UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
0-12536
(Commission File Number)
CHINA DIGITAL WIRELESS, INC.
(Exact name of registrant as specified in its charter)
Nevada 90-0093373
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation)
429 Guangdong Road
Shanghai, People's Republic of China 200001
(Address of principal executive offices) (Zip Code)
Issuer telephone number, including area code: (86 21) 6336-8686
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. [X]Yes [ ]No
As of April 16, 2005, 17,018,692 of the Issuer's $.001 par value common stock
were outstanding.
Transitional Small Business Disclosure Format: [ ]Yes [X] No
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2005 and 2004
(Unaudited) F-1
Consolidated Statements of Income and Comprehensive Income
For the Three Months Ended March, 2005 and 2004 (Unaudited) F-2
Consolidated Statements of Shareholders' Equity (Unaudited) F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (Unaudited) F-4
Notes to Consolidated Financial Statements F-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 3
ITEM 3. CONTROLS AND PROCEDURES 7
PART II - OTHER INFORMATION
ITEM 4. EXHIBITS 8
SIGNATURES 9
2
CHINA DIGITAL WIRELESS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2005
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 75,511 $ 404,242
Accounts receivable, net of allowance for doubtful accounts of
$47,922 and $27,237 4,619,809 3,044,340
Inventories 101,696 895,270
Deferred tax assets 28,772 11,336
Common stock proceeds held in escrow 1,500,000 0
Amounts due from related parties 4,987,956 4,259,643
Advances & deposits to suppliers 150,412 1,472,016
------------ ------------
Total current assets 11,464,156 10,086,847
------------ ------------
Property and equipment, net 1,198,509 1,181,277
Deposit for business acquisition -- 2,160,335
------------ ------------
Total assets $ 12,662,665 $ 13,428,459
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 55,839 $ 929,301
Deferred revenue 617,694 172,275
VAT payable 213,535 87,918
Income tax payable 312,763 210,577
Due to related parties 100,260 51,350
Other liabilities 287,025 235,083
------------ ------------
Total current liabilities 1,587,116 1,686,504
------------ ------------
Shareholders' equity:
Common stock - $0.001 par value, 100,000,000 shares
authorized, 17,018,692 shares issued and outstanding 17,019 17,019
Additional paid-in capital 4,229,974 4,229,974
Retained earnings 6,828,281 7,494,689
Accumulated other comprehensive income 275 273
------------ ------------
Total shareholders' equity 11,075,549 11,741,955
------------ ------------
Total liabilities and shareholders' equity $ 12,662,665 $ 13,428,459
============ ============
See accompanying notes to consolidated financial statements
F-1
CHINA DIGITAL WIRELESS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Three Months ended March 31,
----------------------------
2004 2005
------------ ------------
(unaudited) (unaudited)
Revenues:
Product sales $ 2,098,876 $ 669,191
Product sales to related parties 1,775,000 4,060,514
Information service revenue 868,830 657,703
Advertising service revenue, net -- 387,954
------------ ------------
Total revenues 4,742,706 5,775,362
------------ ------------
Cost of goods sold 1,940,054 605,888
Cost of goods sold to related parties 1,739,425 3,963,905
Cost of information services 253,824 170,808
------------ ------------
Total cost of goods sold 3,933,303 4,740,601
------------ ------------
Gross profit 809,403 1,034,761
------------ ------------
Operating expenses:
Sales and marketing 36,236 43,289
General and administrative 126,181 192,039
------------ ------------
Total operating expenses 162,417 235,328
------------ ------------
Income from operations 646,986 799,433
Interest income 0 465
------------ ------------
Income before income taxes 646,986 799,898
Income tax provision 48,524 133,490
------------ ------------
Net income $ 598,462 $ 666,408
============ ============
Other comprehensive income
Translation adjustments $ (330) $ (2)
------------ ------------
Comprehensive income $ 598,132 $ 666,406
============ ============
Basic earnings (loss) per share $ 0.04 $ 0.04
Weighted average shares of common stock outstanding 13,782,636 17,018,692
See accompanying notes to consolidated financial statements.
F-2
CHINA DIGITAL WIRELESS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In U.S. dollars, except share data)
Additional Other Total
Common Stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2003 13,782,636 $ 13,783 $ 1,436,217 $ 5,233,652 $ 12 $ 6,683,664
Recapitalization and
reorganization 1,585,705 1,586 308,465 -- -- 310,051
Shares issued for consulting
services 167,895 168 604,254 -- -- 604,422
Shares issued for proceeds of
$190,000 and consulting
services 166,667 167 599,834 -- -- 600,001
Shares issued for net proceeds
of $1.5 million 1,315,789 1,315 1,498,685 -- -- 1,500,000
Offset by issuing cost -- -- (217,481) -- -- (217,481)
Net income -- -- -- 1,594,629 -- 1,594,629
Translation adjustment -- -- -- -- 263 263
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2004 17,018,692 $ 17,019 $ 4,229,974 $ 6,828,281 $ 275 $ 11,075,549
Net income (unaudited) -- -- -- 666,408 -- 666,408
Translation adjustment
(unaudited) -- -- -- -- (2) (2)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2005 17,018,692 $ 17,019 $ 4,229,974 $ 7,494,689 $ 273 $ 11,741,955
============= ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-3
CHINA DIGITAL WIRELESS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months ended March 31,
----------------------------
2004 2005
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 598,462 $ 666,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 68,856 67,684
Bad debt expenses 48,624 (20,685)
Deferred tax assets (3,647) 17,437
Changes in assets and liabilities:
Accounts receivable (1,348,027) 1,596,154
Inventories 1,305,562 (793,574)
Advances & deposits to suppliers (659,649) (1,321,604)
Accounts payable 229,243 873,462
Deferred revenue (4,711) (445,419)
VAT payable 83,414 (125,617)
Income tax payable 0 (102,186)
Due to related parties 0 (48,910)
Other liabilities 216,206 (51,942)
------------ ------------
Net cash provided by operating activities 534,333 311,208
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (35,570) (50,452)
Amount due from related parties (962,875) (1,432,023)
------------ ------------
Net cash used in investing activities (998,445) (1,482,475)
------------ ------------
Cash flows from financing activities:
Escrow receivable 0 1,500,000
------------ ------------
Net cash provided by (used in) financing activities 0 1,500,000
------------ ------------
Foreign currency translation (330) (2)
------------ ------------
Net increase (decrease) in cash and cash equivalents (464,442) 328,731
Cash and cash equivalents, beginning of the period 1,713,748 75,511
------------ ------------
Cash and cash equivalents, end of the period $ 1,249,306 $ 404,242
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 0 0
Income taxes 48,524 218,239
See accompanying notes to consolidated financial statements.
