended June 30
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income including noncontrolling interests
|
|
$
|
2,829,930
|
|
|
$
|
88,539
|
|
Adjustments
to reconcile net income to cash used by operating
activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
794,796
|
|
|
|
573,875
|
|
Provision
for inventory obsolescence
|
|
|
(128,714
|
)
|
|
|
(57,745
|
)
|
Provision
for doubtful receivables
|
|
|
17,065
|
|
|
|
(58,908
|
)
|
Loss
on disposal of fixed assets
|
|
|
-
|
|
|
|
-
|
|
Investment
income
|
|
|
-
|
|
|
|
(3,141
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
97,416
|
|
|
|
111,380
|
|
Accounts
receivable
|
|
|
(28,462,538
|
)
|
|
|
1,725,405
|
|
Inventories
|
|
|
961,193
|
|
|
|
(2,628,832
|
)
|
Advances
to suppliers
|
|
|
(7,795,231
|
)
|
|
|
3,777,155
|
|
Prepaid
expenses and other assets
|
|
|
731,160
|
|
|
|
1,242,010
|
|
Accounts
payable
|
|
|
31,742,430
|
|
|
|
(794,993
|
)
|
Advance
from customers
|
|
|
3,045,866
|
|
|
|
(1,981,706
|
)
|
Related
parties-net
|
|
|
(7,565,773
|
)
|
|
|
(2,110,221
|
)
|
Accrued
expenses and other current liabilities
|
|
|
394,659
|
|
|
|
(596,853
|
)
|
Cash
used by operating activities
|
|
|
(3,337,741
|
)
|
|
|
(714,035
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(3,214,856
|
)
|
|
|
(17,255
|
)
|
Advance
to related parties
|
|
|
(7,795,149
|
)
|
|
|
(3,425,854
|
)
|
Cash
paid for long- term investments
|
|
|
-
|
|
|
|
(9,031,486
|
)
|
Purchase
of property and equipment and other long-term assets
|
|
|
(63,273
|
)
|
|
|
(1,800,462
|
)
|
Net
cash used by investing activities
|
|
|
(11,073,278
|
)
|
|
|
(14,275,057
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
|
15,489,762
|
|
|
|
9,897,308
|
|
Proceeds
from long-term loans
|
|
|
-
|
|
|
|
1,131,121
|
|
Repayment
on borrowing from related parties
|
|
|
(103,219
|
)
|
|
|
(6,754,567
|
)
|
Proceeds
from notes payable
|
|
|
6,429,712
|
|
|
|
(4,224,448
|
)
|
Collection
on advance to related parties
|
|
|
8,199,422
|
|
|
|
2,668,496
|
|
Receipt
from related parties
|
|
|
106,374
|
|
|
|
21,465,151
|
|
Repayments
on short-term loans
|
|
|
(14,320,723
|
)
|
|
|
(11,767,900
|
)
|
Repayments
on long-term loan
|
|
|
(1,169,039
|
)
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
14,632,289
|
|
|
|
12,415,161
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(2,026
|
)
|
|
|
407,644
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
219,244
|
|
|
|
(2,166,287
|
)
|
Cash
and cash equivalents, beginning balance
|
|
|
812,769
|
|
|
|
3,980,584
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
1,032,013
|
|
|
$
|
1,814,297
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
596,987
|
|
|
$
|
727,729
|
|
Income
tax paid
|
|
$
|
53,506
|
|
|
$
|
639,087
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTE
1 - ORGANIZATION AND PROPOSED BUSINESS OPERATIONS
Gold Lion
Holding Ltd ("Gold Lion" or “the Company”) was founded by Mr. Gu Lei (“Gu”) in
September 2002 in the British Virgin Islands. Pursuant to an agreement dated
June 30, 2007, Mr. Cao Wei (“Cao”), purchased from Gu 29.4% shares in the
Company. Through a resolution of the Company on November 26, 2008, the Company’s
issued 705 shares to Gu and 294 shares to Mr. Du Songtao (“Du”), resulting in a
total of 1,000 issued and outstanding shares of Common Stock. Pursuant to a
pledge agreement dated November 26, 2008, Du pledged his 294 shares to Cao,
including all rights to such shares. As such, Gu and Cao jointly control 100% of
Gold Lion.
On August
2, 2007, Gu founded Profit Harvest Corporation Ltd. (“Profit Harvest”) in Hong
Kong, and in December 2008, 100% ownership of Profit Harvest was transferred to
Gold Lion.
Pursuant
to the capital injection agreement (“the Agreement”) by and among Tianjin
Communication and Broadcasting Group Co., Ltd. (“TCBGCL”), TCBGCL Labour Union,
Hebei Leimone Science and Technology Co., Ltd. (“Hebei Leimone”), Tianjin 712
Communication and Broadcasting Co., Ltd. (“712”), Beijing Depu Investment Co.,
Ltd. (“Beijing Depu”) and other natural person shareholders on May 8, 2007 and a
resolution of the shareholder’s meeting on June 30, 2007, Hebei Leimone, a
company controlled by Gu, acquired 25.13% of Tianjin Tong Guang Group Digital
Communication Co., Ltd. (“TCB Digital”) from TCBGCL Labour Union and various
natural person shareholders for RMB9,000,000, approximately $1,286,000. Pursuant
to this Agreement, Hebei Leimone and Beijing Depu, the companies controlled by
Gu and Cao respectively, invested additional RMB15,928,700 and RMB10,377,600
respectively in TCB Digital, bringing the total investment from Hebei Leimone
and Beijing Depu to $4,679,111 (RMB35,306,300). After this additional investment
was made as of June 30, 2007, Hebei Leimone and Beijing Depu held 36.03% and 15%
respectively of TCB Digital, or 51.03% ownership in TCB Digital. Pursuant to an
agreement dated June 30, 2007, Cao irrevocably pledged his 15% interest in TCB
Digital through his ownership in Beijing Depu to Gu in exchange for a 29.4%
stake in Gold Lion.
On
November 30, 2007, Gold Lion and GD Industrial Company signed a share transfer
agreement, pursuant to which, GD Industrial Company transferred 60% of Nantong
Zong Yi Kechuang Digital Camera Technology Co., Ltd. (“Nantong Zong Yi”) for
$10,273 to the Company. In July 2008, Nantong Zong Yi changed its name to
Jiangsu Leimone Electronic Co., Ltd. (“JS Leimone”). Before the acquisition, JS
Leimone did not have any operating activities. In January 2008, the Company
invested $5,074,226 (HK$38,800,000) in JS Leimone to increase the Company’s
ownership in JS Leimone to 80%. Pursuant to the share transfer agreement by and
between Gold Lion and Nantong Zong Yi Investment Co., Ltd. dated November 26,
2008, the Company acquired the remaining 20% of JS Leimone from Nantong Zong Yi
Investment Co., Ltd. for $103,214 (HK$800,000). After this transaction, the
Company owned 100% of JS Leimone.
Pursuant
to the share transfer agreement by and among Hebei Leimone, Beijing Depu
Investment Co., Ltd and JS Leimone dated December 15, 2008, Hebei Leimone and
Beijing Depu Investment Co., Ltd. transferred their 51.03% of TCB Digital to JS
Leimone on December 30, 2008.
Because
TCB Digital and Profit Harvest are under common control with the Company since
July 2007 and August 2007, respectively, we combined their financials at
historical cost into the Company from the date the Company acquired control.
Acquisition method is used when the Company has actual equity investment in TCB
Digital and Profit Harvest.
