As filed with the Securities and Exchange Commission on January 4, 2005
Registration No. 333-120431
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
Form SB - 2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
CHINA DIGITAL WIRELESS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 90-0093373
(State or other jurisdiction (IRS Employer incorporation or
of organization) identification No.)
7374
(Primary Standard Industrial
Classification Code Number)
429 Guangdong Road
Shanghai 200001
People's Republic of China
Ph: (86-21) 6336-8686
--------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
The Corporation Trust Company of Nevada
6100 Neil Road, Suite 500
Reno, Nevada 89511
Ph: (775) 688-3061
--------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
Jackson Walker L.L.P.
Attention: George Diamond, Esq.
901 Main Street, Suite 6000
Dallas, Texas 75202
Ph: (214) 953-6000
Fax: (214) 661-6618
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
Subject to completion dated January 4, 2005
2,737,381 Shares
CHINA DIGITAL WIRELESS, INC.
Common Stock
---------------------------
This is an offering of 2,737,381 shares of common stock by the selling
stockholders. The shares are being registered to permit public secondary trading
of the shares that are being offered by the selling stockholders named in this
prospectus. We will not receive any of the proceeds from the sale of the shares.
The selling stockholders may, but are not obligated to, offer all or
part of their shares for resale from time to time through public or private
transactions, at either prevailing market prices or at privately negotiated
prices.
Our common stock is currently quoted on the NASD's Over-the-Counter
Bulletin Board under the symbol "CHDW." On January 3, 2005, the last reported
sales price on our common stock was $3.76 per share.
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 6 to read about factors you should consider before buying
shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ___________, 2005.
---------------------------
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this document or
any other document to which we refer you. Neither we nor the selling
stockholders have authorized anyone to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. Neither we nor the selling stockholders are making an offer to
sell these securities in a jurisdiction where the offer or sale is not
permitted. The information contained in this document is current only as of its
date, regardless of the time of delivery of this prospectus or of any sales of
shares of common stock. Our business, financial condition, results of operations
and prospects may have changed since that date.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell the securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................3
CHINA DIGITAL WIRELESS, INC....................................................3
THE OFFERING...................................................................5
RISK FACTORS...................................................................6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.............................19
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY.....20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION.....................21
BUSINESS......................................................................35
DIRECTORS AND EXECUTIVE OFFICERS..............................................48
PRINCIPAL STOCKHOLDERS........................................................51
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..........................52
DESCRIPTION OF OUR CAPITAL STOCK..............................................53
SELLING STOCKHOLDERS..........................................................54
SHARES ELIGIBLE FOR FUTURE SALE...............................................55
PLAN OF DISTRIBUTION..........................................................55
INDEPENDENT PUBLIC ACCOUNTANTS................................................56
LEGAL MATTERS.................................................................56
EXPERTS.......................................................................56
INTERESTS OF NAMED EXPERTS AND COUNSEL........................................56
WHERE YOU CAN FIND MORE INFORMATION...........................................56
FINANCIAL STATEMENTS
PART II.....................................................................II-1
INFORMATION NOT REQUIRED IN PROSPECTUS......................................II-1
RECENT SALES OF UNREGISTERED SECURITIES.....................................II-1
EXHIBITS....................................................................II-2
UNDERTAKINGS................................................................II-3
SIGNATURES..................................................................II-5
2
PROSPECTUS SUMMARY
This summary highlights selected information about us and the offering
that is contained elsewhere in this prospectus. You should read the entire
prospectus before making an investment decision, especially the information
presented under the heading "Risk Factors" and the financial statements and
related notes included elsewhere in this prospectus, as well as the other
documents to which we refer you. Except as otherwise indicated by the context,
references in this prospectus to "we," "us," "our," or the "company" are to the
combined business of China Digital Wireless, Inc. and its wholly-owned direct
subsidiary, Sifang Holdings Company Limited, or Sifang Holdings, and its
wholly-owned subsidiary, Shanghai TCH Data Technology Co., LTD, or TCH, and in
each case do not include the selling stockholders.
CHINA DIGITAL WIRELESS, INC.
Our Business
Value-added Information Services. We render value-added information
services in China by purchasing content from third-party providers and
reformatting that content. Our value-added information services enable wireless
receiver (mobile phone and pager) users in China to access financial information
and various entertainment-related services. We contract with our affiliated
wireless service providers to transmit the reformatted content to customers of
China's various network operators.
The primary focus of our value-added information services is on
providing wireless receiver users in China with access to financial information.
We derive the vast majority of our value-added information services revenue from
our financial information business. Our financial information software, Sifang
Gutong, allows our customers to access stock and currency exchange information
and execute stock trades.
Leveraging our experience and understanding of the wireless value-added
services market in China, we purchase and reformat content, applications and
technologies that we believe are popular in the Chinese wireless market. To
further enhance and differentiate our services, we have entered into, and will
continue to actively pursue, collaborative relationships with third parties to
customize, market and provide access to their content through various wireless
technologies to Chinese consumers. In addition, all of our services are promoted
by our sales force and supported by our customer service team, each of which is
strategically based in Shanghai.
We began providing our entertainment-related services, including icons,
screen savers, multiplayer games, Western horoscopes, jokes, and sports and
entertainment news during the latter part of 2003. These services are ancillary
to our financial information services and they represent only a small percentage
of our value-added information services revenue at the present time.
We conduct our business in China solely through our wholly-owned
subsidiary, Sifang Holdings, and its wholly-owned subsidiary, TCH. In order to
meet ownership requirements under Chinese law that restrict us, as a foreign
company, from operating in certain industries such as value-added
telecommunication and Internet services, we have entered into information
service and cooperation agreements with two of our affiliates that are
incorporated in the People's Republic of China: Shanghai Sifang Information
Technology Co., Ltd., or Sifang Information, and Shanghai Tianci Industrial
Group Co., Ltd., or Tianci.
The original stockholder structure of Sifang Holdings was identical to
the current stockholder structure of Sifang Information, and each of Sifang
Information and Tianci are owned approximately 69% through direct and indirect
ownership by Tai Caihua, our president and the chairman of our board of
directors. We hold 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, Tianci and TCH, respectively.
3
Distribution. We primarily distribute nine different SAMSUNG
Electronics Co., Ltd., or Samsung, mobile phone models in the region surrounding
Shanghai, China. Six of the Samsung models we distribute are compatible with the
CDMA network and three are compatible with the GSM network. We plan to
pre-install the end-user portion of our Sifang Gutong software in all of the
Samsung mobile phones we distribute, and market our stock information, stock
trading, and currency exchange services by placing brochures touting those
services in the packaging of those Samsung mobile phones before we distribute
the phones to retailers. We believe this process will increase name recognition
of our financial information, stock trading, and currency exchange services with
wireless receiver users.
There are three main first-tier wholesalers of Samsung phones in China:
Shanghai Taili Communication Equipment Co., Ltd., Shenzhen Tianyin Communication
Development Co., Ltd., and Guangzhou Yingtai Data Power Technology Co., Ltd.
These first-tier wholesalers contract, through local branches, with
sub-wholesalers to distribute each Samsung model in a defined area. We have
contracts with Shanghai branch offices of the three main first-tier wholesalers
on whom we rely, making us a sub-wholesaler distributor of nine Samsung mobile
phone models in the Shanghai region. We sell approximately 52% of our mobile
phones to three retailers.
Our Corporate Information
We originally began operations as a Colorado corporation known as
Boulder Brewing Company, or Boulder Brewing. We were incorporated in Colorado on
May 8, 1980 and operated as a microbrewery of various beers. Boulder Brewing was
unable to become profitable within any segment of its core business, became
illiquid, and was forced to divest itself of all of its assets. Boulder Brewing
became dormant without any operations or assets in the second quarter of 1990.
In September 2001, Boulder Brewing changed its state of incorporation
from Colorado to Nevada and changed its name to Boulder Acquisitions, Inc., or
Boulder Acquisitions. The articles of incorporation and bylaws of the Nevada
corporation became the articles of incorporation and bylaws of the surviving
corporation. From the date of reincorporation until June 23, 2004 Boulder
Acquisitions had no material operations or assets.
On June 23, 2004, we completed a stock exchange transaction with the
stockholders of Sifang Holdings. The exchange was consummated under Nevada and
Cayman Islands law pursuant to the terms of a Securities Exchange Agreement
dated effective as of June 23, 2004 by and among Boulder Acquisitions, Sifang
Holdings and the stockholders of Sifang Holdings. Pursuant to the Securities
Exchange Agreement, we issued 13,782,636 shares of our common stock, par value
$0.001 per share, to the stockholders of Sifang Holdings, representing
approximately 89.7% of our post-exchange issued and outstanding common stock, in
exchange for 100% of the outstanding capital stock of Sifang Holdings. We
presently carry on the business of Sifang Holdings' wholly-owned subsidiary,
Shanghai TCH Data Technology Co., Ltd., a Chinese corporation, or TCH.
Effective August 6, 2004, we changed our name from Boulder
Acquisitions, Inc. to China Digital Wireless, Inc. The name change was
undertaken in order to provide us with a name that is more indicative of the
business operations we conduct.
Our corporate headquarters is located at 429 Guangdong Road, Shanghai,
200001, Peoples Republic of China. Our telephone number is (86-21) 6336-8686.
4
THE OFFERING
Common stock outstanding prior to this offering.... 17,018,692 shares
Common stock offered by us......................... 0 shares
Common stock offered by the selling stockholders... 2,737,381 shares
Total shares of common stock offered............... 2,737,381 shares
Common stock to be outstanding after the offering.. 17,018,692 shares
Risk factors....................................... See "Risk Factors" and other
information included in this
prospectus for a discussion
of factors you should
consider before deciding to
invest in shares of our
common stock.
5
RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the following risks and the other information set
forth elsewhere in this prospectus, including our financial statements and
related notes, before you decide to purchase shares of our common stock. If any
of these risks occur, our business, financial condition and results of
operations could be adversely affected. As a result, the trading price of our
common stock could decline, perhaps significantly, and you could lose part or
all of your investment.
Risks Related to Our Business
Risks Related to Our Wireless Value-Added Information Services Business
We depend upon contractual arrangements with our affiliated value-added mobile
phone service providers, Sifang Information and Tianci, for the success of our
business. These arrangements may not be as effective in providing operational
control as direct ownership of these businesses and may be difficult to enforce.
Because we conduct our business only in China, and because we are
restricted by the Chinese government from owning telecommunications or Internet
operations in China, we depend on our affiliated value-added mobile phone
service providers, Sifang Information and Tianci, in which we have no direct
ownership interest, but with which we have entered into information service and
cooperation agreements, to provide those services to mobile phone users in China
through contractual agreements with the mobile operators, China Mobile and China
Unicom. These arrangements may not be as effective in providing control over our
value-added information services to mobile phone users in China as would be
direct ownership of these businesses. For example, Sifang Information or Tianci
could fail to take actions required to operate our business, such as entering
into service contracts with China Mobile or China Unicom. Moreover, a portion of
the fees for our services are paid by the mobile operators directly to Sifang
Information and Tianci, which are then obligated to transfer all of those fees
to us, in return for a small fee. If Sifang Information or Tianci fails to
perform their obligations under these agreements, we may have to rely on legal
remedies under Chinese law, which we cannot assure you would be effective or
sufficient.
In the opinion of our Chinese counsel, Grandall Legal Group (Shanghai),
Sifang Information and Tianci each possess such licenses, permits, certificates,
authorities and approvals, issued by appropriate governmental agencies or bodies
in the People's Republic of China, as are necessary to conduct its business as
presently conducted as well as to perform its obligations under any contracts
between it and China Mobile and China Unicom, respectively. In addition, to the
best knowledge of Grandall Legal Group (Shanghai), TCH is not in breach of or in
default under any laws of the People's Republic of China or any approval,
consent, waiver, authorization, exemption, permission, endorsement or license
granted by any People's Republic of China governmental agencies. There are,
however, substantial uncertainties regarding the interpretation and application
of current and future Chinese laws and regulations, as discussed below.
We depend on one software developer for a significant portion of our software
development, as well as for important marketing relationships.
We rely on Shanghai Chengao Industrial Co., Ltd., or Chengao, to
develop a significant portion of our software, including our Sifang Gutong
software. We also rely on Chengao to provide us with an important marketing
relationship regarding the mobile phone version of our Sifang Gutong software.
If we lose our relationship with Chengao, we could have a difficult time finding
a suitable replacement in the short term.
6
Our corporate structure could be deemed to be in violation of current or future
Chinese laws and regulations which could adversely affect our ability to operate
our business effectively or at all.
In connection with China's entry into the World Trade Organization, or
WTO, foreign investment in telecommunications and Internet services in China was
liberalized to allow for 30.0% foreign ownership in value-added
telecommunication and Internet services in 2002, 49.0% in 2003, and 50.0%
thereafter. In order to meet these ownership requirements, we have entered into
information service and cooperation agreements with Sifang Information and
Tianci. We do not have any direct ownership interest in Sifang Information or
Tianci. The original stockholder structure of Sifang Holdings was identical to
the current stockholder structure of Sifang Information, and each of Sifang
Information and Tianci are beneficially owned 69% by Tai Caihua, our president
and the chairman of our board of directors. It is possible that the relevant
Chinese authorities could, at any time, assert that any portion or all of TCH's,
Sifang Information's, or Tianci's existing or future ownership structure and
businesses violate existing or future Chinese laws, regulations or policies. It
is also possible that the new laws or regulations governing the
telecommunication or Internet sectors in China that have been adopted or may be
adopted in the future will prohibit or restrict foreign investment in, or other
aspects of, TCH's, Sifang Information's or Tianci's current or proposed
businesses and operations. In addition, these new laws and regulations may be
retroactively applied. In any such case, we could be required to restructure our
operations, which could adversely affect our ability to operate our business
effectively or at all.
We depend on China Mobile and China Unicom for delivery of our value-added
information services to mobile phone users in China, and the termination or
alteration of Sifang Information's and Tianci's various contracts with either of
them or their provincial or local affiliates could materially and adversely
impact our business.
Our affiliated value-added mobile phone service providers, Sifang
Information and Tianci, contract with the two principal mobile phone operators
in China, China Mobile and China Unicom, to offer our wireless value-added
information services to mobile phone users through these mobile phone operators,
which service nearly all of China's approximately 282.2 million mobile phone
subscribers. Given their dominant market position, our affiliated value-added
mobile phone service providers' negotiating leverage with these operators is
limited. If our affiliated value-added mobile phone service providers' various
contracts with either operator are terminated or adversely altered, it may be
impossible for our affiliated value-added mobile phone service providers to find
appropriate replacement operators with the requisite licenses and permits,
infrastructure and customer base to offer our services, and our business would
be significantly impaired.
Our value-added information services are provided to mobile phone users
in China pursuant to contracts with Sifang Information and Tianci have with
China Mobile and China Unicom and their provincial or local affiliates. Each of
these contracts is non-exclusive, and has a limited term (generally one year).
Our affiliates usually renew these contracts or enter into new ones when the
prior contracts expire, but on occasion the renewal or new contract can be
delayed by periods of one month or more. The terms of these contracts vary, but
the operators are generally entitled to terminate them in advance for a variety
of reasons or, in some cases, for no reason in their discretion. For example,
several of our affiliates' contracts with the mobile operators can generally be
terminated if:
o our affiliate fails to achieve performance standards which are
established by the applicable operator from time to time,
o our affiliate breaches its obligations under the contracts, which
include, in many cases, the obligation not to deliver content that
violates the operator's policies and applicable law,
o the operator receives high levels of customer complaints about our
affiliate's services, or
o the operator sends written notice to our affiliate that it wishes to
terminate the contract at the end of the applicable notice period.
Our affiliates may also be compelled to alter their arrangements with
these mobile operators in ways which adversely affect our business. China Mobile
and China Unicom have unilaterally changed their policies as applied to
third-party service providers in the past, and may do so again in the future. We
7
may not be able to adequately respond to negative developments in the
contractual relationships between our affiliates and China Mobile or China
Unicom in the future because we do not have a contractual relationship with
China Mobile or China Unicom.
Our business could be adversely affected if China Mobile or China Unicom or both
begin providing their own wireless value-added services.
Our wireless value-added information services business may be adversely
affected if China Mobile or China Unicom or both decide to begin providing their
own wireless value-added services to mobile phone users. In that case, we would
face enhanced competition, and our services could be fully or partially denied
access to their networks.
We depend in part on China Mobile and China Unicom to maintain accurate records
and their willingness to pay our affiliated value-added wireless service
providers.
We depend in part on China Mobile and China Unicom to maintain accurate
records of the fees paid by mobile phone users and their willingness to pay our
affiliated value-added wireless service providers. Specifically, the mobile
operators provide our affiliates with monthly statements that do not provide
itemized information regarding which of our services are being paid for. As a
result, monthly statements that our affiliates receive and provide to us from
the mobile operators cannot be reconciled to our internal records. In addition,
we have only limited means to independently verify the information provided to
us by our affiliates in this regard because we do not have access to the mobile
operators' internal records. Our business and results of operation could be
adversely affected if these mobile phone companies miscalculate the revenue
generated from our services and our affiliates' portion of that revenue, or
refuse to pay our affiliates altogether.
Our revenues and cost of services are affected by billing and transmission
failures which are often beyond our control.
Our affiliates do not collect fees for our services owed to them by
China Mobile and China Unicom in a number of circumstances, including if:
o the delivery of our service to a customer is prevented because his or
her phone is turned off for an extended period of time, the customer's
prepaid phone card has run out of value or the customer has ceased to
be a customer of the applicable operator,
o China Mobile or China Unicom experiences technical problems with their
networks which prevent the delivery of our services to the customer,
o we experience technical problems with our technology platform that
prevent delivery of our services,
o our affiliates experience technical problems with their technology
platforms that prevent delivery of our services, or
o the customer refuses to pay for our service due to quality or other
problems.
These situations are known in the industry as billing and transmission
failures, and we do not recognize any revenue for services which are
characterized as billing and transmission failures. The failure rate can vary
among the operators, and by province, and also has fluctuated significantly in
the past. If actual billing and transmission failures exceed our estimates, our
revenues could be materially adversely affected.
Because China Mobile and China Unicom do not supply our affiliated value-added
mobile phone service providers with revenue and transmission information on a
service-by-service basis, we can only estimate our actual gross revenue and our
cost of services by service type, and as a result, which of our services are or
may be profitable, all of which make it difficult to analyze the factors
affecting our financial performance.
China Mobile's and China Unicom's monthly statements to our affiliated
value-added service providers regarding the services provided through their
networks currently do not contain revenue and billing and transmission failure
8
information on a service-by-service basis. Although we maintain our own records
reporting the services provided, we can only estimate our actual gross revenue
and cost of services by service type in this business because we are unable to
confirm which services were transmitted but resulted in billing and transmission
failures. As a result, we are not able to definitively calculate and monitor
service-by-service revenue, margins and other financial information, such as
average revenue per user by service and total revenue per user by service, and
also cannot definitively determine which of our services are or may be
profitable.
China Mobile and China Unicom may impose higher service or network fees on our
affiliated value-added service providers if we are unable to satisfy customer
usage and other performance criteria.
Fees for our wireless value-added information services are charged on a
monthly subscription or per use basis. Based on our contractual arrangement and
those of our wireless value-added service providers, we rely on China Mobile and
China Unicom to bill and collect fees for our services from mobile phone users.
China Mobile and China Unicom generally charge our affiliated
value-added service providers service fees of 15% and 30% of the revenues
generated by their services, respectively. To the extent that the number of
messages sent by Sifang Information over China Mobile's network exceeds the
number of messages their customers send to it, Sifang Information must pay per
message network fees, which decrease in several provinces as the volume of
customer usage of our services increases. The number of messages sent by Sifang
Information will exceed those sent by end-users, for example, if a user sends
Sifang Information a single message to order a game but Sifang Information in
turn must send that user several messages to confirm his or her order and
deliver the game itself. Tianci's service fees owed to China Unicom could also
rise if Tianci fails to meet certain customer usage, revenue and other
performance criteria. We cannot be certain that our affiliates will be able to
continue to satisfy these criteria in the future or that the mobile operators
will keep the criteria at their current levels. Any increase in China Mobile's
or China Unicom's network fees and service charges could reduce our gross
margins.
China Mobile and China Unicom may terminate their relationships with our
affiliates if our affiliates fail to achieve minimum customer usage, revenue and
other criteria.
Our business could be adversely affected if our affiliated value-added
mobile phone service providers fail to achieve minimum customer usage, revenue
and other criteria imposed or revised by China Mobile and China Unicom at their
discretion from time to time. China Mobile and China Unicom, through their
national and local offices, have historically preferred to work only with a
small group of the best performing wireless value-added service providers, based
upon the uniqueness of the service offered by each provider, total number of
users, usage and revenue generated in the applicable province or municipality,
the rate of customer complaints, and marketing expenditures in the applicable
province or municipality.
The services our affiliated value-added mobile phone service providers offer and
the prices they charge are subject to approval by China Mobile and China Unicom,
and if requested approvals are not granted in a timely manner, our business
could be adversely affected.
