SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): February 10, 2003
INDUSTRIES INTERNATIONAL, INCORPORATED
(Exact name of registrant as specified in Charter)
Nevada 000-32053 87-0522115
(State or other jurisdiction of (Commission File No.) (IRS Employee Identification No.)
incorporation or organization)
4/F., Wondial Building, Keji South 6 Road
Shenzhen High-Tech Industrial Park, Shennan Road
Shenzhen, China
(Address of Principal Executive Offices)
011-86-755-26983856
(Issuer Telephone number)
- -------------------------------------------------------------------------------
Forward Looking Statements
This Form 8-K and other reports filed by Registrant from time to time with
the Securities and Exchange Commission (collectively the "Filings") contain or
may contain forward looking statements and information that are based upon
beliefs of, and information currently available to, Registrant's management as
well as estimates and assumptions made by Registrant's management. When used in
the filings the words "anticipate", "believe", "estimate", "expect", "future",
"intend", "plan" or the negative of these terms and similar expressions as they
relate to Registrant or Registrant's management identify forward looking
statements. Such statements reflect the current view of Registrant with respect
to future events and are subject to risks, uncertainties, assumptions and other
factors relating to Registrant's industry, Registrant's operations and results
of operations and any businesses that may be acquired by Registrant. Should one
or more of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those
anticipated, believed, estimated, expected, intended or planned.
Although Registrant believes that the expectations reflected in the
forward looking statements are reasonable, Registrant cannot guarantee future
results, levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, Registrant
does not intend to update any of the forward-looking statements to conform these
statements to actual results. The following discussion should be read in
conjunction with Registrant's financial statements and the related notes that
appear elsewhere in this report and Registrant's annual report on Form 10-KSB
for the year ended December 31, 2002 as filed with the Securities and Exchange
Commission.
Item 1. Changes in Control of Registrant.
On February 12, 2003, the Registrant filed with the Commission a
Current Report on Form 8-K (SEC File No. 000-32053) with respect to a change of
control effected pursuant to an Amended and Restated Agreement and Plan of Share
Exchange, dated as of February 10, 2003, by and among Broad Faith Limited, a
British Virgin Islands company ("Broad Faith"), Industries International,
Incorporated, a Nevada corporation ("INDI"), Dr. Kit Tsui, the sole stockholder
of Broad Faith, and certain stockholders of INDI. This Amendment No. 1 to that
Form 8-K is filed for the purpose of providing the audited financial statements
of Broad Faith.
Item 7. Financial Statement and Exhibits.
Audited Financial Statements of Broad Faith Limited begin on page 3.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /S/ Weijiang Yu
-----------------------------------
Name: Weijiang Yu
Title: President
Dated: April 22, 2003
2
Combined Financial Statements
Broad Faith Limited
Years ended December 31, 2001 and 2002
Broad Faith Limited
Index to Combined Financial Statements
Years ended December 31, 2001 and 2002
- ------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F1
Combined Statements of Operations F2
Combined Balance Sheet F3
Combined Statements of Changes in Stockholders' Equity and F4
Comprehensive Income / Loss
Combined Statements of Cash Flows F5
Notes to Combined Financial Statements F6 - F31
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Broad Faith Limited
(A company incorporated in British Virgin Islands with limited liability)
We have audited the accompanying combined balance sheet of Broad Faith Limited
and its affiliates (the "Group") as of December 31, 2002, and the related
combined statements of operations, combined statements of changes in
stockholders' equity and comprehensive income / loss and combined statements of
cash flows for each of the two years in the year ended December 31, 2002. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
December 31, 2002 and the results of their operations and their cash flows for
each of the two years in the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Date: April 16, 2003
F-1
Broad Faith Limited
Combined Statements of Operations
Years ended December 31, 2001 and 2002
- ------------------------------------------------------------------------------------------------------------------------
(amount in thousands, except share data)
Year ended December 31,
------------------------------------------------
2001 2002 2002
Note RMB RMB USD
Operating revenues
Net sales 14 277,057 288,236 34,865
Rental income - 8,160 987
------------- -------------- -------------
Total operating revenues 277,057 296,396 35,852
------------- -------------- -------------
Operating expenses
Manufacturing and other costs of sales 190,010 211,106 25,535
Sales and marketing 19,774 10,410 1,259
General and administrative 9,447 11,768 1,423
Research and development 8,438 8,025 971
Depreciation and amortization 1,382 10,306 1,247
Other operating costs and expenses 2,906 662 80
------------- -------------- -------------
Total operating expenses 231,957 252,277 30,515
------------- -------------- -------------
Operating income 45,100 44,119 5,337
Interest expenses (12,274) (10,072) (1,218)
Other income, net 351 1,569 190
------------- -------------- -------------
Income before income taxes and minority interest 33,177 35,616 4,309
Provision for income taxes 13 (2,504) (2,820) (341)
------------- -------------- -------------
Income before minority interest 30,673 32,796 3,968
Minority interest in income of combined affiliates (13,079) (12,346) (1,493)
------------- -------------- -------------
Net income 17,594 20,450 2,475
============= ============== =============
Earnings per share:
Basic weighted average number of common stocks 2 2 2
outstanding
============= ============== =============
Basic net income per common stock 8,797 10,225 1,238
============= ============== =============
The accompanying notes are an integral part of these combined financial
statements.
F-2
Broad Faith Limited
Combined Balance Sheet
As of December 31, 2002
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(amount in thousands, except share data)
As of December 31
------------- ----- -------------
2002 2002
Note RMB USD
ASSETS
Current assets:
Cash and cash equivalents 59,619 7,212
Marketable securities 5 12,603 1,524
Accounts receivable, net 3 67,949 8,219
Due from related parties 15 44,113 5,336
Due from director and employees 15 188 23
Inventories 6 19,657 2,378
Prepaid expenses and other current assets 18,393 2,225
Plant and equipment held for sales 64,644 7,819
------------- -------------
Total current assets 287,166 34,736
Property, plant and equipment, net 7 53,160 6,431
------------- -------------
Total assets 340,326 41,167
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debts maturing within one year 9 115,025 13,913
Accounts payable - Trade 21,161 2,560
Due to related parties 15 405 49
Due to a director 15 912 110
Other payable 2(b) 44,800 5,419
Tax payable 13 8,669 1,049
Accrued expenses and other accrued liabilities 13,029 1,576
------------- -------------
Total current liabilities 204,001 24,676
------------- -------------
Minority interests in combined affiliates 62,496 7,560
------------- -------------
Stockholders' equity:
Common stock and paid-in capital, one US dollar par value:
- - 50,000 shares authorized
- - 2 shares issued and outstanding - -
Additional paid-in capital 9,100 1,101
Dedicated reserves 15,457 1,870
Retained earnings 49,962 6,044
Accumulated other comprehensive loss (690) (84)
------------- -------------
Total stockholders' equity 73,829 8,931
------------- -------------
Total liabilities and stockholders' equity 340,326 41,167
============= =============
The accompanying notes are an integral part of these combined financial
statements.