Principles of
Consolidation
The accompanying consolidated
financial statements include the accounts of Gold Lion Holding Ltd, its
100%-owned subsidiary Profit Harvest, its 100%-owned subsidiary JS Leimone and
its 51.03%-owned joint venture TCB Digital as of and for the six months ended
June 30, 2009. As of June 30, 2007, Gu and Cao jointly acquired 51.03% equity of
TCB Digital through Hebei Leimone and Beijing Depu respectively, and Gu
controlled 100% of Profit Harvest in 2007. The consolidated financial statements
for the six months ended June 30, 2008 included the combination of 51.03%
results of TCB Digital from January 1, 2008 through June 30, 2008 and 100% of
the operating results of Profit Harvest for six months ended June 30, 2008. As
Gu and Cao transferred their 51.03% equity interest of TCB Digital into JS
Leimone on December 30, 2008, and 100% equity interest of Profit Harvest was
transferred to Gold Lion on December 22, 2008, the consolidated financial
statements as of June 30, 2009 include the consolidation of balance sheets and
operating results for the six months ended June 30, 2009 of TCB Digital and
Profit Harvest.
Basis of
Presentation
The
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America ("US
GAAP"). The Company’s functional currency is the Chinese Renminbi
(“RMB”); however the accompanying consolidated financial statements have been
translated and presented in United States Dollars ($).
Use of
Estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management of the Company to make a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period.
Significant items subject to such estimates and assumptions include the
recoverability of the carrying amount of property and equipment and intangible
assets; the allocation of the purchase price for the Company’s acquisitions; the
collectibility of accounts receivable; the fair value of share-based
compensation; the useful lives and salvage values of property and equipment; the
realizability of inventories; and amounts recorded for contingencies. These
estimates are often based on complex judgments and assumptions that management
believes to be reasonable but are inherently uncertain and unpredictable. Actual
results may differ from those estimates.
Foreign Currency
Translation
The
Company’s financial records are maintained in its local currency, RMB, which is
the functional currency. Assets and liabilities are translated at the exchange
rates at the balance sheet dates and revenue and expenses are translated at the
average exchange rates and stockholders’ equity is translated at historical
exchange rates. Any translation adjustments resulting are not included in
determining net income but are included in foreign exchange adjustment to other
comprehensive income, a component of stockholders’ equity.
The
reporting currency of the Company is the US dollar. Transactions denominated in
currencies other than US dollars are translated into US dollars at the average
rate for the period. Monetary assets and liabilities denominated in currencies
other than US dollars are translated into US dollars at the rates of exchange at
the balance sheet date. The resulting exchange differences are recorded in other
expenses in the statement of income and comprehensive income.
Foreign Currency
Transaction
RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People’s Bank of China (the “PBOC”) or
other institutions authorized to buy and sell foreign exchange. The exchange
rates adopted for the foreign exchange transactions are the rates of exchange
quoted by the PBOC, which are determined largely by supply and
demand.
Fair Value of Financial
Instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, marketable securities, trade, bills and other
receivables, deposits, trade, bills and other payables approximate their fair
values due to the short-term maturity of such instruments. The carrying amounts
of bank borrowings approximate their fair values because the applicable interest
rates approximate current market rates.
It is
management’s opinion that the Company is not exposed to significant interest,
price or credit risks arising from these financial instruments.
The
Company is exposed to foreign currency risk arising from import purchase
transactions and trade payables as they affect the future operating results of
the Company. The Company did not have any hedging transactions during the six
months ended June 30, 2009 or 2008.
Risks and
Uncertainties
The
Company is subject to risks from, among other things, competition associated
with the industry in general, other risks associated with financing, liquidity
requirements, rapidly changing customer requirements, limited operating history,
foreign currency exchange rates and the volatility of public
markets.
Cash and Cash
Equivalents
Cash
consists of cash on hand, cash in bank accounts and interest-bearing savings
accounts. Cash deposits that are restricted as to withdrawal or pledged as
security, are disclosed separately on the consolidated balance sheet, and not
included in cash for the purpose of the consolidated statements of cash
flows.
Accounts
Receivable
Allowances
for doubtful accounts are maintained against accounts receivable for estimated
losses resulting from the inability of customers to make required payments.
These allowances are based on both recent trends of certain customers estimated
to be a greater credit risk as well as general trends of the entire customer
pool. Accounts are written off against the allowance when it becomes evident
collection will not occur.
Inventories
Inventories are stated at the lower of
cost or market. Cost is determined on a weighted average basis and includes all
expenditures incurred in bringing the goods to the point of sale and putting
them in a saleable condition. In assessing the ultimate realization of
inventories, the management makes judgments as to future demand requirements
compared to current or committed inventory levels. Our reserve requirements
generally increase as our projected demand requirements; or decrease due to
market conditions and product life cycle changes. The Company estimates the
demand requirements based on market conditions, forecasts prepared by its
customers, sales contracts and orders in hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and inventory ageing analyses. The Company writes down
inventories for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventories and their estimated market value
based upon assumptions about future demand and market conditions. Historically,
the actual net realizable value has been close to management’s
estimate.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation is calculated on a straight-line basis over estimated
useful lives of 30 years for buildings and improvements, 10 years for
machinery and equipment, 4-5 years for electronic equipment, 5 years for
workshop reconstruction and assembling line reconstruction, and 5 years for
transportation equipment. Expenditures for maintenance and repairs are expensed
as incurred. Major renewals and betterments are charged to the property accounts
while replacements, maintenance and repairs, which do not improve or extend the
lives of the respective assets, are expensed in the current
period.
Capitalized
Interest
Interest
associated with major development and construction projects is capitalized and
included in the cost of the project. When no debt is incurred specifically for a
project, interest is capitalized on amounts expended on the project using
weighted-average cost of the Company’s outstanding borrowings. Capitalization of
interest ceases when the project is substantially complete or development
activity is suspended for more than a brief period.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No.144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
reviews the carrying values of long-lived assets, including property, plant and
equipment and other intangible assets, whenever facts and circumstances indicate
that the assets may be impaired. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
undiscounted cash flows expected to be generated by the asset. If an asset is
considered impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds the fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs of disposal. For 2008, the Company performed an annual impairment review
of long-lived assets and concluded that there was no impairment
loss.
Goodwill
The
Company recognizes goodwill for the excess of the purchase price over the fair
value of the identifiable net assets of the business acquired. As required by
SFAS No. 142, “Goodwill and Other Intangible Assets,” an impairment test for
goodwill is undertaken by the Company at the reporting unit level annually, or
more frequently if events or changes in circumstances indicate that goodwill
might be impaired. As of June 30, 2009, the Company did not incur any impairment
loss for goodwill.
Revenue
Recognition
The
Company recognizes sales in accordance with the United States Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue
Recognition in Financial Statements” and SAB No. 104, “Revenue Recognition.” The
Company recognizes revenue when the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services were
rendered, (iii) the price to the customer is fixed or determinable and (iv)
collection of the resulting receivable is reasonably assured. Revenue is not
recognized until title and risk of loss is transferred to the customer, which
occurs upon delivery of goods, and objective evidence exists that customer
acceptance provisions were met. Provisions for discounts and returns are made
when the sale is recorded, and are recorded as a reduction of sales. The Company
bases its estimates on historical experience taking into consideration the type
of products sold, the type of customer, and the type of specific transaction in
each arrangement. Revenues represent the invoiced value of goods, net of value
added tax (“VAT”).
The
Company does not offer promotional payments, customer coupons, rebates or other
cash redemption offers to its customers. Deposits or advance payments from
customers prior to delivery of goods and passage of title of goods are recorded
as advanced from customers.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes”. Under this method, deferred income taxes are recognized for
the estimated tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts and each
year-end based on enacted tax laws and statutory rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation
allowances are established to reduce deferred tax assets to the amount expected
to be realized when, in management’s opinion; it is more likely than not that
some portion of the deferred tax assets will not be realized. The provision for
income taxes represents current taxes payable net of the change during the
period in deferred tax assets and liabilities.
