================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 23, 2004
CHINA DIGITAL WIRELESS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 0-12536 90-0093373
------------------------------- ----------- ----------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification Number)
429 Guangdong Road
Shanghai People's Republic of China 200001
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (86-21) 6336-8686
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This Current Report on Form 8-K/A (Amendment No. 1) supplements the
information contained in the Current Report on Form 8-K previously filed with
the Securities and Exchange Commission ("SEC") on July 8, 2004, relating to the
stock exchange transaction by and between the registrant and the shareholders of
Sifang Holdings Co., Ltd., an exempted company incorporated in the Cayman
Islands with limited liability, and the corresponding change-in-control of the
registrant that occurred on June 23, 2004.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements of the Business Acquired. The following audited
financial statements of Sifang Holdings Co., Ltd. and its subsidiary are hereby
included as part of this report:
Report of Independent Registered Public Accounting Firm.............F-2
Balance Sheets......................................................F-3
Statements of Income and Comprehensive Income.......................F-4
Statements of Stockholders' Equity..................................F-5
Statements of Cash Flows............................................F-6
Notes to Financial Statements.......................................F-7
b. Pro Forma Financial Information (Unaudited). The pro forma financial
statements of the registrant are hereby included as part of this report.
Unaudited Pro Forma Combining Financial Statements..................F-20
Pro Forma Balance Sheet - March 31, 2004 (unaudited)................F-21
Pro Forma Combined Income Statement (unaudited) for the
Year Ended December 31, 2003....................................F-22
Pro Forma Combined Income Statement (unaudited) for the
Three Months Ended March 31, 2004...............................F-23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto authorized.
CHINA DIGITAL WIRELESS, INC.
By: /s/ Tai Caihua
------------------------
Tai Caihua, President
DATED: September 2, 2004
SIFANG HOLDINGS CO. LTD.
CONTENTS
Report of Independent Registered Public Accounting Firm.............F-2
Consolidated Financial Statements
Balance Sheets......................................................F-3
Statements of Income and Comprehensive Income.......................F-4
Statements of Stockholders' Equity .................................F-5
Statements of Cash Flows............................................F-6
Notes to Financial Statements.......................................F-7
F-1
Report Of Independent Registered Public Accounting Firm
The Board of Directors
Sifang Holdings Co. Ltd.
We have audited the accompanying consolidated balance sheets of Sifang Holdings
Co. Ltd. (the "Company") as of December 31, 2002 and 2003 and the related
consolidated statements of income and comprehensive income, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
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 financial position of Sifang Holdings Co.
Ltd., as of December 31, 2002 and 2003 and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Shanghai Zhonghua
BDO Shanghai Zhonghua
Certified Public Accountants
Shanghai, PRC
June 1, 2004
F-2
SIFANG HOLDINGS CO. LTD.
BALANCE SHEETS
(In U.S. Dollars)
December 31, March 31,
-------------------------- -----------
2002 2003 2004
----------- ----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,193,690 $ 1,713,748 $ 1,249,306
Note (trade) and accounts receivable, net of allowance
for doubtful accounts by $30,143, $25,651, and $73,679 572,711 2,363,327 3,132,343
Trade receivable from a related party -- -- 530,983
Advances to employees, net of allowance for doubtful
accounts by $ 0, $659, and $1,255 -- 12,525 23,841
Advances to vendors -- 76,891 665,742
VAT recoverable 201,194 83,414 --
Inventories 1,169,223 1,591,223 285,661
Deposits and prepaids 37,178 248,288 307,174
Deferred tax assets 5,556 4,955 8,602
Amounts due from parent -- -- 962,875
----------- ----------- -----------
Total current assets 3,179,552 6,094,371 7,166,527
----------- ----------- -----------
Property and equipment, net 1,333,796 1,354,238 1,320,952
----------- ----------- -----------
Total assets $ 4,513,348 $ 7,448,609 $ 8,487,479
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 111,569 $ 340,812
Deferred revenue 43,930 537,046 532,335
Employee welfare payable 41,034 67,240 72,313
VAT payable -- -- 187,245
Other taxes payable 27,973 26,171 33,297
Accrued liabilities 1,046 22,919 39,681
Amounts due to parent 604,062 -- --
----------- ----------- -----------
Total current liabilities 718,045 764,945 1,205,683
----------- ----------- -----------
Total liabilities 718,045 764,945 1,205,683
----------- ----------- -----------
Commitments
Stockholders' equity:
Contributed capital 1,450,000 1,450,000 1,450,000
Retained earnings 2,345,672 5,233,652 5,832,114
Accumulated other comprehensive income (loss) -
translation adjustments (369) 12 (318)
----------- ----------- -----------
Total stockholder's equity 3,795,303 6,683,664 7,281,796
----------- ----------- -----------
Total liabilities and stockholders' equity $ 4,513,348 $ 7,448,609 $ 8,487,479
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
SIFANG HOLDINGS CO. LTD.
STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In U.S. Dollars)
Three Months Ended
Years Ended December 31, March 31,
---------------------------- ----------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues:
Products sales $ 520,325 $ 13,529,279 $ 4,410,061 $ 2,126,010
Products sales to a related party -- -- -- 1,775,000
Service revenue, net 3,403,082 3,503,099 722,753 850,279
------------ ------------ ------------ ------------
Total revenues 3,923,407 17,032,378 5,132,814 4,751,289
Cost of goods sold 527,458 12,424,454 3,918,936 3,679,479
Cost of service 852,233 910,440 233,245 227,773
------------ ------------ ------------ ------------
Gross profit 2,543,716 3,697,484 980,633 844,037
Operating expenses:
Selling 288,539 153,437 42,095 36,236
General and administrative 211,322 391,930 176,934 160,815
Loss on disposal of fixed assets 4,168 5,361 -- --
------------ ------------ ------------ ------------
Total operating expenses 504,029 550,728 219,029 197,051
------------ ------------ ------------ ------------
Income from operations 2,039,687 3,146,756 761,604 646,986
Interest expense (36,245) (12,082) (7,249) --
------------ ------------ ------------ ------------
Income before income taxes 2,003,442 3,134,674 754,355 646,986
Income tax provision (benefit) (5,556) 246,694 56,577 48,524
------------ ------------ ------------ ------------
Net income $ 2,008,998 $ 2,887,980 $ 697,778 $ 598,462
============ ============ ============ ============
Other comprehensive income (loss):
Translation adjustments $ (252) $ 381 $ 93 $ (330)
------------ ------------ ------------ ------------
Comprehensive income $ 2,008,746 $ 2,888,361 $ 697,871 $ 598,132
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
SIFANG HOLDINGS CO. LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
(In U.S. Dollars)
Accumulated
Contributed Other Total
------------- Retained Comprehensive Stockholders'
Amount Earnings Income (Loss) Equity
------------- ------------- ------------- -------------
Balance, January 1, 2002 $ 1,450,000 $ 336,674 $ (117) $ 1,786,557
Net income -- 2,008,998 -- 2,008,998
Translation adjustments -- -- (252) (252)
------------- ------------- ------------- -------------
Balance, December 31, 2002 1,450,000 2,345,672 (369) 3,795,303
Net income -- 2,887,980 -- 2,887,980
Translation adjustments -- -- 381 381
------------- ------------- ------------- -------------
Balance, December 31, 2003 1,450,000 5,233,652 12 6,683,664
Net income (unaudited) -- 598,462 -- 598,462
Translation adjustments (unaudited) -- -- (330) (330)
------------- ------------- ------------- -------------
Balance, March 31, 2004 (unaudited) $ 1,450,000 $ 5,832,114 $ (318) $ 7,281,796
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
SIFANG HOLDINGS CO. LTD.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In U.S. Dollars)
Three Months Ended
Years Ended December 31, March 31,
-------------------------- ---------------------------
2002 2003 2003 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,008,998 $ 2,887,980 $ 697,778 $ 598,462
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 132,904 234,055 51,503 68,856
Bad debt expenses 17,817 659 7,536 48,624
Loss on disposal of fixed assets 4,168 5,361 -- --
Deferred tax assets (5,556) 601 119 (3,647)
Changes in assets and liabilities:
Accounts receivables (356,298) (1,790,616) (1,502,645) (1,348,027)
Prepaids, deposit and advances to employees 13,372 (224,294) 12,326 (70,798)
Advance to vendors -- (76,891) -- (588,851)
Inventories (1,169,223) (422,000) (845,786) 1,305,562
Accounts payable -- 111,569 1,202,112 229,243
Deferred revenue (8,236) 493,116 289,726 (4,711)
Employee welfare payable 25,227 26,206 17,551 5,073
VAT recoverable (201,194) 117,780 (59,781) 83,414
Other taxes payable 19,079 (1,802) (20,490) 194,371
Accrued liabilities 714 21,873 (766) 16,762
----------- ----------- ----------- -----------
Net cash provided by operating activities 481,772 1,383,597 (150,817) 534,333
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, equipment, and software (1,186,756) (259,858) (22,197) (35,570)
Decease (Increase) in due from parent 604,113 -- -- (962,875)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (582,643) (259,858) (22,197) (998,445)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Increase (Decrease) in due to parent 604,062 (604,062) -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 604,062 (604,062) -- --
----------- ----------- ----------- -----------
Foreign currency translation (25) 381 107 (330)
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents 502,939 520,058 (172,907) (464,442)
Cash and cash equivalents, beginning of the period 690,751 1,193,690 1,193,690 1,713,748
----------- ----------- ----------- -----------
Cash and cash equivalents, end of the period $ 1,193,690 $ 1,713,748 $ 1,020,783 $ 1,249,306
----------- ----------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 36,245 $ 12,082 $ 7,249 $ --
Income taxes -- 246,093 56,458 52,171
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 1 - ORGANIZATION AND BUSINESS BACKGROUND
Sifang Holdings Co. Ltd. (the "Company") was incorporated in the Cayman Islands,
established under the law of the Cayman Islands, on March 8, 2004 for the
purpose of holding a 100% equity interest in TCH Data Technology Co. Ltd.