F-3
Broad Faith Limited
Combined Statements of Changes in Stockholders' Equity and Comprehensive Income / Loss
Years ended December 31, 2001 and 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(amount in thousands, except share data)
Common stock
----------------- Accumulated
other
Additional comprehensive
No of paid-in Dedicated Retained income
shares Amount capital reserves earnings (loss) Total
------- -------- ---------- --------- --------- ------------ -------------------
RMB RMB RMB RMB RMB RMB USD
Balance at January 1, 2001 2 - 9,100 7,710 70,860 394 88,064 10,651
--------- --------
Comprehensive income:
Net income - - - - 17,594 - 17,594 2,128
Transfer to dedicated reserves - - - 4,340 (4,340) - - -
Other comprehensive loss
Net unrealizable loss on - - - - - (771) (771) (93)
marketable securities
--------- --------
Total comprehensive income 16,823 2,035
--------- --------
Dividend as a result of
combination under common
control - - - - (25,695) - (25,695) (3,108)
------- -------- ---------- --------- --------- ------------ --------- --------
Balance at December 31, 2001 2 - 9,100 12,050 58,419 (377) 79,192 9,578
--------- --------
Comprehensive income:
Net income - - - - 20,450 - 20,450 2,475
Transfer to dedicated reserves - - - 3,407 (3,407) - - -
Other comprehensive loss
Net unrealizable loss on - - - - - (313) (313) (38)
marketable securities
--------- --------
Total comprehensive income 20,137 2,437
--------- --------
Dividend declared - - - - (25,500) - (25,500) (3,084)
------- -------- ---------- --------- --------- ------------ --------- --------
Balance at December 31, 2002 2 - 9,100 15,457 49,962 (690) 73,829 8,931
======= ======== ========== ========= ========= ============ ========= ========
The accompanying notes are an integral part of these combined financial
statements.
F-4
Broad Faith Limited
Combined Statements of Cash Flows
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
Years ended December 31,
--------------------------------------
2001 2002 2002
Note RMB RMB USD
Cash flows from operating activities
Net income 17,594 20,450 2,475
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 11,985 17,883 2,163
Provision for doubtful accounts 3,228 898 109
Minority interest in net income of a combined affiliate 13,079 12,346 1,493
Loss on sales, disposal or impairment of long-lived assets, net 4,181 281 34
Changes in assets and liabilities:
Accounts receivable, net 3,535 (12,969) (1,569)
Inventories, net 15,406 26,381 3,191
Due from related parties 27,229 3,438 416
Due from directors and employees (25,812) 1,459 176
Prepaid expenses and other current assets 14,813 (12,189) (1,473)
Accounts payable 1,957 (1,166) (141)
Due to related parties (42,642) (6,297) (763)
Due to a director - 912 110
Tax payable (6,142) 1,662 201
Accrued expenses and other accrued liabilities (7,368) (2,755) (333)
---------- ----------- ---------
Net cash provided by operating activities 31,043 50,334 6,089
---------- ----------- ---------
Cash flows from investing activities
Payments for purchases of marketable securities (954) - -
Purchase of property, plant and equipment (78,426) (6,758) (817)
Proceeds on disposal of property, plant and equipment - 66 8
---------- ----------- ---------
Net cash used in investing activities (79,380) (6,692) (809)
---------- ----------- ---------
Cash flows from financing activities
Borrowings of short-term debts 151,800 - -
Repayments of short-term debts (105,718) (62,167) (7,520)
Dividends paid to minority interests (500) - -
---------- ----------- ---------
Net cash provided by (used in) from financing 45,582 (62,167) (7,520)
---------- ----------- ---------
Net decrease in cash and cash equivalents (2,755) (18,525) (2,240)
Cash and cash equivalents, beginning of fiscal year 80,899 78,144 9,452
---------- ----------- ---------
Cash and cash equivalents, end of fiscal year 78,144 59,619 7,212
========== =========== =========
Supplemental disclosure of cash flow information
Cash paid during the fiscal year for:
Income and other taxes 18,440 25,849 3,127
Interest 12,274 10,072 1,218
========== =========== =========
Non-cash investing and financing activities
Dividend declared without payment 17 - 25,500 3,084
Dividends as a result of combination under common control 17 25,695 - -
Acquisition of equity interest in an affiliate 17 36,800 - -
========== =========== =========
The accompanying notes are an integral part of these combined financial
statements
F-5
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND REORGANIZATION
The Company was incorporated in the British Virgin Islands ("BVI") on
January 3, 2001 as a limited liability company and was known as Broad
Faith Limited. On the basis as set out in Note 10 below, as of December
31, 2002, the Company has authorized and outstanding common stock of
50,000 shares and 2 shares of United States one dollar par value each
respectively. All outstanding common stock are issued to Mr. Tsui Kit.
The Company has had no operation since its incorporation up to November
25, 2002 and is used as an investment holding company since then.
Mr. Tsui Kit is the controlling stockholder and/or owner of the
following companies:
i) the Company;
ii) Chao Ying (H.K.) Industrial Company ("CYHK");
iii) Shenzhen Kexuntong Industrial Company Limited ("SKI") (see Note
2(a) below);
iv) Shenzhen Wonderland Communication Science & Technology Company
Limited ("Wondial") (see Note 2(b) below); and
v) Wonderland Telecommunication Industrial (Hong Kong) Company Limited
("WTI") (see Note 2(b) below).
The following combinations occurred during the year ended December 31,
2002:
a) Merger under common control
Pursuant to the share exchange agreement entered into between
the Company and Mr. Tsui Kit, trading as CYHK on November 25,
2002, the Company consummated a combination with SKI, by issue
of one share of common stock of the Company, par value United
States one dollar each, to the beneficial owner of SKI, Mr. Tsui
Kit in exchange for all his beneficial interests in SKI ("the
Share Exchange"). The Share Exchange was approved by Shenzhen
Foreign Investment Bureau (the "Bureau") on December 23, 2002.
CYHK, an unincorporated entity established in Hong Kong on April
25, 1993, was the entity named by Mr. Tsui Kit to register in
the Bureau as the controlling joint venturer of SKI, a
sino-foreign equity joint venture established in the People's
Republic of China ("PRC") on March 29, 1994. Mr. Tsui Kit is the
sole proprietor of CYHK since its establishment.
Upon completion of the Share Exchange, the Company became the
registered controlling joint venturer of SKI. The principal
activities of SKI were an investment holding company of Wondial
(see Note 2 (b) below) which contributed substantially income of
the Group.