Our affiliated value-added mobile phone service providers must obtain
approval from China Mobile and China Unicom with respect to each service that
they propose to offer to their customers and the pricing for each such service.
In addition, any changes in the pricing of our affiliates' existing services
must be approved in advance by these operators. There can be no assurance that
such approvals will be granted in a timely manner or at all. Moreover, under
some of our affiliates' contracts with the operators, prices cannot be changed
more than once every six months and prices must be within fixed parameters,
depending on the service. Any failure of our affiliates to obtain, or any delay
in obtaining, such approvals could place us at a competitive disadvantage in the
market and adversely affect our business.
9
We operate in a rapidly evolving industry, which makes it difficult for
investors to evaluate our business.
We began commercially offering wireless value-added information
services to mobile phone and pager users in China in January 2002, and since
that time, the technologies and services used in the wireless value-added
information services industry in China have developed rapidly. As a result of
this rapid and continual change in the industry, the prospects of our
value-added information service business should be considered in light of the
risks and difficulties frequently encountered by businesses in an early stage of
development. These risks include our ability to:
o attract and retain users for our wireless value-added information
services,
o expand the content and services that we offer and, in particular,
develop and aggregate innovative new content and service offerings,
o respond effectively to rapidly evolving competitive and market dynamics
and address the effects of mergers and acquisitions among our
competitors,
o build relationships with strategic partners, and
o increase awareness of our brand and user loyalty.
Due to these factors, there can be no certainty that we will maintain
or increase our current share of the highly competitive wireless value-added
information services market in which we operate.
The success of much of our wireless value-added information services is
significantly dependent on our ability to obtain and reformat desirable content
and technology from third parties.
We obtain much of our content, including financial information, games,
logos, music, news and other information, from third parties. Furthermore, we
expect that we will develop and purchase technology in connection with our
development of next generation services such as MMS, JAVA and BREW. As the
market for wireless value-added information services develops, content and
technology providers may attempt to increase their profits from distribution
arrangements by demanding greater fees or a share of revenues, which would
adversely affect our financial performance. Many of our arrangements with
content and technology providers are non-exclusive, have a term of one year, and
are subject to renewal. If our competitors are able to obtain such content in a
similar or superior manner or to develop, purchase or license the same
technologies, it could adversely affect the popularity of our services and our
negotiating leverage with third-party providers.
If we fail to establish and maintain economically attractive
relationships with content and technology providers and to thereafter
successfully reformat their products, we may not be able to attract and retain
customers or maintain or improve our financial performance.
We depend on our Sifang Gutong software continuing to be compatible with new
mobile phone models.
There can be no assurance that our Sifang Gutong software will be
compatible with new mobile phones developed by manufacturers such as Samsung. If
the software is no longer compatible, we will be forced to engage Chengao or an
alternative software developer to develop software that is compatible with the
new mobile phones or we will have to develop the software ourselves. If we are
unable to either engage a software developer or develop software in house that
is compatible with new mobile phones, we will lose a significant portion of our
value-added information services revenue, including all of the pre-charged
subscription fee revenues we receive pursuant to our information services and
cooperation agreement among us, Chengao, and Sifang Information.
We face intense competition.
The Chinese market for wireless value-added services is intensely
competitive. We believe there are more than 800 service providers (including the
three groups discussed below) as of June 30, 2004. We compete directly or
indirectly with three groups of wireless value-added service providers in China:
10
o portal service providers, which have established expertise in Internet
content and have subsequently branched into mobile space. The portals
serve as content aggregators offering a variety of wireless value-added
services,
o dedicated service providers, whose businesses focus on offering a
variety of wireless content directly to mobile phone users, and
o niche service providers, which focus primarily on a particular market
segment or application that often builds on a pre-existing sector
competency.
We have faced direct or indirect competition from all three groups
since our entry into this market. Moreover, there are low barriers to entry for
new competitors in the wireless value-added services market. As a result, our
existing or potential competitors may in the future achieve greater market
acceptance and gain additional market share, which in turn could reduce our
revenues.
Most of our value-added information services revenues are derived from the
Shanghai municipal area and surrounding provinces, and the termination or
alteration of our affiliates' contracts with the mobile operators, or a general
economic downturn in those areas, could have a particularly adverse effect on
our business.
Per capita income levels and mobile phone penetration rates (i.e., the
number of mobile subscribers divided by the population of China) in China are
generally higher in the coastal and southern provinces, and most of our revenues
derive from those areas, including the municipality of Shanghai and the
provinces of Beijing and Jiangsu.
We depend on key personnel for the success of our business. Our business may be
severely disrupted if we lose the services of our key executives and employees
or fail to add new senior and middle managers to our management.
Our future success is heavily dependent upon the continued service of
our key executives, particularly Tai Caihua, our president and chairman of our
board of directors, Fu Sixing, our chief executive officer, Lu Qin, our chief
financial officer, and Huang Tianqi, our chief technology officer. Our future
success is also dependent upon our ability to attract and retain qualified
senior and middle managers to our management team. If one or more of our current
or future key executives and employees are unable or unwilling to continue in
their present positions, we may not be able to easily replace them, and our
business may be severely disrupted. In addition, if any of these key executives
or employees joins a competitor or forms a competing company, we could lose
customers and suppliers and incur additional expenses to recruit and train
personnel. Each of our executive officers has entered into non-competition
agreements with TCH. We do not maintain key-man life insurance for any of our
key executives. Management will spend approximately 30% of its time managing
Sifang Information.
We also rely on a number of key technology staff for the operation of
our company. Given the competitive nature of our industry, the risk of key
technology staff leaving our company is high and could disrupt our operations.
Rapid growth and a rapidly changing operating environment strain our limited
resources.
As our value-added information services customer base increases, we
will need to increase our investment in our technology infrastructure,
facilities and other areas of operations, in particular our product development,
customer service and sales and marketing departments, which are important to our
future success. If we are unable to manage our growth and expansion effectively,
the quality of our services and our customer support could deteriorate and our
business may suffer. Our future success will depend on, among other things, our
ability to:
o develop and quickly introduce new services, adapt our existing services
and maintain and improve the quality of all of our services,
particularly as new mobile technologies such as 3G are introduced,
11
o expand the percentage of our value-added information services revenues
which are recurring and are derived from monthly subscription based
services,
o continue to enter into and maintain relationships with desirable
content providers,
o continue training, motivating and retaining our existing employees and
attract and integrate new employees, including our senior management,
most of whom have been with our company for less than one year,
o develop and improve our operational, financial, accounting and other
internal systems and controls, and
o maintain adequate controls and procedures to ensure that our periodic
public disclosure under applicable laws, including U.S. securities
laws, is complete and accurate.
Any failures of the mobile telecommunications network, the Internet or our
technology platform may reduce use of our services.
Both the continual accessibility of China Mobile's and China Unicom's
mobile networks and the performance and reliability of China's Internet
infrastructure are critical to our ability to attract and retain our value-added
information services customers . Moreover, our business depends on our ability
to maintain the satisfactory performance, reliability and availability of our
technology platform. The servers which constitute the principal system hardware
for our operations are located in one location in Shanghai. Any server
interruptions, break-downs or system failures, including failures caused by
sustained power shutdowns, floods or fire causing loss or corruption of data or
malfunctions of software or hardware equipment, or other events outside our
control that could result in a sustained shutdown of all or a material portion
of the mobile networks, the Internet or our technology platform, could adversely
impact our ability to provide our services to our value-added information
services customers and decrease our revenues.
Computer viruses and hacking may cause delays or interruptions on our systems
and may reduce use of our services and harm our reputation.
Computer viruses and hacking may cause delays or other service
interruptions on our systems. "Hacking" involves efforts to gain unauthorized
access to information or systems or to cause intentional malfunctions or loss or
corruption of data, software, hardware or other computer equipment. In addition,
the inadvertent transmission of computer viruses could expose us to a material
risk of loss or litigation and possible liability. We may be required to expend
significant capital and other resources to protect our systems against the
threat of such computer viruses and hacking and to rectify any damage to our
systems. Moreover, if a computer virus or hacking which affects our systems is
highly publicized, our reputation could be materially damaged and usage of our
services may decrease.
We may be held liable for information we purchase and reformat.
We may face liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the reformatted content to
which we provide access through our wireless value-added information services.
For example, SMS news updates provided by us could possibly be deemed to contain
state secrets in violation of applicable Chinese law. In addition, third parties
could assert claims against us for losses incurred in reliance on information
distributed by us. We may incur significant costs in investigating and defending
these claims, even if they do not result in liability.
We may not be able to adequately protect our intellectual property, and we may
be exposed to infringement claims by third parties.
We rely on contractual restrictions on disclosure to protect our
intellectual property rights. Monitoring unauthorized use of our information
services is difficult and costly, and we cannot be certain that the steps we
take will effectively prevent misappropriation of our technology and content.
Our management may determine in the future to make application for copyright,
trademark or trade secret protection if management determines that such
protection would be beneficial and cost-effective.
12
From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and
diversion of our resources. In addition, third parties may initiate litigation
against us for alleged infringement of their proprietary rights. In the event of
a successful claim of infringement and our failure or inability to develop
non-infringing technology or content or license the infringed or similar
technology or content on a timely basis, our business could suffer. Moreover,
even if we are able to license the infringed or similar technology or content,
license fees that we pay to licensors could be substantial or uneconomical.
We have limited business insurance coverage.
The insurance industry in China is still at an early stage of
development. Insurance companies in China offer limited business insurance
products, and do not, to our knowledge, offer business liability insurance. As a
result, we do not have any business liability insurance coverage for our
operations. Moreover, while business disruption insurance is available, we have
determined that the risks of disruption and cost of the insurance are such that
we do not require it at this time. Any business disruption, litigation or
natural disaster might result in substantial costs and diversion of resources.
Risks Related to the Wireless Value-Added Services Industry
Our ability to generate revenues could suffer if the Chinese market for wireless
value-added services does not develop as anticipated.
The wireless value-added services market in China has evolved rapidly
over the last four years, with the introduction of new services, development of
consumer preferences, market entry by new competitors and adaptation of
strategies by existing competitors. We expect each of these trends to continue,
and we must continue to adapt our strategy to successfully compete in our
market.
In particular, we currently offer a wide range of wireless value-added
information services for mobile phones using 2.5G technologies. There can be no
assurance, however, that these 2.5G technologies and any services compatible
with them will be accepted by consumers or promoted by the mobile operators.
Moreover, there are numerous other technologies in varying stages of
development, such as third generation mobile technologies, which could radically
alter or eliminate the market for SMS or 2.5G services.
Accordingly, it is extremely difficult to accurately predict consumer
acceptance and demand for various existing and potential new offerings and
services, and the future size, composition and growth of this market.
Furthermore, given the limited history and rapidly evolving nature of our
market, we cannot predict the price that wireless subscribers will be willing to
pay for our services or the services of our affiliated value-added service
providers or whether subscribers will have concerns about security, reliability,
cost and quality of service associated with wireless services. If acceptance of
our wireless value-added information services is different than anticipated, our
ability to maintain or increase our revenue and profits could be materially and
adversely affected.
The popularity of our services which operate with next generation technology
standards are necessarily dependent on the market penetration of mobile phones
that are compatible with those standards, which is beyond our control.
Mobile phone users can access our MMS, WAP, JAVA, BREW and other
services which operate with next generation technology standards only if they
purchase mobile phones that are compatible with those standards. In particular,
mobile phones that are 2.5G-compatible have historically been significantly more
expensive in China than mobile phones using older technology such as GSM.
Although the prices of 2.5G-compatible mobile phones have been dropping rapidly
in recent quarters, we cannot be certain whether this trend will continue or the
extent to which existing users will be willing to upgrade their mobile phones to
obtain the latest technology. The pricing, marketing and other factors which
affect the sales of more sophisticated mobile phones are all outside of our
control, and weak sales of mobile phones for which we have developed services
could adversely affect our business.
13
The telecommunication laws and regulations in China are evolving and subject to
interpretation and will likely change in the near future. If we are found to be
in violation of current or future Chinese laws or regulations, we could be
subject to severe penalties.
Although wireless value-added services are subject to general
regulations regarding telecommunication services, we believe that currently
there are no Chinese laws at the national level explicitly governing wireless
value-added services, such as our services related to MMS, WAP, JAVA, and BREW,
and no Chinese government authority has been specifically designated to regulate
these services. Many providers of wireless value-added services have obtained
various value-added telecommunication services licenses, such as the licenses
possessed by our Chinese affiliates, Sifang Information and Tianci. These
value-added telecommunication licenses were issued by the local Shanghai
Municipal Telecommunications Administration Bureau, and may not be sufficient to
offer wireless value-added services on a national basis. Sifang Information and
Tianci are in the process of applying with the Ministry of Information
Industries for an inter-provincial value-added telecommunication license in
accordance with the Ministry's general regulations regarding telecommunication
services. However, we cannot predict whether either will be granted that
license. Moreover, we cannot be certain that any local or national value-added
telecommunication license requirements will not conflict with one another or
that any given license will be deemed sufficient by the relevant governmental
authorities for the provision of this category of service. It is also possible
that new national legislation might be adopted to regulate such services.
If we or our affiliates are found to be in violation of any existing or
future Chinese laws or regulations regarding wireless value-added services or
Internet access, the relevant Chinese authorities have the power to, among other
things:
o levy fines;
o confiscate our income or the income of our affiliated value-added
service providers;
o revoke our business license or the business licenses of our affiliated
value-added service providers;
o shut down our servers or the servers of our affiliated value-added
service providers or block any Web sites that we or our affiliated
value-added service providers may operate;
o require us to discontinue any portion or all of our wireless
value-added information services business; or
o require our affiliated value-added service providers to discontinue any
portion or all of their wireless value-added services business.
The Chinese government, China Mobile or China Unicom may prevent us from
distributing, and we may be subject to liability for, content that any of them
believe is inappropriate.
China has enacted regulations governing telecommunication service
providers, Internet access and the distribution of news and other information.
In the past, the Chinese government has stopped the distribution of information
over the Internet that it believes violates Chinese law, including content that
is obscene, incites violence, endangers national security, is contrary to the
national interest, or is defamatory. In addition, our affiliated value-added
service providers may not publish certain news items, such as news relating to
national security, without permission from the Chinese government. Furthermore,
the Ministry of Public Security has the authority to cause any local Internet
service provider to block any Web site maintained outside China at its sole
discretion.
China Mobile and China Unicom also have their own policies regarding
the distribution of inappropriate content by wireless value-added service
providers and have recently punished certain providers for distributing content
deemed by them to be obscene. Such punishments have included censoring of
content, delaying payments of fees by the mobile operators to the offending
service provider, forfeiture of fees owed by the mobile operators to the
offending service provider and suspension of the service on the mobile
operators' networks. Accordingly, even if our affiliated wireless value-added
14
service providers comply with Chinese governmental regulations relating to
licensing and foreign investment prohibitions, if the Chinese government, China
Mobile or China Unicom were to take any action to limit or prohibit the
distribution of information or to limit or regulate any current or future
content or services available to users, our revenues could be reduced and our
reputation harmed.
The Chinese government is expected to grant licenses to offer wireless
services in China to China Telecom, China Netcom and possibly other parties with
which our affiliated wireless value-added service providers have not yet
developed close relationships. If those parties receive licenses and are
successful in the market but our affiliates are unable to develop cooperative
relationships with them, our business could be adversely affected.
It is also possible that China Telecom, China Netcom and any other
parties receiving wireless licenses may decide to offer wireless value-added
services created by them, rather than by third-party service providers such as
our affiliated wireless value-added service providers. In that case, our
business could be adversely affected.
Risks Related to Doing Business in China
A downturn in the Chinese economy may slow down our growth and profitability.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any downturn will not have a negative
effect on our business. Our profitability, will decrease if expenditures for
wireless value-added services decrease due to a downturn in the Chinese economy.
More specifically, increased penetration of wireless value-added services in the
less economically developed central and western provinces of China will depend
on those provinces achieving certain income levels so that mobile phones and
related services become affordable to a significant portion of the population.
Government regulation of the telecommunications and Internet industries may
become more complex.
Government regulation of the telecommunications and Internet industries
is highly complex. New regulations could increase our costs of doing business
and prevent us from efficiently delivering our services. These regulations may
stop or slow down the expansion of our wireless value-added information services
customer base and limit access to our services.
The uncertain legal environment in China could limit the legal protections
available to you.
The Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which decided legal cases
have little precedential value. In the late 1970s, the Chinese government began
to promulgate a comprehensive system of laws and regulations governing economic
matters. The overall effect of legislation enacted over the past 20 years has
significantly enhanced the protections afforded to foreign invested enterprises
in China. However, these laws, regulations and legal requirements are relatively
recent and are evolving rapidly, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to foreign investors, such as the right of foreign invested
enterprises to hold licenses and permits such as requisite business licenses.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could adversely affect our business and
results of operations.
A renewed outbreak of SARS or another widespread public health problem
in China, where all of our revenue is derived, and in Shanghai, where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including
the following:
15
o quarantines or closures of some of our offices which would severely
disrupt our operations,
o the sickness or death of our key officers and employees, and
o a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our business and results of operations.
Changes in China's political and economic policies could harm our business.
The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include:
o economic structure;
o level of government involvement in the economy;
o level of development;
o level of capital reinvestment;
o control of foreign exchange;
o methods of allocating resources; and
o balance of payments position.
As a result of these differences, our business may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.
Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.
Because almost all of our future revenues may be in the form of
Renminbi, any future restrictions on currency exchanges may limit our ability to
use revenue generated in Renminbi to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
The value of our securities will be affected by the foreign exchange rate
between U.S. dollars and Renminbi.
The value of our common stock will be affected by the foreign exchange
rate between U.S. dollars and Renminbi. For example, to the extent that we need
to convert U.S. dollars into Renminbi for our operational needs and should the
Renminbi appreciate against the U.S. dollar at that time, our financial position
and the price of our common stock may be adversely affected. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our common stock or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in China would be reduced.
16
Risks Related to the Mobile Phone Distribution Industry
We are dependent on three main first-tier wholesalers to supply all of our
mobile phones.
Our performance depends on whether we can continue to secure contracts
with the three first-tier wholesalers of Samsung mobile phones on whom we rely.
We have no long-term purchase contracts or other contracts that provide
continued supply, pricing or access to new mobile phone models and any of the
first-tier wholesalers on whom we rely could discontinue selling to us at any
time. We may not be able to acquire new Samsung models in the future and we may
not be able to acquire the models that we need in sufficient quantities or on
terms that are acceptable to us in the future. As a result, our revenues may
decrease.
Our performance is dependent on the popularity of Samsung's mobile phone models.
We primarily distribute mobile phones manufactured by Samsung and thus
are dependant on Samsung's ability to create and deliver high quality mobile
phone models in a cost effective and timely manner. Samsung is a leading
manufacturer of mobile phones based on both the CDMA network and the GSM network
in China. There can be no assurance that Samsung will continue to create high
quality mobile phone models that are popular with consumers. As a result, our
revenues may decrease. In addition, our success depends on our ability to
anticipate and respond to changing mobile phone model trends and consumer
demands in a timely manner. The models we distribute must appeal to a broad
range of consumers whose preferences cannot always be predicted with certainty
and may change between sales seasons. If we misjudge which mobile phone models
will be popular or the market for the models we distribute, our sales may
decline or we may be required to sell our models at lower prices.
Cash Flow.
It is important that we have sufficient cash flow to purchase enough
mobile phones from the first-tier wholesalers on whom we rely. If our cash flow
decreases significantly, we will not be able to purchase a sufficient quantity
of inventory to meet our customers' demands, which would have a negative impact
on our sales, and may cause the first-tier wholesalers on whom we rely to look
to other sub-wholesalers to distribute their mobile phones. This development
would have a negative impact on our revenues.
Customers.
One of the factors the first-tier wholesalers on whom we rely consider
when determining who they will use as a sub-wholesaler is the sub-wholesaler's
relationship with retailers. Currently approximately 52% of our mobile phone
sales are made to three retailers. We have no long-term sales contracts or other
contracts that provide continued selling or pricing and any of the retailers we
supply could discontinue buying from us at any time. If we lose our
relationships with our three largest retailers, we will have a difficult time
finding new large retailers to purchase our Samsung mobile phones and may lose
our relationships with the first-tier wholesalers on whom we rely. This would
have a negative impact on our business.
We face certain risks relating to customer service.
Any material disruption or slowdown in our order processing systems
resulting from labor disputes, mechanical problems, human error or accidents,
fire, natural disasters, or comparable events could cause delays in our ability
to receive and distribute orders and may cause orders to be lost or to be
shipped or delivered late. As a result, customers may cancel orders or refuse to
receive goods on account of late shipments, which would result in a reduction in
our net sales and could result in increased administrative and shipping costs.
17
We face risks associated with distribution.
We conduct all of our distribution operations from one facility in
Shanghai, China. Any disruption in the operations at our distribution center
could have a negative impact on our business.
Competition.
Despite the fact that we distribute nine Samsung mobile phone models in
the Shanghai, China region, we face competition from distributors of different
models of mobile phones manufactured by Samsung in the Shanghai region and from
distributors of phones manufactured by companies other than Samsung that
distribute in the Shanghai region.