("TCH"). TCH was established as a foreign investment enterprise in Shanghai
under the laws of People's Republic of China (the "PRC") on May 25, 2004 with a
registered capital of $7.2 million.
Sifang Information Technology Co. Ltd. ("Sifang Information") is a
Shanghai-based privately owned enterprise established under the laws of the PRC
on August 14, 1998. Sifang Information conducts 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 a majority of the 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 spin-off business had been a stand-alone company for two years and one
quarter. On March 31, 2004 Sifang Information transferred this spin-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 25, 2004 Sifang Information transferred its
100% equity interest in TCH in exchange for a 100% equity interest in the
Company. Because the three entities have the same group of ultimate owners and
the three entities are under common control, the transfer of ownership is
accounted for at historical costs under the guidance of SFAS No. 141, Appendix
D. Prior to May 25, 2004 the Company had no activities. As a result of the share
exchange between TCH and the Company, TCH's historical financial statements
become the historical financial statements of the Company.
Because Sifang Information operates in a business segment, paging facilities,
that is subject to certain restrictions imposed by the PRC government, PRC
government regulations prohibit foreign investment enterprises from owning radio
transmitting stations and transmitting equipment owned by Sifang Information.
Therefore, Sifang Information still keeps a small part of its business and
paging facility to comply with the relevant regulations and laws in China.
Following the spin-off, TCH is 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 phone
products from first-tier distributors and sells 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 information
from Shanghai Stock Exchange, comments and analysis on stock market provided by
certain reputable security and investment companies, lottery information,
weather forecasts, etc., and reformats the aforementioned information through
decoding and recoding. The reformatted information is transmitted by Sifang
Information via a service contract to pager users constantly and is stored 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 are
asked to make payment for three- or six-month subscription fees in advance.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements have been derived from the historical
financial statements and accounting records of Sifang Information using the
historical results of operating results and historical basis of the assets and
liabilities transferred to the Company in accordance with accounting principles
F-7
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
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 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. Interim
information may not be indicative of results for a full year.
In the carve-out process, the cost of sales included in the Company's financial
statements is directly related to the product revenue. The cost of services is
directly related to different types of service. The selling expenses are
allocated based on the relationship between expense and revenue (such as
commission) and payroll records. The general and administrative expenses
allocated are mainly based on the hours management spent and payroll records.
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 to 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
expense, 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.
The accompanying statements of income and comprehensive income and cash flows
for each of the three months ended March 31, 2004 and 2003, and balance sheet as
of March 31, 2004, have not been audited. In the opinion of management, they
include all normal recurring adjustments necessary for a fair presentation of
the financial position and the results of operations for the periods presented.
However, interim information may not be indicative of results for a full year.
Foreign Currency Translations and Transactions
The Renminbi ("RMB"), the national currency of 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 stockholders' equity as part of accumulated
comprehensive loss - translation adjustments. Gains or losses resulting from
transactions in currencies other than RMB are reflected in the statement of
income for the reporting periods.
F-8
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenues generated from sales of mobile phones are recognized 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 the ownership have been transferred to the customer, the price is
fixed or determinable and collectibility is reasonably assured.
The Company provides wireless receiver users with access to certain financial
information provided by Stock Exchanges, comments and analyses on stock market
provided by certain reputable security investment companies in China, lottery
information, weather forecast, etc. through signing a monthly subscription
agreement or buying a pre-charged service card. The Company purchases the
aforementioned information from respective vendors and reformats it through
decoding and recoding and transmits the reformatted information via Sifang
Information into pager users constantly and stores them in the Company'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 need to make
payments for three- to six-month subscription in advance. The Company records
the proceeds as deferred revenue and amortizes the deferred revenue over the
subscription 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.
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 fees 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three
months or less to be cash equivalents.
Accounts Receivable, Employees Receivable, and Concentration of Credit Risk
During the normal course of business, the Company extends unsecured credit to
its retail customers who are mainly located in Shanghai metropolitan area.
Typically credit terms require payment to be made within 30 days of the sale.