F-4
NOTE 1 - ORGANIZATION AND BUSINESS BACKGROUND
China Digital Wireless, Inc. ("CDW") formerly known as Boulder
Acquisitions, Inc. sells mobile phones to retailers, distributors, and related
parties and provides information services to users of mobile phones and pagers.
Substantially all of China Digital Wireless, Inc. operations are in Shanghai,
People's Republic of China (PRC).
In order to meet ownership requirements under Chinese law that restrict
a foreign company from operating in certain industries such as value-added
telecommunication and Internet services, CDW's subsidiary has entered into
information service and cooperation agreements with two of CDW's affiliates that
are incorporated in the China: Sifang Information and Tianci. CDW holds no
ownership interest in Sifang Information or Tianci. Sifang Information and
Tianci contract with China Mobile Communications Corporation, or China Mobile,
and China United Telecommunications Corporation, or China Unicom, respectively,
to provide wireless value-added information services to wireless receiver
customers in China via China Mobile and China Unicom. Sifang Information
transmits those services to customers of China Mobile and China Unicom on behalf
of itself and Tianci pursuant to a signed agreement between Sifang Information
and Tianci.
Recapitalization and Reorganization
On June 23, 2004, Boulder Acquisitions, Inc. ("Boulder Acquisitions")
entered into a stock exchange agreement with Sifang Holdings Co. Ltd. ("Sifang
Holdings") and certain shareholders. Pursuant to the stock exchange agreement,
Boulder Acquisitions issued 13,782,636 shares of its common stock in exchange
for a 100% equity interest in Sifang Holdings, making Sifang Holdings a wholly
owned subsidiary of Boulder Acquisitions.
Boulder Acquisitions was incorporated under the laws of the State of
Colorado on May 8, 1980 as Boulder Brewing Company ("Boulder Brewing"). Boulder
Brewing was the successor to a general partnership formed in 1979. From the
initial inception of the original partnership through 1990, Boulder Brewing was
in the business of operating a microbrewery in Boulder, Colorado. During 1990,
as a result of various debt defaults, Boulder Brewing's assets were foreclosed
upon and all business operations were ceased. Boulder Brewing has effectively
had no operations, assets or liabilities since its fiscal year ended December
31, 1990.
In September 2001, Boulder Brewing changed its state of incorporation
from Colorado to Nevada by means of a merger with and into Boulder Acquisitions,
a Nevada corporation formed on September 6, 2001 solely for the purpose of
effecting the reincorporation. The Articles of Incorporation and Bylaws of the
Nevada corporation are the Articles of Incorporation and Bylaws of the surviving
corporation. Such Articles of Incorporation eliminated the provision for Boulder
Acquisitions to issue preferred stock.
The above stock exchange transaction resulted in those shareholders of
Sifang Holdings obtaining a majority voting interest in Boulder Acquisitions.
Generally accepted accounting principles in the United States of America require
that the company whose shareholders retain the majority interest in a combined
business be treated as the acquirer for accounting purposes. Consequently, the
stock exchange transaction has been accounted for as a recapitalization of
Sifang Holdings as Sifang Holdings acquired a controlling equity interest in
Boulder Acquisitions, as of June 23, 2004. The reverse acquisition process
utilizes the capital structure of Boulder Acquisitions and the assets and
liabilities of Sifang Holdings recorded at historical cost.
Sifang Holdings is the continuing operating entity for financial
reporting purposes, and the financial statements prior to June 23, 2004
represent Sifang Holdings' financial position and results of operations. As of
June 23, 2004, Boulder Acquisitions had only cash of $310,051, and shareholders'
equity of $310,051 with 1,585,705 shares of common stock outstanding, all of
which were included in the consolidated financial statements of Sifang Holdings.
Please see the shareholders' equity statement for the period from January 1,
2004 to March 31, 2005. Although Sifang Holdings is deemed to be the acquiring
corporation for financial accounting and reporting purposes, the legal status of
Boulder Acquisitions as the surviving corporation did not change. Subsequent to
June 30, 2004, Boulder Acquisitions changed its name to China Digital Wireless,
Inc.
F-5
Business History
CDW's business is primarily conducted through its wholly-owned
subsidiary Sifang Holdings Co., Ltd., (Sifang Holdings) and its wholly-owned
subsidiary TCH Data Technology Co., Ltd. (TCH). Sifang Holdings was established
under the laws of the Cayman Islands on February 9, 2004 for the purpose of
acquiring a 100% equity interest in TCH. TCH was established as a foreign
investment enterprise in Shanghai under the laws of the PRC on May 25, 2004,
with registered capital of $7.2 million.
CDW's current operations were originally a business division of
Shanghai Sifang Information Technology Co. (Sifang Information). Sifang
Information is a Shanghai-based privately owned enterprise established under the
laws of the PRC on August 14, 1998. Sifang Information is engaged in the
business of pager and mobile phone distribution and provides value added
information services to the customers in the Shanghai metropolitan area. In
March 2004, Sifang Information spun off its mobile phone distribution business
and the majority of its value added information services business to TCH. As the
acquiring entity under common control, TCH initially recognized all the assets
and liabilities transferred at their carrying amounts in the accounts of Sifang
Information at the date of transfer under the guidance of SFAS No. 141, Appendix
D.
On May 26, 2004, Sifang Information exchanged 100% of the equity
interest in TCH for 100% of the equity interest in Sifang Holdings. Since the
ultimate owners of the three entities were the same owners and the three
entities remained under common control, the ownership exchange transaction was
accounted for at historical costs under the guidance of SFAS No. 141, Appendix
D. Prior to May 26, 2004, there were no activities in Sifang Holdings. As a
result of the exchange of ownership between TCH and Sifang Holdings, TCH's
historical financial statements became the historical financial statements of
Sifang Holdings.
As a result of the spin-off, TCH engages in the business of mobile
phone distribution and provides pager and mobile phone users with access to
certain value-added information reformatted by TCH. TCH purchases mobile phones
from first tier distributors and sells them to retailers and distributors with a
mark-up. In the process of providing value-added information services through
entering into monthly subscription agreements with various users, TCH purchases
trading activity information from stock exchanges, comments and analysis on PRC
stock markets provided by certain reputable security and investment companies,
lottery information, weather forecast, and other value-added products and
reformats the aforementioned information through decoding and recoding and then
has the reformatted information transmitted by Sifang Information, via service
contracts, to pager users. The value-added information is constantly saved on
TCH's server in order for mobile phone users to dial in via China Mobile or
China Unicom. By signing a monthly subscription agreement, wireless receiver
users agree to make advance payments for our services for either three or
six-month subscription periods.