F-6
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
a) Merger under common control
Consistent with the provisions of Accounting Principle Board
("APB") Opinion 16 "Business Combination", Statement of
Financial Accounting Standards ("SFAS") No. 141 "Business
Combination" states that transfers of net assets or exchanges of
equity interests between entities under common control do not
constitute business combinations. In general, business
combinations exclude transfers and exchanges that do not include
outsiders.
Since the minority equity interest joint venturer of SKI is not
party to the Share Exchange and the Company and SKI were
beneficially owned by the same individual, Mr. Tsui Kit,
immediately before and after the combination, the Share Exchange
has been accounted for as a combination of entities under common
control on a historical cost basis in a manner similar to a
pooling of interests. Accordingly, it is not a purchase event
and should be accounted for based on existing carrying amounts.
That is, if the minority interest does not change and if in
substance the only assets of the combined entity after the
exchange are those of the partially owned affiliate prior to the
exchange, a change in ownership has not taken place, and the
Share Exchange should be accounted for based on the carrying
amounts of the partially owned affiliate's assets and
liabilities. SFAS No. 141 indicates that the assets and
liabilities transferred in such an exchange of shares should be
accounted for at existing carrying amounts.
However, since the Company and SKI account for similar assets
and liabilities using same accounting methods, no change in
accounting method should be applied retroactively, and financial
statements presented for prior periods need not be restated.
When the manner similar to pooling of interests method is used,
it is necessary to present the financial position and results of
operations of the Company and SKI as if they had always been
combined. Any difference between the par issued for the Share
Exchange and present par on the books of the combinee, SKI,
would result in a capital transaction, and would be treated as
either an additional capital contribution or a dividend. This
would lead to a combination in which the original retained
earnings were preserved. Accordingly, since the par issued,
United States one dollar, is less than the par of 51% equity
interest in SKI, Rmb 5,100 on the books of the combinee as of
January 1, 2000, SKI, the excess of the prior par, Rmb 5,100
over the new par, United States one dollar, was added to the
Group's Additional Paid-in Capital.
During 2000, an additional 44% interest in SKI has been
transferred to CYHK at a consideration of Rmb 4,000. However,
pursuant to the pooling transaction as described above, the
Company would not have to pay for this additional consideration
so an additional Rmb 4,000 was added to Additional Paid-in
Capital.
F-7
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
a) Merger under common control
The accompanying financial statements of the Company have been
prepared to illustrate the retrospective effect of the Share
Exchange as if the Share Exchange had occurred and the Company
had been incorporated at the beginning of the earliest period
presented, as of January 1, 2001. By eliminating the effects of
intercompany transactions between the Company and SKI in
determining the results of operations for the period before the
combination, those results will be on substantially the same
basis as the results of operations for the period after the date
of combination. The effects of intercompany transactions on
current assets, current liabilities, revenue, and cost of sales
for periods presented and on retained earnings at the beginning
of the periods presented have been eliminated to the extent
possible. There is no nonrecurring intercompany transaction
between the Company and SKI involving long-term assets and
liabilities needs to be eliminated. Accordingly, the nature of
and effects on earnings per share have not been disclosed.
b) Recapitalization
On December 24, 2002, Industries International Incorporated
("INDI") and the Company reached an agreement in principle to a
"public shell merger" under which the Company merged into a
non-operating public shell corporation, INDI. As a result, the
controlling stockholder of the Company, Mr. Tsui Kit, has actual
or effective operating control of the combined company after the
transaction while the stockholders of the former public shell
continuing only as passive investors ("INDI Agreement").
Since INDI has no operations and only a minor amount of net
assets, such transaction was considered as a capital transaction
in substance, rather than business combination and no goodwill
is recognized in the transaction. Accordingly, the public shell
merger, for accounting purposes, was recorded as a
recapitalization of INDI with the Company being the accounting
survivor and the operating entity and INDI being the legal
survivor.
The public shell merger was effected by an exchange of stock
under which the sole stockholder of the Company, Mr. Tsui Kit
would exchange all of the outstanding shares of the Company for
15,003,140 new shares of INDI. INDI would increase the number of
authorized shares from 20,000,000 to at least 100,000,000 and
would issue an additional 41,260,748 shares to Mr. Tsui Kit
(and/or his designees) to complete the merger. As a result of
the transaction, the Company would become a wholly owned
subsidiary of INDI, and Mr. Tsui Kit (and/or his designees)
would become the principal stockholder of INDI owning
approximately 92% of the outstanding stock in INDI.
Pursuant to the term of INDI Agreement, the INDI's current board
of directors agreed, subject to compliance with applicable
Federal securities law, to take such action as is necessary to
enable it to appoint the designees to the board of directors
effective immediately following the closing of the INDI
Agreement. The designees are: Mr. Tsui Kit, Yu Weijiang, and Xu
Zhiyong.
The merger was finally completed on February 10, 2003.
F-8
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
b) Recapitalization
INDI, a Nevada corporation, was incorporated under the laws of
the state of Nevada on January 11, 1991. INDI was accepted for
quotation on the OTC Bulletin Board on December 7, 2001 and was
assigned the trading symbol "INDI". INDI was incorporated with
an authorized capital of 20,000,000 shares of common stock, par
value United States one cent each. 4,996,860 common stocks were
issued and outstanding as of December 31, 2002. Of the 4,996,860
total shares, 3,964,000 outstanding shares are held by a control
group.
2. INVESTMENTS
Following the Share Exchange described in Note 1(a) above, the Company
accounted for the investments in various equity joint ventures and/or
body incorporates and marketable securities as if these were
investments of the Company at the beginning of the earliest period
presented, as of January 1, 2001. The details of the investments are as
follows:
a) SKI
SKI was established in the PRC on March 29, 1994 as a sino -
foreign equity joint venture and planned to operate for a term
of 15 years until March 29, 2009.
As of January 1, 2001, the equity capital of SKI was Rmb 10,000.
As described in Note 1(a) above, CYHK was the registered owner
of 95% equity interest in SKI. The remaining 5% equity interests
in SKI was owned by Shenzhen Ligaofa Electronic Company Limited
("SLFE", an entity established in PRC).
SKI acts as an investment holding company of Wondial (see 2 (b)
below). During 2001 and 2002, SKI had derived insignificant
revenues from the manufacturing and sales of plastic products.
b) Wondial
Wondial was a sino - foreign equity joint venture established in
PRC on July 2, 1993 and planned to operate for an initial term
of 15 years until July 2, 2008. Prior to the significant changes
in the owners and status of Wondial made in 2000 (see below),
its equity capital of Rmb 50,000 was 70% owned by SKI and 30%
owned by WTI, a company controlled by Mr. Tsui Kit.
On April 17, 2000, the board of directors of Wondial approved to
introduce strategic joint venture partners to Wondial.