The Company does not require collateral from its customers. The Company
maintains its cash accounts at credit worthy financial institutions. As of
December 31, 2003 and March 31, 2004 accounts
F-9
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts Receivable, Employees Receivable and Concentration of Credit Risk
(Continued)
receivable resulting from the pre-charged fees were $1,788,974 and $2,263,419,
respectively. The outstanding balance of $1,788,974 was collected in full in
April 2004.
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, along with a general reserve, in the overall
allowance for doubtful accounts. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. Based on the
information available to management, the Company believes that its allowance for
doubtful accounts was adequate as of December 31, 2002 and 2003. However, actual
write-offs might exceed the recorded allowance.
The Company advances cash to sales people for their travel and business activity
needs. Under certain circumstances, the advances to employees might not be fully
recovered by the Company. Accordingly, the Company also provides allowances
against any doubtful accounts. The following table presents combined allowance
activities in accounts receivable and advances to employees.
December 31
----------------------- March 31
2002 2003 2004
-------------------------------------
(Unaudited)
Beginning balance $ 12,326 $ 30,143 $ 26,310
Additions charged to expense 17,817 659 48,624
Recovered -- (4,492) --
Actual write off -- -- --
---------- ---------- ----------
Ending balance $ 30,143 $ 26,310 $ 74,934
========== ========== ==========
Inventories
Inventories consist principally of mobile phones manufactured by name brand
manufactures with various features and are stated at the lower of cost
(first-in, first-out) or market.
Rebates and Credits Receivable
In 2004 the Company's major vendor began providing sales rebates and credits if
the Company fulfills certain sales volumes prescribed by the vendor in order to
attract its distributors to sell more of its products. 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 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.
F-10
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 by the
Company and enable 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, 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
Properties and equipment are recorded at cost and are stated net of accumulated
depreciation. Depreciation expense is determined using the straight-line method
over the shorter of 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. When an item is retired or otherwise disposed of, the cost and
applicable accumulated depreciation are removed and the resulting gain or loss
is recognized and reflected as an item before operating income (loss).
Impairment of Long-Lived Assets
Effective January 1, 2002, 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. There was no impairment of long-lived assets in the years ended
December 31, 2002 and 2003, and in the three months ended March 31, 2003 and
2004.
Fair Value of Financial Instruments
The carrying amount of cash, notes receivable, accounts receivable, other
receivables, advances to vendor, accounts payable and accrued liabilities are
reasonable estimates of their fair value because of the short maturity of these
items. Due to and due from parent bear interest at 5.8% per annum which is
similar to the market interest rate at the time these due to and due from were
incurred.
F-11
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Value Added Tax
TCH is subject to value added tax ("VAT") imposed by the PRC government 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%, in general,
depending on the types of products purchased and sold. The input VAT can be
offset against the output VAT. The VAT payable or receivable balance presented
on the Company's balance sheets represents the input VAT either less than or
larger than the output VAT. The debit balance represents a credit against future
collection of output VAT instead of a real receivable.
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 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 $39,945, $58,501, $14,607, and
$14,849 to these funds as part of selling, general and administrative expenses
for years ended December 31, 2002 and 2003 and three months ended March 31, 2003
and 2004, respectively.
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"),
issued by the FASB. SFAS No. 109 requires an entity to recognize deferred tax
liabilities and assets. Deferred tax assets and liabilities are recognized 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 included the enactment date.
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 registered in the Shanghai downtown and 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 be subject to a favorable income tax rate of 15% and
qualifies for income tax exemption for three years from January 1, 2000 to
December 31, 2002, and 50% of income tax reduction for three years from January
1, 2003 to December 31, 2005. The
F-12
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
income tax provisions presented on the Company's financial statements are based
on the historical actual income tax rates of Sifang Information at 0%, 7.5% and
7.5%. The deferred tax assets are determined based on the historical income tax
rates applicable at the Sifang Information 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 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.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46, as amended by FIN 46(R),
issued in January 2003, requires an investor with a majority of the variable
interests in a variable interest entity to consolidate the entity and also
requires majority and significant variable interest investors to provide certain
disclosures. A variable interest entity is an entity in which the equity
investors do not have a controlling financial interest or the equity investment
at risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. The provisions of
FIN 46(R) are applicable for fiscal years ending after December 15, 2004. The
Company does not have any variable interest entities that must be consolidated.