In the spin-off process, the cost of sales included in the Company's
financial statements is directly related to the product revenue and the cost of
services is directly related to different types of service. The business taxes
(similar to sales taxes in the U.S.) are related only to service revenue at a
tax rate of approximately 3.3%. The selling expenses are allocated based on the
relationship between expense and revenue (such as commission) and payroll
records. The general and administrative expenses are allocated based on
management hours spent and payroll records. The income tax provision has been
calculated on a separate company basis and is in line with the historical actual
income tax provision at the Sifang Information level assuming that all income
taxes had been paid by Sifang Information and no income tax liability was in
existence in the periods reported in the accompanying financial statements.
Management believes that the costs, operating expenses, interest expense, and
income tax provision included in the Company's financial statements are a
reasonable representation of the costs and expenses that would have been
incurred if the Company had performed these functions as a stand-alone company.
F-6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
Company's financial condition and results of operations for the interim periods
presented in this Form 10-QSB have been included. Operating results for the
interim periods are not necessarily indicative of financial results for the full
year. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2004.
The Company's consolidated financial statements for the three months
ended March 31, 2004 have been derived from the historical financial statements
and accounting records of Sifang Information using the historical operating
results and the historical basis of the assets and liabilities transferred to
the Company in accordance with accounting principles generally accepted in the
United States of America. Management believes that the assumptions underlying
the accompanying financial statements are reasonable. However, the financial
statements that are derived from Sifang Information's financial records may not
necessarily reflect the Company's results of operations and cash flows had the
Company been a stand-alone company.
Principles of Consolidation:
The consolidated financial statements for the three months ended March
31, 2005 and March 31, 2004 include the accounts of CDW, its wholly owned
subsidiary Sifang Holdings, and its wholly owned subsidiary TCH, collectively,
the "Company"). Substantially all of CDW's revenues are derived from the
operations of TCH, which represents substantially all of CDW's consolidated
assets and liabilities as of March 31, 2005 and March 31, 2004. All significant
intercompany accounts and transactions have been eliminated.
Foreign Currency Translations and Transactions
The Renminbi ("RMB"), the national currency of the PRC, is the primary
currency of the economic environment in which the operations of TCH are
conducted. The Company uses the United States dollar ("U.S. dollars") for
financial reporting purposes.
The Company translates TCH's assets and liabilities into U.S. dollars
using the rate of exchange prevailing at the balance sheet date, and the
statement of income is translated at average rates during the reporting period.
Adjustments resulting from the translation of TCH's financial statements from
RMB into U.S. dollars are recorded in shareholders' equity as part of
accumulated comprehensive income. Gains or losses resulting from transactions in
currencies other than RMB are reflected in the statement of income for the
reporting periods.
Revenue Recognition
The Company derives revenues from the sale of mobile phones,
advertisement designing service and the provision of wireless information
services that are used on cell phones, pagers and prepaid phone cards. The
Company additionally earns commission income ("Agency Income") from the sale of
CDMA mobile phones on the behalf of a related party. The Company recognizes its
revenues net of related business taxes and value added taxes.
Mobile Phone Sales:
Revenues generated from the sale of mobile phones are recognized when
the products are shipped to the distributor or retailer and when persuasive
evidence of an arrangement exists, delivery of the products has occurred,
customer acceptance has been obtained, which means the significant risks and
rewards of ownership have been transferred to the customer, the price is fixed
or determinable and collectibility is reasonably assured.
F-7
Advertising Servicing Revenue, Net:
Advertising revenues are derived from advertisement designing,
masterminding and producing services. The Company recognizes service revenues
over the term of noted agreement at the time of completion of the services.
Information Services:
The Company recognizes service revenues over the term of the noted
agreement and or when the services have been provided to the end user.
i) Information Services - TCH:
By signing a subscription agreement, wireless receiver users agree to
make payments for three to six-month subscriptions in advance. TCH records the
proceeds as deferred revenue and amortizes the deferred revenue over the
subscriptions period. When customers buy a pre-charged service card, the Company
records the proceeds as deferred revenue. When a customer starts to use this
card to access to the Company's server and starts to use a pager to access the
aforementioned information, the Company identifies the subscription period and
amortizes the deferred revenue over the subscription period.
ii) Information Services - Installing Agent.
In response to a retailer's request, the Company has an installing
agent install the Company's software on mobile phones, which are owned by the
retailer. The retailer sells these phones for a premium covering a fee to be
paid to the installing agent and pre-charged six-month subscription fee to be
paid to the Company. After a customer using such a phone dials into the server
to access the desired information, the server records a unique identification
number installed on the mobile phone, which indicates that a specific phone user
starts his or her subscription period. After the Company receives a detailed
list from the installing agent regarding the number of phones that have been
installed with the Company's software, the Company matches this information with
a detailed list from the retailer setting forth how many such phones have been
sold. Based on the number of such phones sold, the Company records accounts
receivable and deferred revenue correspondingly. At the date on which a customer
starts to dial into the server, the six-month subscription period begins and the
Company amortizes deferred revenue accordingly.
iii) Information Services - China Mobile and / or Unicom:
Since April 2004, the revenue generated from selling pre-charged cards
has gradually decreased while the revenue generated through monthly
subscriptions with China Mobile and/or China Unicom (collectively, "Mobile
Operators") has gradually increased as the Mobile Operators' billing systems
have been enhanced. The Company's affiliates, Sifang Information and Shanghai
Tianci Industrial Group Co., Ltd. ("Tianci"), contract with the Mobile Operators
for the transmission of the Company's value-added information services. The
Mobile Operators bill and collect from customers and then pass those fees (net
of billing and collection service fees charged by the Mobile Operators) to
Sifang Information and Tianci who in turn pass those fees to the Company. The
Company recognizes net revenues based on the total amount paid by its customers,
for which the Mobile Operators bill and collect on behalf of the Company. There
is a time lag ranging from 10 days to 45 days between the end of the service
period and the date the Mobile Operators send out their billing statements due
to the segregated billing systems of each provincial subsidiaries of the Mobile
Operators. The Company has not recognized service revenue based on the records
provided by its own server but has performed a reconciliation on a monthly basis
of the revenues recognized by the Company's server to the Mobile Operator's
billing statement. In addition, the Mobile Operators charge a network usage fee
based on a fixed per message fee multiplied by the excess of messages sent over
messages received (This type of service is not covered by a monthly service
subscription and the Company has no control whether it will occur or not.).
Network usage fees charged by the Mobile Operators are reduced for messages
received by the Company because the Mobile Operators separately charge the
sender a fee for these transmissions.