Accordingly, SKI entered into agreements (the "Disposal
Agreements") to transfer 26.695% of its interest in Wondial to
the following parties:
i) Beijing Tsinghua University Enterprise Group ("BTUEG")
(9.7458%);
ii) Lutianhua (Group) Company Limited ("LG") (8.4746%); and
iii) Beijing Zhijin Science & Technology Investment Limited
("BZSTI") (8.4746%)
F-9
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
2. INVESTMENTS (Continued)
b) Wondial (Continued)
At the same time, WTI entered into agreements (the "Acquisition
Agreements") to transfer all of its interest in Wondial to the
following parties:
i) SKI (8.4746%);
ii) Huajin Information Industry Investment Limited ("HIII")
(8.8135%);
iii) Shenzhen Junde Investment Development Limited ("SJID")
(8.4746%); and
iv) Shanghai Sanfeng Investment Management Limited ("SSIM")
(4.2373%)
According to the Disposal and Acquisition Agreements, the
disposition of 16.9492% equity interests to LG and BZSTI and the
acquisition of 8.4746% equity interests by SKI were both subject
to an option which gave rights to the acquirers to request the
sellers to repurchase the shares at an agreeable consideration
if Wondial was not able to get its shares listed on the PRC
stock market by August 31, 2001.
On August 15, 2000, the Bureau approved the above transfer of
interests and the application for the change of Wondial's status
from an equity joint venture to a company with limited
liabilities. The operating period of Wondial was then extended
to July 2, 2050. Pursuant to a resolution passed by the owners
of Wondial on August 30, 2000, Wondial further changed its
status to a company limited by shares. The change of status was
subsequently approved by the Bureau on September 26, 2000.
On September 25, 2001, Wondial's plan to get its shares listed
was still pending. Accordingly, LG and BZSTI exercised their
rights to request SKI to repurchase the shares previously
transferred to them. Due to the non-fulfillment of the
above-mentioned condition as specified in the Agreements, the
disposition of 16.9492% equity interests to LG and BZSTI was not
recognized by SKI in both 2000 and 2001. The amount of the sales
proceeds of Rmb 44,800 received from LG and BZSTI was treated as
other payables in the combined balance sheets.
In respect of the options granted to LG and BZSTI, they are not
indexed to, and settled in, the stock of the combined affiliate,
Wondial, because those options are exercisable only if Wondial
has an initial public offering before August 31, 2001 and that
contingent event is not an observable market or an observable
index and the option settlement is not based solely on Wondial's
stock but at an agreed consideration. Accordingly, the options
are treated as contingent liabilities which will be confirmed
only when the future event (that is, the initial public
offering) fails to occur. According to the Disposal Agreements,
LG and BZSTI have the rights to request SKI to repurchase the
shares at a premium (to cover the interest element on the
consideration paid in 2000). However, according to the Disposal
Agreements, the premiums so calculated are not material and
therefore adjustments that might result from the resolution of
this matter have not been reflected in the combined financial
statements.
F-10
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
2. INVESTMENTS (Continued)
b) Wondial (Continued)
On the other hand, SKI did not exercise the option in respect of
the acquisition of 8.4746% interest in Wondial and the
acquisition was completed in September 2001. Since SKI acquires
shares in Wondial from its controlling stockholder, Mr. Tsui
Kit, through WTI, those shares must be recorded at historical
cost because it was the transfer among companies under common
control. The method of accounting for such transfer of equity
interests was similar to pooling of interest method. EITF Issue
No. 90-5, "Exchanges of Ownership Interests between Entities
under Common Control," defines "historical cost" for substantive
operating companies, i.e., Wondial, as the carrying amount of
the transferee which in this case would be the carrying amount
of the controlling stockholder, i.e., SKI. Any difference
between nonstock considerations paid for the assets acquired and
the historical cost of such assets to the controlling
stockholder would be recorded as a dividend or a capital
contribution, as appropriate. Accordingly, the difference
between the nonstock consideration exchanged (Rmb 36,800, see
Note 17 below) and the net carrying value of 8.4746% interest in
Wondial (Rmb 11,105) was treated as dividend (Rmb25,695) to the
controlling stockholder of both companies (i.e., SKI and WTI),
Mr. Tsui Kit.
As a result of the above-mentioned transactions, for accounting
purposes, SKI owned 68.7288% interest in Wondial as of December
31, 2001 and 2002.
Prior to the granting of the status of incorporated limited
company, the Company combined Wondial on the basis that SKI
controlled the board of Wondial which decided Wondial's ongoing
operations and assets in the ordinary course of business. Upon
granting status of incorporated limited company, there were no
matters that required unanimous vote of all stockholders of
Wondial and the financial and operating decisions were governed
by the board of directors of Wondial. According to the new
articles of association of Wondial, the composition of the board
of directors was determined by the majority stockholdings of
Wondial. In effect, the minority stockholders of Wondial had no
substantive and participating right in the management and
policies of Wondial.
At present, substantially all of the Group's income was
generated in PRC by Wondial which is principally engaged in the
design, development, manufacturing and trading of telephone
products, such as cordless telephone, videophone and digital
communication equipment, etc.
F-11
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The combined financial statements and accompanying notes are presented
in Renminbi and prepared in accordance with generally accepted
accounting principles in the United States of America ("USGAAP").
Basis of combination
The accompanying combined financial statements include the accounts of
the following entities, a) the Company; b) SKI; and c) Wondial, because
they are companies under the common control of Mr. Tsui Kit. See "Basis
of financial statements presentation and reorganization" within Note
1(a) above for more information on the basis of presentation of the
combined financial statements.
All significant intercompany accounts and transactions have been
eliminated upon combination.
Affiliate
An affiliate is an entity controlled by another entity directly, or
indirectly through one or more intermediaries. The term control
(including the terms controlling, controlled by and under common
control with) means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a
person, whether through the ownership of voting shares, by contract, or
otherwise.
Revenue recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT"), returns and sales incentive. Wondial makes sales to
distributors in first-tier distribution channels. These distributors
then arrange to sell products to second-tier distribution channels or
directly to consumer. These first-tier distributors are generally given
privileges to good credit terms but at the same time they are
responsible for marketing and repairing the products. The Group
generally recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, fee is fixed or
determinable, and collectibility is probable. The Group adopts a policy
of including handling costs incurred for finished goods, which are not
significant, in the sales and marketing expenses. The handling costs
for the years ended December 31, 2001 and 2002 were Rmb 483 and Rmb
547, respectively. The Group does not accrue for warranty costs, sales
returns and other allowances based on its experience.
In 2002, Wondial offers a customer ("distributor") a rebate ("sales
incentive") of a specified amount of cash consideration that is
redeemable only if the customer completes a specified cumulative level
of purchases. The Group recognizes the cost of the offer in a
systematic and rational manner over the period in which the underlying
revenue transactions that qualify the distributor for the sales
incentive take place. According to EITF Issue No.01-9, "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor's Products)", such sales incentive is treated as a reduction
of revenue.