F-13
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 3 - PROPERTY AND EQUIPMENT
A summary of property and equipment at cost is as follows:
December 31,
-------------------------- March 31,
2002 2003 2004
-------------------------- -----------
(Unaudited)
Buildings $ 943,300 $ 943,368 $ 943,323
Software 222,858 391,660 426,614
Vehicles -- 65,484 65,481
Other equipment 414,562 424,891 413,267
----------- ----------- -----------
1,580,720 1,825,403 1,860,949
Accumulated depreciation (246,924) (471,165) (539,997)
----------- ----------- -----------
$ 1,333,796 $ 1,354,238 $ 1,320,952
=========== =========== ===========
The depreciation and amortization for the years ended December 31, 2002 and 2003
and the three months ended March 31, 2003 and 2004 was $132,904, $234,055,
$51,503, and $68,856, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company had certain transactions with Sifang Information during the years
ended December 31, 2002 and 2003 and the three months ended March 31, 2003 and
2004, summarized as follows:
In accordance with terms contained in a signed service agreement between TCH and
Sifang Information giving TCH the right to use Sifang Information's paging
facility (which may not be owned by foreign investors at the present time) to
transmit the reformatted information, the Company paid service fees of
RMB4,700,000 (equivalent approximately $567,840) in each of the years ended
December 31, 2002 and 2003, and RMB1,175,000 (equivalent approximately $141,960)
in each of the three months ended March 31, 2003 and 2004.
During the normal course of business, TCH incurred due to and due from Sifang
Information for financing purposes. In 2002 TCH used funds from Sifang
Information to start its mobile phone distribution business. The outstanding
balance due to this related party was $604,062 at December 31, 2002 and interest
expense incurred on the amount due to this related party for the year ended
December 31, 2002 was $36,245.
During 2003, TCH paid off all outstanding balances and lent certain funds to
Sifang Information which was repaid before December 31, 2003. There were a
couple of borrowing and lending transactions between TCH and Sifang Information
in 2003, however, the outstanding balance of due to related party and due from
related party at December 31, 2003 was $0 whereas interest expense incurred on
the amount due to related party for the year ended December 31, 2003 was
$12,082.
F-14
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 4 - RELATED PARTY TRANSACTIONS (Continued)
In the first quarter of 2004, TCH lent money to Sifang Information for financing
purposes, the outstanding due from parent at March 31, 2004 was $962,875 and the
interest income on the due from related party was immaterial as the funds were
advanced to Sifang Information at the end of March 2004.
Sifang Information purchased a building to be used as a machinery building from
one of its related parties for an agreed price of $910,925. This building was
carved-out of Sifang Information to TCH for its operation convenience at the net
book value on the historical basis.
During the three months ended March 31, 2004, TCH sold Samsung GSM mobile phones
worth approximately $1,775,000 including a 2% mark-up, to the Shanghai Shantian
Telecommunication Technology Inc. (Shantian), a related party in which Sifang
Information holds a 51% equity interest. As of March 31, 2004 the accounts
receivable (trade) balance due from Shantian was $530,983, which was fully
collected in April 2004.
NOTE 5 - INCOME TAXES
The income (loss) generated in the Cayman Islands and the PRC before income
taxes in 2002 and 2003, and the three months ended March 31, 2003 and 2004, was
as follows:
Three Months Ended
Years Ended December 31, March 31,
------------------------ -----------------------
2002 2003 2003 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Income (Loss) in Cayman Island before
income taxes $ -- $ -- $ -- $ --
Income in China before income taxes 2,003,442 3,134,674 754,355 646,986
---------- ---------- ---------- ----------
$2,003,442 $3,134,674 $ 754,355 $ 646,986
========== ========== ========== ==========
The income tax provision was as follows:
Three Months Ended
Years Ended December 31, March 31,
------------------------ -----------------------
2002 2003 2003 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Current:
Cayman Island $ -- $ -- $ -- $ --
China -- 246,093 56,458 52,171
---------- ---------- ---------- ----------
Deferred:
Cayman Island -- -- -- --
China (5,556) 601 119 (3,647)
---------- ---------- ---------- ----------
$ (5,556) $ 246,694 $ 56,577 $ 48,524
========== ========== ========== ==========
F-15
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 5 - INCOME TAXES (Continued)
TCH is subject to taxation under the laws of the PRC, and the statutory income
tax rate for the years ended December 31, 2002 and 2003 and the three months
ended March 31, 2004 was 0%, 7.5% and 7.5%, respectively. The income tax
provision for 2002 was based on pretax income of $2,003,442 and adjusted by
permanent differences of $146,285 with an income tax rate at 0%. The income tax
provision for 2003 was based on a pretax income $3,134,674 and adjusted by
permanent differences of $154,557 with an income tax rate at 7.5%. In the three
months ended of March 31, 2003 and 2004, income tax expense was $56,577 and
$48,524, respectively, based on pre tax income of $754,355 and $646,986,
respectively, with a projection that there were no or little permanent and
temporary differences for income tax purpose.