The Company records the revenue from China Mobile / China Unicom on a
net basis in compliance with EITF 99-19, "Reporting Revenues Gross as a
Principle versus Net as an Agent" because the Company:
F-8
o Is not the primary obligor in the arrangement, as it relies on
Sifang Information to transmit the information services to the
end user
o Has limited ability to adjust the cost of services by
adjusting the design or marketing of the service,
o Has limited ability to determine prices, the Company must
follow the price policy within ranges prescribed by Mobile
Operators, and
o Has limited ability to assume risk of non-payment by
customers.
The Company's dependence on the substance and timing of the billing
systems of the mobile telecommunications operators may require us to estimate
portions of our reported revenue for wireless Internet services from time to
time. As a result, subsequent adjustments may have to be made to our wireless
Internet service revenue in our financial statements. As we do not bill our
wireless Internet services users directly, we depend on the billing systems and
records of the mobile telecommunications operators to record the volume of our
wireless Internet services provided, charge our users through mobile telephone
bills and collect payments from our users and pay us.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents. The Company maintains its cash
accounts at credit worthy financial institutions.
Accounts Receivable and Concentration of Credit Risk
During the normal course of business, the Company extends unsecured
credit to retailers and distributors who are mainly located in the Shanghai
metropolitan area. Typically, for mobile phone distributors, credit terms
require payment to be made within 30 days of the sale. The Company does not
require collateral from its customers. The Company's policy is to provide for an
allowance for doubtful accounts that is based on 5% of total trade accounts
receivable less amounts due from related parties and from the installing agent.
The Company regularly evaluates and monitors the creditworthiness of
each customer on a case-by-case basis. The Company includes any account balances
that are determined to be uncollectible in the overall allowance for doubtful
accounts. After all attempts to collect a receivable have failed, the receivable
is written off against the allowance. The Company believes that its allowance
for doubtful accounts was adequate as of March 31, 2004 and 2005. However,
actual write-offs might exceed the recorded allowance.
The following table presents activities in the allowance for doubtful accounts.
December 31, March 31,
------------ ------------
2004 2005
------------ ------------
(Unaudited)
Beginning balance $ 28,158 $ 47,922
Additions charged to expense 19,764 --
Recovered -- (20,685)
Actual write off -- --
------------ ------------
Ending balance $ 47,922 $ 27,237
============ ============
Inventories
Inventories consist principally of mobile phones manufactured by name
brand manufacturers with various features and are stated at the lower of cost
(weighted-average) or market.
Rebates and Credits Receivable
In 2004, the Company's major vendor began providing rebates and credits
if the Company meets certain sales volume levels prescribed by the vendor. As a
result, the Company is entitled to receive certain rebates and credits for the
inventory held and sold by the Company within the specified period of time as
defined by its vendor through submitting the necessary application forms. In
F-9
general, once the vendor approves these applications the amounts of these
rebates and credits will be deducted from the Company's accounts payable to its
vendor and decrease the cost of goods sold or inventory held correspondingly.
Capitalization of Software Costs
The Company's software is developed by an independent third party to
enable pager users to accept certain recoded information which is transmitted,
through affiliates, by the Company and enables mobile phone users to dial into
the Company's server. The software is for internal use and gives the Company the
ability to provide value added information services. In accordance with SOP 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," the Company capitalizes the external cost incurred to develop
this internal-use software by an engineering company at the application
development stage and amortizes that cost over the estimated economic life of
the software (two or three years) which is consistent with the expected life of
a particular type of mobile phone.
Property and equipment
Property and equipment are recorded at cost and are stated net of
accumulated depreciation. Depreciation expense is determined using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings 20 years
Software 2-3 years
Vehicles and other equipment 2-5 years
Maintenance and repairs are charged directly to expense as incurred,
whereas betterment and renewals are generally capitalized in their respective
property accounts.
Impairment of Long-Lived Assets
The Company applies the provisions of Statement of Financial Accounting Standard
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"), issued by the Financial Accounting Standards Board ("FASB"). SFAS No.
144 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable through the estimated undiscounted cash flows expected to
result from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, advances
and deposits to supplier, accounts payable and other current liabilities are
reasonable estimates of their fair value because of the short maturity of these
items.
F-10
Stock Based Compensation
The Company utilizes FAS 123 "Accounting for Stock-Based Compensation," when
accounting for stock based compensation and recognizes the fair value impact of
the compensation granted to employees and consultants as a charge to net income
in the period that the services associated with the compensation are incurred.
The Company does not currently have a stock option plan.
Value Added Tax
TCH is subject to value added tax ("VAT") imposed by the PRC on TCH's
domestic product sales. The output VAT is charged to customers who purchase
mobile phones from TCH and the input VAT is paid when TCH purchases mobile
phones from its vendors. The VAT rate ranges from 13% to 17%, depending on the
types of products purchased and sold. The input VAT can be offset against the
output VAT.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires an entity to recognize deferred tax liabilities and
assets. For the future tax consequence attributable to the difference between
the tax bases of assets and liabilities and their reported amounts in the
financial statements. Deferred tax assets and liabilities are measured using the
enacted tax rate expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. The Company establishes a
valuation when it is more likely than not that that the assets will not be
recovered.
The Company's Chinese subsidiary TCH is registered at Pudong District
in Shanghai and subject to a favorable income tax rate of 15% compared to a
normal income tax rate of 33% (30% for the central government and 3% for the
local government) under current PRC tax laws. However, Sifang Information is
registered in the Shanghai downtown and the area has been treated by the
Shanghai Municipal Administration of Labor as an enterprise that provides
unemployed and handicapped people with jobs. Accordingly, Sifang Information is
entitled to a favorable income tax rate of 15% and qualifies for an income tax
exemption for three years from January 1, 2000 to December 31, 2002, and a 50%
income tax reduction for three years from January 1, 2003 to December 31, 2005.
The income tax provisions presented in the Company's financial statements are
based on the historical actual income tax rates of SFT at 7.5% for the three
months ended March 31, 2004. The income tax provision presented for the three
months ended March 31, 2005 is based on 15% . The deferred tax assets are
determined based on the historical income tax rates applicable at the TCH level.
There is no income tax for companies domiciled in the Cayman Islands.
Accordingly, the Company's financial statements do not present any income tax
provisions related to Cayman Islands tax jurisdiction.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.
Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), issued by the FASB. SFAS
No. 130 establishes standards for reporting and presentation of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements. The Company has chosen to report comprehensive income (loss) in the
statements of income and comprehensive income. Comprehensive income (loss) is
comprised of net income and all changes to stockholders' equity except those due
to investments by owners and distributions to owners.
F-11
Earnings (Loss) Per Share
The Company presents earnings per share in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). Basic earnings (loss) per share includes no dilution and is computed
by dividing income (loss) available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in the
earnings of an entity if they were converted. The Company did not have any
potentially dilutive common share equivalents as of March 31, 2004 and 2005.