Operating
Leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company that do not meet the capitalization criteria of SFAS 13, are
accounted for as operating leases. Rental payables under operating leases are
recognized as expenses on the straight-line basis over the lease
term.
Comprehensive
Income
The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders'
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.
SFAS
No.130, “Reporting Comprehensive Income,” establishes standards for reporting
and displaying comprehensive income and its components in the consolidated
financial statements. Accumulated other comprehensive income (loss) includes
foreign currency translation adjustments.
Long-Term
Investments
The
Company accounted for its 9% investment in Tianjin Tong Guang Microelectronics
Co., Ltd using the cost method.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The Company adopted
SFAS 160 from January 1, 2009.
Certain
amounts presented for prior periods that were previously designated as minority
interest were reclassified to conform to the current year presentation.
Effective January 1, 2009, the Company adopted SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51,” which established new standards governing the accounting for
and reporting of noncontrolling interests (NCIs) in partially owned consolidated
subsidiaries and the loss of control of subsidiaries. Certain provisions of this
standard indicate, among other things, that NCIs (previously referred to as
minority interests) be treated as a separate component of equity, not as a
liability (as was previously the case); that increases and decreases in the
parent’s ownership interest that leave control intact be treated as equity
transactions, rather than as step acquisitions or dilution gains or losses; and
that losses of a partially owned consolidated subsidiary be allocated to the NCI
even when such allocation might result in a deficit balance. This standard also
required changes to certain presentation and disclosure requirements. The
provisions of the standard were applied to all NCIs prospectively, except for
the presentation and disclosure requirements, which were applied retrospectively
to all periods presented. As a result, upon adoption, the Company retroactively
reclassified the “Minority interest” balance previously included in the “Other
liabilities” section of the consolidated balance sheet to a new component of
equity with respect to NCIs in consolidated subsidiaries. The adoption also
impacted certain captions previously used on the consolidated statement of
income and other comprehensive income, largely identifying net income including
NCI and net income attributable to Gold Lion Holding Ltd.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
Company adopted SFAS 141 (Revised) on January 1, 2009. The adoption of SFAS 141
(Revised) had no impact on the Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. The Company adopted SFAS 161 on January 1, 2009. The adoption of
SFAS 161 did not have any impact on the Company’s
financial statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP (the GAAP hierarchy). SFAS 162 had no
impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 was adopted on January 1, 2009 and
had no impact on the Company’s financial statements.
In
January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the
impairment model included within EITF 99-20 to be more consistent with the
impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the
impairment model in EITF 99-20 to remove its exclusive reliance on “market
participant” estimates of future cash flows used in determining fair value.
Changing the cash flows used to analyze other-than-temporary impairment from the
“market participant” view to a holder’s estimate of whether there has been a
“probable” adverse change in estimated cash flows allows companies to apply
reasonable judgment in assessing whether an other-than-temporary impairment has
occurred. The adoption of FSP EITF 99-20-1 had no material impact on the
consolidated financial statements because all of the investments in debt
securities are classified as trading securities.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on identifying
circumstances that indicate a transaction is not orderly for fair value
measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. An entity early adopting this FSP must also early
adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally,
if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB
28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this
FSP. The adoption of FSP FAS 157-4 had no significant impact on the
determination or reporting of the financial results.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115,
“Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124,
“Accounting for Certain Investments Held by Not-for-Profit Organizations,” and
EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held
by a Transferor in Securitized Financial Assets,” to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This FSP will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This FSP provides increased
disclosure about the credit and noncredit components of impaired debt securities
that are not expected to be sold and also requires increased and more frequent
disclosures regarding expected cash flows, credit losses, and an aging of
securities with unrealized losses. Although this FSP does not result in a change
in the carrying amount of debt securities, it does require that the portion of
an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. This FSP shall be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. An entity may early adopt
this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an entity
elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the
entity also is required to early adopt this FSP. The adoption of FSP FAS 115-2
and FAS 124-2 had no significant impact on the determination or reporting of our
financial results.
In April
2009, the FASB issued FAS 164, “Not-for-Profit Entities: Mergers and
Acquisitions Including an amendment of FASB Statement No.142”, to improve the
relevance, representational faithfulness, and comparability of the information
that a not-for-profit entity provides in its financial reports about a
combination with one or more other not-for-profit entities, businesses, or
nonprofit activities. This Statement also improves the relevance,
representational faithfulness, and comparability of the information a
not-for-profit entity provides about goodwill and other intangible assets after
an acquisition by amending FASB Statement No. 142, Goodwill and Other
Intangible Assets, to make it fully applicable to not-for-profit entities. This
Statement is effective for: Mergers for which the merger date is on or after the
beginning of an initial reporting period beginning on or after December 15,
2009, Acquisitions for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15, 2009. A
not-for-profit entity shall apply those items prospectively in the first set of
initial or annual financial statements for a reporting period beginning on or
after December 15, 2009. Application before that date is prohibited.
We are currently evaluating this new FSP but do not believe it will have a
significant impact on the determination or reporting of our financial
results.
In May
2009, the FASB issued FAS 165, “Subsequent Events”, to establish general
standards of accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This Statement should be applied to the accounting for and
disclosure of subsequent events. This Statement does not apply to subsequent
events or transactions that are within the scope of other applicable generally
accepted accounting principles (GAAP) that provide different guidance on the
accounting treatment for subsequent events or transactions. This Statement would
apply to both interim financial statements and annual financial statements. This
Statement should not result in significant changes in the subsequent events that
an entity reports—either through recognition or disclosure—in its financial
statements. This Statement introduces the concept of financial statements being
available to be issued. It requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date, that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This disclosure should alert all users of financial
statements that an entity has not evaluated subsequent events after that date in
the set of financial statements being presented.In accordance with this
Statement, an entity should apply the requirements to interim or annual
financial periods ending after June 15, 2009. The adoption of FAS 165 had no
significant impact on the determination or reporting of our financial
results.
In June
2009, the FASB issued FAS 166, “Accounting for Transfers of Financial Assets—an
amendment of FASB Statement No. 140”, to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferor’s continuing involvement, if any, in transferred
financial assets. This Statement must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. This Statement must be applied to transfers occurring on or
after the effective date. Additionally, on and after the effective date, the
concept of a qualifying special-purpose entity is no longer relevant for
accounting purposes. Therefore, formerly qualifying special-purpose
entities (as defined under previous accounting standards) should be evaluated
for consolidation by reporting entities on and after the effective date in
accordance with the applicable consolidation guidance. If the evaluation
on the effective date results in consolidation, the reporting entity should
apply the transition guidance provided in the pronouncement that requires
consolidation. Additionally, the disclosure provisions of this Statement should
be applied to transfers that occurred both before and after the effective date
of this Statement. This Statement has the same scope as Statement 140.
Accordingly, this Statement applies to all entities. This Statement removes the
concept of a qualifying special-purpose entity from Statement 140 and removes
the exception from applying FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, to qualifying special-purpose
entities. This Statement clarifies that the objective of paragraph 9 of
Statement 140 is to determine whether a transferor and all of the entities
included in the transferor’s financial statements being presented have
surrendered control over transferred financial assets. This Statement defines
the term participating interest to establish specific conditions for reporting a
transfer of a portion of a financial asset as a sale. The special provisions in
Statement 140 and FASB Statement No. 65, Accounting for Certain Mortgage Banking
Activities, for guaranteed mortgage securitizations are removed to require those
securitizations to be treated the same as any other transfer of financial assets
within the scope of Statement 140, as amended by this Statement. If such
a transfer does not meet the requirements for sale accounting, the securitized
mortgage loans should continue to be classified as loans in the transferor’s
statement of financial position. This Statement requires that a transferor
recognize and initially measure at fair value all assets obtained (including a
transferor’s beneficial interest) and liabilities incurred as a result of a
transfer of financial assets accounted for as a sale. Enhanced disclosures are
required to provide financial statement users with greater transparency about
transfers of financial assets and a transferor’s continuing involvement with
transferred financial assets. We are currently evaluating this new FSP but do
not believe it will have a significant impact on the determination or reporting
of our financial results.