The difference between the effective income tax rate and the expected federal
statutory rate was as follows:
Three Months Three Months
Years Ended December 31, Ended Ended
---------------------------- March 31, March 31,
2002 2003 2003 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Statutory rate 33.0% 33.0% 33.0% 33.0%
Income tax holiday (33.0) (25.5) (25.5) (25.5)
Permanent differences (0.3) 0.4 -- --
Change in valuation allowance -- -- -- --
------------ ------------ ------------ ------------
Effective income tax rate (0.3)% 7.9% 7.5% 7.5%
============ ============ ============ ============
The primary components of temporary differences which give rise to the Company's
deferred tax assets were as follows:
December 31,
----------------------- March 31,
2002 2003 2004
---------- ---------- ----------
Allowance for receivables $ 2,261 $ 1,973 $ 5,620
Accrued liabilities 3,295 2,982 2,982
---------- ---------- ----------
5,556 4,955 8,602
Valuation allowance -- -- --
---------- ---------- ----------
Net deferred tax assets $ 5,556 $ 4,955 $ 8,602
========== ========== ==========
NOTE 6 - COMMITMENTS
In order for TCH to provide value-added information services to wireless
receiver users located in Shanghai and provinces in the Shanghai vicinity, the
Company needs to use certain frequency transmitting equipment and relevant other
equipment (collectively "paging facilities') which are prohibited to be owned by
foreign information
F-16
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 6 - COMMITMENTS (Continued)
investment enterprise. As a consequence, the Company entered into a service
agreement with Sifang Information pursuant to which Sifang Information provides
TCH with the radio signal transforming service and other services on an annual
basis. The total service expenses for the years ended December 31, 2002 and 2003
and the three months ended March 31, 2003 and 2004 were approximately $567,840,
$567,840, $141,960 and $141,960, respectively. The service agreement will
continued to be effective and be renewed on annual basis until PRC laws and
regulations allow foreign investment enterprises to own these paging facilities.
Operating leasing commitment
TCH has an operating lease with Shanghai Tianci Real Estate Co. Ltd. (one of its
related parties) to lease one of its apartments (250 square meters) as a
management office. The leasing agreement runs from May 1, 2003 to April 30,
2008. The annual rent is RMB340,000 (equivalent $41,078). The rental expense
incurred for the Company for the years ended December 31, 2002 and 2003 and the
three months ended March 31, 2003 and 2004 was $0 (the rental incurred at the
Sifang Information level was proportionally charged to TCH as a service charge
under the co-operation agreement), $27,385, $0 (the same reason as
aforementioned) and $13,693, respectively.
Future minimum payments required under the operating lease which has a remaining
lease term in excess of one year at December 31, 2003 are as follows:
December 31, Amount
------------------------ ----------
2004 $ 41,078
2005 41,078
2006 41,078
2007 41,078
2008 13,693
----------
$ 178,005
==========
NOTE 7 - SEGMENT REPORTING
The Company currently operates in two 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. The company's accounting systems do not
capture the total assets for each segment. 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.
F-17
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 7 - SEGMENT REPORTING (Continued)
Product Mobile Phone Beep Pagers
Sales Service Service Corporate Total
------------ ------------ ------------ ------------ ------------
2002
Revenue $ 520,325 $ 6,957 $ 3,396,125 $ -- $ 3,923,407
Gross margin (7,133) (39,262) 2,590,111 -- 2,543,716
Inventory 1,169,223 -- -- -- 1,169,223
Fixed assets -- 390,496 -- 943,300 1,333,796
Expenditures for long-lived assets -- 243,456 -- 943,300 1,186,756
2003
Revenue $ 13,529,279 $ 1,297,323 $ 2,205,776 $ -- $ 17,032,378
Gross margin 1,104,825 1,082,003 1,510,656 -- 3,697,484
Inventory 1,591,223 -- -- -- 1,591,223
Fixed assets -- 392,270 -- 961,968 1,354,238
Expenditures for long-lived assets -- 194,374 -- 65,484 259,858
Three months ended March 31, 2003
(Unaudited)
Revenue $ 4,410,061 $ 98,537 $ 624,216 $ -- $ 5,132,814
Gross margin 491,125 48,171 441,337 -- 980,633
Inventory 2,015,009 -- -- -- 2,015,009
Fixed assets -- 372,369 -- 932,121 1,304,490
Expenditures for long-lived assets -- 22,197 -- -- 22,197
Three months ended March 31, 2004
(Unaudited)
Revenue $ 3,901,010 $ 513,171 $ 337,108 $ -- $ 4,751,289
Gross margin 221,531 467,204 155,302 -- 844,037
Inventory 285,661 -- -- -- 285,661
Fixed assets -- 373,342 -- 947,610 1,320,952
Expenditures for long-lived assets -- 35,570 -- -- 35,570
F-18
SIFANG HOLDING CO. LTD.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2003
AND THREE MONTHS ENDED MARCH 31, 2004
(Information for the Three Months Ended March 31, 2003 and 2004 is Unaudited)
NOTE 8 - CONCENTRATION OF CUSTOMERS AND VENDORS
Customers and vendors who account for 10% or more of revenues, accounts
receivable, purchases and accounts payable are presented as follows:
Accounts Accounts
Revenue Receivable Purchases Payable
------------ ------------ ------------ ------------
2002
Customer A 8% 57% -- --
Vendor A -- -- 98% 0%
2003
Customer Z 16% 2% -- --
Customer Y 14% 2% -- --
Customer X 12% 1% -- --
Customer W 7% 79% -- --
Vendor T -- -- 36% 0%
Vendor S -- -- 31% 0%
Vendor X -- -- 23% 0%
Customer A
The Company provided value-added paging service to Customer A, which was another
paging service provider in Jiangsu province. The paging service revenue was
collected on a semiannual basis pursuant to the terms of the service agreement
signed between the Company and Customer A. The outstanding receivable balance
was collected in full amount in 2003.