NOTE 3 - Equity Transactions
On June 23, 2004, the Company issued 167,895 shares of its common stock
to a consultant for services relating to the reverse merger that was completed
in fiscal 2004. The trading price of the Company's common stock on June 23, 2004
was $3.60 per share, accordingly, the fair value of 167,895 shares was $604,422.
On June 23, 2004, the Company issued 166,667 shares of its common stock
in exchange for services performed by an existing major shareholder of Boulder
Acquisitions for his consulting services involved with the reverse merger. The
common stock was issued at a price of $1.14 per share in exchange for gross
proceeds of $190,000 based on a stock purchase agreement. The $1.14 per share
price was pre-negotiated between the Company and the shareholder before the
reverse merger had been completed. Pursuant to the stock purchase agreement, the
Company granted the existing shareholder an option which required the Company to
purchase up to the aforementioned 166,667 shares of common stock at a price of
$1.14 per share, such option being exercisable at any time after the date that
is six months after the Company files a registration statement on Form SB-2 with
the SEC, registering the shares purchased by the existing shareholder, up to and
including the earlier of the date that such registration statement is declared
effective by the SEC or the existing shareholder's shares are eligible for
resale under Rule 144 under the Securities Act of 1933. According to Topic D-98
from the SEC, "Classification and Measurement of Redeemable Securities," these
shares should be presented outside the permanent equity section. However, on
November 12, 2004, the Company filed a Registration Statement on Form SB-2 with
the SEC, for registration of these securities to be sold to the public by a
small business issuers. On February 8, 2005, the SEC approved the registration
filing and accordingly, the Company has recorded these shares in shareholders'
equity as the contingency surrounding these shares expired as of February 8,
2005. On June 23, 2004, the trading price at the end of the day was $3.60 per
share. Due to the relationship between the parties, the difference between the
price of $1.14 per share and the price of $3.60 per share was recorded as
compensation by presenting $410,001 in additional paid-in capital and in general
and administrative expenses.
On June 28, 2004, the Company issued, in aggregate, 1,315,789 shares of
its common stock to three investors at a price of $1.14 per share in exchange
for gross proceeds of $1,500,000 based on a stock purchase agreement. The $1.14
per share price was pre-negotiated between the Company and the investor before
the reverse merger had been completed. Pursuant to the signed stock purchase
agreement, the Company granted to each of the three investors an option which
requires the Company to purchase up to the aforementioned 1,315,789 shares, in
aggregate, of common stock at a price of $1.14 per share, such option being
exercisable at any time after the date that is six months after the Company
files a Registration Statement on Form SB-2 with the SEC, registering the shares
purchased by the existing stockholder, up to and including the earlier of the
date that such registration statement is declared effective by the SEC or the
existing shareholder's shares are eligible for resale under Rule 144 under the
Securities Act of 1933. As of December 31, 2004, the proceeds of $1.5 million
were held in an escrow account with an agent who is related to a shareholder. As
of December 31, 2004, the Company has treated the proceeds held in escrow as a
current asset as the entire amount was released from escrow in March 2005 and
paid to the Company. According to Topic D-98 from SEC, "Classification and
Measurement of Redeemable Securities," these shares should be presented outside
the permanent equity section. However, on November 12, 2004, the Company filed a
Registration Statement on Form SB-2 with the SEC, for registration of these
securities to be sold to the public by small business issuers. On February 8,
2005, the SEC declared the registration statement effective. Accordingly, the
Company has recorded these shares in shareholders' equity as the contingency
surrounding these shares expired as of February 8, 2005.
In connection with the June 28, 2004, issuance of common stock, the
Company incurred share issue costs of $217,481 and accounted for it as a
reduction of additional paid-in capital.
F-12
NOTE 4 - Related Party Transactions
Related Party Relationships
The following related parties are related through common ownership with
the major shareholder of the Company.
Merchandise Sold to Related Parties
Three months Ended March 31,
2004 2005
------------ ------------
(Unaudited) (Unaudited)
Shanghai Shantian Telecommunication Co. Ltd. ("Shantian") $ 1,775,000 $ 4,060,514
------------ ------------
$ 1,775,000 $ 4,060,514
============ ============
During the three months ended March 31, 2005, TCH sold Samsung GSM
mobile phones valued at $4,060,514 (2004 - $1,775,000) at a 2.4% (2004 - 2%)
gross profit margin to Shantian. Accounts receivable include $2,526,838 (2004
$1,583,512) due from Shantian.
Advertising Services Rendered to Related Party
Three months Ended March 31,
2004 2005
------------ ------------
(Unaudited) (Unaudited)
Shanghai Tianci Real Estate Co. Ltd. $ -- $ 459,131
------------ ------------
$ -- $ 459,131
============ ============
In January 2005, Shanghai Sifang Media Co., Ltd ("Sifang Media") and
TCH entered into the "Bank Digital TV's Cooperation Agreement", where TCH will
assist in the promotion of TV ads for Tianci Real Estate. TCH received a fee of
approximately $459,000 for providing the service from January 2005 to March 31,
2005. There is an "Advertisement Agency Contract" between Tianci Real Estate and
Sifang Media, which continues until November 2005 and it is expected that TCH
will earn additional advertising service revenue during the term of the
Advertising Agency Contract.
Service Provided by Related Party
Three months Ended March 31,
2004 2005
------------ ------------
(Unaudited) (Unaudited)
Shanghai SFT Co., Ltd. ("Sifang Information") $ 141,960 $ 121,556
------------ ------------
$ 141,960 $ 121,556
============ ============
In accordance with terms contained in signed service agreements between
TCH and Sifang Information giving TCH the right to use Sifang Information's
facility (which may not be owned by foreign investors at the present time) to
transmit the reformatted information the Company paid service fees of
approximately $141,960 and $90,618 for the three months ended March 31, 2004 and
2005 respectively. The annual payments for the services have declined from
approximately $567,000 to approximately $362,472 from January 1, 2005.
During the three months ended March 31, 2005, Sifang Information also
provided other management support and marketing services to TCH for $30,938.
F-13
Amounts Due from Related Parties
December 31, 2004 March 31, 2005
----------------- -----------------
(unaudited)
Shanghai SFT Co., Ltd. $ 4,987,956 $ 4,259,643
----------------- -----------------
$ 4,987,956 $ 4,259,643
================= =================
In order to develop the Company's mobile phone distribution business,
the Company is applying to become Nokia's distributor (provincial level) of
mobile phones. On March 20, 2005 TCH signed an agreement with Sifang Information
for cooperation on Nokia mobile phone's distribution, as TCH will act as the
agent to sell Nokia phones on Sifang Information's behalf. Currently, the final
approval from Nokia has not been received. As at March 31, 2005, TCH advanced
$3,020,600 (RMB25,000,000) to Sifang Information so that when Sifang Information
is approved to distribute Nokia's products there is enough working capital
available to purchase Nokia mobile phones and to establish marketing for channel
distribution.