In June
2009, the FASB issued FAS 167, “Amendments to FASB Interpretation No. 46(R)”, to
improve financial reporting by enterprises involved with variable interest
entities. The Board undertook this project to address (1) the effects on certain
provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation
of Variable Interest Entities, as a result of the elimination of the qualifying
special-purpose entity concept in FASB Statement No. 166, Accounting for
Transfers of Financial Assets, and (2) constituent concerns about the
application of certain key provisions of Interpretation 46(R), including those
in which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. This Statement amends Interpretation 46(R) to require
an enterprise to perform an analysis to determine whether the enterprise’s
variable interest or interests give it a controlling financial interest in a
variable interest entity. This Statement amends Interpretation 46(R) to require
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. This Statement amends Interpretation 46(R) to
eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity, which was based on
determining which enterprise absorbs the majority of the entity’s expected
losses, receives a majority of the entity’s expected residual returns, or both.
This Statement amends certain guidance in Interpretation 46(R) for determining
whether an entity is a variable interest entity. This Statement amends
Interpretation 46(R) to add an additional reconsideration event for determining
whether an entity is a variable interest entity when any changes in facts and
circumstances occur such that the holders of the equity investment at risk, as a
group, lose the power from voting rights or similar rights of those investments
to direct the activities of the entity that most significantly impact the
entity’s economic performance. This Statement amends Interpretation 46(R) to
require enhanced disclosures that will provide users of financial statements
with more transparent information about an enterprise’s involvement in a
variable interest entity.This Statement shall be effective as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. We are
currently evaluating this new FSP but do not believe it will have a significant
impact on the determination or reporting of our financial results.
In June
2009, the FASB issued FAS 168, “The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162”. The FASB Accounting Standards CodificationTM (Codification)
will become the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of this Statement,
the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. This
Statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. We are currently evaluating this new
FSP but do not believe it will have a significant impact on the determination or
reporting of our financial results.
NOTE
2 - MERGER AND ACQUISITION
The
Company acquired 60% equity in JS Leimone on November 30, 2007. As of November
30, 2007, the net assets of JS Leimone were Nil. The agreed purchase
consideration was $10,273 which was higher than 60% of total net assets of JS
Leimone and resulted in goodwill of $10,273. On January 1, 2008, the Company
invested $4,972,466 (HK$38,800,000) in JS Leimone. After this investment, the
net assets of JS Leimone were $4,976,051 and the Company owned 80% of JS
Leimone. The fair value of the 80% of equity interest of JS Leimone
Electronic Co., Ltd on January 1, 2008 was $3,981,085. The agreed purchase
consideration was $4,972,466 (HK$38,800,000) which was higher than 80% of total
net assets of JS Leimone and resulted in goodwill of $991,381. The Company
acquired the remaining 20% of equity of JS Leimone on November 30, 2008. As of
November 30, 2008, the net assets of JS Leimone were $5,001,783 and therefore
20% of total assets of JS Leimone were $1,000,357. The agreed purchase
consideration was $101,760 which was lower than 20% of total net assets of JS
Leimone and resulted in negative goodwill of $898,597. Therefore, the total
goodwill resulting from the acquisition of JS Leimone was $103,057. As of June
30, 2009 and December 31, 2008, goodwill was $103,057 and $103,057 respectively.
There was no impairment of goodwill for 2008. The following table summarizes
goodwill resulting from the acquisition of JS Leimone:
November
30, 2007
|
|
$
|
10,273
|
|
January
1, 2008
|
|
991,381
|
|
November
30, 2008
|
|
(898,597)
|
|
|
|
|
|
|
Total
goodwill
|
|
$
|
103,057
|
|
The
following table summarizes the fair values of the assets acquired and
liabilities assumed from JS Leimone as of the dates of
acquisition. The total consideration for the acquisition exceeded the
fair value of the net assets acquired by $103,057.
|
|
November 30, 2007
|
|
|
January 1, 2008
|
|
|
November 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
39,231
|
|
|
$
|
5,010,704
|
|
|
$
|
79,411
|
|
Accounts
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
18,475
|
|
Other
receivables
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,750
|
)
|
Advance
to suppliers
|
|
|
-
|
|
|
|
-
|
|
|
|
4,665,134
|
|
Inventories
|
|
|
-
|
|
|
|
-
|
|
|
|
246,854
|
|
Due
from related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
45,431
|
|
Other
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
217,569
|
|
Fixed
assets
|
|
|
|
|
|
|
|
|
|
|
1,708,102
|
|
Accounts
payable
|
|
|
|
|
|
|
|
|
|
|
(388,235
|
)
|
Advance
from customers
|
|
|
|
|
|
|
|
|
|
|
(115,716
|
)
|
Salary
payable
|
|
|
|
|
|
|
(21,401
|
)
|
|
|
(52,961
|
)
|
Taxes
payable
|
|
|
|
|
|
|
|
|
|
|
(5,138
|
)
|
Other
Payable
|
|
|
|
|
|
|
|
|
|
|
(1,111,614
|
)
|
Due
to related parties
|
|
|
(39,231
|
)
|
|
|
(39,648
|
)
|
|
|
|
|
Affect
from foreign currency translation
|
|
|
-
|
|
|
|
200
|
|
|
|
(258,357
|
)
|
Purchase
price
|
|
$
|
-
|
|
|
$
|
4,949,855
|
|
|
$
|
5,001,783
|
|
NOTE
3 - RESTRICTED CASH
Restricted
cash as of June 30, 2009 and December 31, 2008, was $11,979,897 (unaudited) and
$8,753,757 respectively. Restricted cash was deposits in banks representing
collateral for the banks to issue banker’s acceptances. Restricted cash may not
be recovered when the secured notes payable cannot be paid.
NOTE
4 - ACCOUNTS RECEIVABLE
As of
June 30, 2009 and December 31, 2008, the Company’s accounts receivable consisted
of the following:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Accounts
receivable
|
|
$
|
40,854,834
|
|
|
$
|
12,383,724
|
|
Less:
Allowance for doubtful accounts
|
|
|
(33,994
|
)
|
|
|
(16,910
|
)
|
|
|
|
|
|
|
|
|
|
Accountants
receivable, net
|
|
$
|
40,820,840
|
|
|
$
|
12,366,814
|
|
NOTE
5 - INVENTORIES
Inventories,
by major categories, as of June 30, 2009 and December 31, 2008 were as
follows:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw
materials
|
|
$
|
1,748,406
|
|
|
$
|
3,669,226
|
|
Work
in progress
|
|
|
13,285
|
|
|
|
17,672
|
|
Low
value consumables
|
|
|
39,541
|
|
|
|
5,591
|
|
Consigned
goods
|
|
|
1,141,883
|
|
|
|
|
|
Finished
goods
|
|
|
212,065
|
|
|
|
418,020
|
|
|
|
|
3,155,180
|
|
|
|
4,096,227
|
|
Less:
Allowance for obsolete inventories
|
|
|
(240,284
|
)
|
|
|
(368,463
|
)
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
2,914,896
|
|
|
$
|
3,742,046
|
|
NOTE
6 - ADVANCE TO SUPPLIERS
As of
June 30, 2009 and December 31, 2008, the Company’s advance to suppliers
consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Suzhou
Moben Communication Technology Ltd.
|
|
$
|
207,338
|
|
|
$
|
200,039
|
|
Shenzhen
Yingqiongxing Trading Company
|
|
|
289,271
|
|
|
|
455,852
|
|
Beijing
Xingwang Time Commercial Trading Co., Ltd.
|
|
|
3,308,477
|
|
|
|
7,737,737
|
|
CEC
CoreCast Corporation Limited
|
|
|
15,708,281
|
|
|
|
7,305,206
|
|
Beijing
Orsus Xelent Technologies Inc.
|
|
|
4,280,788
|
|
|
|
6,000,625
|
|
Derong
|
|
|
409,070
|
|
|
|
1,312,336
|
|
CEC
Telecom Co., Ltd.
|
|
|
-
|
|
|
|
377,085
|
|
Tianjin
Liantuo Electronic Technology Co., Ltd.
|
|
|
382,772
|
|
|
|
382,247
|
|
T.L.Y.