Competition is based on a variety of factors including maintenance of
product quality, competitive pricing, delivery efficiency, customer service and
satisfaction levels and the ability to anticipate technological changes and
changes in customer preferences. The first-tier wholesalers on whom we rely or
Samsung may acquire, startup, or expand their own distribution systems to sell
directly to our customers.
Risks Related to our Common Stock
The market price for our common stock may be volatile.
The market price for our common stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating results,
o announcements of new services by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the wireless value-added services market,
o changes in the economic performance or market valuations of other
companies involved in wireless value-added services or distribution of
mobile phones,
o announcements by our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments,
o additions or departures of key personnel,
o potential litigation, or
o conditions in the mobile phone market.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
Stockholders could experience substantial dilution.
We may issue additional shares of our capital stock to raise additional
cash for working capital. If we issue additional shares of our capital stock,
our stockholders will experience dilution in their respective percentage
ownership in the company.
We have no present intention to pay dividends.
Neither during the preceding two fiscal years nor during the nine month
period ended September 30, 2004 did we pay dividends or make other cash
distributions on our common stock, and we do not expect to declare or pay any
dividends in the foreseeable future. We intend to retain any future earnings for
working capital and to finance current operations and expansion of our business.
18
A large portion of our common stock is controlled by a small number of
stockholders.
A large portion of our common stock is held by a small number of
stockholders. As a result, these stockholders are able to influence the outcome
of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
We may be subject to "penny stock" regulations.
The Securities and Exchange Commission, or SEC, has adopted rules that
regulate broker-dealer practices in connection with transactions in "penny
stocks." Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). Penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document prepared by the SEC, which specifies
information about penny stocks and the nature and significance of risks of the
penny stock market. A broker-dealer must also provide the customer with bid and
offer quotations for the penny stock, the compensation of the broker-dealer, and
our sales person in the transaction, and monthly account statements indicating
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that, prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for stock that becomes subject to those penny
stock rules. Whenever any of our securities become subject to the penny stock
rules, holders of those securities may have difficulty in selling those
securities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks
and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "expect," "plan,"
"intend," "anticipate," "believe," "estimate," "predict," "potential," or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the "Risk Factors" section above. These
factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this prospectus to
conform such statements to actual results or to changes in our expectations.
19
MARKET FOR COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND DIVIDEND POLICY
Our common stock is traded on the NASD's Over-the-Counter Bulletin
Board under the symbol "CHDW." On August 6, 2004 we changed our name from
Boulder Acquisitions, Inc. to China Digital Wireless, Inc. and changed our
symbol from "BAQI" to "CHDW." On January 3, 2005, the last reported sales price
for our common stock was $3.76 per share.
The following table sets forth, for the quarters indicated, the range
of closing high and low bid prices of our common stock as reported by the NASD
Over-the-Counter Bulletin Board, as adjusted for all previously effected stock
splits.
Common Stock
-----------------
By Quarter Ended High Low
---------------- -------- -------
Fiscal 2002
March 31, 2002........................................... $.02 $.02
June 30, 2002............................................ $.02 $.02
September 30, 2002....................................... $.00 $.02
December 31, 2002........................................ $.00 $.00
Fiscal 2003
March 31, 2003........................................... $.00 $.00
June 30, 2003............................................ $.42 $.23
September 30, 2003....................................... $.42 $.42
December 31, 2003........................................ $.42 $.42
Fiscal 2004
March 31, 2004........................................... $5.00 $.42
June 30, 2004............................................ $4.05 $2.30
September 30, 2004....................................... $3.90 $1.98
December 31, 2004........................................ $4.85 $2.80
------------------------
As of January 3, 2005, there were 17,018,692 shares of our common stock
outstanding held by approximately 2545 stockholders of record.
We did not pay any cash dividends on our common stock in fiscal 2002 or
2003 nor have dividends been paid or declared in fiscal 2004. We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to finance
operations and the expansion of our business.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
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. You are also
urged to carefully review and consider our discussions regarding the various
factors, which affect our business, included in this section and elsewhere in
this report. In evaluating our business, you should carefully consider the
information provided under the caption "Risk Factors" beginning on page 6 in
this prospectus.
Factors that might cause actual results, performance or achievements to
differ materially from those projected or implied in such forward-looking
statements include, among other things: (i) the impact of competitive products;
(ii) changes in law and regulations; (iii) adequacy and availability of
insurance coverage; (iv) limitations on future financing; (v) increases in the
cost of borrowings and unavailability of debt or equity capital; (vi) the effect
of adverse publicity regarding our products; (vii) our inability to gain and/or
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands; (xii)
market and industry conditions including pricing and demand for products, (xiii)
the success of product development and new product introductions into the
marketplace; (xiv) the departure of key members of management; (xv) our ability
to efficiently market its products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Overview of Business Background
Sifang Holdings was formed under the laws of the Cayman Islands on
February 9, 2004 for the purpose of holding 100% of the equity interests in TCH.
TCH was established as a foreign investment enterprise in Shanghai under the
laws of the PRC on May 25, 2004, with a 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 the customers in the Shanghai metropolitan
area. In March 2004, Sifang Information spun off its pager and 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 the 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
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
21
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 the provision of 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 are asked to make advance payments for either three or six-month
subscription periods.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
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 collectability is reasonably assured.
We provide wireless receiver users with access to certain financial
information provided by stock exchanges, comments and analyses on stock market
activity provided by certain reputable security investment companies in China,
lottery information, weather forecasts, and other value-added products through
signing a monthly subscription agreement or buying a pre-charged service card.
We purchase the aforementioned information from respected vendors and reformat
it through decoding and recoding and transmit the reformatted information via
Sifang Information to pager users. We constantly store the reformatted
information in our 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 subscriptions in
advance. We record the proceeds as deferred revenue and amortize the deferred
revenue over the subscription period. When customers buy a pre-charged service
card, we record the proceeds as deferred revenue. When a customer commences
using this card to access our server or begins using a pager to access the
aforementioned information, we identify the subscription period and amortize the
deferred revenue over the subscription period.
In response to a retailer's request, we have an installing agent
install our 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 with the pre-charged six-month subscription fee being paid to
us. After a customer using such a phone dials the server to access the desired
22
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 we receive a detailed list from the installing agent
regarding the number of phones that have been installed with our software, we
match 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, we
record accounts receivable and deferred revenue correspondingly. At the date on
which a customer starts to dial into the server, the subscription period begins
and we amortize deferred revenue accordingly.
Since April 2004, the revenue generated from selling pre-charged cards
has gradually decreased while the revenue generated through monthly subscription
with China Mobile and/or China Unicom (collectively "Mobile Operators") has
gradually increased as the Mobile Operators' billing systems have been enhanced.
Our affiliates, Sifang Information and Tianci, contract with the Mobile
Operators for the transmission of our value-added information service. 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 us. We recognize
net revenues based on the total amount paid by our customers, for which the
Mobile Operators bill and collect on our behalf . There is a time lag ranging
from 10 days to 45 days between the service period cut-off date and the date the
Mobile Operators send out their billing statements due to the segregated billing
systems of each provincial subsidiary of the Mobile Operators. For the nine
months ended September 30, 2004, about 10% of our service revenue from mobile
phone users is recognized based on monthly billing statements prepared by the
provincial subsidiaries of the Mobile Operators. However, as of September 30,
2004 none of such revenue can be attributed to the relationship between Tianci
and China Unicom, as billing delays have prevented us from recognizing any
revenue from this relationship. We have not recognized service revenue based on
the records provided by our own server. 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 service is not covered by a
monthly service subscription and we have no control whether it will incur or
not). These network usage fees charged by the Mobile Operators are reflected as
a part of cost of services in the financial statements. Network usage fees
charged by the Mobile Operators are reduced for messages received by us because
the Mobile Operators separately charge the sender a fee for these transmissions.
We currently record the mobile phone service revenue based on the
amounts paid by our customers net of the Mobile Operators' service charge for
billing and collection on our behalf. According to EITF Issue No. 99-19,
recognizing revenue on a net basis in this situation is appropriate if we do not
act as a principal in connection with the provision of our services. Factors
which support a conclusion that we are not acting as a principal include:
o limited ability to adjust the cost of services by adjusting the design
or marketing of the service,
o limited ability to determine prices, we must follow the price policy
within ranges prescribed by Mobile Operators, and
o limited ability to assume risk of non-payment by customers.
We have very limited ability to adjust the ratio of our revenues to
cost of services (which include the Mobile Operators' network usage fee and
other fees, if any). In addition, the majority of service revenue derived from
mobile phone users are subject to the floor price for monthly service set by the
Mobile Operators as we do no have an ability to negotiate with our customers.
The Mobile Operators will normally make payments within the 30 days after we
receive the billing statement because it takes time for the Mobile Operators to
collect payments from our customers. Consequently, we actually bear less risk of
non-payments by customers as Mobile Operators must take care of their
collections first. Only about 10% of the total service revenue derived from
mobile phone users in the nine months ended September 30, 2004 was billed
through the Mobile Operators' billing systems. Whereas, there are three items of
mobile phone services over which we do have an ability to determine price,
however, the portion of this type of revenue was immaterial in the nine months
ended September 30, 2004. Therefore, we have concluded that reporting net
revenue billed through the Mobile Operators' billing systems is appropriate.
23
Accounts Receivable, Employees Receivable, and Allowance for Doubtful Accounts
During the normal course of business, we extend unsecured credit to our
retail customers who are mainly located in the Shanghai metropolitan area.
Typically, the credit terms require payment to be made within 30 days of the
sale. We do not require collateral from our customers. We maintain our cash
accounts at credit worthy financial institutions.
We regularly evaluate and monitor the creditworthiness of each customer
on a case-by-case basis. We include any account balances that are determined to
be uncollectable, 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, we believe that our allowance for doubtful accounts was
adequate as of September 30, 2003 and 2004. However, actual write-offs might
exceed the recorded allowance.
We advance cash to sales people for their travel and business activity
needs. Under certain circumstances, the advances to employees might not be fully
recovered by us. Accordingly, we also provide allowances against any doubtful
accounts.
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 our major vendor began providing sales rebates and credits if
we fulfilled certain sales volumes prescribed by the vendor in order to induce
our distributors to sell more of our products. As a result, we are entitled to
receive certain rebates and credits for the inventory held and sold by us within
the specified period of time as defined by our 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 our
accounts payable to our vendor and decrease the cost of goods sold or inventory
held correspondingly.
Impairment of Long-Lived Assets
We apply 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.
Income Taxes
We account 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. 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
24
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 income tax provisions
presented on our financial statements are based on the historical actual income
tax rates of Sifang Information at 7.5% for the nine months ended September 30,
2003 and 2004, respectively. 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, Sifang Holdings 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.
Discussion and Analysis of Operating Results
Nine Months Ended September 30, 2004 Comparing to Nine Months Ended
September 30, 2003
Revenue recognition
We generate revenue from both mobile phone sales and the delivery of
value-added services. The revenues related to mobiles phone distribution are
recognized when the following criteria are met: (a) we have transferred to the
customer the significant risks and rewards of ownership of the goods; (b) we
retain neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold; (c) the
amount of revenue can be measured reliably; (d) it is probable that the economic
benefits associated with the transaction will flow to us; and (e) the costs
incurred or to be incurred in respect of the transaction can be measured
reliably. The revenues related to the delivery of value-added services are
comprised of services provided to pager users and services provided to mobile
phone users. Revenues from providing services to pager users are recognized in
the period in which services are rendered and the subscription fee is fixed or
determinable and collectability is reasonably assured. Revenues from providing
services to mobile phone users are recognized in the period in which the
services are performed, provided that persuasive evidence of a contractual
arrangement exists and collectability is reasonably assured. Any payments
received related to the services prior to service being rendered are recorded as
deferred revenue.
Revenue
Mobile phone distribution
Our mobile phone distribution in the nine months ended September 30,
2004 increased by approximately $4,459,211, representing an approximately 41%
increase, to $15,427,286 (including product sales to three related parties
(Shanghai Shantian Telecommunication Technology Inc., Tianci Group Co., Ltd., or
Tianci Group, and Sifang Information) as compared to $10,968,075 for the same
period of the prior year. The increase was due mainly to our marketing effort
25
and further facilitated by Samsung's marketing promotion. For the nine months
ended September 30, 2004, Samsung's mobile phones accounted for about 97% of
total product sales and other name brand mobile phones accounted for the
remaining 3%. Compared to the nine months ended September 30, 2003, Samsung's
mobile phones accounted for 99% of total product sales and other brands
accounted for the balance. Market competition for mobile phone sales is so
fierce that we decreased our overall mark-up ratio to 5.0% in order to maintain
our market position, compared to the mark-up ratio of 8.9% for the same period
the prior year.
Mobile phone sales to a related party
Before January 1, 2004 we only distributed CDMA mobile phones in the
Shanghai area. Beginning in January 2004 we entered into the GSM mobile phone
distribution business. Since the retail market channel related to our GSM mobile
phone distribution was developed and maintained by Shanghai , in which Sifang
Information holds a 51% equity interest, all of our Samsung GSM mobile phones
were sold to Shanghai Shantian, which made Shanghai Shantian our second tier
distributor. During the nine months ended September 30, 2004, we sold
$10,512,821 of mobile phones with a reasonable mark-up of approximately 3.6% in
order to support start-up stage of Shantian's business as compared to the
aggregate mark-up ratio of 5.0% for the products sold to all other customers.
Compared to the mark-up ratio of 7.9% in the first half year of 2004, the
decrease in mark-up ratio was due mainly to the significant decline of mark-up
to 1.8% for the three months ended September 30, 2004 compared to 7.0% for the
same period of the prior year. Because TCH had not obtained all the government
issued VAT invoices for the mobile phones distribution, the sales of mobile
phones went through the related parties during the third quarter.
Service revenue, net
Total service revenue net of the related business tax and surcharge for
the nine months ended September 30, 2004 increased by approximately $116,541,
representing approximately a 5.0% increase, to $2,467,990 compared to $2,351,449
for the same period of the prior year. Moreover, the components of service
revenue changed significantly. Service revenue from mobile phone users for the
nine months ended September 30, 2004 increased by $1,433,076 to $1,828,041
compared to $394,965 for the same period of the prior year, representing an
increase of approximately 363%, which resulted in the overall increase in
service revenue. Service revenue from pager users for the nine months ended
September 30, 2004 decreased by $1,316,535 to $639,949 compared to $1,956,484
for the same period of the prior year, representing approximately a 67%
decrease. We believe that service revenue from pager users will continue to
decrease given the increased popularity of mobile phones over beepers and
pagers. 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.
Cost of goods sold
The cost of goods sold for the nine months ended September 30, 2004
increased by $4,670,568 to $14,658,663 compared to $9,988,095 for the same
period of the prior year, representing an approximately 47 % increase. The
increase was consistent with the increases in revenue from product sales.
Cost of service
The cost of service for the nine months ended September 30, 2004
decreased by $47,684 to $660,791 compared to $708,475 for the same period of the
prior year, representing an approximately 6.7% decrease. This decrease was the
26
result of a decrease in the content fee charged by the content providers from
$66,901 to $25,538 in the comparison of the nine months ended September 30, 2004
and the same period last year. According to the contracts signed between TCH and
other content providers who offered us information content related to
securities, lottery entertainment and so on, we recorded all accrued expenses in
the third quarter of year 2004. We expect that the final determined fee due to
the providers will be confirmed in the fourth quarter of 2004. Meanwhile, we are
striving to expand the contents included in our value-added services within the
current fee-charge level and trying to establish collaborative relationships or
partnerships with certain information content providers.
Gross profit
After considering the cost of goods sold and cost of service, our gross
profit for the nine months ended September 30, 2004 decreased by approximately
$47,132 to approximately $2,575,822, representing an approximately 1.8 %
decrease, compared to the gross profit of $2,622,954 for the same period of the
prior year. The decrease of gross profit was primarily attributable to the fact:
(i) service revenue from pager users generated in the nine months ended
September 30, 2004 decreased from $1,956,484 to $639,949, representing an
approximately 67.3% decrease, compared to the same period in fiscal 2003; and
(ii) the gross profit ratio of the mobile phone distribution for the first three
quarters in fiscal 2004 decreased from 8.9% to 5.0% resulting in the decline of
the total gross profit.
The following table presents in summary certain information related to
the various components of revenue in a manner similar to segment reporting
information.
Information Information
Mobile Phone Service - Service -
Distribution Mobile Phone Pager Total
------------ ------------ ------------ ------------
For nine months ended September 30, 2004
Revenue $ 15,427,286 $ 1,828,041 $ 639,949 $ 17,895,276
Cost 14,658,663 150,900 509,891 15,319,454
Gross profit 768,623 1,677,141 130,058 2,575,822
Gross profit ratio 5.0% 91.7% 20.3% 14.4%
For nine months ended September 30, 2003
Revenue $ 10,968,075 $ 394,965 $ 1,956,484 $ 13,319,524
Cost 9,988,095 163,827 544,648 10,696,570
Gross profit 979,980 231,138 1,411,836 2,622,954
Gross profit ratio 8.9% 58.5% 72.2% 19.7%
Other income, net
On July 16, 2004, Tianci Group, a related party to TCH, entered into an
agreement with China Unicom to promote CDMA mobile phones and relevant monthly
service for China Unicom. According to the signed agreement, should Tianci Group
sell varieties of CDMA mobile phones owned by China Unicom to customers who
would like to subscribe for monthly service for a period of two years with a
monthly service fee of $3.38, Tianci Group would be entitled to receive an sales
commission from China Unicom of $15.70 per unit, sales commission of $3.62 per
SIM card, and $12.08 for monthly service subscription. Tianci Group feels that
TCH has been in a better position to sell these CDMA mobile phones, SIM cards
and monthly service subscriptions. Therefore, Tianci Group entered into an agent
agreement with TCH and asked TCH to conduct these businesses on behalf of Tianci
Group. Consequently, TCH would be entitled to receive the sales commission from
Tianci Group based on the terms between Tainci Group and China Unicom. This
agent business started in August 2004 along with the promotion initiated by
China Unicom. As this business activity is more uncertain in nature, we reported
this sales commission as other income instead of regular revenue. We recognized
agent income of $130,060 in the nine months ended September 30, 2004 at TCH
level. The recurrence of this type of transaction depends on the promotion
initiated by China Unicom. Therefore, we recognize the agent income as other
income.
Selling expenses
Selling expenses for the nine months ended September 30, 2004 increased
by $11,592 to $127,833 compared to $116,241 for the same period of the prior
year, representing an approximately 10% increase. The increase was due to
promotion expenses for value-added information service related to mobile phone
users. Advertising fees increased from $889 to $29,707.
General and administrative expenses
General and administrative expenses for the nine months ended September
30, 2004 increased by $1,169,720 to $1,462,504 compared to $292,784 for the same
period of the prior year, representing a material increase. The increase was due
27
mainly to the stock-based compensation expenses of approximately $1,014,000 and
an increase of $19,737 in software amortization expenses from $75,293 to
$95,030. In addition, office rental expense increased by approximately $20,556
and audit and consultant fees incurred in the first three quarters of fiscal
2004 accounted for a $10,656 increase for the reorganization and
recapitalization transaction. Other miscellaneous items accounted for the
remaining increase of $4,355 for the nine months ended September 30, 2004.
Of the aforementioned stock-based compensation of $1,014,000 for the
nine months ended September 30, 2004, $604,000 was the fair value of the 167,895
shares issued to a consultant in lieu of cash payment, and other $410,000 was
total premium difference between the trading price ($3.60 per share) and the
stock purchase price ($1.14 per share) per a stock purchase agreement resulting
in the issuance of 166,667 redeemable shares.
Interest income (expense)
For the nine months ended September 30, 2004, interest income was
$31,931, which was mainly derived from the amount due from Sifang Information.
For the nine months ended September 30, 2003, there were two borrowing and
lending transactions between TCH and Sifang Information resulting in the
interest expense $10,873.
Income tax
TCH is subject to taxation under the laws of the PRC, and the statutory
income tax rate for the nine months ended September 30, 2003 and 2004 was 7.5%.
In the nine months ended of September 30, 2003 and 2004, income tax expense was
$165,229 and $169,643, respectively, based on pretax income of $2,258,366 and
$1,247,476 (which included the stock compensation of $1,014,000 incurred in the
U.S.). Since the loss of approximately $1,014,000 incurred in the U.S. did not
offset the taxable income in China, the income tax expense of $169,643 incurred
in China was based on the taxable income of approximately $2,261,899.
Net income
We recorded net income of $977,833 for the nine months ended September
30, 2004, a $1,059,994 decrease in net income compared to a net income of
$2,037,827 for the same period of the prior year, representing an approximately
52% decrease. The decrease in net income was attributable to (i) the increase in
general and administrative expenses for the period compared to general and
administrative expenses for the same period of the prior year, and (ii) the
decrease of the gross profit generated from mobile phone distribution and the
pager service business.