The Company advanced US$ 1,239,043 (2004 - $1,205,000) to provide
Sifang Information with working capital in order to complete spin-off procedures
in the PRC. The Company's management believes that the collection of the
remaining balance from Sifang Information is reasonably assured and accordingly,
no allowance has been recorded as of March 31, 2005.
Deposit for Business Acquisition
In March 2005, TCH signed an agreement with Tianci Group to act as an
agent for assisting with TCH's proposal to acquire assets and a related business
from Shanghai Oriental New Window Company Limited ("Shanghai ONW"), whose main
business was digital mobile television and digital media services. To initiate
the acquisition, TCH advanced Tianci Group RMB 20,000,000 (equivalent to
approximately $2,418,000). As of March 31, 2005, there remains a receivable of
$2,160,335 from the Tianci Group. The acquisition will be under the nominal name
of Tianci Group. After the completion of the acquisition, all related assets and
the business will transfer from Tianci Group to TCH with no mark up.
F-14
Due to Related Parties
December 31, 2004 March 31, 2005
----------------- -----------------
(unaudited)
Shanghai Tianci Real Estate Co. Ltd $ 51,350 $ 51,350
Shanghai Tianci Industry Group Co. Ltd. 48,910 --
----------------- -----------------
$ 100,260 $ 51,350
================= =================
The balance of $51,350 owed to Tianci Real Estate at March 31, 2005
represents rental payments for fiscal 2003 and 2004. The rental agreement was
cancelled as of September 30, 2004. The $48,910 owed to the Tianci Group was
paid during the three months ended March 31, 2005. The above amounts due to
related parties are unsecured, non-interest bearing and due on demand.
NOTE 5 - SEGMENT REPORTING
The Company currently operates in three principal business segments.
Management believes that the following table presents the useful information to
the chief operation decision makers for measuring business performance and
financing needs and preparing the corporate budget, etc. As most of the
Company's customers are located in the Shanghai metropolitan area and the
Company's revenues are generated in Shanghai, no geographical segment
information is presented.
Advertising Mobile Phone Mobile Phone Beep Pagers
Income Distribution Service Service Corporate Total
------------ ------------ ------------ ------------ ------------ ------------
Three months ended
March 31, 2004
Revenue $ -- $ 3,873,876 $ 520,965 $ 347,865 $ -- $ 4,742,706
Gross profit -- 194,397 448,947 166,059 -- 809,403
Depreciation -- -- 54,544 -- 14,312 68,856
Interest Income (Expense) -- -- -- -- -- --
Net Income -- 124,152 359,611 114,699 -- 598,462
Expenditures for long-lived -- -- 35,570 -- -- 35,570
assets
Total Assets, as at December -- 2,721,741 2,443,657 -- 7,497,267 12,662,665
31, 2004
Three months ended
March 31, 2005
Revenue $ 387,954 $ 4,729,705 $ 450,098 $ 207,605 $ 0 $ 5,775,362
Gross profit 387,954 159,912 346,771 140,124 0 1,034,761
Depreciation -- -- 53,371 -- 14,313 67,684
Interest Income (Expense) -- -- -- -- 465 465
Net Income 323,211 97,491 253,167 99,037 106,498 666,408
Expenditures for long-lived -- -- 50,452 -- -- 50,452
assets
Total Assets, as at March -- 8,377,108 300,822 -- 4,750,529 13,428,459
31, 2005
F-15
NOTE 6 -EMPLOYEE WELFARE AND RETIREMENT BENEFITS
The PRC has been undergoing significant reforms with regard to its
employee welfare and fringe benefits administration. Any enterprise operating in
the PRC is subject to government-mandated employee welfare and retirement
benefit contribution as a part of operating expense to the State Administration
of Labor Affairs. In accordance with PRC laws and regulations, TCH participates
in a multi-employer defined contribution plan pursuant to which TCH is required
to provide employees with certain retirement, medical and other fringe benefits.
PRC regulations require TCH to pay the local labor administration bureau a
monthly contribution at a stated contribution rate based on the monthly basic
compensation of qualified employees. The local labor administration bureau,
which manages various investment funds, will take care of employee retirement,
medical and other fringe benefits. TCH has no further commitments beyond its
monthly contribution. TCH contributed a total of $14,849 and $ 12,782 to these
funds as part of selling, general and administrative expenses for the three
months ended March 31, 2004 and 2005, respectively.
F-16
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains certain forward-looking statements and information
relating to us that are based on the beliefs and assumptions made by our
management as well as information currently available to the management. When
used in this document, the words "anticipate", "believe", "estimate", and
"expect" and similar expressions, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to future
events and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
The following discussion should be read in conjunction with our
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. When used in this discussion, the words "believes,"
"anticipates," "expects," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected due to a number of factors beyond our control. We do not undertake to
publicly update or revise any of its forward-looking statements even if
experience or future changes show that the indicated results or events will not
be realized. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
Overview of Business Background
Sifang Holdings was formed under the laws of the Cayman Islands on
February 9, 2004 for the purpose of holding a 100% equity interest in TCH. TCH
was established as a foreign investment enterprise in Shanghai under the laws of
the PRC on May 25, 2004, with registered capital of $7.2 million.
Sifang Information is a Shanghai-based privately owned enterprise
established under the laws of the PRC on August 14, 1998. Sifang Information is
engaged in the business of pager and mobile phone distribution and provides
value added information services to customers in the Shanghai metropolitan area.
In March 2004, Sifang Information spun off its mobile phone distribution
business and the majority of its value added information services business by
presenting a set of carve-out financial statements for the years ended December
31, 2002 and 2003 and three months ended March 31, 2004 as if the spun-off
business had been a stand-alone company for two years and one quarter. On March
31, 2004, Sifang Information transferred the spun-off business into TCH. Being a
receiving entity under common control, TCH initially recognized all the assets
and liabilities transferred at their carrying amounts in the accounts of Sifang
Information at the date of transfer under the guidance of SFAS No. 141, Appendix
D. On May 26, 2004 Sifang Information exchanged 100% of its equity interest in
TCH for a 100% equity interest in Sifang Holdings. Since the ultimate owners of
the three entities were the same owners and the three entities remained under
common control, the ownership exchange transaction was accounted for at
historical costs under the guidance of SFAS No. 141, Appendix D. Prior to May
26, 2004, there were no activities in Sifang Holdings. As a result of exchanging
the ownership between TCH and Sifang Holdings, TCH's historical financial
statements become the historical financial statements of Sifang Holdings.