(Hong Kong) Limited
|
|
|
-
|
|
|
|
104,840
|
|
Beijing
HYT Technology & Trade Co., Ltd.,
|
|
|
6,777,407
|
|
|
|
-
|
|
Shenzhen
Wuxing Commercial Trading Co., Ltd.
|
|
|
354,817
|
|
|
|
|
|
Others
|
|
|
383,873
|
|
|
|
399,346
|
|
|
|
|
|
|
|
|
|
|
Total
advance to suppliers
|
|
$
|
32,102,094
|
|
|
$
|
24,275,313
|
|
NOTE
7 - OTHER RECEIVABLES
As of
June 30, 2009 and December 31, 2008, the Company’s other receivables and prepaid
expenses consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Advance
to employees
|
|
$
|
62,934
|
|
|
$
|
177,068
|
|
Loan
to third parties
|
|
|
159,128
|
|
|
|
476,963
|
|
Deposit
for rental of equipment lease
|
|
|
92,771
|
|
|
|
43,769
|
|
Receivable
for disposal of long-term assets
|
|
|
-
|
|
|
|
297,628
|
|
Others
|
|
|
70,089
|
|
|
|
83,605
|
|
Prepaid
expenses
|
|
|
5,504
|
|
|
|
40,848
|
|
|
|
|
|
|
|
|
|
|
Total
other receivables
|
|
$
|
390,426
|
|
|
$
|
1,119,881
|
|
The loan
to third parties bears no interest.
The
deposit for rental of equipment lease will be recovered in one
year.
NOTE
8 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment as of June 30, 2009 and December 31, 2008 consisted of the
following:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
Machinery
and Equipment
|
|
$
|
8,571,532
|
|
|
$
|
8,479,599
|
|
Electronic
Equipment
|
|
|
1,603,208
|
|
|
|
1,581,014
|
|
Transportation
Equipment
|
|
|
132,414
|
|
|
|
169,235
|
|
Workshop
reconstruction
|
|
|
58,687
|
|
|
|
58,606
|
|
Assembling
line reconstruction
|
|
|
119,337
|
|
|
|
119,173
|
|
Total
at cost
|
|
|
10,485,178
|
|
|
|
10,407,627
|
|
Less:
Accumulated depreciation
|
|
|
(4,151,953
|
)
|
|
|
(3,352,735
|
)
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net
|
|
$
|
6,333,225
|
|
|
$
|
7,054,892
|
|
Depreciation
for the six months ended June 30, 2009 and 2008 was $794,796 and $573,875
respectively, and depreciation for the three months ended June 30, 2009 and 2008
was $390,177 and $331,094 respectively.
NOTE
9 - LONG-TERM INVESTMENTS
As of
June 30, 2009 and December 31, 2008, the Company’s long-term investments
consisted of the following:
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
Tianjin
Tong Guang Microelectronics Co., Ltd.
|
|
|
9%
|
65,743
|
|
|
9%
|
65,653
|
|
Tianjin
Tong Guang Microelectronics Co., Ltd. was established on April 19, 2006 with
total registered capital of $622,549 (RMB5,000,000). Tianjin Tong
Guang Microelectronics Co., Ltd.’s principal activities are development,
manufacturing and sale of electronic information products and related technical
consulting services.
NOTE
10 - SHORT-TERM LOANS
Short-term
loans represent amounts due to various financial institutions which are normally
due within one year. As of June 30, 2009 and December 31, 2008, the Company’s
short term loans consisted of the followings:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Bank
of Communications Tianjin Branch (“BOCTB”), due from April 25, 2008 to
March 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common
shareholder of TCB Digital, paid on March 25, 2009
|
|
$
|
-
|
|
|
$
|
4,376,878
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from May 26, 2008 to April 25, 2009 with interest at 8.217%,
guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on April
25, 2009
|
|
|
-
|
|
|
|
2,917,919
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from June 25, 2008 to June 13, 2009 with interest at 8.217%,
guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on June
13, 2009
|
|
|
-
|
|
|
|
2,917,919
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from July 15, 2008 to May 25, 2009 with interest at 8.217%, guaranteed
by TCBGCL, the common shareholder of TCB Digital, paid on May 25,
2009
|
|
|
-
|
|
|
|
2,917,919
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from September 17, 2008 to September 16, 2009 with interest at 7.92%,
secured by the Company’s fixed assets
|
|
|
2,775,830
|
|
|
|
2,772,023
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from November 17, 2008 to November 16, 2009 with interest at 7.326%,
secured by the Company’s fixed assets
|
|
|
1,241,819
|
|
|
|
1,240,116
|
|
|
|
|
|
|
|
|
|
|
Northern
International Trust & Investment Co., LTD, due from December 23, 2008
to October 23, 2009 with interest at 8.7000%, guaranteed by small and
medium enterprises credit guaranty center.
|
|
|
1,753,156
|
|
|
|
1,750,751
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from March 3, 2009 to March 2, 2010 with interest at 5.841%,
guaranteed by TCBGCL, the common shareholder of TCB
Digital
|
|
|
4,382,889
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from May 15, 2009 to February 14, 2010 with interest at 5.310%,
guaranteed by TCBGCL, the common shareholder of TCB
Digital
|
|
|
2,921,926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from May 25, 2009 to January 24, 2010 with interest at 5.310%,
guaranteed by TCBGCL, the common shareholder of TCB
Digital
|
|
|
2,921,926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
BOCTB,
due from June 15, 2009 to March 14, 2010 with interest at 5.310%,
guaranteed by TCBGCL, the common shareholder of TCB
Digital
|
|
|
2,921,926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Industrial
and Commercial Bank of China Tianjin Branch, due from April 15, 2009 to
October 14, 2009 with interest at 5.103%, guaranteed by Nantong Zong Yi
Investment Co., Ltd.