Customer W
Customer W actually is an installing agent who installed the Company's software
per a retailer's request on the retailer's mobile phones. The retailer in turn
sells its mobile phones at a premium. In terms of the signed agreement between
the Company and the installing agent, the installing agent should be responsible
for collection from the retailer and then pay the Company according to the terms
of the agreement on a semiannual basis. The outstanding balance for the year
ended December 31, 2003 was collected in full in April 2004.
NOTE 9 - SUBSEQUENT EVENT
On June 23, 2004, the Company entered into a securities exchange agreement with
Boulder Acquisitions, Inc. based on which Boulder Acquisitions, Inc. would issue
13,782,636 shares of its common stock in exchange for a 100% equity interest in
Sifang Holdings Co. Ltd. After this stock exchange transaction, the Company's
stockholders took a controlling position in Boulder Acquisitions, Inc.
Subsequent to the stock exchange transaction and in August 2004, Boulder
Acquisitions, Inc. changed its name to China Digital Services, Inc. ("China
Digital").
F-19
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
On June 23, 2004, Boulder Acquisitions Inc. (Boulder), a public reporting
company without any business or operations activities, issued 13,782,636 shares
of restricted, unregistered shares of common stock in exchange for 100% equity
interest in Sifang Holdings Co. Ltd. ("Sifang Holdings"), making Sifang Holdings
a wholly-owned subsidiary of Boulder at the opening of business on June 24,
2004. This stock exchange transaction resulted in the shareholders of Sifang
Holdings obtaining a majority voting interest in Boulder. Accounting principles
generally accepted 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, resulting in a reverse
acquisition. Accordingly, the stock exchange transaction has been accounted for
as recapitalization of Sifang Holdings.
The following unaudited pro forma combined financial statements give effect to
the aforementioned reverse acquisition based on the assumptions and adjustments
set forth in the accompanying notes to the unaudited pro forma combined
financial statements which management believes are reasonable. The following
unaudited pro forma financial statements and accompanying notes should be read
in conjunction with the audited historical financial statements and related
notes of Boulder Acquisitions, Inc. (subsequently named China Digital Services,
Inc.) and Sifang Holdings, which are included in this document.
The following unaudited pro forma combined balance sheet represents the combined
financial position of China Digital and Sifang Holdings as of March 31, 2004 as
if the reverse acquisition occurred on March 31, 2004. The unaudited pro forma
combined income statements give effect to the reverse acquisition of China
Digital by Sifang Holdings assuming that the reverse acquisition took place on
January 1, 2003.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have been achieved if the reverse acquisitions of China
Digital had been consummated as of the beginning of the period indicated, nor is
it necessarily indicative of the results of future operations.
F-20
China Digital Services, Inc.
(Formerly Boulder Acquisitions, Inc. and Successor of Sifang Holdings Co., Ltd.)