Research and development
All cost of research and development activities are expensed as
incurred.
F-12
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising and promotion costs
Advertising and promotion costs are expensed when the advertisement or
commercial appears in the selected media. Advertising and promotion
expenses for the years ended December 31, 2001 and 2002 were Rmb 13,243
and Rmb 4,107, respectively and are included in sales and marketing
expense in the combined statements of operations.
Income taxes
Provision for income and other related taxes has been provided in
accordance with the tax rates and laws in effect in PRC.
The Group did not carry on any business and did not maintain any branch
office in the United States of America. No provision for withholding or
U.S. federal income taxes or tax benefits on the undistributed earnings
and / or losses of the Group has been provided as the earnings of the
Company, in the opinion of the management, will be reinvested
indefinitely.
Income tax expense is computed based on pre-tax income included in the
combined statement of operation. Income taxes have been provided, using
the liability method, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases assets and
liabilities and their reported amounts. The tax consequences of those
differences are classified as current or non-current based upon the
classification of the related assets or liabilities in the combined
financial statements.
Cash equivalents
Cash equivalents include all highly liquid investments, generally with
original maturities of three months or less that are readily
convertible to known amount of cash and are so near maturity that they
represent insignificant risk of changes in value because of changes in
interest rates.
Marketable equity securities
Equity securities designated as available-for-sale, whose fair values
are readily determinable, are carried at fair value with unrealized
gains or losses included are a component of accumulated other
comprehensive income. Equity securities classified as trading
securities as carried at fair value with unrealized gains or losses
included in income. Realized gains and losses are determined on the
average cost method and reflected in income.
Inventories
All inventories are stated at the lower of monthly weighted average
cost or market. Potential losses from obsolete and slow-moving
inventories are provided for when identified. Costs of work-in-progress
and finished goods are composed of direct materials, direct labor and
an attributable portion of manufacturing overheads.
F-13
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, plant and equipment
Property, plant and equipment is stated at original cost less
accumulated depreciation and amortization.
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to its present working
condition and location for its intended use. Expenditures incurred
after the assets have been put into operation, such as repairs and
maintenance, overhaul and minor renewals and betterments, are normally
charged to operating expenses in the period in which they are incurred.
In situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected to
be obtained from the use of the assets, the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the combined financial statements and
any gain or loss resulting from their disposal is recognized in the
year of disposition as an element of other income, net.
Depreciation is provided to write off the cost of property, plant and
equipment using straight-line method at rates based on their estimated
useful lives of assets from the date on which they become fully
operational and after taking into account their estimated residual
values.
Accounting for the impairment of long-lived assets
The long-lived assets held and used by the Group are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. It is reasonably
possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability
of assets to be held and used is by comparing the carrying amount of an
asset to future net undiscounted cash flows to be generated by the
assets. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
Operating leases
Leases where substantially all the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating
leases. Rental receivables and payables under operating leases are
recognized as income and expenses respectively on the straight-line
basis over the lease terms.
Earnings per share
The basic earnings per share are computed by dividing income available
to common stockholders by the weighted-average number of common stocks
outstanding as set out in Note 10 below. The computation of diluted
earnings per share is same to the computation of basic earnings per
share except that the weighted-average number of shares outstanding is
adjusted to include estimates of additional shares that would be issued
if potentially dilutive common stocks had been issued. In addition,
income available to common stockholders is adjusted to include any
changes in income or loss that would result from the assumed issuance
of the dilutive common stocks. There were no diluted securities
outstanding during any of the years.
F-14
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency translation
The Group considers Renminbi as its functional currency as a
substantial portion of the Group's business activities are based in
Renminbi.
Transactions in currencies other than functional currency during the
year are translated into the functional currency at the applicable
rates of exchange prevailing at the time of the transactions. Monetary
assets and liabilities denominated in currencies other than functional
currency are translated into functional currency at the applicable
rates of exchange in effect at the balance sheet date. Exchange gains
and losses are dealt with in the combined statement of operation.
For the convenience of the readers of these combined financial
statements, translation of amounts from Renminbi (Rmb) into United
States dollars (USD) has been made at the exchange rate of Rmb 1.00 =
USD0.12096. No representation is made that the Renminbi amounts could
have been or could be converted into the United States dollars at the
rates or at any other rates on December 31, 2002.
Use of estimates
The preparation of the combined financial statements in conformity with
USGAAP requires the Company's 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
financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual amounts could differ from those
estimates. Estimates are used for, but not limited to, the accounting
for certain items such as allowance for doubtful accounts, depreciation
and amortization, inventory allowance, taxes and contingencies.
Allowance for doubtful accounts
The Group provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Group's estimate is based on
historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Group's
estimate of the allowance for doubtful accounts will change. Accounts
receivable are presented net of an allowance for doubtful accounts of
Rmb 4,435 as of December 31, 2002.
Comprehensive income
The Group has reported all changes in equity during a period in
combined financial statements for the period in which they are
recognized. Comprehensive income consists of net incomes, the net
unrealized gains or losses on available-for-sale marketable securities,
foreign currency translation adjustments, minimum pension liability
adjustments and unrealized gains and losses on financial instruments
qualifying for hedge accounting and is presented in the Combined
Statement of Stockholders' Equity and Comprehensive Income. For the
Group, such items consist primarily of unrealized gains and losses on
marketable equity investments. The Group has disclosed comprehensive
income, which encompasses net income in the changes in stockholders'
equity.
F-15
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Related parties
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
Segment reporting
The Group adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". Segment information is disclosed
in Note 14 to the combined financial statements.
Recently issued accounting standards
On January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
issued by the Financial Accounting Standards Board ("FASB") in June
2001. SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting
and broadens the criteria for recording intangible assets separately
from goodwill. SFAS No. 142, among other things, eliminates the
amortization of goodwill and indefinite-lived intangible assets and
requires them to be tested for impairment at least annually.
As described in Notes 1(b) and 18, a recapitalization transaction
occurred subsequent to the balance sheet date. Under SFAS No. 141,
poolings of interest method is prohibited and all business combinations
will be accounted for as purchases, unless the combining entities were
under common control prior to the transaction. Purchase accounting is
required for all recapitalization transactions and the cost of
recapitalization should be measured at the fair market value of the net
assets acquired, or the value of the consideration paid, if more
apparent. However, if fair market value cannot be determined for the
stock of the legal survivor, the acquisition cost is determined based
on the fair market value of the issuer's tangible and identifiable
intangible net assets, no goodwill should be recognized in the
transaction. Moreover, if the parties to the recapitalization
transaction are a publicly held shell company and a privately held
acquiree, the SEC does not permit recognition of goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". The SFAS No. 143 addresses accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This
statement is effective for fiscal years beginning after June 15, 2002.