|
|
|
1,168,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
short-term loans
|
|
$
|
20,088,242
|
|
|
$
|
18,893,525
|
|
NOTE
11 - NOTES PAYABLE
These
notes are payable in three or six months and bear no interest. The balance of
notes payable as of June 30, 2009 and December 31, 2008 consisted of the
following (all were bankers acceptances):
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
To
Beijing Orsus Xelent Technology & Trading Company Limited (“Beijing
Orsus”), honored by the BOCTB, from September 11, 2008 to March
11, 2009, secured by $729,480 of cash in bank, paid on March 11, 2009
(
Unaudited)
|
|
$
|
-
|
|
|
$
|
1,458,960
|
|
|
|
|
|
|
|
|
|
|
To
CEC CoreCast Corporation Limited (“CoreCast”), honored by the
BOCTB, from September 10, 2008 to March 10, 2009, secured by
$2,188,439 of cash in bank, paid on March 10, 2009
(
Unaudited)
|
|
|
-
|
|
|
|
4,376,878
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from September 16, 2008 to
March 16, 2009, secured by $2,188,439 of cash in bank, paid on March 16,
2009
(
Unaudited)
|
|
|
-
|
|
|
|
4,376,878
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from September 17, 2008 to
March 17, 2009, secured by $583,584 of cash in bank, paid on March 17,
2009
(
Unaudited)
|
|
|
-
|
|
|
|
1,167,168
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from September 22, 2008 to
March 22, 2009, secured by $875,376 of cash in bank, paid on March 22,
2009
(
Unaudited)
|
|
|
-
|
|
|
|
1,750,751
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from September 09, 2008 to
March 09, 2009, secured by $1,458,959 of cash in bank, paid on March 9,
2009
(
Unaudited)
|
|
|
-
|
|
|
|
2,917,919
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from October 17, 2008 to
April 17, 2009, secured by $292,159 of cash in bank, paid on April 17,
2009(Unaudited)
|
|
|
-
|
|
|
|
583,584
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from December 18, 2008 to
June 18, 2009, secured by $438,238 of cash in bank, paid on June 18, 2009
(Unaudited)
|
|
|
-
|
|
|
|
875,376
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from April 17, 2009 to
October 17, 2009, secured by $292,193 of cash in bank
|
|
|
584,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from June 18, 2008 to
December 18, 2009, secured by $438,289 of cash in bank
|
|
|
876,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from March 13, 2009 to
September 13, 2009, secured by $584,385 of cash in bank
|
|
|
1,168,770
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
Beijing Orsus, honored by the BOCTB, from March 18, 2009 to
September 18, 2009, secured by $146,096 of cash in bank
|
|
|
292,193
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to CoreCast, honored by the BOCTB, from January 15,
2009 to July 15, 2009, secured by $2,191,445 of cash in bank, paid on July
15, 2009 (Unaudited)
|
|
|
4,382,889
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from February 12, 2009 to
August 12, 2009, secured by $2,191,445 of cash in bank, paid on August 12,
2009 (Unaudited)
|
|
|
4,382,889
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from March 10, 2009 to
September 10, 2009, secured by $1,460,963 of cash in bank
|
|
|
2,921,926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from March 16, 2009 to
September 16, 2009, secured by $3,214,119 of cash in bank
|
|
|
6,428,238
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from March 17, 2009 to Sept.
17, 2009, secured by $584,385 of cash in bank
|
|
|
1,168,770
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
To
CoreCast, honored by the BOCTB, from March 23, 2009 to
September 23, 2009, secured by $876,578 of cash in bank
|
|
|
1,753,156
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
23,959,794
|
|
|
$
|
17,507,514
|
|
NOTE
12 - ACCRUED EXPENSES AND OTHER PAYABLES
As of
June 30, 2009 and December 31, 2008, the accrued expenses and other liabilities
of the Company were summarized as follows:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Accrued
machinery rent
|
|
$
|
1,085,194
|
|
|
$
|
1,158,189
|
|
Accrued
plant rent
|
|
|
820,806
|
|
|
|
807,404
|
|
Accrued
utility
|
|
|
739,210
|
|
|
|
608,480
|
|
Accrued
others
|
|
|
-
|
|
|
|
46,451
|
|
Welfare
& salary payable
|
|
|
41,447
|
|
|
|
53,702
|
|
Others
|
|
|
249,071
|
|
|
|
158,373
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses and other payables
|
|
$
|
2,935,728
|
|
|
$
|
2,832,599
|
|
NOTE
13 - LONG-TERM LOANS
As of
December 31, 2008, the Company’s long-term loans consisted of the
followings:
|
|
2008
|
|
|
|
|
|
Nantong
Zong Yi Investment Co., Ltd., due from January 29, 2008 to January 28,
2010. with interest at same period secured bank lending rate (7.56%) plus
0.756%, secured by the Company’s fixed assets, paid on April
20, 2009.
|
|
$
|
729,480
|
|
|
|
|
|
|
Nantong
Zong Yi Investment Co., Ltd., due from March 5, 2008 to March 4, 2010.
with interest at same period secured bank lending rate (7.56%) plus
0.756%, secured by the Company’s fixed assets, paid on April
20, 2009.
|
|
|
437,688
|
|
|
|
|
|
|
Total
notes payable
|
|
$
|
1,167,168
|
|
NOTE
14 - DIVIDENDS PAYABLE
In June
2007, before the Company acquired 51.03% of TCB Digital, TCB Digital decided to
distribute dividends to its original shareholders of $1,074,068 (RMB7,862,700).
The Company paid dividends of $495,926 (RMB3,900,000) in July 2007 to its
original shareholders. The balance of dividends payable was $578,936 and
$578,142 as of June 30, 2009 and December 31, 2008 respectively, representing
the dividend payable to TCBGCL amounting to RMB3,962,700. The Company has no
plan to pay this amount in the first two quarters of 2009. The specific due date
of the dividend will be negotiated between the current shareholders and original
shareholders of the Company. The fluctuation of the balance of dividend payable
represents the fluctuation of currency exchange rate.
NOTE
15 - RELATED PARTY BALANCES AND TRANSCATIONS
Due from related
parties
As of
June 30, 2009 and December 31, 2008, due from related parties were:
|
|
200
9
|
|
|
200
8
|
|
|
|
(Unaudited)
|
|
|
|
|
Due
from related parties - short term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
$
|
1,034,838
|
|
|
$
|
673,380
|
|
Hebei
Leimone
|
|
|
262,293
|
|
|
|
745,943
|
|
Shanghai
Spreadbridge Information Technology Co., Ltd.
|
|
|
1,338,305
|
|
|
|
2,111,460
|
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd.
|
|
|
247,633
|
|
|
|
561,699
|
|
Gu
Lei (Shareholder)
|
|
|
511,337
|
|
|
|
575,710
|
|
Leimone
(Tianjin) Industrial Co., Ltd.
|
|
|
937,909
|
|
|
|
582,096
|
|
Beijing
Leimone Shengtong Cultural Development Co., Ltd.
|
|
|
148,142
|
|
|
|
14,590
|
|
TCBGCL
(Shareholder)
|
|
|
-
|
|
|
|
74,484
|
|
Tianjin
Tong Guang Group Wanjie Import & Export Trading Co.,
Ltd.
|
|
|
8,217,807
|
|
|
|
|
|
712
(Shareholder)
|
|
|
95,712
|
|
|
|
51,990
|
|
Zhejiang
Leimone Electronics Co., Ltd.
|
|
|
686,718
|
|
|
|
678,489
|
|
|
|
|
|
|
|
|
|
|
Total
due from related parties-short term
|
|
|
13,233,061
|
|
|
|
6,069,842
|
|
|
|
|
|
|
|
|
|
|
Due
from related parties – long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd.
|
|
|
-
|
|
|
|
247,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
due from related parties
|
|
$
|
13,480,694
|
|
|
$
|
6,317,136
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co., Ltd. (“Electronics
Science & Tech”), an entity related to the Company through a common
shareholder of TCB Digital, purchased products from the Company. For the six
months ended June 30, 2009 and 2008, the Company recorded net revenues of
$879,877 and $589,048 from sales to Electronics Science & Tech respectively.
For the three months ended June 30, 2009 and 2008, the Company recorded net
revenues of $398,177 and $311,860 from sales to Electronics Science and Tech
respectively.