Pro Forma Balance Sheet (Unaudited)
March 31, 2004
Sifang China Digital Pro Forma
Holdings Services Pro Forma Combined
03/31/04 03/31/04 Adjustments 12/31/03
-------------------------------------------------------
Unaudited
ASSETS
Current assets:
Cash and cash equivalents 1,249,306 302,096 -- 1,551,402
Note (trade) and accounts receivable,
net of allowance for doubtful accounts
by $73,679 3,132,343 -- -- 3,132,343
Trade receivable from a related party 530,983 -- -- 530,983
Advances to employees, net of allowance
for doubtful accounts by $1,255 23,841 -- -- 23,841
Advances to vendors 665,742 -- -- 665,742
Inventories 285,661 -- -- 285,661
Deposits and prepaids 307,174 -- -- 307,174
Deferred tax assets 8,602 -- -- 8,602
Amount due from parent 962,875 -- -- 962,875
------------------------ ------------------------
Total current assets 7,166,527 302,096 -- 7,468,623
Property and equipment, net 1,320,952 -- -- 1,320,952
------------------------ ------------------------
Total assets 8,487,479 302,096 -- 8,789,575
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 340,812 -- -- 340,812
Deferred revenue 532,335 -- -- 532,335
Employee welfare payable 72,313 -- -- 72,313
VAT payable 187,245 -- -- 187,245
Other taxes payable 33,297 -- -- 33,297
Accrued liabilities 39,681 -- -- 39,681
------------------------ ------------------------
Total current liabilities 1,205,683 -- -- 1,205,683
Total liabilities 1,205,683 -- -- 1,205,683
Commitments
Stockholders' equity:
Common stock - $0.001 par value,
160,000,000 shares authorized,
1,453,983 shares issued and
outstanding -- 1,454 (1) 13,783 15,237
Additional paid-in capital -- 3,292,452 (1) 1,436,217 4,728,669
Contributed capital 1,450,000 -- (1) (1,450,000) --
Retained earnings 5,832,114 (2,991,810) 2,840,304
Accumulated other comprehensive income
(loss) - translation adjustments (318) -- -- (318)
------------------------ ------------------------
Total stockholder's equity 7,281,796 302,096 -- 7,583,892
Total liabilities and stockholders' equity 8,487,479 302,096 -- 8,789,575
======================== ========================
(1) Reclassify into common stock and additional paid-in capital to reflect newly
issued 13,782,636 shares of common stock.
F-21
China Digital Services, Inc.
(Formerly Boulder Acquisitions, Inc. and Successor of Sifang Holdings Co., Ltd.)
Pro Forma Combined Income Statement (Unaudited)
For the Year Ended December 31, 2003
Sifang China Digital Pro Forma
Holdings Services Pro Forma Combined
12/31/03 12/31/03 Adjustments 12/31/03
-------------------------------------------------------------
Unaudited
Revenues:
Products sales 13,529,279 -- 13,529,279
Service revenue, net 3,503,099 -- 3,503,099
--------------------------- ------------
Total revenues 17,032,378 -- 17,032,378
Cost of goods sold 12,424,454 -- 12,424,454
Cost of service 910,440 -- 910,440
--------------------------- ------------
Gross profit 3,697,484 -- 3,697,484
Operating expenses:
Selling 153,437 -- 153,437
General and administrative 391,930 -- 391,930
Loss on disposal of fixed assets 5,361 -- 5,361
--------------------------- ------------
Total operating expenses 550,728 -- 550,728
Income from operations 3,146,756 -- 3,146,756
Interest expense (12,082) 5 (12,077)
--------------------------- ------------
Income before income taxes 3,134,674 5 3,134,679
Income tax provision (benefit) 246,694 -- 246,694
--------------------------- ------------
Net income 2,887,980 5 2,887,985
=========================== ============
Weighted average number of common
shares outstanding -- 367,278 (1) 13,782,636 14,149,914
-------------------------- ------------
Earnings per shares - basic and diluted -- 0.20
============ ============
(1) See the explanation on the pro forma balance sheet.
China Digital Services, Inc.
(Formerly Boulder Acquisitions, Inc. and Successor of Sifang Holdings Co., Ltd.)
Pro Forma Combined Income Statement (Unaudited)
For the Three Months Ended March 31, 2004
Sifang China Digital Pro Forma Pro Forma
Holdings Services Adjustments Combined
03/31/04 03/31/04 03/31/04
-------------------------------------------------------------
Unaudited
Revenues:
Products sales 2,126,010 -- 2,126,010
Products sales to a related party 1,775,000 1,775,000
Service revenue, net 850,279 -- 850,279
-------------------------- -----------
Total revenues 4,751,289 -- 4,751,289
Cost of goods sold 3,679,479 -- 3,679,479
Cost of service 227,773 -- 227,773
-------------------------- -----------
Gross profit 844,037 -- 844,037
Operating expenses:
Selling 36,236 -- 36,236
General and administrative 160,815 30,000 190,815
-------------------------- -----------
Total operating expenses 197,051 30,000 227,051
Income from operations 646,986 (30,000) 616,986
Interest income (expense) -- 164 164
-------------------------- -----------
Income before income taxes 646,986 (29,836) 617,150
Income tax provision (benefit) 48,524 -- 48,524
-------------------------- -----------
Net income 598,462 (29,836) 568,626
========================== ===========
Weighted average number of common shares
outstanding -- 814,035 (1) 13,782,636 14,596,671
-------------------------- -----------
Earnings per shares - basic and diluted (0.04) 0.04
=========== ===========
(1) See the explanation on the pro forma balance sheet.
F-23