Earnings per share
The earnings per share for the nine months ended September 30, 2004
decreased by $0.08 to $0.07 compared to $0.15 for the same period of the prior
year, representing an approximately 53% decrease. The decrease was due mainly to
the decrease in our net income and the increase in the total outstanding shares
of common stock as the weighted average number of shares of common stock
outstanding for the nine months ended September 30, 2004 increased by
approximately 13%, compared the weighted average number of common stock
outstanding for the same period of the prior year.
Fiscal Year Ended December 31, 2003 Compared to the Fiscal Year Ended December
31, 2002
Revenue recognition
We generate revenue from both mobile phone sales and the delivery of
value-added services. The revenues related to mobiles phone distribution are
recognized when the following criteria are met: (a) we have transferred to the
customer the significant risks and rewards of ownership of the goods; (b) we
retain neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold; (c) the
amount of revenue can be measured reliably; (d) it is probable that the economic
28
benefits associated with the transaction will flow to us; and (e) the costs
incurred or to be incurred in respect of the transaction can be measured
reliably. The revenues related to the delivery of value-added services are
comprised of services provided to pager users and services provided to mobile
phone users. Revenues from providing services to pager users are recognized in
the period in which services are rendered and the subscription fee is fixed or
determinable and collectability is reasonably assured. Revenues from providing
services to mobile phone users are recognized in the period in which the
services are performed, provided that persuasive evidence of a contractual
arrangement exists and collectability is reasonably assured. Any payments
received related to the services prior to service being rendered are recorded as
deferred revenue.
Revenue
Mobile phone distribution
Our mobile phone distribution for the year ended December 31, 2003
increased by $13,008,954, representing a 2,500% increase, to $13,529,279 as
compared to $520,325 for the year ended December 31, 2002. The increase was due
mainly to our marketing effort, which was combined with Samsung's marketing
efforts. In the telecommunication market of China, mobile phones have rapidly
replaced beep pagers with the development of the wireless communication
technology that stimulated a large demand from consumers resulting in an
increase in mobile phone distribution. In the year ended December 31, 2003,
Samsung's mobile phones accounted for about 97% of the total product sales and
the other name brands mobile phones accounted for the remaining 3%. During the
year ended December 31, 2002, we did not sell any Samsung mobile phones whereas
Motorola's mobile phones accounted for 99.6% of total product sales and other
name brands accounted for the balance. Compared to the negative gross profit
ratio for the year ended December 31, 2002, the gross profit ratio for the year
ended December 31, 2003 was a positive 8.17%, which was due mainly to the
increase in sales volume and product mix.
Service revenue, net
Total service revenue net of related business tax and surcharges for
the year ended December 31, 2003 increased by $100,017, to $3,503,099, as
compared to $3,403,082 for the year ended December 31, 2002, representing an
approximately 2.9% increase. The overall increase was due primarily to the
increase of service revenue from mobile phone users which was offset by the
decrease of service revenue from pager users. Service revenue for mobile phone
users for the year ended December 31, 2003 increased by $1,290,366 to $1,297,323
compared to $6,957 for the prior year. In addition, approximate $60,850 of
service revenue from mobile phone users was attributed to the prepaid service
fees generated by an installing agent, Chenggao Industry Co. Ltd. who installed
the software on a retailer's inventories and collected proceeds from the
retailer and transferred the proceeds to us. Please refer to our accounting
policy regarding revenue recognition for further details. Service revenue from
pager users for the year ended Decembr31, 2003 decreased by $1,190,349 to
$2,205,776 compared to $3,396,125 for the year ended December 31, 2002, which
was due mainly to the prevailing demand for mobile phone services.
Cost of goods sold
The cost of goods sold for the year ended December 31, 2003 increased
by $11,896,996 to $12,424,454 as compared to $527,458 for the year ended
December 31, 2002. The increase of the cost of goods sold was consistent with
the increase of the revenue. For the years ended December 31, 2003 and 2002, the
inventory turn-over ratios are 9.00 and 0.45, respectively.
29
Cost of service
The cost of service for the year ended December 31, 2003 increased by
$58,207 to $910,440 compared to $852,233 for the year ended December 31, 2002,
representing an approximately 6.8% increase. The increase was related mainly to
the value-added information service provided to mobile phone users and the
purchasing cost related to more information content along with the increase in
service fees charged by Mobile Operators. In the year ended December 31, 2003,
we expanded the category of information services to meet the expectations of
variety of customers accompanied by the rise of information acquisition cost at
the rate of nearly 50%. The cost for purchasing information content jumped from
$40,267 to $72,656 and the service fees charged by Mobile Operators increased
form $1,153 to $18,420, respectively. Regarding the cost of service related to
mobile phone users, the cost of service for the year ended December 31, 2003
increased by $169,101 compared to $46,219 for the year ended December 31, 2002,
representing a 365.87% increase and being consistent with the increase in
service revenue generated from mobile phone users. Regarding the cost of service
related to beep pager users, the cost of service for the year ended December 31,
2003 decreased by $110,894 compared to $806,014 for the year ended December 31,
2002, representing a decrease of 13.76% and a semi-fixed nature of cost.
Gross profit
After considering the cost of goods sold and cost of service, our gross
profit for the year ended December 31, 2003 increased by $1,153,768 to
$3,697,484, representing an approximately 45.4% increase, as compared to gross
profit of $2,543,716 for the year ended December 31, 2002. The increase was
primarily attributable to the material increase of the gross profit of mobile
phone distribution and information service provided for mobile phone users. The
increase of these two items was from the negative gross profit of $7,133 in
fiscal 2002 to a positive gross profit of $1,104,825 and from a negative gross
profit of $39,262 to a positive gross profit of $1,082,003, respectively,
aggregating $2,233,223, which offset the decrease in gross profit of information
service provided for beep pager users from $2,590,111 to $1,510,656.
However, the percentage of gross profit over the total revenue for the
year ended December 31, 2003 was approximately 21.7% compared to 64.8% for the
year ended December 31, 2002, representing a 43.1% decrease. The decrease was
due to the fact that the service revenue generated in year 2003 accounted for
only 21% of total revenue whereas the service revenue generated in the year 2002
accounted for 87% of total revenue, given that the service revenue is much more
profitable than mobile phone distribution.
30
Information Information
Mobile Phone Service - Service -
Distribution Mobile Phone Pager Total
------------ ------------ ------------ ------------
For the year ended December 31, 2003
Revenue $ 13,529,279 $ 1,297,323 $ 2,205,776 $ 17,032,378
Cost 12,424,454 215,320 695,120 13,334,894
Gross profit 1,104,825 1,082,003 1,510,656 3,697,484
Gross profit ratio 8.17% 83.40% 68.49% 21.71%
For the year ended December 31, 2002
Revenue $ 520,325 $ 6,957 $ 3,396,125 $ 3,923,407
Cost 527,458 46,219 806,014 1,379,691
Gross profit (7,133) (39,262) 2,590,111 2,543,716
Gross profit ratio (1.37)% (564.35)% 76.27% 64.83%
Selling expenses
Selling expenses for the year ended December 31, 2003 decreased by
$135,012 to $153,437 as compared to $288,539 for the prior year, representing an
approximately 47% decrease. The decrease was due mainly to the reduction in
advertising and promotion expenses of this year compared with those of the prior
year, which declined from $117,290 to $14,721. We have moved the marketing focus
from beep pager users to mobile phone users in order for us to adapt to the
demands demonstrated by the telecommunication market. Furthermore, the
traditional marketing method on beep pager users was not a fit for mobile phone
value-added information service and distribution. As we have contracted with an
installing agent to install our software in the inventory of a retailer, and
established collaborative relationships and partnerships with the installing
agent and retailer to sell information services, we have been able to reduce our
marketing expenses.
General and administrative expenses
General and administrative expenses for the year ended December 31,
2003 increased by $180,608 to $391,930 as compared to $211,322 for the year
ended December 31, 2002, representing an 85% increase. The increase was
attributable mainly to an increase in employee compensation and welfare payments
along with the annual amortization of intangible assets. The employee
compensation and welfare payments increased by $102,666 representing a 161%
increase. In addition, the amortization of software development cost increased
by $45,645, representing a 76% increase at TCH level. Property taxes increased
by $9,056 in the year ended December 31, 2003 as we purchased a new property at
the end of year 2002. The rent increase of $20,540 in the year ended December
31, 2003 was due to rent for new office space.
Interest income (expense)
During the year ended December 31, 2002, we used funds from Sifang
Information to start our mobile phone distribution business, the outstanding
balance of due to our parent was $604,062 at December 31, 2002 and interest
expense incurred during the year ended December 31, 2002 was $ 36,245 all of
which was paid to our parent, Sifang Information.
During the year ended December 31, 2003, we paid off all outstanding
balances and lent certain funds to our parent, Sifang Information. All lent
monies were repaid before December 31, 2003. During 2003 there were
inter-company loans between TCH and Sifang Information. However, the outstanding
balance due to and due from these entities at the year ended December 31, 2003
was $0, whereas the total interest expense incurred during the year ended
December 31, 2003 was $12,082 all of which was related to the amount due to
parent.
31
Income tax
TCH is subject to taxation under the laws of the PRC, and the statutory
income tax rate for the year ended December 31, 2003 was 7.5% and for the year
ended December 31, 2002 was 0%. During the year ended December 31, 2003, the
income tax expense was $246,694 based on pretax income of $3,134,674 whereas the
income tax for the year ended December 31, 2002 was zero as our company was
still under the period for receiving the preferred tax treatment regardless of
pretax income of $2,003,442 for that year.
According to Statement of Financial Accounting Standards No. 109
"Accounting for Income Tax", an entity is required to recognize deferred tax
liabilities and assets which 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 statement. Regarding the deferred
income tax expense (benefit), the deferred income tax benefit $5,556 generated
in the year December 31, 2002 was due to the changes in deferred tax liabilities
and assets. For the year ended December 31, 2003, the deferred income tax
expense $601 was due to the changes in deferred tax liabilities and assets.
Net income
We recorded net income of $2,887,980 for the year ended December 31,
2003, an $878,982 increase in net income compared to a net income of $2,008,998
for the prior year, representing an approximately 44% increase. The increase in
net income was due mainly to: 1) the increase of mobile phone distribution gross
profit from a negative 7,133 to a positive $1,104,825; 2) the after tax income
generated from providing value-added information service to mobile phone users
was higher than the after-tax income generated from providing value-added
information service to pager users.
Earnings per share
The earnings per share for the year ended 2003 increased by $0.06 to
$0.21 compared to earnings per share of $0.15 for the prior year, representing
an approximately 40% increase. The increase was due mainly to an increase in net
income.
Liquidity and Capital Resources
The Company's cash balance decreased by approximately $750,502 from
approximately $877,568 as of September 30, 2003 to approximately $127,066 as of
September 30, 2004. This decrease in cash was due primarily to the decrease in
net income and the increase of accounts receivable.
The cash flow provided by operating activities for the nine months
ended September 30, 2004 decreased by approximately $139,716 to $290,362
compared to $430,078 cash provided in operating activities for the same period
of the prior year. We believe that the decrease was due mainly to the increase
of $1,891,866 in accounts receivable offset by the non-cash expense of
$1,014,423 and increase of $68,166 in current liabilities for the nine months
ended September 30, 2004. First, net income of $977,833 for nine months ended
September 30, 2004 compared to net income of $2,037,827 in the same period of
the prior year, represented a change of $1,059,994. Second, the cash used in
accounts receivable increased $1,891,866 in the nine months ended September 30,
2004 compared to the net cash used of $251,770 in the same period of the prior
year, representing a change of $1,640,096. Advances to vendors increased by
$463,248 at September 30, 2004 compared to the increase of $1,153,961 for the
same period of the prior year, represented a positive change of $690,713.
Inventory decreased by $521,815 at September 30, 2004, compared to the increase
in inventory by $1,403,365. VAT recoverable in the nine months ended September
30, 2004 was a cash generator representing a change of approximately $196,420
compared to that in the same period of the prior year. However, the change in
accounts payable was in a net cash used position in the nine months September
30, 2004, representing a negative change of approximately $579,932 compared to
positive cash inflow of $474,889 for the same period of the prior year. The
change in deferred revenue at September 30, 2004 was less than the change in
deferred revenue for the same period of the prior year.
The cash flow used in investing activities for the nine months ended
September 30, 2004 increased by $1,413,809 to approximately $2,159,769 compared
to $745,960 for the same period of the prior year, representing a significant
increase. The increase in cash used in investing activities was due mainly to
the increase in loan receivables from Sifang Information, the parent company
before the reverse acquisition.
32
The cash flow provided by financing activities for nine months ended
September 30, 2004 increased by approximately $282,570 compared to the absent
cash inflow for the same period of the prior year. We believe that the increase
was due mainly to the proceeds from issuing its common stock in addition to the
fact that we did not have any payment for amount due to Sifang Information in
the nine month period ended September 30, 2004.
Our cash balance increased by approximately $520,058 from $1,193,690 as
of December 31, 2002 to $1,713,748 as of December 31, 2003. This increase in
cash was due primarily to the increase in net income.
The cash flow provided by operating activities for the year ended
December 31, 2003 increased by approximately $901,825 to approximately
$1,383,597 as compared to the cash of approximately $481,772 generated from
operating activities for the year ended December 31, 2002. The increase in cash
flow from operating activities was attributed mainly to the increase of $878,982
in net income. The cash out-flow in accounts receivable for the year ended
December 31, 2003 increased by $1,434,318 compared to the cash out-flow of
$356,298 for the prior year, representing a 402.56% increase. The cash out-flow
in inventory for the year ended December 31, 2003 decreased by $747,223 compared
to the cash out-flow of $1,169,223 for the prior year, representing a 63.91% of
decrease. The cash in-flow in VAT recoverable for the year ended December 31,
2003 was $117,780 compared to the cash out-flow of $201,194 for the prior year,
representing a positive change of $318,974. Deferred revenue and accounts
payable were in a net cash generated position for the year ended December 31,
2003, representing a positive change of approximately $111,569 and $501,352 as
compared to the prior year.
The cash flow used in investing activities for the year ended December
31, 2003 decreased by $322,785 to approximately $259,858 as compared to $582,643
for the prior year, representing a 55.4% decrease. The decrease in cash used in
investing activities was mainly due to the decrease in purchasing of property,
equipment and software.
The cash flow used in financing activities for the year ended December
31, 2003 was the same amount provided by financing activities for the prior year
due to the repayment of amounts due to parent incurred in 2003.
Management estimates that we will continue to have positive cash flow
provided by operating activities in the remaining three months of 2004. We may
continue to lend money to Sifang Information on an as-needed basis. However,
management expects to collect certain amounts due form Sifang Information in the
second half of 2004.
Management predicts that in the upcoming year, the cash needed for our
growth strategy and related working capital requirements will be derived from
the cash generated from operating activities and financing activities. We intend
to conduct a private placement to raise approximate $5 million from investors
and a long-term debt financing, as an alternative way, for the purpose of
developing our new projects and expanding current operations, which focus on
mobile phone distribution and wireless value-added services. No assurance can be
given that we will succeed in our plan of financing.
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. The actual funding requirements may
differ materially from this as a result of a number of factors including plans
to fully support our expansion.
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
33
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. We do
not have any variable interest entities that must be consolidated.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk. Substantially all our revenues and expenses are
denominated in Renminbi, but a portion of our cash is kept in U.S. dollars.
Although we believe that, in general, our exposure to foreign exchange risks
should be limited, our cash flows and revenues will be affected by the foreign
exchange rate between U.S. dollars and Renminbi. For example, to the extent that
we need to convert U.S. dollars into Renminbi for our operational needs and
should the Renminbi appreciate against the U.S. dollar at that time, our cash
flows would be reduced which could materially adversely affect our business.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of declaring dividends on our ordinary shares or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries in China would be reduced.
We have experienced minute foreign exchange gains or losses to date.
However, we do not engage in any hedging activities, and we may in the future
experience economic loss as a result of any foreign currency exchange rate
fluctuations.
BUSINESS
General
Our current operations include providing value added information
services and cellular phone distribution through our Chinese operating
subsidiary.
Overview
Value-Added Information Services. We render value-added information
services in China by purchasing content from third-party providers and
reformatting that content. Our value-added information services enable wireless
receiver (mobile phone and pager) users in China to access financial information
and various entertainment-related services. We contract with our affiliated
wireless service providers to transmit the reformatted content to customers of
China's various network operators.
The primary focus of our value-added information services is on
providing wireless receiver users in China with access to financial information.
We derive the vast majority of our value-added information services revenue from
our financial information business. Our financial information software, Sifang
Gutong, allows our customers to access stock and currency exchange information
and execute stock trades. We are one of the largest stock information and
trading value-added information service providers in China.
We began providing our entertainment-related services, including icons,
screen savers, multiplayer games, Western horoscopes, jokes, and sports and
entertainment news during the latter part of 2003. These services are ancillary
to our financial information services and they represent only a small portion of
our value-added information services revenue at the present time.
34
Leveraging our experience and understanding of the wireless value-added
services market in China, we have consistently purchased and reformatted
content, applications and technologies that are popular in the Chinese wireless
market. To further enhance and differentiate our services, we have entered into,
and will continue to actively pursue, collaborative relationships with third
parties to customize, market and provide access to their content through various
wireless technologies to Chinese consumers. In addition, all of our services are
promoted by our sales force and supported by our customer service team, each of
which is strategically based in Shanghai.
In order to meet ownership requirements under Chinese law that restrict
us, as a foreign company, from operating in certain industries such as
value-added telecommunication and Internet services, we have entered into
information service and cooperation agreements with two of our affiliates that
are incorporated in the People's Republic of China: Sifang Information and
Tianci. We hold 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.
Distribution. We primarily distribute nine different SAMSUNG
Electronics Co., Ltd., or Samsung, mobile phone models in the Shanghai, China
region. Six of the Samsung models we distribute are compatible with the CDMA
network and three of the Samsung models we distribute are compatible with the
GSM network. We plan to pre-install the end-user portion of our Sifang Gutong
software in all of the Samsung mobile phones we distribute, and market our stock
information, stock trading, and currency exchange services by placing brochures
touting those services in the packaging of those Samsung mobile phones before we
distribute the phones to retailers. We believe this process will increase name
recognition of our financial information, stock trading, and currency exchange
services with wireless receiver users.
There are three main first-tier wholesalers of Samsung phones in China:
Shanghai Taili Communication Equipment Co., Ltd., Shenzhen Tianyin Communication
Development Co., Ltd., and Guangzhou Yingtai Data Power Technology Co., Ltd.
These first-tier wholesalers contract, through local branches, with
sub-wholesalers to distribute each Samsung model in a defined area. We have
contracts with Shanghai branch offices of the three main first-tier wholesalers
on whom we rely, making us a sub-wholesaler distributor of nine Samsung mobile
phone models in the Shanghai region. We sell approximately 52% of our mobile
phones to three retailers.
Our Business Strategy
Our objective is to maintain and strengthen our position both as a
provider of wireless value-added information services and as a distributor of
mobile phones in the Shanghai region. In order to achieve our objective, we plan
to, among other things, increase the number of subscribers to our value-added
information services by increasing the number of mobile phones we distribute and
pre-installing those phones with the end-user portion of our Sifang Gutong
software. Key strategies for achieving our goal are to:
o Continue to expand and diversify our portfolio of wireless value-added
information services, including new SMS, 2.5G and other next generation
services such as those compatible with 3G,
o Increase investment in sales, marketing and branding, both in
conjunction with network operators and through independent activities,
in order to promote customer awareness of our wireless value-added
information services in China,
o Continue to strengthen our relationships with China Mobile and China
Unicom by increasing our sales presence at the national and local
levels and through joint marketing and promotion activities,
o Expand our marketing channels by continuing to develop integrated
marketing campaigns with traditional media outlets,
35
o Continue to be a sub-wholesaler of Samsung mobile phones and increase
the number of models of mobile phones that we distribute, and
o Work on establishing relationships with new mobile phone manufacturers
and wholesalers in order to diversify our distribution business.
Our Value-Added Information Services
Financial Services
Our primary focus with regard to value-added information services is
the provision of financial information services utilizing our Sifang Gutong
software. This software, developed by Chengao, utilizes the JAVA and BREW
platforms. JAVA and BREW utilize the more advanced 2.5G technology standard,
which enables high-capacity wireless data transmissions. As a result, services
offered over these platforms are more sophisticated and offer users higher
quality graphics and richer content and interactivity, commanding a premium
price over our other services. Our Sifang Gutong software enables our mobile
phone and pager customers to access quotes and retrieve customized
investment-related information, as well as access our currency exchange
information.
Sifang Gutong provides our mobile phone and pager customers with the
ability to receive streaming real-time quotes, including stocks, most active
issues, largest gainers and losers, and mutual funds for securities trading on
the Shenzhen and Shanghai stock exchanges. Our Sifang Gutong software available
to mobile phone users includes a stock trading function that enables our mobile
phone customers to directly place orders to buy and sell securities listed on
the two aforementioned stock exchanges. Our trading window corresponds with the
hours that securities markets are open from 9:30 a.m. to 11:30 a.m., and from
1:00 p.m. to 3:00 p.m., Beijing Time.
We receive a continuous direct feed of detailed quote data, market
information and news. Our customers can create customized lists of stocks for
quick access to current trading information. Through our relationships with
financial information companies such as Shanghai Stock Information Company, we
also provide access to breaking news, charts, market commentary and analysis.