Hebei
Leimone is controlled by Gu, the majority shareholder of the
Company.
a.
|
Hebei
Leimone sells certain handsets to the Company. For the six months ended
June 30, 2009 and 2008, the Company recorded total purchases from Hebei
Leimone of nil and nil respectively. For the three months ended June 30,
2009 and 2008, the Company recorded total purchase from Hebei Leimone of
nil and nil respectively. The balances due from Hebei Leimone represented
advances to Hebei Leimone which were Nil and $68,206 respectively as of
June 30, 2009 and December 31,
2008;
|
b.
|
The
Company sells certain products and provides some technical services to
Hebei Leimone. For the six months ended June 30, 2009 and 2008, the
Company recorded net revenues of $611,996 and $400,763 respectively from
sales to Hebei Leimone; and as of June 30, 2009 and December 31, 2008, the
balances due from Hebei Leimone regarding such sales were $262,293 and
$437,009 respectively. For the three months ended June 30, 2009 and 2008,
the Company recorded net revenues of $392,908 and $48,339 respectively
from sales to Hebei Leimone;
|
c.
|
Additionally,
Hebei Leimone borrowed money from the Company. The borrowings bear no
interest and had a maturity of 12 months. As of June 30, 2009 and December
31, 2008, the balance of such loans was nil and
$240,728.
|
Shanghai
Spreadbridge Information Technology Co., Ltd. (“Shanghai Spreadbridge”) is
controlled by Gu, the majority shareholder of the Company.
a.
|
Shanghai
Spreadbridge borrows money from the Company. The borrowings bear no
interest and had a maturity of 14 months. As of June 30, 2009 and December
31, 2008, the balances of loans were $379,851 and $393,919 respectively,
of which $393,919 was due on December 31, 2008 and $14,069 was
subsequently received on February 19,
2009;
|
b.
|
The
Company sells certain products to Shanghai Spreadbridge. For the six
months ended June 30, 2009 and 2008, the Company recorded net revenues of
nil and $4,045,559 from sales to Shanghai Spreadbridge respectively. As of
June 30, 2009 and December 31, 2008, the balances of due from Shanghai
Spreadbridge related to such sales was $604,979 and $1,263,007
respectively;
|
c.
|
Additionally,
Shanghai Spreadbridge sells raw materials to the Company. For the six
months ended June 30 2009 and 2008, the Company recorded total purchases
from Shanghai Spreadbridge of nil and nil respectively. The amount due
from Shanghai Spreadbridge represented advances made and the amount was
$353,475 and $454,534 as of June 30, 2009 and December 31, 2008
respectively.
|
Beijing
Leimone Shengtong Wireless Technology Co., Ltd. (“Beijing Leimone”) was founded
by Gu, the majority shareholder of the Company.
a.
|
Beijing
Leimone borrows money from the Company. The borrowings bore no interest
and had a maturity of 12 months or more. As of June 30, 2009 and December
31, 2008, the balance of such loans was $247,633and $247,294 and is due on
March 30, 2010.
|
b.
|
TCB
Digital transferred a project to Beijing Leimone on June 25, 2008 and as
of December 31, 2008, the balance related to this business was $561,699,
which was received on March 11,
2009.
|
The
majority shareholder of the Company, Gu borrowed money from the Company, these
borrowings bore no interest and had a two-year repayment term. As of June 30,
2009 and December 31, 2008, the balances of such loans were $511,337 and
$575,710 respectively; and the amount outstanding as of June 30, 2009 is due on
August 5, 2009.
The
amount due from Leimone (Tianjin) Industrial Co., Ltd. (“Tianjin Leimone”)
represented short term loans granted by the Company. Tianjin Leimone is
controlled by Gu. The borrowing bore no interest and had a one-year repayment
term. As of June 30, 2009 and December 31, 2008, the balance of loans was
$937,909 and $582,096 respectively and $609,222 due on July 28, 2009, $321,412
due on April 1, 2010 and $7,275 due on March 9, 2010. Additionally, the Company
made an advance payment to Tianjin Leimone on December 18, 2007; and as of June
30, 2009 and December 31, 2008, the balances of advance payments amounted to nil
and $14,649,850 respectively.
The
amount due from Beijing Leimone Shengtong Cultural Development Co., Ltd.
(“Beijing Leimone Cultural”) represented short term loan granted by the Company.
Beijing Leimone Cultural was controlled by Gu. The borrowing bears no interest
and no maturity date.
The
amount due from TCBGCL represented the advance payment. TCBGCL is a shareholder
of TCB Digital.
Tianjin
Tong Guang Wanjie Import & Export Trading Co., Ltd.(“Wanjie”), an entity
related to the Company through a common shareholder of TCB Digital, sells
products to the Company. The balances due from Wanjie represented advances which
were $8,217,806 and nil respectively as of June 30, 2009 and December 31,
2008;
712 is a
minority shareholder of TCB Digital. 712 purchases raw materials from the
Company. For the six months ended June 30 2009 and 2008, the Company recorded
total revenues from such sales to 712 of $104,762 and $786,428 respectively. Due
from 712 as of June 30, 2009 and December 31, 2008 amounted to $95,712 and
51,990 respectively.
Zhejiang
Leimone Electronics Co., Ltd. (“Zhejiang Leimone”) was controlled by Gu.
Zhejiang Leimone acquired Personal Phone System Electronic Manufacturing Service
from the Company in 2008. The acquisition cost was $628,214 and had not been
paid as at June 30, 2009. Additionally, the Company purchases raw materials from
Zhejiang Leimone. The amount due from Zhejiang Leimone represented the advance
payment of $58,504 and $51,136 as of June 30, 2009 and December 31, 2008
respectively.
Due to related
parties
As of
June 30, 2009 and December 31, 2008, due to related parties were:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
Hebei
Leimone
|
|
$
|
233,754
|
|
|
$
|
233,434
|
|
Zhejiang
Leimone
|
|
|
37,053
|
|
|
|
37,002
|
|
Gu
|
|
|
4,883,044
|
|
|
|
4,879,889
|
|
Others
|
|
|
5,884
|
|
|
|
10,844
|
|
|
|
|
|
|
|
|
|
|
Total
due to related parties
|
|
$
|
5,159,735
|
|
|
$
|
5,161,169
|
|
The
Company borrowed money from Hebei Leimone. The borrowing bears no interest and
had a two-year repayment term. As of June 30, 2009 and December 31, 2008, the
balances of such loans were $233,754 and $233,434 respectively; and the
outstanding amount as of June 30, 2009 is due on November 21, 2009.
Zhejiang
Leimone transferred fixed assets to the Company of $37,053 which the Company has
not yet paid as at June 30, 2009.
Gu
provides fund to the Company with no interest and no repayment term. As of June
30, 2009 and December 31, 2008, the balances of funds provided by Gu was
$4,883,044 and $4,879,889 respectively.
NOTE
16 - DISCONTINUED OPERATION
On May 6,
2008, the Company entered into a project transfer agreement and transferred the
digital project department to 712. Such agreement was implemented before June
30, 2008. For the period before June 30, 2008, the statements of operations of
the Company reported the results of operations of the digital project department
as discontinued operations. The digital project department was sold at its net
book value of $1,669,674.
NOTE
17 - INCOME TAX
TCB
Digital and JS Leimone are governed by the Income Tax Law of the PRC concerning
the private-run enterprises, which are generally subject to tax at a statutory
rate of 25% (33% before 2008) on income reported in the statutory financial
statements after appropriate tax adjustments.
JS
Leimone is exempt from income tax in PRC for two years starting from the first
profitable year or the year 2008, whichever is earlier, and is subject to a 50%
discount on normal income tax rate for the following three
years.
TCB
Digital had pre-tax profit of approximately $551,800 and $688,326 for the six
months ended June 30, 2009 and 2008 respectively, while JS Leimone had pre-tax
profit (loss) of approximately $10,767 and $(378,975) for the six months ended
June 30, 2009 and 2008 respectively, while Profit Harvest had pre-tax profit of
approximately $2,880,452 and nil for the six months ended June 30, 2009 and 2008
respectively. A 100% valuation allowance was established due to the
uncertainty of its realization. The additional deducted expenses in 2008 were
the additional 50% of R&D expenses deducted before income tax.