The Group is currently assessing the impact of this new standard.
On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" issued by the FASB in
October 2001. SFAS No. 144 addresses financial accounting and reporting
for the impairment of long-lived assets and for long lived assets to be
disposed of and supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
F-16
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting standards (Continued)
During 2000 and 2001, Wondial had acquired some machines of Rmb 71,430
and intended to acquire additional machines from a PRC company (the
"Vendor") to set up production lines of advance telephone products.
However, since early 2002, Wondial changed its plan not to participate
in these advance telephone products and agreed to lease the acquired
machines back to the Vendor for a year. Before the end of 2002, at the
request of the Vendor, Wondial agreed to sell these machines back to
the Vendor at a net book value of Rmb 64,644. The disposal took place
in January 2003 and the sales proceed is expected to be settled fully
in the third quarter of 2003.
In accordance with SFAS No. 144, these machines are classified as "held
for sale" as they are available for immediate sale and the sale at the
balance sheet date. These machines are measured at the current value of
the net proceeds to be received from the asset's future sales in 2003
which was negotiated between willing parties, other than at its force
or liquidation sales.
In April 2002, the FASB issued SFAS No. 145,"Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies and simplifies
existing accounting pronouncements. The Group is required to adopt SFAS
No. 145 during the first quarter of 2003. Adoption will not have a
material impact on the combined financial statements of the Company.
However, SFAS No. 145 could affect how the Company records certain
expenses after December 31, 2002.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires
that a liability for a cost that is associated with an exit or disposal
activity be recognized when the liability is incurred. This standard
nullifies the guidance of EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". Under
EITF Issue No. 94-3, an entity recognized a liability for an exit cost
on the date that the entity committed itself to an exit plan. Under
SFAS No. 146, the FASB concludes that an entity's commitment to an exit
plan does not, by itself, create a present obligation to other parties
that meets the definition of a liability. SFAS No. 146 also establishes
that fair value is the objective for the initial measurement of the
liability. SFAS No. 146 will be effective for exit or disposal
activities that are initiated after December 31, 2002. Adoption will
not have a material impact on the Group's combined financial statements
of the Company. However, SFAS No. 146 will affect how the Group
recognizes exit costs after December 31, 2002.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions". SFAS No. 147 provides interpretive guidance on
the application of all acquisitions of financial institutions, except
transactions between two or more mutual enterprises. The Group does not
expect that this standard will have any effect on its combined
financial statements.
F-17
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting standards (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123". This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. Certain provisions of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002 and other provisions are effective
for fiscal years beginning after December 15, 2002. The adoption of
SFAS No. 148 will not have a material impact on the Group's combined
financial statements.
4. OPERATING RISKS
(a) Concentration of major customers and suppliers
Years ended December 31,
-------------------------------
2001 2002 2002
RMB RMB USD
Major customers with revenues of more than 10% of the Group's sales
Sales to major customers 42,271 38,908 4,706
Percentage of sales 15% 14% 14%
Number 1 1 1
======== ======== =======
Major suppliers with purchases of more than 10% of the Group's purchases
Purchases from major suppliers - 18,390 2,224
Percentage of purchases - 16% 16%
Number - 1 1
======== ======== =======
Accounts receivable related to the Group's major customer was
10% of all account receivables as of December 31, 2002.
Credit risk represents the accounting loss that would be
recognized at the reporting date if counter parties failed to
perform as contracted. Concentrations of credit risk (whether on
or off balance sheet) that arise from financial economic
characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in
economic or other conditions. The major concentrations of credit
risk arise from the Group's account receivables. Even though the
Group has, it does not consider itself exposed to significant
risk with regards to the related receivable.
F-18
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
4. OPERATING RISKS (Continued)
(b) Country risks
The Group may also be exposed to the risks as a result of its
sales operation being related in PRC. These include risks
associated with, among others, the political, economic and legal
environmental and foreign currency exchange. The Group's results
may be adversely affected by change in the political and social
conditions in PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods
of taxation, among other things. The Company's management does
not believe these risks to be significant. There can be no
assurance, however, those changes in political and other
conditions will not result in any adverse impact.
(c) Cash and time deposits
The Group maintains its cash balances and investments in time
deposits with various banks and financial institutions located
in PRC. In common with local practice, such amounts are not
insured or otherwise protected should the financial institutions
be unable to meet their liabilities. There has been no history
of credit losses. There are neither material commitment fees nor
compensating balance requirements for all outstanding loans of
the Group.
(d) Borrowing risk
As described in Note 9 below, certain bank borrowings were
pending further extension. Should the banks not extend the
maturity of these borrowings, the Group may need to have other
financing arrangement to meet its short-term liquidity
requirements. The financial statements do not include any
adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of
liabilities that might result should the Group be unable to
obtain additional financing. The Group has paid bank interests
on schedule and believes that the outstanding bank borrowings
will be extended in the near future.
5. MARKETABLE SECURITIES
The aggregate cost, gross unrealized losses and fair value pertaining
to available-for-sales securities are as follows:
As of December 31,
------------------------
2002 2002
RMB USD
Cost 12,971 1,569
Gross unrealized losses (368) (45)
---------- ----------
Fair value 12,603 1,524
========== ==========
F-19
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
6. INVENTORIES
Inventories comprise the follows:
As of December 31,
--------------------------
2002 2002
RMB USD
Raw materials 15,796 1,911
Work-in-progress 1,131 137
Finished goods 2,730 330
------------ -----------
19,657 2,378
============ ===========
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
Estimated useful life As of December 31,
(in years)
---------------------------
2002 2002
RMB USD
Buildings 35 28,324 3,426
Moulds 3 - 5 18,913 2,288
Plant and machinery 5 - 10 21,707 2,625
Electronic equipment 5 11,219 1,357
Motor vehicles 5 - 8 5,023 608
------------ -----------
85,186 10,304
Accumulated depreciation (32,026) (3,873)
------------ -----------
53,160 6,431
============ ===========
F-20
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
8. BANKING FACILITIES
The Group had various lines of credit under banking facilities as
follows:
As of December 31,
---------------------------
2002 2002
RMB USD
Facilities granted
Committed credit lines 119,025 14,397
============ ===========
Utilized
Committed credit lines 115,025 13,913
============ ===========
Unutilized facilities
Committed credit lines 4,000 484
============ ===========
There are no significant commitment fees or requirements for
compensating balances associated with any lines of credit.