The value-added financial information we offer can only be accessed by
a customer on whose mobile phone or pager the end-user portion of our Sifang
Gutong software has been installed. We plan to pre-install the end-user portion
of our Sifang Gutong software in all of the Samsung mobile phones that we
distribute. With regard to mobile phones and pagers not distributed by us, we
will provide installation of our Sifang Gutong software free of charge upon
request.
Pursuant to the request of a Beijing retailer, we entered into an
agreement with Chengao and Sifang Information whereby Chengao installs the
end-user portion of our Sifang Gutong software into mobile phones owned by the
retailer. The retailer sells these phones at a premium price to consumers. In
return for the premium price, the consumers receive our value-added information
services for six months free of charge. The retailer passes the premium back to
Chengao, who retains a small installation fee and then passes the remainder on
to us. This relationship helps us market our value-added information services
and enables us to establish relationships with new customers.
Other Services
We also provide icons and screen savers, multiplayer action games,
Western horoscopes, jokes and event-driven or entertainment news updates. These
services represent only a small portion of our value-added information services
revenues at the present time. However, we believe that providing wireless
receiver users in China access to entertainment-related services increases our
ability to retain our financial information subscribers and expand our
subscriber base, and we expect the entertainment-related services portion of our
value-added information services business will grow over time.
36
o Horoscopes. With this service, users can obtain daily Western
horoscopes via their mobile phones or pagers.
o Games. We offer interactive SMS, JAVA and WAP-based games that can be
played on the screens of mobile phones. These games are designed to be
easy to play on the dial pad of a mobile phone and to maximize the
graphics available on mobile phone screens. Our current game offerings
include our popular titles Ant Kingdom and English Island. Ant Kingdom,
designed for the WAP platform, is a role-playing game set in the
kingdom of Ant. Players begin play as a soldier, and as they gain
experience in the game, gradually build their character to higher
levels such as captain, officer and eventually, king. The goal of the
game is to be the king. In English Island, a JAVA-based educational
game, players are given English words and must spell them correctly.
Every time a player spells a word correctly, the player's score
increases. The faster a player can spell words correctly, the higher
the score he can achieve.
o Jokes. We send users of this service a variety of jokes on demand or
via automatic daily messages.
o News. We automatically send periodic SMS messages on recent
event-driven news, sports (especially soccer), or entertainment events
to subscribers of this service. Mobile phone users can also download
desired information on demand. We obtain our news content from
government affiliated media companies, such as XinhuaNet and other
local media.
Content Relationships
Our content collaborators authorize the inclusion of their content in
one or more of our value-added information services for a fixed fee which we pay
directly to the provider. Our agreements with our content collaborators usually
have a one-year term, and are non-exclusive. Currently, our key content
collaborators are:
o Shanghai Stock Information Company.
o Xinhua News Agency (Shanghai).
o Shanghai Wanguo Stock Information Company.
o Shanghai Yibang Stock Information Company.
o Shanghai Shiji Stock Information Company.
o Korea Techall Co., Ltd. (which provides game content).
o Shanghai Shenfa Software Co., Ltd. (which provides game content).
Marketing Relationships
Sifang Information and Tianci, our affiliated value-added mobile phone
service providers, have marketing relationships with China Mobile and China
Unicom. We sell and market our services principally through China Mobile and
China Unicom. We also sell and market through Sifang Information's Web site,
www.sifang.net, and promotional events, direct marketing, media advertising and
other activities.
We are also focused on expanding our marketing channels by developing
integrated marketing campaigns with traditional media outlets and multinational
corporations. For example, we have been involved in several marketing campaigns
with Motorola whereby our wireless value-added services are promoted in their
in-store and media advertising in China, and Motorola is in turn promoted
through our services.
We sell all of our paging value-added information services through our
affiliated value-added paging service provider, Sifang Information. We contract
directly with end users to settle all payments from pager users. We market our
paging value-added information services through traditional media outlets,
including newspapers and magazines, and directly to end-users.
Operator Channels
General. All of our paging value-added information services are
provided through the paging network owned by Sifang Information. We contract
directly with the pager users to collect all fees generated from our value-added
information services. We have an information service and cooperation agreement
with Sifang Information that provides us exclusive access to their paging
37
network for ten years. This agreement is automatically renewable for additional
one year terms unless we decide to terminate. All of our mobile phone
value-added information services are provided to mobile phone users by Sifang
Information through the networks of China Mobile and China Unicom. Previously,
mobile phone users paid for our services by purchasing pre-paid services cards.
Now, our services are billed to mobile phone customers in one of two ways: (1)
certain of our customers pay for our services in advance when they purchase our
services and a mobile phone together in a premium package (through our
relationship with Chengao and Sifang Information), and (2) our other customers
(who do not purchase our services as part of any such premium package) are
billed by the mobile operators, who collect the fees for our services, including
both our data access and short message services, from their mobile phone
subscribers. The mobile operators then pass those fees (net of fees charged by
the mobile operator) to our affiliated value-added service providers, Sifang
Information and Tianci, who in turn pass those fees to us in return for a small
fee pursuant to the terms of information service and cooperation agreements
between us and each of them.
Our management team utilizes our experience in China to develop close
ties with the key personnel of the mobile operators at the central and
provincial levels. As of September 30, 2004, we had approximately 25 sales
professionals strategically located in provinces and municipalities concentrated
in the eastern and southern regions of China to work closely with the mobile
operators at the local level, where pricing and important marketing and
operational decisions are made. Our sales network enables us to work closely
with operators to facilitate the approval required for new service offerings and
for related pricing and to enjoy enhanced marketing and promotional support. We
are also able to gain insight into developments in the local markets and the
competitive landscape, as well as new market opportunities. Our sales
professionals are well-incentivized; most of their compensation is tied to usage
of our services in the applicable region.
Coordinated Marketing Campaigns. Our affiliated wireless service
providers cooperate in marketing campaigns with China Mobile and China Unicom.
These network operators distribute literature marketing us and our affiliates.
Non-Operator Channels
We also focus on non-mobile operator sales and marketing activities,
such as:
o promoting Sifang Information's Web site, www.sifang.net, to potential
users as a fun, easy-to-access place to request our wireless content
and applications,
o engaging in direct marketing to mobile phone users by, for example,
including advertising inserts in users' bills from Shanghai Mobile and
Shanghai Unicom,
o engaging in direct marketing to stock market investors by, for example,
including advertising inserts in investors' bills from brokerage
companies such as GF Securities Co., Ltd., Guotai Junan Securities Co.,
Ltd., Everbright Securities Co., Ltd. and Guoxin Securities Co., Ltd.,
o utilizing our database of users to create targeted marketing campaigns,
o advertising in traditional media outlets such as newspapers and
magazines, and
o we plan to pre-install the Samsung mobile phones we distribute with the
end-user portion of our Sifang Gutong software, and place brochures
touting our stock information, stock trading and currency exchange
services in the packaging of those phones, before distributing them to
retailers.
Customer Research
Our sales, marketing and product development activities are supported
by our five-member customer research department. This department focuses our
sales efforts in the following three distinct phases:
Customer Acquisition. Our customer research department analyzes the
success rates of various national and local marketing campaigns in which we are
involved, including by user segment and cost per user, in order to determine
38
which campaigns are the most effective. Using phone surveys, focus groups and
analyses of usage patterns, the department also considers demographic and other
market factors to identify product mixes and product categories which are
suitable for the current market environment.
Customer Conversion. To enhance our ability to convert one-time or
occasional customers into regular users of our services, our customer research
department analyzes customer and product churn rates across the market, average
revenue per user data and other information. In this way, it can identify
different customer segments and develop targeted marketing campaigns for those
segments, including cross-selling and up-selling marketing campaigns.
Customer Retention. Our customer research department evaluates ways to
maximize user interest in our services through, for example, providing feedback
to our product developers to improve product features based on customer
information and bundling older services with newly launched services. It also
creates various reward programs designed to enhance customer loyalty.
Customer Services
We pride ourselves in providing high quality customer service. Our
dedicated customer service center based in Shanghai provides our users real-time
support and is staffed by 20 full-time professionals. The center currently
operates everyday from 7:00 a.m. to 10:00 p.m. We strive to achieve the fastest
response times and highest customer satisfaction levels in the industry.
Competitive Landscape
There are currently three broad categories of wireless service
providers in China:
o Portal service providers, which have established expertise in Internet
content and have subsequently branched into mobile space. The portals
serve as content aggregators offering a variety of wireless value-added
services. These national portal operators include Sohu, NetEase, SINA,
and Tom.com.
o Dedicated service providers, whose businesses focus on offering a
variety of wireless content directly to mobile users. These providers
include Linktone, Newpalm and Mtone Wireless.
o Niche service providers, which focus on a particular market segment or
application that often builds on a pre-existing sector competency.
These providers include Tencent, Enorbus, and Solute. We belong in this
category because of our focus on financial information services.
We may also face competition from international wireless service providers.
As the mobile operators are becoming more selective in choosing their service
providers to promote high quality content, ensure high levels of customer
service and limit the number of providers with which they have to deal, scale is
becoming more important, and we believe the industry will likely experience
consolidation with the leading nationwide providers gaining more market share at
the expense of smaller local providers. Nationwide providers may also acquire
some of their smaller competitors to gain access to local relationships with the
mobile operators in China or new product expertise.
39
Distribution
Our Distribution Operation
We distribute various mobile phone brands in the Shanghai, China
region. We distribute mobile phones manufactured primarily by Samsung, and to a
lesser extent, by Motorola, Inc. ("Motorola"). We began distributing Motorola
mobile phones in early 2002 and Samsung mobile phones in November 2002. We began
discontinuing our Motorola mobile phone distribution business on June 30, 2004.
We will remain a distributor, for the Shanghai region, of nine different mobile
phone models manufactured by Samsung, and plan to increase our sales of Samsung
mobile phones.
Six of the Samsung models we distribute are compatible with the CDMA
network and three of the Samsung models we distribute are compatible with the
GSM network. We plan to pre-install the end-user portion of our Sifang Gutong
software in all of the Samsung mobile phones we distribute, and market our stock
information, stock trading, and currency exchange services by placing brochures
touting those services in the packaging of those Samsung mobile phones before we
distribute the phones to retailers. We believe this process will increase name
recognition of our financial information and stock trading services with
wireless receiver users.
There are three main first-tier wholesalers of Samsung phones in China:
Shanghai Taili Communication Equipment Co., Ltd., Shenzhen Tianyin Communication
Development Co., Ltd., and Guangzhou Yingtai Data Power Technology Co., Ltd.
These wholesalers contract, through local branches, with sub-wholesalers to
distribute each model in a defined area. We have contracts with Shanghai branch
offices of the three main first-tier wholesalers on whom we rely, making us a
sub-wholesaler distributor of nine Samsung mobile phone models in the Shanghai
region. We sell approximately 52% of our mobile phones to three retailers.
We have rebate programs with Shanghai Taili Communication Equipment
Co., Ltd. and Shenzhen Tianyin Communication Development Co., Ltd. whereby we
are credited a certain portion of the sales price we paid to the first-tier
wholesaler if we are able to fulfill certain sales volume prescribed by that
first-tier wholesaler. As a result, we are entitled to receive certain rebates
and credits for the inventory held and sold by us within a specified period of
time as set by the first-tier wholesaler offering the rebate program.
Competition
We estimate that we compete with between ten and 20 other
sub-wholesalers for the rights to distribute Samsung phones in the Shanghai
region. The three main competitive factors the wholesalers consider in granting
a sub-wholesaler the rights to distribute a particular model include:
Available Cash Flow. Sub-wholesalers must be able to pay for the mobile
phones they desire to purchase from first-tier wholesalers. First-tier
wholesalers will be hesitant to grant rights to distribute a particular model to
a sub-wholesaler if that sub-wholesaler does not have sufficient capital to make
large purchases. We believe that having adequate cash flow gives us a
competitive advantage.
Relationships with Retailers. The wholesalers look to the types of
relationships sub-wholesalers have with large retailers when deciding which
sub-wholesaler to utilize. We have strong relationships with three large
retailers in Shanghai and sell approximately 52% of our mobile phones to these
three retailers.
Relationships with Wholesalers. We have relationships with the three
major wholesalers of Samsung phones in China and have been sub-wholesalers for
those three wholesalers for more than a year.
40
Employees
The following table summarizes the functional distribution of our employees as
of December 29, 2003 and 2004:
December 20,
Department 2003 2004
Business Development 5 5
Customer Research 5 5
Customer Service 20 20
Finance 3 3
Human Resources 2 2
Investor Relations 2 2
Legal and Administrative 2 2
Sales and Marketing 25 25
Product Development 20 20
Technical Support 10 10
Total 94 94
None of our personnel are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
We currently occupy two office spaces in the Shanghai region. We lease
the first, located at 429 Guangdong Road, Shanghai, People's Republic of China
200001, for approximately $41,000 a year, pursuant to an operating lease that
expires in December 2006. This office space contains our corporate headquarters,
and is approximately 250 square meters under an operating lease that expires in
December 2006. We own the second, located at 689 Laoshandong Road, Shanghai,
People's Republic of China 200120, which houses our technical team and servers,
and is approximately 800 square meters. We believe we will be able to obtain
adequate facilities, principally through the leasing of appropriate properties,
to accommodate our future expansion plans.
Legal Proceedings
No legal proceedings have been or are currently being undertaken for or
against the company, nor are we aware of any contemplated proceedings.
Wireless Technology Standards in China
Several different wireless technology standards have been developed
which operate at different frequencies with both analog and digital radio
signals. First generation wireless telephone systems employ analog technology,
while newer systems employ digital technology. Digital wireless technology,
commonly referred to as second generation technology, or 2G, multiplies the
number of users that can be served by the same band of spectrum using analog
technology. The wireless technologies most relevant in China currently include:
o Global System for Mobile Communications, or GSM -- initially developed
in order to facilitate unification and integration of
telecommunications within the European Union has become widespread
throughout most Asian countries. GSM technology breaks audio signals
into sequential pieces of data of a defined length, places each piece
into an information conduit at specific intervals and then reconstructs
the pieces at the end of the conduit. A key component of the GSM system
is the SIM card. Data stored on the card identifies the subscriber to
the mobile network as well as the service authorized for that
subscriber. Since the identity of the subscriber is held on the card,
any mobile phone can be used in conjunction with the SIM card.
o Code Division Multiple Access, or CDMA -- a digital technology standard
which has been used in commercial operation by several operators in
certain countries such as the United States and Korea. Unlike GSM, CDMA
technology is a continuous transmission technology which uses a coding
system to mix discrete audio signals together during transmission and
then separates those signals at the end of transmission.
41
Prior to the commercial rollout of third generation, or 3G, networks,
2.5G technology standards have been developed for both the GSM and CDMA
technologies to offer higher data transmission speeds, enabling the use of more
data intensive products. Current 2.5G wireless technologies include:
o General Packet-Switched Radio Service, or GPRS -- offers faster data
transmission with speeds ranging from 56 kilobits per second, or Kbps,
to 114 Kbps via a GSM network. GPRS supports a wide range of bandwidths
and is particularly suited for sending and receiving small bursts of
data, such as e-mail and Web browsing, as well as large volumes of
data. GPRS also makes it possible for users to make telephone calls and
transmit data simultaneously.
o CDMA 1x RTT -- an advanced CDMA-based technology which allows
transmission of data at speeds of up to 144 Kbps, compared to a maximum
of 64 Kbps for second generation CDMA networks.
3G represents several technology standards developed by The
International Telecommunications Union. Third generation technology has been
developed for both the GSM standard and CDMA standard.
Wireless value-added services can be offered through all of these
technology standards and most commonly include:
o Short Messaging Services, or SMS -- a service that enables a user to
send and receive text messages comprised of words or numbers or an
alphanumeric combination. SMS was created when it was incorporated into
the GSM standard.
o Wireless Application Protocol, or WAP -- a software protocol standard
that defines a standardized means of transmitting Internet-based
content and data to handheld devices such as mobile phones and pagers
with secure access to e-mail and text-based Web pages. WAP supports
most wireless networks including GSM and CDMA.
o Multimedia Messaging Services, or MMS -- a method of transmitting
graphics, video clips, sound files and short text messages over
wireless networks using the WAP protocol. MMS, however, is not the same
as e-mail in that MMS is based on the concept of multimedia messaging.
An MMS message is coded so that the images, sounds and text are
displayed in a predetermined order as one singular message.
Furthermore, MMS does not support attachments as e-mail does.
o JAVA -- a general programming environment that creates applications for
the Internet or any other distributed networks. JAVA applications are
intended to be independent of the hardware platform.
42
Market Overview
Wireless Value-Added Services as a Revenue Driver for the Mobile Operators
As the wireless market in China continues to develop, an increasing
portion of the mobile operators' users have relatively low per capita incomes.
These subscribers generally yield lower levels of average revenue per user, or
ARPU, because they are primarily users of pre-paid services. In addition,
China's wireless market is becoming increasingly competitive, as demonstrated by
the recent CDMA promotions by China Unicom, as well as the intra-city wireless
offerings by China's two fixed-line operators, China Telecom and China Netcom,
which offer users limited mobile services within a city based on Personal
Handyphone Service or Personal Access System technology. In addition, China
Telecom, China Netcom and possibly other parties are expected to be awarded two
wireless licenses, although the timing of such grants is unclear. Both China
Telecom and China Netcom are large, established companies with significant
assets and the entry by them or other companies into the Chinese wireless market
could lead to further competition among the mobile operators. Due to these
pressures on the traditional voice-related businesses of the mobile operators,
SMS and other wireless value-added services have become a key differentiator and
increasingly important driver for the growth prospects of China Mobile and China
Unicom. We believe wireless value-added services will play a key role in the
mobile operators' competitive positioning when attracting and retaining users as
well as in their efforts to reverse declining ARPU levels.
Against this competitive backdrop, the market for wireless value-added
services in China has expanded significantly and is expected to continue to grow
at a fast pace. Currently, SMS services continue to represent the bulk of the
wireless value-added services market in China. This market is increasingly
shifting towards next generation technologies, with mobile operators upgrading
their networks to GPRS and CDMA 1x RTT and users upgrading to next generation
mobile phones that can operate with technologies such as MMS and WAP. China
Mobile and China Unicom have recognized this opportunity and are collaborating
with select service providers, including us, to further develop 2.5G
applications and services.
Operators' Wireless Value-Added Services Initiatives in China
China Mobile was the first to enter the market by introducing a popular
trial SMS program in connection with the Sydney Olympic Games in August 2000.
China Mobile later established its Monternet(TM) platform in November 2000.
China Unicom started its Uni-Info platform in May 2001. Monternet(TM) and
Uni-Info offer mobile phone users a single access point to order and pay for
wireless value-added services.
From the inception of Monternet(TM) and Uni-Info, China Mobile and
China Unicom have outsourced almost all content and applications for their
platforms, meaning that these operators, much like NTT DoCoMo and SK Telecom,
rely almost entirely upon third-party service providers to drive their network
traffic, supply attractive wireless services and increase revenue from their
wireless value-added services. In turn, the operators focus on the operation of
their networks. For their part, wireless value-added service providers in China
rely on the two operators, China Mobile and China Unicom, for the network
distribution of their content and services, billing and collection, and
remittance of revenues. Both operators have established similar fee
arrangements.
In addition to their working relationships with third-party service
providers, China's mobile operators will likely form closer alliances with
mobile phone vendors in order to standardize user friendly access to and
functionality for wireless value-added services in all mobile phones.
Government Regulation
The following is a summary of the principal governmental laws and
regulations that are or may be applicable to wireless service providers like us
in China. The scope and enforcement of many of the laws and regulations
described below are uncertain. We cannot predict the effect of further
developments in the Chinese legal system, including the promulgation of new
laws, changes to existing laws or the interpretation or enforcement of laws,
particularly with regard to wireless value-added services, which is an emerging
industry in China.
43
Regulation of Telecommunication Services
The telecommunications industry, including certain wireless value-added
services, is highly-regulated in China. Regulations issued or implemented by the
State Council, the Ministry of Information Industries, and other relevant
government authorities cover many aspects of telecommunications network
operation, including entry into the telecommunications industry, the scope of
permissible business activities, interconnection and transmission line
arrangements, tariff policy and foreign investment.
The principal regulations governing the telecommunications services
business in China include:
o Telecommunications Regulations (2000), or the Telecom Regulations. The
Telecom Regulations categorize all telecommunications businesses in
China as either infrastructure telecommunications businesses or
value-added telecommunications businesses. The latter category includes
SMS and other wireless value-added services. Under the Telecom
Regulations, certain services are classified as being of a value-added
nature and require the commercial operator of such services to obtain
an operating license, including telecommunication information services,
online data processing and translation processing, call centers and
Internet access. The Telecom Regulations also set forth extensive
guidelines with respect to different aspects of telecommunications
operations in China.
o Regulations for the Administration of Foreign-Invested
Telecommunications Enterprises (2002), or the FI Telecom Regulations.