The
following table summarizes the temporary differences which result in deferred
tax assets and liabilities as at June 30, 2009 and December 31,
2008:
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
(Unaudited)
|
|
|
|
|
Inventory
impairment
|
|
$
|
60,071
|
|
|
$
|
92,116
|
|
Buy-back
reverse
|
|
|
168,090
|
|
|
|
290,550
|
|
Bad
debt allowance
|
|
|
4,265
|
|
|
|
-
|
|
Expenses
deductible in next year
|
|
|
225,533
|
|
|
|
171,490
|
|
Accrued
rental deductible in next year
|
|
|
822
|
|
|
|
-
|
|
Understated
cost and expenses
|
|
|
63,400
|
|
|
|
58,679
|
|
Carryforeward
operating loss
|
|
|
6,601
|
|
|
|
35,512
|
|
Total
deferred tax assets
|
|
|
528,782
|
|
|
|
612,835
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Understated
sales
|
|
|
(24,394
|
)
|
|
|
(11,879
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
504,388
|
|
|
$
|
600,956
|
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended June 30, 2009 and 2008:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
US
statutory rates
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
Tax
rate difference
|
|
|
16.1
|
%
|
|
|
11.1
|
%
|
Valuation
allowance
|
|
|
-
|
|
|
|
(23.2
|
%)
|
Effect
of tax holiday
|
|
|
0.1
|
%
|
|
|
4.0
|
%
|
Tax
for prior year
|
|
|
0.4
|
%
|
|
|
-
|
|
Additional
deducted expenses
|
|
|
0.0
|
%
|
|
|
23.3
|
%
|
|
|
|
|
|
|
|
|
|
Tax
per financial statements
|
|
|
(17.4
|
%)
|
|
|
(18.8
|
%)
|
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended June 30, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
US
statutory rates
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
Tax
rate difference
|
|
|
15.4
|
%
|
|
|
8.3
|
%
|
Valuation
allowance
|
|
|
-
|
|
|
|
(30.5
|
%)
|
Effect
of tax holiday
|
|
|
0.3
|
%
|
|
|
1.4
|
%
|
Tax
for prior year
|
|
|
1.3
|
%
|
|
|
-
|
|
Additional
deducted expenses
|
|
|
0.0
|
%
|
|
|
33.3
|
%
|
|
|
|
|
|
|
|
|
|
Tax
per financial statements
|
|
|
(17.6
|
%)
|
|
|
(24.3
|
%)
|
NOTE
18 - STATUTORY RESERVES
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the PRC (the “PRC GAAP”).
Appropriations to the statutory surplus reserve should be at least 10% of the
after tax net income determined in accordance with the PRC GAAP until the
reserve equals 50% of the entities’ registered capital or members’ equity.
Appropriations to the statutory public welfare fund are at least 5% of the after
tax net income determined in accordance with PRC GAAP. Commencing on January 1,
2006, new PRC regulations waived the requirement for appropriating retained
earnings to a welfare fund. For the six months ended June 30, 2009 and 2008, the
Company appropriated$ 42,849 and $36,863 to statutory surplus reserve
respectively. As of June 30, 2009 and December 31, 2008, the Company’s statutory
surplus reserve were $612,042 and $569,193,respectively.
NOTE
19 - CONCENTRATION DISCLOSURE
The
following table sets forth the Company’s major customers whose purchases from
the Company represent over 10% of the Company’s sales for the six months ended
June 30, 2009 and 2008:
2009
|
|
2008
|
|
Customers
|
|
Sales
revenue
|
|
|
%
of
total
revenue
|
|
Customers
|
|
Sales
revenue
|
|
|
%
of
total
revenue
|
|
Beijing
Baina Wei’er Science and Technology Co., Ltd.
|
|
$
|
32,714,275
|
|
|
|
40
|
%
|
Beijing
Orsus Xelent Technology & Trading Co., Limited.
|
|
$
|
5,680,142
|
|
|
|
25
|
%
|
CLP
Guangtong Beijing Science and Technology Co., Ltd.
|
|
|
11,134,322
|
|
|
|
14
|
%
|
Shanghai
Spreadbridge Information Technology Co., Ltd.
|
|
|
3,922,724
|
|
|
|
17
|
%
|
|
|
|
-
|
|
|
|
-
|
|
Beijing
HYT Technology & Trade Co., Ltd.
|
|
|
2,452,515
|
|
|
|
11
|
%
|
Total
|
|
$
|
43,848,597
|
|
|
|
54
|
%
|
Total
|
|
$
|
12,055,381
|
|
|
|
52
|
%
|
The
following table set forth the Company’s major suppliers whose sales to the
Company represent over 10% of the Company’s purchase for the six months ended
June 30, 2009 and 2008:
2009
|
|
2008
|
|
Suppliers
|
|
Purchase
|
|
|
%
of
total
purchase
|
|
Suppliers
|
|
Purchase
|
|
|
%
of
total
purchase
|
|
Beijing
Tianyu Communication Equipment Co.Ltd
|
|
$
|
25,161,075
|
|
|
|
35
|
%
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
$
|
12,933,286
|
|
|
|
41
|
%
|
CEC
CoreCast Corporation Limited
|
|
|
10,810,021
|
|
|
|
15
|
%
|
Sichuan
Moba Industrial Co., Ltd.
|
|
|
4,554,974
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
Beijing
Orsus Xelent Technology & Trading Co., Limited.
|
|
|
4,833,850
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
Tianjin
Tong Guang Group Electronics Science & Technology Co.,
Ltd.
|
|
|
3,485,648
|
|
|
|
11
|
%
|
Total
|
|
$
|
35,971,086
|
|
|
|
50
|
%
|
Total
|
|
$
|
25,807,708
|
|
|
|
82
|
%
|
NOTE
20 - OPERATING RISK
The
industry in which we compete is rapidly evolving, highly competitive, fragmented
and driven by consumer preferences and quickly evolving technology. Increased
competition may result in price reductions, reduced gross margin and loss of
market share. Failure to compete successfully against current or future
competitors could have a material adverse effect on the Company’s business,
operating results and financial condition.
(b)
|
Product risk of
obsolescence
|
From the
second half of year 2007, the Company began to involve in the agent business of
some famous high-end smart phones. Because of the restructure of China Unicom,
one type of smart phones could not be sold as expected and inventory impairment
loss arose. Such uncertain and unpredictable events could take significant
effect on the profits that the Company will make in the future.
The
Company cannot guarantee the Renminbi and US dollar exchange rate will remain
steady, therefore the Company could post the same profit for two comparable
periods and post higher or lower profit depending on exchange rate of Renminbi
and US dollars. The exchange rate could fluctuate depending on changes in the
political and economic environments without notice.
Currently,
PRC is in a period of growth and is openly promoting business development in
order to bring more business into PRC. Additionally PRC currently allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations relating to ownership of a Chinese corporation are changed by the
PRC government, the Company's ability to operate the PRC subsidiaries could be
affected.
The
Company is exposed to interest rate risk arising from short-term variable rate
borrowings from time to time. The Company’s future interest expense will
fluctuate in line with any change in borrowing rates. The Company does not have
any derivative financial instruments as of December 31, 2008 and 2007 and
believes its exposure to interest rate risk is not material.
NOTE
21 - COMMITMENT
Operating lease
commitment
The
Company has operating leases and the lessor of the premises for TCB Digital is
TCBGCL, a common shareholder of TCB Digital. Pursuant to these leases
which rates of rent are all at Rmb 8 per square meter per month for production
facilities and dormitory space, the commitment of the Company as pf June 30,
2009 is as follows:
12
month period ending June 30
|
|
|
|
2010
|
|
$
|
222,739
|
|
2011
|
|
200,954
|
|
2012
|
|
200,954
|
|
2013
|
|
10,804
|
|
|
|
|
|
Total
minimum lease payments
|
|
$
|
635,451
|
|
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