Under the banking facilities arrangements, the Group's banking
facilities amounted to Rmb 15,000 as of December 31, 2002 were
collateralized by guarantees of a Shenzhen city government sponsored
corporation, namely Shenzhen Hi-Tech Investment Company Limited
("SHTI", which assists hi-tech companies in Shenzhen to obtain working
capital). Each year, Wondial has to report their financial positions
for the year to SHTI which will assess the extent of assistance to
Wondial.
As of December 31, 2002, the short-term loans of Rmb 72,025 were
collateralized by pledge of the Group's property at a carrying value of
Rmb 12,332, corporate guarantees of SKI, a related company, Wuhan
Lixing Power Sources Company Limited ("WLPS") and corporate guarantees
provided by SHTI and the sponsor who is responsible for the listing of
Wondial's shares in PRC. Details of guarantees with related party were
disclosed in Note 15 below.
9. DEBTS MATURING WITHIN ONE YEAR
Debts maturing within one year represented mainly short-term bank loans
and were summarized as follows:
Weighted-average Outstanding debts maturing
interest
rates within one year
-------------- ---------------------------------
% RMB USD
As of December 31,
2002 7.15 115,025 13,913
============== ============= =============
Wondial is currently in negotiations with various bankers to further
extend Wondial's outstanding bank borrowings of Rmb 46,000 as of
December 31, 2002, which have already been falling due. The Group does
not anticipate that future borrowings will be limited.
The interests on amounts borrowed under the various loan agreements are
at market rates.
F-21
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
10. EQUITY CAPITAL
As of December 31, 2002, the authorized capital of the Company is USD50
divided into 50,000 shares of common stock, par value United States one
dollar each, with one vote for each share.
On December 31, 2001, one share of common stock, par value United
States one dollar each, was allotted to Mr. Tsui Kit for cash. For the
purpose of preparation of these combined financial statements, this
share has been treated as issued for all years presented.
As described in Notes 1 and 18, on November 25, 2002, the Company has
entered into a Share Exchange Agreement with its stockholder, Mr. Tsui
Kit, trading as CYHK (which was named by Mr. Tsui Kit to be the
registered joint venturer of SKI). In exchange for his beneficial
interest in SKI, the Company allotted one share of common stock, par
value United States one dollar each, to Mr. Tsui Kit. Since the Company
and SKI were beneficially owned by the same individual, Mr. Tsui Kit,
immediately before and after the combination, the Share Exchange has
been accounted for as a reorganization of entities under common control
on a historical cost basis in a manner similar to a pooling of
interests. On this basis, for the purpose of these combined financial
statements, the one share of common stock of the Company issued for
this combination has been treated as issued for all years presented.
Accordingly, the total issued and outstanding common stocks used in
these combined financial statements are two.
11. DISTRIBUTION OF INCOME
The Group's income is substantially contributed by Wondial, a limited
company incorporated in PRC. Income of Wondial is distributable to its
stockholders after transfer to dedicated reserves as required under
relevant PRC rules and regulations and Wondial's articles of
association.
Dedicated reserves include statutory surplus reserve and statutory
public welfare fund. In accordance with the relevant PRC Companies Law
and rules and regulations, Wondial is required to transfer amounts
equal to 10% and 5% of its income after taxation to the statutory
surplus reserve and statutory public welfare fund respectively.
Prior to the granting of the status of incorporated limited company on
August 15, 2000, Wondial had been a sino - foreign equity joint venture
established in PRC. According to Wondial's articles of association,
income of Wondial was distributable to its joint venture partners after
transfer to general reserve fund and staff welfare fund at the rates
determined by Wondial's board of directors. Since its establishment,
Wondial transferred 10% and 5% of the after-tax income to the general
reserve fund and staff welfare fund respectively every year.
SKI was also a sino - foreign equity joint venture established in PRC.
Income is distributable to its joint venture partners after transfer to
general reserve fund and staff welfare fund as governed under relevant
Mainland Chinese rules and regulations. Pursuant to SKI's articles of
association, the rates and amounts of transfer are determined by the
board of directors. During the year ended December 31, 2001, SKI
transferred 10% and 5% of its after-tax income to the general reserve
fund and staff welfare fund respectively.
F-22
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
11. DISTRIBUTION OF INCOME (Continued)
The statutory surplus reserve and general reserve fund can only be
utilized to offset prior years' losses or for capitalization as paid-in
capital, whereas the statutory public welfare fund and staff welfare
fund shall be utilized for collective staff welfare benefits such as
building of staff quarters or housing. The amounts appropriated to
staff welfare fund were charged against income and the related
provisions are reflected as accrued liabilities in the combined balance
sheets. No distribution of the remaining reserves shall be made other
than on liquidation of SKI and/or its affiliate.
As described in Note 2(b) above, the excess of consideration of Rmb
25,695 for the acquisition of 8.4746% interest in Wondial over the net
carrying value of Wondial was treated as dividend to the common control
owner, Mr. Tsui Kit. In 2002, the Company's board of directors approved
an annual dividend for 2002 of Rmb 25,500 distributed to the
stockholder, Mr. Tsui Kit. The said dividends have been charged to
retained earnings as of December 31, 2001 and 2002 respectively.
12. PENSION COSTS
As stipulated by PRC regulations, the Group maintains a defined
contribution retirement plan for all of its employees who are residents
of PRC. All retired employees of the Group are entitled to an annual
pension equal to their basic annual salary upon retirement. The Group
contributed to a state sponsored retirement plan approximately 9% of
the basic salary of its employees and has no further obligations for
the actual pension payments or post-retirement benefits beyond the
annual contributions. The state sponsored retirement plan is
responsible for the entire pension obligations payable to all
employees.
The pension expense for the years ended December 31, 2001 and 2002 was
Rmb 211 and Rmb 218, respectively.
13. TAXATION
The Company and its affiliates are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdictions in
which they operate. The Company was incorporated under the
International Business Companies Act of the British Virgin Islands and,
accordingly, is exempted from payment of the British Virgin Islands
income taxes.
The tax holidays of the Group comprised the following:
a) Income taxes
At present, substantially all of the Group's income is generated
in PRC by Wondial, an enterprise established in Shenzhen,
Special Economic Zone and is subject to PRC income taxes at a
rate of 15%. Wondial, being a hi-tech enterprise whose operating
period is more than 10 years, is entitled to be exempted from
income tax for two years starting from the first profit making
year, January 1, 1997, and is then subject to a 50% reduction in
income tax for the following eight years. The tax holiday of the
full exemption of income tax expired on January 1, 1999.
Starting from January 1, 1999, Wondial enjoyed a 50% reduction
in income tax until 2006. If the tax holiday of the income tax
had not existed, the Group's income tax expenses would have been
increased by approximately Rmb 2,504 Rmb 2,821 for the years
ended December 31, 2001 and 2002. Basic earnings per common
stock share would have been decreased by approximately Rmb 1,252
and Rmb 1,411 for the year ended December 31, 2001 and 2002
respectively.