The FI Telecom Regulations set forth detailed requirements with respect
to capitalization, investor qualifications and application procedures
in connection with the establishment of a foreign-invested telecom
enterprise. Under the FI Telecom Regulations, a foreign entity is
prohibited from owning more than 50% of the total equity in any
value-added telecommunications business in China, subject to certain
geographic limitations.
o Administrative Measures for Telecommunications Business Operating
License (2001), or the Telecom License Measures. Under the Telecom
License Measures, an approved value-added telecommunications service
provider must conduct its business in accordance with the
specifications recorded on its Telecom Business Operating License.
In addition to regulations promulgated at the national level by the
Chinese government, the Shanghai municipal government has issued provisional
regulations requiring SMS service providers to obtain licenses from or register
with the local Ministry of Information Industries branch office before providing
SMS service within the city. At this time, it is unclear whether national
regulations will be promulgated regulating SMS services.
Our affiliates, Sifang Information and Tianci, each have a value-added
telecommunication services license issued by the Shanghai Municipal
Telecommunications Administration Bureau, which is the local office of the
Ministry of Information Industries. They are each also in the process of
applying for an inter-provincial value-added telecommunication license with the
Ministry of Information Industries.
Other Laws and Their Application
Regulation of Internet Content Services. As a wireless value-added
information services provider, we do not engage in the Internet portal business
which typically involves the provision of extensive Internet content services,
including Chinese language Web navigational and search capabilities, content
channels, web-based communications and community services and a platform for
e-commerce, such as auction houses. Sifang Information registered with the
Shanghai Telecommunication Administration Bureau in January 2001 to provide
commercial services at the www.sifang.net Web site.
44
As a commercial ICP provider, Sifang Information is prohibited from
posting or displaying any content that:
o opposes the fundamental principles determined in China's Constitution;
o compromises state security, divulges state secrets, subverts state
power or damages national unity;
o harms the dignity or interests of the state;
o incites ethnic hatred or racial discrimination or damages inter-ethnic
unity;
o sabotages China's religious policy or propagates heretical teachings or
feudal superstitions;
o disseminates rumors, disturbs social order or disrupts social
stability;
o propagates obscenity, pornography, gambling, violence, murder or fear
or incites the commission of crimes;
o insults or slanders a third party or infringes upon the lawful rights
and interests of a third party; or
o includes other content prohibited by laws or administrative
regulations.
Failure to comply with these prohibitions may result in the closing of Sifang
Information's Web site.
Regulation of News Dissemination through SMS Services. Pursuant to a
circular issued by the Shanghai Communications Administration, distribution of
news content through wireless applications like SMS must be approved by relevant
government agencies. Both Sifang Information and Tianci have all necessary
approvals.
Regulation of Advertisements. The State Administration of Industry and
Commerce, or the SAIC, is the government agency responsible for regulating
advertising activities in China. The SAIC has not promulgated regulations
specifically aimed at wireless advertising through a media other than the
Internet, such as through SMS services. One provisional regulation issued by
Shanghai municipal government prohibits service providers from sending SMS
advertisements without the client's consent.
As part of our non-mobile operator marketing activities, we have
developed integrated marketing campaigns with traditional media outlets such as
magazines and newspapers and multinational corporations through certain
cross-selling efforts with companies, including Motorola and Samsung. If the
SAIC were to treat our integrated marketing campaigns or other activities as
being advertising activities, we would need to apply to the local SAIC for an
advertising license to conduct wireless advertising business (through SMSs, for
example). We can give no assurance that such application would be approved by
the SAIC. Failure to obtain such approval could result in penalties including
being banned from engaging in online advertising activities, confiscation of
illegal earnings and fines.
Foreign Exchange Controls. The principal regulations governing foreign
exchange in China are the Foreign Exchange Control Regulations (1996) and the
Administration of Settlement, Sale and Payment of Foreign Exchange Regulations
(1996), or the Foreign Exchange Regulations. Under the Foreign Exchange
Regulations, Renminbi is freely convertible into foreign currency for current
account items, including the distribution of dividends. Conversion of Renminbi
for capital account items, such as direct investment, loans and security
investment, however, is still subject to the approval of the State
Administration of Foreign Exchange, or SAFE.
Under the Foreign Exchange Regulations, foreign-invested enterprises
are required to open and maintain separate foreign exchange accounts for capital
account items (but not for other items). In addition, foreign-invested
enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing valid commercial
documents and, in the case of capital account item transactions, obtaining
approval from SAFE.
Intellectual Property and Proprietary Rights
We rely primarily on a combination of copyright laws and contractual
restrictions to establish and protect our intellectual property rights. We
require our employees to enter into agreements requiring them to keep
confidential all information relating to our customers, methods, business and
45
trade secrets during and after their employment with us. Our employees are
required to acknowledge and recognize that all inventions, trade secrets, works
of authorship, developments and other processes, whether or not patentable or
copyrightable, made by them during their employment are our property. They also
sign agreements to substantiate our sole and exclusive right to those works and
to transfer any ownership that they may claim in those works to us.
While we actively take steps to protect our proprietary rights, such
steps may not be adequate to prevent the infringement or misappropriation of our
intellectual property. This is particularly the case in China where the laws may
not protect our proprietary rights as fully as in the United States.
Infringement or misappropriation of our intellectual property could materially
harm our business. Sifang Information has registered the following Internet and
WAP domain name www.sifang.net.
Shanghai Sifang Communication Company ("Sifang Communication") has
registered one trademark with China's Trademark Office. That trademark is our
logo, a square (the English translation of "Sifang" is "square"). China's
trademark law utilizes a "first-to-file" system for obtaining trademark rights.
As a result, the first applicant to file an application for registration of a
mark will preempt all other applicants. Prior use of unregistered marks, except
"well known" marks, is generally not a basis for legal action in China. We may
not be able to successfully defend or claim any legal rights in any trademarks
for which we apply in the future.
Pursuant to a license agreement between our affiliate, Sifang
Communication, and us, we have the right to use our registered trademark, our
square logo, whenever necessary. We also acquired all of Sifang Information's
interest in the Sifang Gutong software pursuant to the terms of the spin-off of
Sifang Information's business divisions focusing on value-added information
services and distribution of mobile phones. We have the right to use the word
"Sifang" and to market ourselves through www.sifang.net with regard to both of
the spun-off divisions.
Many parties are actively developing and seeking patent protection for
wireless services-related technologies. We expect these parties to continue to
take steps to protect these technologies, including seeking patent protection.
There may be patents issued or pending that are held by others and that cover
significant parts of our technology, business methods or services. Disputes over
rights to these technologies are likely to arise in the future. We cannot be
certain that our products do not or will not infringe valid patents, copyrights
or other intellectual property rights held by third parties. We may be subject
to legal proceedings and claims from time to time relating to the intellectual
property of others.
46
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our executive officers
and directors and their respective ages and positions as of January 3, 2005. The
directors listed below will serve until the next annual meeting of the China
Digital Wireless stockholders:
Name Age Positions Held
---- --- --------------
Tai Caihua 47 Director, President, Chairman of the Board
Shi Ying 44 Director
Huang Tianqi 32 Director, Chief Technology Officer
Jing Weiping 40 Director
Mao Ming 42 Director
Song Jing 28 Director
Fu Sixing 43 Director, Chief Executive Officer
Yu Ruijie 41 Director
Zhang Xiaodong 36 Director
Huang Wei 41 Director
Lu Qin 35 Chief Financial Officer
Tai Caihua has served as our president, chairman of our board of
directors and a member of our board of directors since June 23, 2004. Mr. Tai
has been (i) the president and sole director of our wholly owned subsidiary,
Sifang Holdings, since February 2004; (ii) chairman of the board of directors of
Sifang Holdings' wholly owned subsidiary, TCH, since our inception in May 2004;
(iii) director and general manager of Shanghai Tianci Industry (Group) Co.,
Ltd., one of our affiliates, since January 1994 and (iv) a director of Sifang
Information, one of our affiliates, since December 2001. Mr. Tai holds a Masters
of Business Administration from the Macau University of Science and Technology.
Shi Ying has served as a member of our board of directors since June
24, 2004. Ms. Shi has been the head of operations and a member of the board of
directors of TCH since our inception in May 2004. For the past eight years she
headed the operations department of Sifang Information. Ms. Shi graduated from
the Shanghai Sports College with a Bachelors degree.
Huang Tianqi has served as our chief technology officer since June 23,
2004 and a member of our board of directors since June 24, 2004. Mr. Huang has
served as chief technology officer of Sifang Holdings and vice-general manager,
chief technology officer and a director of TCH since their inception in February
2004 and May 2004, respectively. Mr. Huang also serves as the vice-general
manager and a member of the board of directors of Sifang Information. Before
becoming vice-general manager, Mr. Huang was the chief technology officer at
Sifang Information for seven years. Mr. Huang graduated from Nanjing University
of Posts and Telecommunications with a Bachelors Degree and from Shanghai Jiao
Tong University with a Masters of Science Degree.
Jing Weiping has served as a member of our board of directors since
June 24, 2004. Mr. Jing has served as a member of the board of directors of TCH
since our inception in May 2004 and as a Director of Sifang Information since
2001. Mr. Jing served as the manager of the technology assurance department of
Sifang Information for the past nine years. Mr. Jing received his Bachelors
Degree from Dong Hua University.
Mao Ming serves as a member of our board of directors. He was elected
to our board of directors June 24, 2004. He has been (i) the general manager and
a member of the board of directors of TCH since our inception in May 2004; and
(ii) the general manager and a director of Sifang Information since January
1998. Mr. Mao graduated from China PLA Measurement College with a Bachelors
Degree and from the Macau University of Science and Technology with a Masters of
Business Administration.
47
Song Jing has served as a member of our board of directors since June
24, 2004. Mr. Song has served as vice-general manager and a member of the board
of directors of TCH since our inception in May 2004 and as general manager of
Shanghai Shan Tian Telecommunication Co., Ltd., an affiliate of ours, since
November 2003. Previously, Mr. Song served as director and general manager of
Shanghai Zhong Si Hua Hao Co., Ltd. for one year and assistant general manager
of both Shanghai Hua Si Trading Co., Ltd. and Shanghai Qi Shi Trading Co., Ltd
for five years.
Fu Sixing has served as our chief executive officer since June 23, 2004
and a member of our board of directors since June 24, 2004. Mr. Fu has served as
executive manager of Sifang Holdings and as the head of the research and
development department and a director of TCH since their inception in February
2004 and May 2004, respectively. For the past seven years, Mr. Fu was (i) the
assistant to general manager of Shanghai Tianci Industry (Group) Co., Ltd.; (ii)
a director and the general manager of Shanghai Sifang Health Technology Co.,
Ltd. and directorate secretary of Sifang Information. Mr. Fu received a
Bachelors of Science in Physics from Nanjing University, a Masters of Social
Science in Economics from Huadong Normal University and a Doctorate of Business
Administration from the University of Southern California.
Yu Ruijie has served as a member of our board of directors since June
24, 2004. Mr. Yu has served (i) as head of the Systems Department and a director
of TCH since our inception in May 2004 and (ii) as the head of the Systems
Department of Sifang Information since January 1994. Mr. Yu received a Bachelors
Degree in Computer Science from Shanghai University of Engineering Science.
Zhang Xiaodong has served as a member of our board of directors since
June 24,2004. Mr. Zhang has served as the head of the projection department of
TCH since our inception in May 2004. Mr. Zhang also serves as a director and the
head of the projection department of Sifang Information. For the past nine
years, Mr. Zhang served as head of the wireless engineering department at Sifang
Information. Mr. Zhang graduated from Shanghai Jiao Tong University with a
Bachelors Degree and received a Masters Degree from the Macao University of
Science and Technology.
Huang Wei has served as a member of our board of directors since June
24, 2004. Mr. Huang has served as (i) the vice-general manager of TCH since our
inception in May 2004 and (ii) vice-general manager and a director of Sifang
Information. since 1993. Ms. Huang graduated from Nanjing University of Air
Force and Politics with a Bachelors Degree in Logistics.
Lu Qin has served as our Chief Financial Officer since June 23, 2004.
Ms. Lu has served as the (i) head of the accounting department of TCH and Sifang
Information since May 2004 and April 1998, respectively and (ii) financial
controller of Sifang Holdings since February 2004. Ms. Lu graduated from
Shanghai Television University with a Bachelors Degree in Financial Accounting
and is a Certified Public Accountant.
Board Composition and Committees
The board of directors is currently composed of ten members, including
Tai Caihua, Song Jin, Shi Ying, Mao Ming, Fu Sixing, Huang Tianqi, Huang Wei,
Jing Weiping, Yu Ruijie and Zhang Xiaodong. All Board action requires the
approval of a majority of the directors in attendance at a meeting at which a
quorum is present.
We currently do not have standing audit, nominating or compensation
committees. We intend, however, to establish an audit committee and a
compensation committee of the board of directors as soon as practicable. We
envision that the audit committee will be primarily responsible for reviewing
the services performed by our independent auditors, evaluating our accounting
policies and our system of internal controls. The compensation committee will be
primarily responsible for reviewing and approving our salary and benefits
policies (including stock options), including compensation of executive
officers.
48
Director Compensation
We do not pay our directors a fee for attending scheduled and special
meetings of our board of directors. We do reimburse each director for reasonable
travel expenses related to such director's attendance at board of directors and
committee meetings.
Indebtedness of Directors and Executive Officers
None of our directors or officers or their respective associates or
affiliates is indebted to us.
Family Relationships
Except as set forth herein, there are no family relationships among our
directors or officers. Mr. Tai Caihua, President and a member of our Board of
Directors is married to Ms. Shi Ying, a member of our Board of Directors and Ms.
Ying is also a sibling of Huang Wei, a member of our Board of Directors.
Executive Compensation
The following Summary Compensation Table sets forth all cash
compensation paid to our chief executive officer for services rendered in all
capacities to the company during the noted periods. No other executive officers
received salary and bonus compensation in excess of $100,000 during fiscal 2003.
Summary Compensation Table
Securities
Name and Principal Underlying Underlying
Positions Year Salary Options
-------------------------------- ---- ------ ----------
Tai Caihua (1)
President/Chairman of the Board 2004 $2,416 --
Timothy P. Halter (2)
Chief Executive Officer/Director 2004 $-0- 131,722
Glenn Little (3) 2004 $-0- --
Chief Executive Officer/Director 2003 $-0- --
------------------------
(1) Began service as an officer and director of the Company in June 2004.
Reported salary information is as of August 31, 2004.
(2) Appointed Chief Executive Officer in February 2004 and resigned as an
officer and director of the Company in June 2004.
(3) Resigned as an officer and director of the Company in March 2004.
49
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 3, 2005, certain
information with respect to the beneficial ownership of our common stock by (i)
each director and officer of China Digital, (ii) each person known to China
Digital to be the beneficial owner of five percent or more of the outstanding
shares of common stock of China Digital, and (iii) all directors and officers of
China Digital as a group. Unless otherwise indicated, the person or entity
listed in the table is the beneficial owner of, and has sole voting and
investment power with respect to, the shares indicated. Certain principal
stockholders are selling stockholders in this offering.
Amount and Nature of Beneficial Ownership (1)
---------------------------------------------
Number Percent of
Name of Beneficial Owner of Shares (2) Voting Stock (3)
------------------------ ------------- ----------------
Tai Caihua (4) 11,301,764 66.4%
Shi Ying (5) 11,301,764 66.4%
Halter Financial Group, Inc. (6) 1,271,287 7.5%
Chinamerica Fund, LP 877,193 5.2%
Mao Ming 413,480 2.4%
Song Jing 413,480 2.4%
Huang Tianqi 275,652 1.6%
Jing Weiping 275,652 1.6%
Fu Sixing 275,652 1.6%
Yu Ruijie 275,652 1.6%
Zhang Xiaodong 275,652 1.6%
Huang Wei 275,652 1.6%
Directors and executive officers
as a group (10 persons) 13,782,636 81.0%
------------------------
(1) On January 3, 2005, there were 17,018,692 shares of China Digital
Wireless common stock outstanding. Each person named below has sole
investment and voting power with respect to all shares of our common
stock shown as beneficially owned by the person, except as otherwise
indicated below.
(2) Under applicable rules promulgated by the SEC pursuant to the
Securities Exchange Act of 1934, as amended, or the Exchange Act, a
person is deemed the "beneficial owner" of a security with regard to
which the person, directly or indirectly, has or shares (a) the voting
power, which includes the power to vote or direct the voting of the
security, or (b) the investment power, which includes the power to
dispose or direct the disposition of the security, in each case
irrespective of the person's economic interest in the security. Under
these SEC rules, a person is deemed to beneficially own securities
which the person has the right to acquire within 60 days through (x)
the exercise of any option or warrant or (y) the conversion of another
security.
(3) In determining the percent of our common stock owned by a person (a)
the numerator is the number of shares of our common stock beneficially
owned by the person, including shares the beneficial ownership of which
may be acquired within 60 days upon the exercise of options or warrants
or conversion of convertible securities, and (b) the denominator is the
total of (i) the 17,018,692 shares of our common stock outstanding on
January 3, 2005 and (ii) any shares of our common stock which the
person has the right to acquire within 60 days upon the exercise of
options or warrants or conversion of convertible securities. Neither
the numerator nor the denominator include shares which may be issued
upon the exercise of any other options or warrants or the conversion of
any other convertible securities.
(4) Includes 1,791,743 shares held by Mr. Tai's wife, Shi Ying. Mr. Tai
disclaims beneficial ownership of those shares.
(5) Includes 9,510,021 shares held by Ms. Shi's husband, Tai Caihua. Ms.
Shi disclaims beneficial ownership of those shares.
(6) Includes 116,720 shares held by Timothy P. Halter, the president and
sole stockholder of Halter Financial Group, Inc.
50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On June 1, 2004, we entered into two information service and
cooperation agreements with Sifang Information, and one information service and
cooperation agreement with Tianci. Pursuant to those agreements, Sifang
Information and Tianci transmit all of our value-added information services to
customers of China's various wireless receiver networks. The agreements have
ten-year terms and we pay each of Sifang Information and Tianci a fee based on
the costs the two companies incur for the transmission of our reformatted
content. During the nine months ended September 30, 2004, we paid to Sifang
Information $425,879 for transmitting value-added information pursuant to an
information service and cooperation agreement between the Company and Sifang
Information.
During the normal course of our business, we incurred debt from related
parties and loaned money to related parties, including Sifang Information, for
financing purposes. In 2002, we borrowed funds from Sifang Information to start
our mobile phone distribution business. At December 31, 2002, the outstanding
balance of the loan was $604,062, and interest expense incurred on the borrowed
amount was $36,245. During 2003, we paid off all outstanding balances and loaned
certain amounts to Sifang Information, which amounts were repaid by Sifang
Information before year end. We continued to borrow funds from and lend funds to
Sifang Information, however, as of December 31, 2003, all such amounts had been
repaid. Interest expense incurred on amounts borrowed from Sifang Information
for the year ended December 31, 2003 was $12,082.
We advanced $966,522 to Sifang Information for financing purposes on
March 28, 2004. At March 31, 2004, the outstanding principal amount due from
Sifang Information was $966,522 and interest income on that amount was
immaterial because the amount was advanced at the end of March 2004. Sifang
Information repaid us the entire amount advanced, plus interest, on June 29,
2004.
We purchased a building located at 689 Laoshandong Road, Shanghai,
People's Republic of China 200120, from our related party, Shanghai Fude
Industry Co., for a price of $910,925. This building now houses our technical
team and our servers.
On June 30, 2004, TCH signed an agreement with Sifang Information Co.
Ltd. for developing a smart card information system related to citizen health
and exercise. This project is approved by the Shanghai Municipal Government.
Pursuant to the signed agreement, Sifang Information will develop smart card
information system in terms of the specifications contained the design
blueprint. This card can be used for accessing gym facilities and other
approved, related health facilities under the program. In accordance with the
financial terms of the signed agreement, Sifang Information will take care of
expenses related to the smart card marketing and related customer after-market
services. TCH will take care of expenses related to the detailed smart card
information system design and development, hardware and software maintenance,
and related information service. In return, TCH is entitled to share a major
portion of the future revenue generated by this smart card information system.
In order to initiate this project, TCH gave Sifang Information a line of credit
of up to RMB20,000,000 (equivalent approximately $2,418,000) for financing its
market promotion and penetration and deployment, with an interest rate based on
the market interest rate (at September 30, 2004 the interest rate was 5%),
interest payable monthly and principal to be repaid by Sifang Information no
later than June 30, 2006 resulting in an estimated total expense of
approximately RMB22,800,000 (equivalent of $2.7 million). The aforementioned
$2.4 million includes the outstanding balance of amounts due from Sifang of
$2,140,607 as of September 30, 2004. The interest income incurred on the
outstanding balance due from Sifang Information for the nine months ended
September 30, 2004 was $ 30,205, based on 5% as the annual interest rate.
Currently, TCH is engaging in the process of designing the sophisticated
software for the card information system and preparing for the operating of the
related hardware.
In the beginning of the third quarter of 2004, TCH had not obtained all
necessary government issued VAT invoices. As such, TCH was prohibited from
selling cellular phones to third parties. In lieu, TCH sold Samsung and other
brand GSM and CDMA mobile phones to Shantian and Sifang Information , two
related parties. As of September 30, 2004 the accounts receivable (trade)
balance due from Shantian and Sifang Information was $2,177,459.