Sifang Information operates in a business segment that is subject to
certain restrictions imposed by the government of the PRC. For example, paging
facilities, radio transmitting stations and transmitting equipment owned by
Sifang Information are not allowed to be owned by foreign investment enterprises
in accordance with PRC government regulations. Therefore, Sifang Information
still maintains a small part of its business and paging facilities in order to
stay in compliance with relevant regulations and laws in PRC.
As a result of the spin-off, TCH engages in the business of mobile
phone distribution and provides pager and mobile phone (collectively "wireless
receiver") users with access to certain information reformatted by TCH. TCH
purchases mobile phones from first tier distributors and sells them to retailers
with a mark-up. In the process of providing value-added information services
through entering into monthly subscription agreements with various users, TCH
purchases trading activity information from stock exchanges, comments and
analysis on PRC stock markets provided by certain reputable security and
investment companies, lottery information, weather forecast, and other
value-added products and reformats the aforementioned information through
decoding and recoding and then has the reformatted information transmitted by
Sifang Information, via service contracts, to pager users. The information is
constantly saved in TCH's server in order for mobile phone users to dial in via
China Mobile or China Unicom. By signing a monthly subscription agreement,
wireless users agree to make advance payments for either three or six-month
subscription periods.
3
Discussion and Analysis of Operating Results
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Revenue
Total Revenue
Total revenues in the three months ended March 31, 2005 increased by
approximately $1,032,656, representing an approximately 21.8% increase, to
$5,775,362 as compared to $4,742,706 for the same period of the prior year. The
increase was due mainly to our marketing effort and further facilitated by
Samsung's marketing promotion. Total revenues consist of product sales, product
sales to related parties, information service revenues, and advertising service
revenue, net. In the Chinese telecommunication market, mobile phones have
rapidly replaced beepers and pagers as the mobile communication device preferred
by consumers, resulting in an increase in mobile phone distribution. In the
three months ended March 31, 2005, Samsung's mobile phones accounted for about
97% of our total product sales and other name brands mobile phones accounted for
the remaining 3%, compared to the same period of the prior year, in which
Samsung's mobile phones accounted for 94% of our total product sales and other
brands accounted for the balance. During 2005 market competition for mobile
phone sales intensified, causing us to decrease our overall mark-up ratio to
3.4% in order to maintain our market position, in comparison to a mark-up ratio
of 5.0% for the same period the prior year.
Product Sales
Revenue from product sales in the three months ended March 31, 2005
decreased by approximately $1,429,685, representing an approximately 68.2%
decrease, to $669,191 as compared to $2,098,876 for the same period of the prior
year. In 2005, we have promoted distribution of mobile phones through our
related party, Shanghai Shantian by establishing its market channel and facility
from the fiscal year 2004. As we have focused our marketing efforts on Shanghhai
Shantian there was a decline in the mobile phones sales to direct customers.
Product sales to a related party
As discussed above, we distributed Samsung mobile phones to our related
party, Shanghai Shantian, in which Sifang Information holds a 51% equity
interest. During the three months period ended March 31, 2005, we sold
$4,060,514 worth of mobile phones to Shantian, with an average mark-up of
approximately 2.4 % as compared to an average mark-up of 3.4% for the products
sold to all of our other customers.
Information service revenue
Total service revenue net of related business tax and surcharge for the
three months ended March 31, 2005 increased by $211,127 representing
approximately a 24.3% decrease, to $657,703 compared to $868,830 for the same
period of the prior year. Value-added service revenue from mobile phone users
for the three months ended March 31, 2005 decreased by $70,867 to $450,098
compared to $520,965 for the same period of the prior year, representing a 13.6%
decrease. The decrease was due mainly to the decline of our financial
value-added service basically based on Chinese security market, which was not
performing well. The Chinese stock market along with inactive stock exchanges
hindered our growth in this segment of business. In addition, service revenue
from pager users for the three months ended March 31, 2005 decreased by $140,260
to $ 207,605 compared to $347,865 for the same period of the prior year,
representing approximately a 40.3% decrease. We believe that service revenue
from pager users will continue to decrease given the increased popularity of
mobile phones over beepers and pagers. We project that the decrease in service
revenue from pager users will likely plateau at a certain level as most lower
income pager users still like to use pagers to access our information services.
Advertising service revenue, net
During the three months ended March 31, 2005, TCH rendered
advertisement designing and producing services to Shanghai Tianci Real Estate
Co. Ltd. ("Tianci Real Estate") for publicity and promoting its apartment.
4
Cost of goods sold
The cost of goods sold for the three months ended March 31, 2005
increased by $890,314 to $4,569,793 compared to $3,679,479 for the same period
of the prior year, representing an approximately 24.2 % increase. The increase
was consistent with the increases in revenue from product sales.
Cost of service
The cost of service for the three months ended March 31, 2005 decreased
by $82,016 to $170,808 compared to $253,824 for the same period of the prior
year, representing an approximately 32.7% decrease. The costs of service consist
of value-added service costs and advertising service costs. The decline was due
mainly to the decrease of information fees paid to content providers for the
value-added service. The breakdown of our service business has changed and the
proportion of beep services that are related to financial service has decreased,
resulting in a decrease in associated costs pertaining to the security
information fee paid. During 2005, we continued to maintain current fee
structures and establish collaborative relationships or partnerships with
Chinese mobile operators and certain information content providers.
Gross profit
After taking into account the cost of goods sold and cost of service,
our gross profit for the three months ended March 31, 2005 increased by
approximately $225,358 to approximately $1,034,761, representing approximately a
27.9% increase, compared to gross profit of $809,403 for the same period of the
prior year. The increase in gross profit was primarily attributable to the
proceeds generated in the new advertising service during the first quarter of
2005.
The following table summarizes certain information related to the
various components of revenue
Information
Service - Information
Advertising Mobile Phone Mobile Service -
Income Distribution Phone Pager Total
------------ ------------ ------------ ------------ ------------
For the quarter ended March 31, 2005
------------ ------------ ------------ ------------ ------------
Revenue $ 459,131 $ 4,729,705 $ 450,098 $ 207,605 $ 5,846,539
------------ ------------ ------------ ------------ ------------
Cost 71,177 4,569,793 103,327 67,482 4,811,778
------------ ------------ ------------ ------------ ------------
Gross profit 387,954 159,912 346,771 140,123 1,034,761
------------ ------------ ------------ ------------ ------------
Gross profit ratio 84.5% 3.4% 77.0% 67.5% 17.7%
------------ ------------ ------------ ------------ ------------
For the quarter ended March 31, 2004
------------ ------------ ------------ ------------ ------------
Revenue $ -- 3,873,876 $ 520,965 $ 347,865 $ 4,742,706
------------ ------------ ------------ ------------ ------------
Cost -- 3,679,479 72,018 181,806 3,933,303
------------ ------------ ------------ ------------ ------------
Gross profit -- 194,397 448,947 166,059 809,403
------------ ------------ ------------ ------------ ------------
Gross profit ratio -- 5.0% 86.2% 47.7% 17.1%
------------ ------------ ------------ ------------ ------------
Selling expenses
Selling expenses for the three months ended March 31, 2005 increased by
$7,053 to $43,289 compared to $36,236 for the same period of the prior year,
representing a 19.5% increase. This increase was due to the fees charged related
to our beeper service. We have moved our marketing focus from beeper and pager
users to mobile phone users in line with changing consumer demands. Salaries
paid to our marketing team were $1,273 and $5,499 in the three months ended
March 31, 2005 and the same period of the prior year, respectively.