During the nine months ended September 30, 2004, we sold Samsung and
other GSM mobile phones valued at $10,512,821 including a 3.6% mark-up to the
Shanghai Shantian Telecommunication Technology Inc. (Shantian) and Sifang
Information, each a related party. As of September 30, 2004 the accounts
receivable (trade) balance due from these parties was $2,177,459.
On February 23, 2004, we sold 987,915 shares of restricted common stock
for gross proceeds of $300,000, pursuant to a subscription agreement, to Halter
Financial Group, Inc., an entity owned by Timothy P. Halter, a former member of
the Board of Directors and the Company's former Chief Executive Officer.
Additionally, in consideration for agreeing to serve as an officer and director
of the Company, Timothy P. Halter was granted a warrant to purchase up to
131,722 shares of common stock of the Company. The warrant was exercised on June
14, 2004, and we received gross proceeds of $40,000 upon exercise.
51
On February 23, 2004, we agreed to pay Little and Company Investment
Securities, an entity owned by Glenn A. Little, our former controlling
stockholder, officer and director, $30,000 in consulting fees related to the
transaction discussed in the previous paragraph and in consideration for
maintaining the corporate entity. To formalize this obligation, we issued a
$30,000 non-interest bearing promissory note maturing on February 23, 2005.
Concurrent with the transaction discussed in the previous paragraph, we and
Little and Company Investment Securities executed an Exchange Agreement whereby
we issued 98,792 shares of common stock in satisfaction of the outstanding
promissory note.
On June 23, 2004, we entered into a Stock Purchase Agreement with
Halter Financial Group, Inc. pursuant to which we sold 166,667 shares of common
stock of the Company in exchange for $190,000. Timothy P. Halter is the sole
stockholder and President of Halter Financial Group, Inc. Pursuant to the Stock
Purchase Agreement, we granted to Halter Financial Group, Inc. an option to
require the Company to purchase up to 166,667 shares of common stock of the
Company 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 Halter
Financial Group, Inc., up to and including the earlier of the date that such
registration statement is declared effective by the SEC or Halter Financial
Group, Inc.'s shares are eligible for resale under Rule 144 under the Securities
Act of 1933.
DESCRIPTION OF OUR CAPITAL STOCK
The following description is a summary of the material terms of our
capital stock. This summary is subject to and qualified in our entirety by our
Articles of Incorporation, as amended, and Bylaws as amended, and by the
applicable provisions of Nevada law.
The authorized capital stock of the company consists of 100,000,000
shares of common stock, having a par value of $0.001 per share.
Common Stock. Each outstanding share of common stock entitles the
holder thereof to one vote per share on all matters. The Articles of
Incorporation do not permit cumulative voting for the election of directors,
which means that the holders of more than 50% of such outstanding shares voting
for the election of directors can elect all of the directors to be elected, if
they so choose; in such event, the holders of the remaining shares will not be
able to elect any of our directors. Stockholders do not have preemptive rights
to purchase shares in any future issuance of our common stock.
The holders of shares of our common stock are entitled to dividends out
of funds legally available when and as declared by our board of directors. Our
board of directors has not declared a dividend during the two preceding fiscal
years or during calendar 2004 and does not anticipate declaring a dividend in
the foreseeable future. In the event of liquidation, dissolution or winding up
of the affairs of the company, holders are entitled to receive, ratably, the net
assets available to stockholders after payment of all creditors.
All of the issued and outstanding shares of our common stock are duly
authorized, validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders will be diluted.
Transfer Agent and Registrar. Our transfer agent is Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75034.
52
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders
and for each selling stockholder the number of shares of common stock
beneficially owned as of December 20, 2004, and the number of shares being
registered. All information with respect to share ownership has been furnished
by the selling stockholders. The shares being offered are being registered to
permit public secondary trading of the shares and each selling stockholder may
offer all or part of the shares owned for resale from time to time. A selling
stockholder is under no obligation, however, to sell any shares immediately
pursuant to this prospectus, nor is a selling stockholder obligated to sell all
or any portion of the shares at any time. Therefore, no estimate can be given as
to the number of shares of common stock that will be sold pursuant to this
prospectus or the number of shares that will be owned by the selling
stockholders upon termination of the offering made hereby.
Percentage
Shares of Shares of Owned Upon
Common Stock Percentage Common Stock Completion of
Selling Stockholders Owned Owned to be Registered Offering
Halter Financial Group, Inc. 1,154,567 6.8 1,154,567 -0-
John Zhang 167,895 * 167,895 -0-
Marat Rosenberg 57,367 * 34,367 38,000
Little & Company Investment
Securities 192,259 1.1 64,763 *
Gary Evans 175,439 1.0 175,439 -0-
Chinamerica Acquisition,
LLC 263,157 1.5 263,157 -0-
Chinamerica Fund, LP 877,193 5.2 877,193 -0-
* Indicates less than 1%
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 17,018,692 shares of
common stock outstanding. A current stockholder who is an "affiliate" of the
company, defined in Rule 144 as a person who directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, the company, will be required to comply with the resale
limitations of Rule 144.
Purchasers of shares in the offering, other than affiliates, may resell
their shares immediately. Sales by affiliates will be subject to the volume and
other limitations of Rule 144, including certain restrictions regarding the
manner of sale, notice requirements, and the availability of current public
information about the company. The volume limitations generally permit an
affiliate to sell, within any three month period, a number of shares that does
not exceed the greater of one percent of the outstanding shares of common stock
or the average weekly trading volume during the four calendar weeks preceding
his sale. A person who ceases to be an affiliate at least three months before
the sale of restricted securities beneficially owned for at least two years may
sell the restricted securities under Rule 144 without regard to any of the Rule
144 limitations.
PLAN OF DISTRIBUTION
The 2,737,381 shares being offered by the selling stockholders may be
sold or distributed from time to time by the selling stockholders or their
transferees directly to one or more purchasers or through brokers, dealers, or
underwriters who may act solely as agents or may acquire shares as principals.
Such sales or distributions may be made at prevailing market prices, at prices
related to such prevailing market prices, or at variable prices negotiated
between the sellers and purchasers that may vary. The distribution of the shares
may be effected in one or more of the following methods:
o ordinary brokerage transactions, including long or short sales,
o transactions involving cross or block trades, or otherwise on the OTC
Bulletin Board,
o purchases by brokers, dealers, or underwriters as principals and
subsequent resale by the purchasers for their own accounts pursuant to
this prospectus,
o sales "at the market" to, or through, market makers or into an existing
market for the shares,
53
o sales not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents,
o transactions involving options, swaps, or other derivatives, whether
exchange-listed or otherwise, or
o transactions involving any combination of the foregoing or any other
legally available means.
In addition, a selling stockholder may enter into hedging transactions
with one or more broker-dealers who may engage in short sales of shares in the
course of hedging the positions they assume with the selling stockholder. A
selling stockholder may also enter into options or other transactions with one
or more broker-dealers requiring the delivery of the shares by such
broker-dealers with the possibility that such shares may be resold thereafter
pursuant to this prospectus.
A broker, dealer, underwriter, or agent participating in the
distribution of the shares may receive compensation in the form of discounts,
concessions, or commissions from the selling stockholders and/or purchasers of
the shares for whom such person may act as an agent, to whom such person may
sell as principal, or both; and such compensation as to a particular person may
be in excess of customary commissions. The selling stockholders and any
broker-dealers acting in connection with the sale of the shares being registered
may be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933, as amended, or the Securities Act, and any profit
realized by them on the resale of shares as principals may be deemed
underwriting compensation under the Securities Act. We know of no existing
arrangements between any of the selling stockholders and any other stockholder,
broker, dealer, underwriter, or agent relating to the sale or distribution of
the shares, nor can we presently estimate the amount, if any, of such
compensation.
Although we will receive no proceeds from the sale of shares pursuant
to this prospectus, we have agreed to bear the costs and expenses of the
registration of the shares, including legal and accounting fees, and such costs
and expenses are estimated to be approximately $230,000.
We have informed the selling stockholders that while they are engaged
in a distribution of the shares included in this prospectus they will be
required to comply with certain anti-manipulative rules contained in Regulation
M under the Exchange Act. With certain exceptions, Regulation M prohibits any
selling stockholder, any affiliated purchaser, and any broker-dealer or other
person who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase, any security that is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security.
INDEPENDENT PUBLIC ACCOUNTANTS
There have been no changes in and/or disagreements with BDO Shanghai
Zhonghua Certified Public Accountants, independent registered public accounting
firm, on accounting and financial disclosure matters.
LEGAL MATTERS
Certain legal matters in this offering, including the legality of the
common stock offered pursuant to this prospectus, will be passed upon for us and
the selling stockholders by Jackson Walker L.L.P.
EXPERTS
The financial statements of the company included in this prospectus
have been audited by BDO Shanghai Zhonghua Certified Public Accountants,
independent registered public accounting firm, as stated in the opinion, which
has been rendered upon the authority of said firm as experts in accounting and
auditing.
54
INTERESTS OF NAMED EXPERTS AND COUNSEL
No "Expert" or "Counsel" as defined by Item 509 of Regulation S-B
promulgated pursuant to the Securities Act, whose services were used in the
preparation of this Form SB-2, was hired on a contingent basis or will receive a
direct or indirect interest in the company.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission under the Securities Act of 1933 with respect to the
shares of common stock offered in this offering prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information set forth in the registration statement, or the exhibits which are
part of the registration statement. You should refer to the registration
statement and its exhibits for additional information that is not contained in
this prospectus. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and we are required to file reports, any proxy
statements and other information with the Securities and Exchange Commission.
You can read our Securities and Exchange Commission files, including this
registration statement, over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
documents we file with the Securities and Exchange Commission at its public
reference facility at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Securities and Exchange Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference facilities.
55
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm......................F-1
Consolidated Financial Statements
Balance Sheets as of December 31, 2002 and 2003, and September 30, 2004
(Unaudited)...............................................................F-2
Statements of Income and Comprehensive Income for the Years Ended
December 31, 2002 and 2003 and the Nine Months Ended September 30, 2003
and 2004 (Unaudited)......................................................F-3
Statements of Shareholders' Equity for the Years Ended December 31, 2002
and 2003 and Nine Months Ended September 30, 2004 (Unaudited).............F-4
Statements of Cash Flows for the Years Ended December 31, 2002
and 2003 and the Nine Months Ended September 30, 2003 and 2004
(Unaudited)...............................................................F-5
Notes to Financial Statements................................................F-6
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.
BDO Shanghai Zhonghua
Certified Public Accountants
Shanghai, PRC
June 1, 2004
F-1
CHINA DIGITAL WIRELESS, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
December 31,
------------------------------ September 30,
2002 2003 2004
------------- ------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,193,690 $ 1,713,748 $ 127,066
Note (trade) and accounts receivable, net of allowance for
doubtful accounts by $30,143, $25,651, and $28,157 572,711 2,363,327 2,075,228
Trade receivable from a related party -- -- 2,177,459
Advances to employees, net of allowance for doubtful accounts by
$0, $659, and $356 -- 12,525 6,769
Advances to vendors -- 76,891 540,139
VAT recoverable 201,194 83,414 78,640
Inventories 1,169,223 1,591,223 1,069,408
Deposits and prepaids 37,178 248,288 332,867
Deferred tax assets 5,556 4,955 9,024
------------- ------------- -------------
Total current assets 3,179,552 6,094,371 6,416,600
------------- ------------- -------------
Loan receivable from a related party -- -- 2,140,607
Escrow receivable -- -- 1,500,000
Property and equipment, net 1,333,796 1,354,238 1,234,549
------------- ------------- -------------
Total assets $ 4,513,348 $ 7,448,609 $ 11,291,756
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ -- $ 111,569 $ 6,526
Deferred revenue 43,930 537,046 579,996
Employee welfare payable 41,034 79,707
VAT payable -- -- 6,671
Other taxes payable 27,973 26,171 106,916
Accrued liabilities 1,046 22,919 53,295
Amounts due to parent 604,062 -- --
------------- ------------- -------------
Total current liabilities 718,045 764,945 833,111
------------- ------------- -------------
Total liabilities 718,045 764,945 833,111
------------- ------------- -------------
Redeemable common stock, 0.001 par value; 1,482,456
shares issued and outstanding, with a redemption
price of $1.14 per share -- -- 1,690,000
Commitments
Stockholders' equity:
Common stock - $0.001 par value, 100,000 000 shares
authorized, 13,782,636 shares and 15,536,236 shares
issued and outstanding and additional paid-in capital 13,783 13,783 15,537
Additional paid-in capital 1,436,217 1,436,217 2,541,456
Retained earnings 2,345,672 5,233,652 6,211,485
Accumulated other comprehensive income (loss) - translation
adjustments (369) 12 167
------------- ------------- -------------
Total stockholder's equity 3,795,303 6,683,664 8,768,645
------------- ------------- -------------
Total liabilities and stockholders' equity $ 4,513,348 $ 7,448,609 $ 11,291,756
============= ============= =============
See accompanying notes to consolidated financial statements.
F-2
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In U.S. Dollars)
Years Ended December 31, Nine Months Ended Sept. 30,
---------------------------- ----------------------------
2002 2003 2003 2004
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenues:
Mobile phones distribution $ 520,325 $ 13,529,279 $ 10,968,075 $ 4,914,465
Mobile phone sales to a related party -- -- -- 10,512,821
Service revenue, net 3,403,082 3,503,099 2,351,449 2,467,990
------------ ------------ ------------ ------------
Total revenues 3,923,407 17,032,378 13,319,524 17,895,276
Cost of goods sold 527,458 12,424,454 9,988,095 4,526,396
Cost of goods sold to a related party -- -- -- 10,132,267
Cost of service 852,233 910,440 708,475 660,791
------------ ------------ ------------ ------------
Gross profit 2,543,716 3,697,484 2,622,954 2,575,822
Operating expenses:
Selling 288,539 153,437 116,241 127,833
General and administrative 211,322 391,930 292,784 1,462,504
Loss on disposal of fixed assets 4,168 5,361 -- --
------------ ------------ ------------ ------------
Total operating expenses 504,029 550,728 409,025 1,590,337
------------ ------------ ------------ ------------
Income from operations 2,039,687 3,146,756 2,213,929 985,485
Interest expense (36,245) (12,082) (10,873) 31,931
------------ ------------ ------------ ------------
Income before income taxes 2,003,442 3,134,674 2,203,056 1,147,476
Income tax provision (benefit) (5,556) 246,694 165,229 169,643
------------ ------------ ------------ ------------
Net income $ 2,008,998 $ 2,887,980 $ 2,037,827 977,833
============ ============ ============ ============
Other comprehensive income (loss):
Translation adjustments $ (252) $ 381 $ (119) $ 155
------------ ------------ ------------ ------------
Comprehensive income $ 2,008,746 $ 2,888,361 $ 2,037,827 $ 977,833
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Years Ended December 31, 2002 and 2003 and Nine Months Ended September 30, 2004
(In U.S. Dollars)
Common Accumulated
----------------------------- Additional Other Total
Stock Stock Paid-in Retained Comprehensive Shareholders'
Shares Amount Capital Earnings Income (Loss) Equity
------------- ------------- ------------- ------------- ------------- -------------
Balance, January 1, 2002 13,782,636 $ 13,783 $ 1,436,217 336,674 $ (117) $ 1,786,557
Net income -- -- -- 2,008,998 -- 2,008,998
Translation adjustments -- -- -- -- (252) (252)
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2002 13,782,636 13,783 1,436,217 2,345,672 (369) 3,795,303
Net income -- -- -- 2,887,980 -- 2,887,980
Translation adjustments -- -- -- -- 381 381
------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 13,782,636 13,783 1,436,217 5,233,652 12 6,683,664
Recapitalization and
reorganization (unaudited) 1,585,705 1,586 308,465 -- -- 310,051
Shares issued for consulting
expense (unaudited) 167,895 168 604,254 -- -- 604,422
Shares issued for proceeds
of $190,000 (unaudited) 166,667 -- 410,001 -- -- 410,001
Shares issued for proceeds
of $1.5 million(unaudited) 1,315,789 -- -- -- -- --
Offset by issuing cost
(unaudited) -- -- (217,481) -- -- (217,481)
Net income (unaudited) -- -- -- 977,833 -- 977,833
Translation adjustments -- -- -- -- 155 155
------------- ------------- ------------- ------------- ------------- -------------
Balance, June 30 2004 17,018,692 $ 15,537 $ 2,541,456 6,211,485 $ 167 $ 8,768,645
============= ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(In U.S. Dollars)
Years Ended December 31, Nine Months Ended Sept. 30,
--------------------------- ---------------------------
2002 2003 2003 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,008,998 $ 2,887,980 $ 2,037,827 $ 977,833
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 132,904 234,055 172,271 138,851
Bad debt expenses 17,817 659 3,499 4,257
Loss on disposal of fixed assets 4,168 5,361 -- --
Stock compensation -- -- -- 1,014,423
Deferred tax assets (5,556) 601 5,556 (4,069)
Changes in assets and liabilities:
Accounts receivables (356,298) (1,790,616) (251,770) (1,891,866)
Prepaids, deposit and advances to employees 13,372 (224,294) 34,218 (80,574)
Advance to vendors -- (76,891) (1,153,961) (463,248)
Inventories (1,169,223) (422,000) (1,403,365) 521,815
Accounts payable -- 111,569 474,889 (105,043)
Deferred revenue (8,236) 493,116 235,579 42,950
Employee welfare payable 25,227 26,206 15,609 12,467
VAT recoverable (201,194) 117,780 201,194 4,774
VAT payable -- -- -- 6,671
Other taxes payable 19,079 (1,802) 49,309 80,745
Accrued liabilities 714 21,873 9,223 30,376
----------- ----------- ----------- -----------
Net cash provided by operating activities 481,772 1,383,597 429,957 290,362
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, equipment, and software (1,186,756) (259,858) (141,898) (19,162)
Decease (Increase) in due from parent 604,113 -- (604,062) (2,140,607)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities (582,643) (259,858) (745,960) (2,159,769)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Recapitalization and reorganization -- -- -- 310,051
Proceeds from issuing redeemable common stock -- -- -- 1,690,000
Escrow receivables -- -- -- (1,500,000)
Offset offering expense -- -- -- (217,481)
Increase (Decrease) in due to parent 604,062 (604,062) -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 604,062 (604,062) -- 282,570
----------- ----------- ----------- -----------
Foreign currency translation (252) 381 (119) 155
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents 502,939 520,058 (316,003) (1,586,682)
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 $ 877,687 $ 127,066
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 36,245 $ 12,082 $ -- $ --
Income taxes -- 246,093 -- --
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 1 - ORGANIZATION AND BUSINESS BACKGROUND
Formation of Sifang Holdings Co. Ltd.
Sifang Holdings Co. Ltd. (the "Company") was incorporated in the Cayman Islands,
established under the law of the Cayman Islands, on February 9, 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 there was no operating activities at Sifang Holdings.
As a result of the ownership 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 business in
which the paging facilities are 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.
As a result of 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.
F-6
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 1 - ORGANIZATION AND BUSINESS BACKGROUND (Continued)
Recapitalization and Reorganization
On June 23, 2004, Boulder Acquisitions, Inc. (Boulder Acquisitions) entered into
a stock exchange agreement with Sifang Holdings Co. Ltd. Pursuant to the stock
exchange agreement, Boulder Acquisitions issued 13,782,636 shares of its common
stock in exchange of 100% equity interest in Sifang Holdings Co. Ltd., 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 (generally defined as a brewery which
produces less than 15,000 barrels per year) in Boulder, Colorado. During 1990,
as a result of various debt defaults, Boulder Brewing's assets were foreclosed
upon and the Company ceased all business operations. 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,
Inc., 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 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 has
acquired 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 are 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 unaudited shareholders' equity statement for the period from January 1, 2004
to June 30, 2004. 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. On August 6,
2004, Boulder Acquisitions, Inc. changed its name to China Digital Wireless,
Inc.
F-7
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
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
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 nine months ended September 30, 2003 and 2004, and balance sheet
as of September 30, 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
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
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 collectability is reasonably assured.
The Company, through TCH, provides wireless receiver users with access to
certain financial information provided by stock exchanges, comments and analysis
on PRC based stock market activity provided by certain reputable security
investment companies in China, lottery information, weather forecast, and other
value added services through the execution of a monthly subscription agreement
or through the purchase of a pre-charged service card. TCH purchases the
aforementioned information from respected vendors, reformats it through decoding
and recoding and transmits the reformatted information via Shanghai Sifang
Information Technology Co., or Sifang Information to pager users. The
information is constantly stored 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 a
three- to six-month subscription in advance. TCH 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
the Company's server or 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 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.
Since April 2004, the revenue generated from selling pre-charged cards has
gradually decreased while the revenue generated through monthly subscription
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., or Tianci, contract with the Mobile Operators for the
transmission of the Company's value-added information service. 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 of a few months between the end of a particular service period and the
date the Mobile Operators send out their billing statements due to the
segregated billing systems of each provincial subsidiary of the Mobile
Operators.