5
General and administrative expenses
General and administrative expenses for the three months ended March
31, 2005 increased by $65,858 to $192,039 compared to $126,181 for the same
period of the prior year, representing a 52.2% increase. The increase was due
mainly to the audit and retainer fees for listing.
General and administrative expenses incurred at the TCH level in the
three months ended March 31, 2005 decreased from $126,181 to $102,002,
representing a slight decrease. The decrease was primarily attributable to the
decrease of account receivable from our clients, resulting in the recovery of
provisions for bad debts, and cost control, which lead to the decline of utility
expenses and communication fees.
The other cash-based expenses incurred at the parent level in the three
months ended March 31, 2005 of $90,037, represented payments for the audit fees,
a retainer fee and other consultant fees.
Interest income (expense)
During the three months ended March 31, 2005, interest income derived
from deposits in banks was $465.
Income tax
The income tax provisions presented in the Company's financial
statements are based on the historical actual income tax rates of Sifang
Information at 7.5% for the three months ended March 31, 2004 and 15% for the
three months ended March 31, 2005. In the three months ended March 31, 2004 and
2005, income tax expense was $48,524 and $133,490 respectively, based on pretax
income of $646,986 and $799,898.
Net income
We recorded net income of $666,408 for the three months ended March 31,
2005, a $67,946 increase in net income compared to a net income of $598,462 for
the same period of the prior year, representing an approximately 11.4% increase.
The increase in net income was attributable to (i) the expansion of our mobile
phone distribution business, and (ii) the startup of our new advertising
business.
Earnings per share
The earnings per share for the three months ended March 31, 2005 was
$0.039 compared to $0.043 for the same period of the prior year. The decrease
was due mainly to the increase in the weighted average number of common shares
outstanding, even though the company was able to increase net income.
Liquidity and Capital Resources
Our cash balance decreased from approximately $1,249,000 as of March
31, 2004 to approximately $404,202 as of March 31, 2005. This decrease in cash
and cash equivalents was due primarily to the increase in the inventories,
advances to suppliers for future purchases of inventory, and advances to related
parties for investment activities.
Net cash generated in operating activities was $311,208 during the
three months ended by March 31, 2005 compared to $534,333 during the same period
of the prior year. The increase in cash generated from operations resulted
primarily from the collection of accounts receivable and slower payment of
payables, which was offset by substantial inventory purchases.
Net cash used in investing activities for the three months ended March
31, 2005 increased to $1,482,475 compared to $998,445 for the same period of the
prior year, representing a $484,030 increase. The increase in cash used in
investing activities was mainly due to the start up of the new advertising
business in the current quarter. .
Net cash provided by financing activities for the three months ended
March 31, 2005 was $1,500,000 compared to $0 for the same period of the prior
year. The $1,500,000 relates to proceeds for shares that were issued in fiscal
2004 but were held in escrow until the Company filed a Registration Statement on
Form SB-2 with the SEC. The Company treated the proceeds held in escrow as a
current asset as the entire amount was released from escrow in March 2005 and
paid to the Company.
6
We believe that current cash balance and cash flows from operations, if
any, will be sufficient to meet present growth strategies and related working
capital. In regards to the capital expenditures, we have sufficient funds to
expand our operations. We plan to utilize a combination of internally generated
funds from operations with potential debt and/or equity financings to fund its
longer-term growth over a period of two to five years. The availability of
future financings will depend on market conditions. There is no assurance that
the future funding will be available.
The forecast of the period of time through which our financial
resources will be adequate to support operations is a forward-looking statement
that involves risks and uncertainties.
Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a
revision to FIN 46, "Consolidation of Variable Interest Entities". FIN 46R
clarifies some of the provisions of FIN46 and exempts certain entities from its
requirements. FIN 46R is effective at the end of the first interim period ending
after March 15, 2004. Entities that have adopted FIN 46 prior to this effective
date can continue to apply the provisions of FIN 46 until the effective date of
FIN 46R. The adoption of FIN 46R did not have any effect on the Company's
consolidated financial statements.
In March 2004, the FASB issued EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF 03-1") which provides new guidance for assessing impairment losses on
debt and equity investments. Additionally, EITF 03-1 includes new disclosure
requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1. The
Company will evaluate the effect, if any, of EITF 03-1 when final guidance is
released.
In November 2004, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory Costs, which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. SFAS No. 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. We do not believe the adoption of
SFAS No. 151 will have a material impact on our consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123-R, Share Based Payments,
which requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in
the financial statements. The cost will be measured based on the estimate fair
value of the equity or liability instruments issued. SFAS 123-R covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Management believes the adoption of this
pronouncement will not have a material effect on our consolidated financial
statements.
Also, in December 2004, the FASB issued SFAS 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the
principle that the exchange of nonmonetary assets should be measured using the
estimated fair market value of the assets exchanged. SFAS No. 153 eliminates the
narrow exception for nonmonetary exchanges of similar productive assets, and
replaces it with a broader exception for exchanges of nonmonetary assets do not
have commercial substance. A nonmonetary exchange has "commercial substance" if
the future cash flows of the entity are expected to change significantly as a
result of the transaction. This pronouncement is effective for monetary
exchanges in fiscal periods beginning after June 15, 2005. Management believes
the adoption of this pronouncement will not have a material effect on our
consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the AICPA, and the SEC did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
Item 3. Controls and Procedures
Prior to the conclusion of the period covered by this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13(a)-14(c). Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings.
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There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
PART II.
OTHER INFORMATION
Item 4. Exhibits
The following documents are filed as part of this report:
31.1 Chief Executive Officer Certification furnished pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Chief Financial Officer Certification furnished pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Chief Financial Officer Certification furnished pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA DIGITAL WIRELESS, INC.
Date: May 25, 2005 /s/ Fu Sixing
----------------------------------
Fu Sixing, Chief Executive Officer
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