F-9
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
For the nine months ended September 30, 2004, approximately 13% of the Company's
service revenue from mobile phone users is recognized based on monthly billing
statements prepared by the provincial subsidiaries of the Mobile Operators. The
Company has not recognized service revenue based on the records provided by its
own server. 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 service is not covered by a monthly service
subscription and the Company has no control over whether it will incur. These
network usage fees charged by the Mobile Operators are reflected as a part of
cost of services in the financial statements. 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 currently records the mobile phone service revenue based on the
amounts paid by its customers net of the Mobile Operators' service charge for
billing and collection on behalf of the Company. According to EITF Issue No.
99-19, recognizing revenue on a net basis in this situation is appropriate if
the Company does not act as a principal, in connection with the provision of its
services. Factors which support a conclusion that the Company is not acting as a
principal include:
o limited ability to adjust the cost of services by adjusting
the design or marketing of the service;
o limited ability to determine prices, the Company must follow
the price policy within ranges prescribed by Mobile Operators,
and
o limited ability to assume risk of non-payment by customers.
The Company has very limited ability to adjust the ratio of our revenues to cost
of services (which include the Mobile Operators' network usage fee, and other
fees, if any). In addition, the majority of service revenue derived from mobile
phone users is subject to the floor price for monthly service set by the Mobile
Operators and the Company does no have an ability to negotiate with its
customers. The Mobile Operators will normally make payments within several
months after the Company receives the billing statement because it takes time
for the Mobile Operators to collect payments from the Company's customers.
Consequently, the Company actually bears less risk of non-payment by customers
as Mobile Operators need to take care of their collections first. Only about 13%
of the total service revenue derived from mobile phone users in the nine months
ended September 30, 2004 was billed through the Mobile Operators' billing
systems. Whereas, there are three items of mobile phone services over which the
Company does have an ability to determine prices. The portion of this type of
revenue was immaterial in the nine months ended September 30, 2004. Therefore,
the Company has concluded that reporting net revenue billed through the Mobile
Operators' billing systems is appropriate.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturity of three
months or less to be cash equivalents.
F-10
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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 and as of
September 30, 2004. 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,
----------------------------- September 30,
2002 2003 2004
----------------------------------------------
(Unaudited)
Beginning balance $ 12,326 $ 30,143 $ 26,310
Additions charged to expense 17,817 659 2,203
Actual write off -- (4,492) --
Recovery -- -- --
------------- ------------- -------------
Ending balance $ 30,143 $ 26,310 $ 28,513
============= ============= =============
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-11
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
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. Loan receivable from a related party bear interest at 5% per annum which
is similar to the market interest rate in China as of September 30, 3004.
F-12
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
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, $25,766, and
$19,951 to these funds as part of selling, general and administrative expenses
for years ended December 31, 2002 and 2003 and nine months ended September 30,
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% under current
PRC tax laws. However, Sifang Information registered in the Shanghai downtown
area and 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 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.
F-13
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (Continued)
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.
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").
The statement replaces the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. 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 reflect
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings (loss) per share. The Company has no
any potential common share equivalents as of September 30, 2004.
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-14
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 3 - Equity Transactions
On June 23, 2004 the Company issued 167,895 share of its common stock to a
consultant in lieu of cash payment. The trading price 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 share of its common stock to an
existing stockholder at a price of $1.14 per share in exchange for gross
proceeds of $190,000 based on a stock purchase agreement. Pursuant to the signed
stock purchase agreement, the Company granted to the existing stockholder an
option which requires the Company to purchase 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 stockholder, up to and including the earlier of the
date that such registration statement is declared effective by the SEC or the
existing stockholder's shares are eligible for resale under Rule 144 under the
Securities Act of 1933. According to Topic D-98 from SEC, "Classification and
Measurement of Redeemable Securities," the Company believes that these shares
should be presented outside the permanent equity section; however, these shares
should be considered to be included in determining basic earnings per share as
there was no contingency surrounding these underlying shares. In the above
transaction of issuing 166,667 shares incurred on June 23, 2004, the trading
price on that day was $3.60 per share. Due to the nature of this insider
transaction, the difference between the price of $1.14 per share and the price
of $3.60 per share was recorded as deemed compensation to an existing
stockholder by presenting the increase of $410,001 in additional paid-in capital
and the increase of $410,001 in general and administrative expenses.
On June 28, 2004, the Company issued, in aggregate, 1,315,789 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 respective stock purchase agreements. Pursuant
to the signed stock purchase agreements, the Company granted to each of three
investors an option which requires the Company to purchase the aforementioned
1,315,789 shares, in aggregate, 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 stockholders' shares are eligible for resale under Rule 144 under the
Securities Act of 1933. As of September 30, 2004, the proceeds of $1.5 million
were kept in an escrow. Due to the uncertainty of when a Form SB-2 will be
declared effective, the Company treated this escrow receivable as a long-term
assets instead of a current asset. According to Topic D-98 from SEC,
"Classification and Measurement of Redeemable Securities," the Company believes
that these shares should be presented outside the permanent equity section;
however, these shares should be considered to be included in determining basic
earnings per share as there was no contingency surrounding these underlying
shares.
The Company incurred issuing expense of $217,481 (mainly audit and legal
expense) and accounted it for a reduction to additional paid-in capital.
F-15
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 4 - PROPERTY AND EQUIPMENT
A summary of property and equipment at cost is as follows:
December 31,
------------------------------ September 30,
2002 2003 2004
------------- ------------- -------------
(Unaudited)
Buildings $ 943,300 $ 943,368 $ 943,380
Software 222,858 391,660 461,187
Vehicles -- 65,484 65,484
Other equipment 414,562 424,891 452,401
------------- ------------- -------------
1,580,720 1,825,403 1,922,452
Accumulated depreciation (246,924) (471,165) 687,903
------------- ------------- -------------
$ 1,333,796 $ 1,354,238 $ 1,234,549
============= ============= =============
The depreciation and amortization for the years ended December 31, 2002 and 2003
and the nine months ended September 30, 2003 and 2004 was $132,904, $234,055,
$172,271, and $138,851, respectively.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company had certain transactions with Sifang Information during the years
ended December 31, 2002 and 2003 and the nine months ended September 30, 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 RMB 3,524,838 (equivalent approximately $425,877 in each
of the nine months ended September 30, 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 parent 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 parent and due from parent
at December 31, 2003 was $0 whereas interest expense incurred on the amount due
to parent for the year ended December 31, 2003 was $12,082.
During the nine months ended September 30, 2004, TCH sold Samsung and other GSM
and CPMA mobile phones valued at $10,512,821 including a 3.6% mark-up to the
Shanghai Shantian Telecommunication Technology Inc. (Shantian) and Sifang
Information, each a related party. As of September 30, 2004 the accounts
receivable (trade) balance due from Shantian and Sifang Information was
$2,177,459.
F-16
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 5 - RELATED PARTY TRANSACTIONS (Continued)
On June 30, 2004 TCH signed an agreement with Sifang Information Co. Ltd. For
developing a smart card information system related to citizen health and
exercise. This project has been approved by the Shanghai Municipal Government.
Pursuant to the signed agreement, Sifang Information will develop smart card
information system in terms of the specifications contained the design
blueprint. This card can be used for accessing gym facilities and other approved
and related health facilities under the program. In accordance with the
financial terms on the signed agreement, Sifang Information will take care of
expenses related to the smart card marketing and related customer after-market
services. TCH will take care of expenses related to the detailed smart card
information system design and development, hardware and software maintenance,
and related information service. In return, TCH is entitled to share a major
portion of the future revenue generated by this smart card information system.
In order to initiate this project, TCH gave Sifang Information a line of credit
up to RMB20 million (equivalent approximately $2.4 million) for financing its
market promotion and penetration and deployment, with an interest rate based on
the market interest rate (at September 30, 2004 the interest rate was 5%),
interest payable monthly and principal shall be repaid by Sifang Information no
later than June 30, 2006 resulting in an estimated total expense of RMB40
million (equivalent of $4.8 million). The aforementioned $2.4 million includes
the outstanding balance of amounts due from Sifang of $2,140,607 as of September
30, 2004. The interest income incurred on the outstanding balance due from
Sifang Information for the nine months ended September 30, 2004 was $30,205,
based on the interest rate of 5% per annum.
NOTE 6 - INCOME TAXES
The income (loss) generated in the Cayman Islands and the PRC before income
taxes in 2002 and 2003, and the nine months ended September 30, 2003 and 2004,
was as follows:
Nine Months Ended
Years Ended December 31, September 30,
------------------------- -------------------------
2002 2003 2003 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Loss in the U.S. before income taxes $ -- $ -- $ -- $(1,114,423)
Income in China before income taxes 2,003,442 3,134,674 2,037,827 2,092,256
----------- ----------- ----------- -----------
$ 2,003,442 $ 3,134,674 $ 2,037,827 $ 977,833
=========== =========== =========== ===========
F-17
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 6 - INCOME TAXES (Continued)
The income tax provision was as follows:
Nine Months Ended
Years Ended December 31, September 30,
------------------------- -------------------------
2002 2003 2003 2004
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Current:
Cayman Island $ -- $ -- $ -- $ --
China -- 246,093 159,673 173,712
---------- ---------- ---------- ----------
Deferred:
Cayman Island -- -- -- --
China (5,556) 601 5,556 (4,069)
---------- ---------- ---------- ----------
$ (5,556) $ 246,694 $ 165,229 $ 169,643
========== ========== ========== ==========
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 nine months
ended September 30, 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 nine
months ended of September 30, 2003 and 2004, income tax expense was $165,229 and
$169,643, respectively, based on pre tax income of $2,203,056 and $1,147,476,
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:
Nine Months Ended
Years Ended December 31, September 30,
------------------------- -------------------------
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%
========== ========== ========== ==========
F-18
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 6 - INCOME TAXES (Continued)
The primary components of temporary differences which give rise to the Company's
deferred tax assets were as follows:
December 31,
----------------------------- September 30,
2002 2003 2004
------------- ------------- -------------
(Unaudited)
Allowance for receivables $ 2,261 $ 1,973 $ 2,139
Accrued liabilities 3,295 2,982 6,885
------------- ------------- -------------
5,556 4,955 9,024
Valuation allowance -- -- --
------------- ------------- -------------
Net deferred tax assets $ 5,556 $ 4,955 $ 9,024
============= ============= =============
NOTE 7 - COMMITMENTS
In order for TCH to provide value-added information services to pager users
located in Shanghai and provinces in the Shanghai vicinity, TCH needs to use
certain frequency transmitting equipment and relevant other equipment
(collectively "paging facilities') which are prohibited to be owned by a foreign
investment enterprise. As a result, TCH 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
nine months ended September 30, 2003 and 2004 were approximately $567,840,
$567,840, $425,877 and $425,877, 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
nine months ended September 30, 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, $17,116 (the same reason as
aforementioned) and $30,808, 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
==========
F-19
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 8 - 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.
Mobile Phone Mobile Phone Beep Pagers
Distribution 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
assetsassetsassassets
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 -- 455,680 -- 898,558 1,354,238
Expenditures for long-lived assets -- 194,374 -- 65,484 259,858
Nine months ended
September 30, 2003
(Unaudited)
Revenue $ 10,968,075 $ 394,965 $ 1,956,484 $ -- $ 13,319,524
Gross margin 768,623 231,138 1,411,836 -- 2,622,954
Inventory 2,572,681 -- -- -- 2,572,681
Fixed assets -- 393,707 -- 909,716 1,303,423
Expenditures for long-lived assets -- 141,898 -- -- 141,898
Nine months ended
September 30, 2004
(Unaudited)
Revenue $ 15,427,286 $ 1,828,041 $ 639,949 $ -- $ 17,895,276
Gross margin 768,623 1,677,141 130,058 -- 2,575,822
Inventory 1,069,408 -- -- -- 1,069,408
Fixed assets -- 369,588 -- 861,961 1,234,549
Expenditures for long-lived assets -- 19,162 -- -- 19,162
F-20
CHINA DIGITAL WIRELESS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Information for Nine Months Ended September 30, 2003 and 2004 is Unaudited)
(In U.S. Dollars)
NOTE 9 - 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.
During the nine months ended September 30, 2004, the Company generated
approximately $10.5 million of sales of mobile phones to related parties, which
accounted for approximately 59% of total revenue for the nine months ended
September 30, 2004.
F-21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
The company's Articles of Incorporation, filed as Exhibit 3.1 hereto,
provide that it must indemnify its directors and officers to the fullest extent
permitted under Nevada law against all liabilities incurred by reason of the
fact that the person is or was a director or officer or a fiduciary of the
company. The effect of these provisions is potentially to indemnify the
company's directors and officers from all costs and expenses of liability
incurred by them in connection with any action, suit or proceeding in which they
are involved by reason of their affiliation with the company. Pursuant to Nevada
law, a corporation may indemnify a director, provided that such indemnity shall
not apply on account of:
(a) acts or omissions of the director finally adjudged to be
intentional misconduct or a knowing violation of the law;
(b) unlawful distributions; or
(c) any transaction with respect to which it was finally adjudged
that such director personally received a benefit in money,
property, or services to which the director was not legally
entitled.
The Bylaws of the company, filed as Exhibit 3.2 hereto, provide that we
will indemnify our officers and directors for costs and expenses incurred in
connection with the defense of actions, suits, or proceedings against them on
account of their being or having been directors or officers of the company,
absent a finding of negligence or misconduct in office.
The company's Bylaws also permit us to maintain insurance on behalf of
our officers, directors, employees and agents against any liability asserted
against and incurred by that person whether or not we have the power to
indemnify such person against liability for any of those acts.
Other Expenses of Issuance and Distribution
Expenses incurred or (expected) relating to this Registration Statement
and distribution are as follows: The amounts set forth are estimates except for
the SEC registration fee:
Amount
SEC registration fee $ 1,529.50
Printing and engraving expenses* $ 5,000.00
Professional fees and expenses* $ 200,000.00
Transfer agent's and registrar's fees and
expenses* $ 1,500.00
Miscellaneous* $ 2,500.00
Total* $ 226,529.50
------------------------
*Estimates
The Registrant will bear all of the expenses shown above.
RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the issuance and sales of the
company's securities without registration for the past three (3) years from the
date of this Registration Statement. No such sales involved the use of an
II-1
underwriter, no advertising or public solicitation were involved, the securities
bear a restrictive legend and no commissions were paid in connection with the
sale of any securities.
On February 23, 2004, the company sold 987,915 shares of restricted
common stock for gross proceeds of $300,000, pursuant to a subscription
agreement, to Halter Financial Group, Inc., an entity owned by Timothy P.
Halter, a former member of the Board of Directors and the Company's former Chief
Executive Officer. Additionally, in consideration for agreeing to serve as an
officer and director of the Company, Timothy P. Halter was granted a warrant to
purchase up to 131,722 shares of common stock of the company.
On February 23, 2004, the company agreed to pay Little and Company
Investment Securities, an entity owned by Glenn A. Little, its former
controlling stockholder, officer and director, $30,000 in consulting fees
related to the transaction discussed in the previous paragraph and in
consideration for maintaining the corporate entity. To formalize this
obligation, the company issued a $30,000 non-interest bearing promissory note
maturing on February 23, 2005. Concurrent with the transaction discussed in the
previous paragraph, the company and Little and Company Investment Securities
executed an Exchange Agreement whereby the company issued 98,792 shares of
common stock in satisfaction of the outstanding promissory note.
On June 23, 2004 the company issued 167,895 share of its common stock
to a consultant in lieu of cash payment.
On June 23, 2004, the company issued 166,667 share of its common stock
to an existing stockholder at a price of $1.14 per share in exchange for gross
proceeds of $190,000 based on a stock purchase agreement.
On June 28, 2004, the Company issued, in aggregate, 1,315,789 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 respective stock purchase agreements.
The foregoing shares were issued in private transactions or private
placements intending to meet the requirements of one or more exemptions from
registration. In addition to any noted exemption below, we relied upon
Regulation D and Section 4(2) of the Securities Act of 1933, as amended (the
"Act"). The investors were not solicited through any form of general
solicitation or advertising, the transactions being non-public offerings, and
the sales were conducted in private transactions where the investor identified
an investment intent as to the transaction without a view to an immediate resale
of the securities; the shares were "restricted securities" in that they were
both legended with reference to Rule 144 as such and the investors identified
they were sophisticated as to the investment decision and in most cases we
reasonably believed the investors were "accredited investors" as such term is
defined under Regulation D based upon statements and information supplied to us
in writing and verbally in connection with the transactions. We never utilized
an underwriter for an offering of our securities and no sales commissions were
paid to any third party in connection with the above-referenced sales. Other
than the securities mentioned above, we have not issued or sold any securities.
EXHIBITS
Exhibit
Number Description
3.1* Articles of Incorporation of the Registrant.
3.2** Second Amended and Restated Bylaws of the Registrant.
4.1**** Common Stock Specimen.
5.1+ Legal Opinion of Jackson Walker L.L.P.
II-2
10.1** Securities Exchange Agreement by and among Boulder
Acquisitions, Inc., Sifang Holdings Co., Ltd. and the
stockholders of Sifang Holdings Co., Ltd. dated
effective as of June 23, 2004.
10.2*** Information Service and Cooperation Agreement by and
among Shanghai Sifang Information Technology Co. Ltd.
and Shanghai TCH Data Technology Co. Ltd. dated as of
June 1, 2004.
10.3*** Information Service and Cooperation Agreement by and
among Shanghai Sifang Information Technology Co. Ltd.
and Shanghai TCH Data Technology Co. Ltd. dated as of
June 1, 2004.
10.4*** Information Service and Cooperation Agreement by and
among Shanghai Sifang Information Technology Co.
Ltd., Shanghai Chengao Industrial Co. Ltd. and
Shanghai TCH Data Technology Co. Ltd. dated as of
June 1, 2004.
10.5*** Information Service and Cooperation Agreement by and
among Shanghai Tianci Industrial (Group), Co. Ltd.
and Shanghai TCH Data Technology Co. Ltd. dated as of
June 1, 2004.
10.6*** Business and Related Assets Transfer Agreement
between Shanghai Sifang Information Technology Co.
Ltd. and Shanghai TCH Data Technology Co. Ltd. dated
as of May 26, 2004.
10.7** Stock Purchase Agreement by and between Halter
Financial Group, Inc. and Boulder Acquisitions, Inc.
dated as of June 23, 2004.
10.8** Stock Purchase Agreement by and between Chinamerica
Fund, LP and Boulder Acquisitions, Inc. dated as of
June 28, 2004.
10.9** Stock Purchase Agreement by and between Chinamerica
Acquisition, LLC and Boulder Acquisitions, Inc. dated
as of June 28, 2004.
10.10** Stock Purchase Agreement by and between Gary Evans
and Boulder Acquisitions, Inc. dated as of June 28,
2004.
21.1**** Subsidiaries of the Registrant.
23.1 Consent of Independent Registered Public Accounting
Firm.
23.2+ Consent of Jackson Walker L.L.P. (filed as part of
Exhibit 5.1).
24.1**** Power of Attorney Reference is made to page II-5 of
the Registration Statement.
+ To be filed by amendment
* Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2001, which was
filed with the Commission on January 28, 2002, and which is
incorporated herein by reference.
II-3
** Previously filed as an exhibit to the Registrant's Current Report on
Form 8-K dated July 8, 2004, and which is incorporated herein by
reference.
*** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-QSB for the period ended June 30, 2004 as filed with the
Commission on August 23, 2004, and which is incorporated herein by
reference.
**** Previously filed as an exhibit to the Registrant's Registration
Statement on Form SB-2 as filed with the Commission on November 12,
2004, and which is incorporated herein by reference.
UNDERTAKINGS
The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which is
being registered) and any deviation from the high or low end
of the estimated maximum range, may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c) To include any additional or changed material information on
the plan of distribution.
2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
3) File a post-effective amendment to remove from registration any of the
securities being registered, which remain unsold at the end of the offering.
4) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of the company
pursuant to the foregoing provisions or otherwise, the company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by us of expenses incurred or paid by a director,
officer or controlling person of us in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Securities
Act and we will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Shanghai, People's Republic of China. China Digital
Wireless, Inc.
China Digital Wireless, Inc.
By: /s/ Tai Caihua Date: January 3, 2005
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Tai Caihua, President and Chairman of the Board
By: /s/ Lu Quin Date: January 3, 2005
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Lu Quin, Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date stated.
By: * Date: January 3, 2005
Tai Caihua, Director
By: * Date: January 3, 2005
Shi Ying, Director
By: * Date: January 3, 2005
Huang Tianqi, Director
By: * Date: January 3, 2005
Jing Weiping, Director
By: * Date: January 3, 2005
Mao Ming, Director
By: * Date: January 3, 2005
Song Jing, Director
By: * Date: January 3, 2005
Fu Sixing, Director
By: * Date: January 3, 2005
Yu Ruijie, Director
By: * Date: January 3, 2005
Zhang Xiaodong, Director
By: * Date: January 3, 2005
Huang Wei, Director
* By: /s/ Tai Caihua Date: January 3, 2005
-------------------------------
Tai Caihua, As Attorney-in-fact
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