F-23
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
13. TAXATION (Continued)
b) VAT
Generally, any sales made in PRC are subject to PRC value-added
tax at a rate of 17% ("output VAT"). Such output VAT is payable
after offsetting VAT paid by the Group on purchases ("input
VAT"). Under the preferential policy in Shenzhen, any products
produced and sold within the Shenzhen is exempted from VAT. Upon
verification by Shenzhen National Tax Bureau on an annual basis,
the sales proportion exempt from VAT under such preferential
policy for 2001 and 2002 was 56% and 36%. If such tax holiday
had not existed, the Group would have an additional VAT payable
of approximately Rmb 16,971 and Rmb 13,916 for the years ended
December 31, 2001 and 2002, respectively. Basic and diluted
earnings per common stock would have been decreased by
approximately Rmb 8,486 and Rmb 6,958 for the years ended
December 31, 2001 and 2002, respectively.
Income tax expense is comprised of the following:
Years ended December 31,
------------------------------------
2001 2002 2002
RMB RMB USD
Current tax 2,504 2,820 341
Deferred tax - - -
-------- --------- ----------
Income tax expenses 2,504 2,820 341
======== ========= ==========
The reconciliation of PRC statutory income to the effective
income tax rate based on income stated in the statements of
operations is as follows:
Years ended December 31,
--------------------------------
2001 2002
% %
Statutory rate 15.0 15.0
Effect of tax holiday (7.5) (7.5)
Non-taxable activities (0.3) (1.8)
Non-deductible activities 0.3 2.2
------------- ------------
Effective tax rate 7.5 7.9
============= ============
F-24
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
13. TAXATION (Continued)
b) VAT (Continued)
Taxation payable is comprised of the following:
As of December 31,
------------------------
2002 2002
RMB USD
PRC value-added tax 8,414 1,018
PRC income tax 212 26
PRC other taxes 43 5
--------- ----------
8,669 1,049
========= ==========
14. REPORT ON SEGMENT INFORMATION
The Group adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in respect of its operating
segments. The Group's income is substantially contributed by Wondial,
which operates in a single business segment that includes the design,
development, and manufacturing and trading of telephone products. Its
products are only sold to PRC distributors so no geographical segment
information is presented.
15. RELATED PARTY TRANSACTIONS
Name and relationship of related parties
Name Relationship with the Company
---- -----------------------------
SLFE Joint venturer of the SKI and under control of
cousin and mother of Tsui Kit
WTI Under common control of Tsui Kit
Lisun Power International Ltd ("LPI") Under common control of Tsui Kit
WLPS Under common control of Tsui Kit
Wuhan Lixing (Torch) Power Sources Company Limited Under common control of Tsui Kit
("WLTPS")
Tsui Kit Stockholder and director of the Company
BTUEG Stockholder of Wondial
Yu Weijiang Brother-in-law of Tsui Kit
Xu Dong Sister of Tsui Kit
Xu Zhiyong Brother of Tsui Kit
Zhang Ernong General manager of Wondial
F-25
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
15. RELATED PARTY TRANSACTIONS (Continued)
Summary of related party transactions
As of December 31,
---------------------------
2002 2002
RMB USD
Due from related parties (Note (i))
SLFE 4,769 577
BTUEG 9,200 1,113
LPI 30,144 3,646
---------- -----------
44,113 5,336
========== ===========
Due from director and employees (Note (i))
Yu Weijiang 80 10
Xu Dong 30 4
Xu Zhiyong 30 4
Zhang Ernong 44 5
Other employees 4 -
---------- -----------
188 23
========== ===========
Due to related parties (Note (ii))
WTI 405 49
========== ===========
Due to a director (Note (ii))
Tsui Kit 912 110
========== ===========
Guarantee of short term loans
WLPS 24,405 2,952
========== ===========
F-26
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
15. RELATED PARTY TRANSACTIONS (Continued)
Summary of related party transactions (Continued)
Year ended December 31,
-----------------------------------------
2001 2002 2002
RMB RMB USD
Sale of goods
SLFE - 22,928 2,773
========== =========== ============
Purchase of goods and materials for manufacturing
WLPS 10,955 - -
WLTPS 3,716 516 62
========== =========== ============
Notes:
(i) The amounts due from related parties, director and employees
represent unsecured advances made to those parties from time
to time. These amounts are interest free and repayable on
demand.
(ii) The amounts due to director and related parties represent
unsecured advances made from those parties from time to time.
These amounts are interest free and repayable on demand.
(iii) Pursuant to an agreement entered into between Mr. Tsui Kit and
SKI on November 25, 1997, Mr. Tsui Kit disposed of certain
properties to SKI at their original purchase costs but he
still held the properties as the registered owners. SKI, being
beneficial owner of these properties, recorded these
properties as its assets.
As of December 31, 2002, the change of the registered owners
of these properties (with a net carrying value of Rmb 12,121)
from Mr. Tsui Kit to SKI was still in progress.
16. COMMITMENTS
(a) Capital commitments
The outstanding capital commitments of the Group are as follow:
As of December 31,
---------------------------------
2002 2002
RMB USD
Acquisition of moulds and other machinery 197 24
============= =============
F-27
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
16. COMMITMENTS (Continued)
(b) Operating leases
i) Operating lease expense
The Group leases certain staff quarters and offices
premises under non-cancelable operating leases. Rental
expenses under operating leases were Rmb 2,876 and Rmb
1,908 for the year ended December 31, 2001 and 2002
respectively. There was no capital lease currently in
effect.
The following table summarizes the approximate future
minimum rental payments under non-cancelable operating
leases in effect:
As of December 31, 2002
--------------------------------
RMB USD
Year ending December 31
2003 174 21
2004 - -
2005 - -
2006 - -
2007 - -
Thereafter - -
------------- ------------
Total 174 21
============= ============
ii) Operating lease income
Operating leases arise from the leases for machinery and
equipment to various subcontractors and the Vendor (see
"Recently issued accounting standards" within Note 3 above
for more information on this lease) were entered into
prior to December 31, 2001 and the lease terms are
generally 12 months.
Depreciation expense for assets subject to operating
leases is provided primarily on the straight-line method
over the estimated useful life of the assets. Depreciation
expense relating to machinery and equipment held as
investments in operating leases was Rmb 76 and Rmb 7,990
for the years ended December 31, 2001 and 2002
respectively.
F-28
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
16. COMMITMENTS (Continued)
(b) Operating leases (Continue)
ii) Operating lease income (Continued)
Investments in operating leases are as follows:
As of December 31,
---------------------------------
2002 2002
RMB USD
Machinery and equipment 15,361 1,858
Accumulated depreciation (7,189) (870)
------------- -------------
Net investment in operating leases 8,172 988
============= =============
Future minimum rental payments to be received on
non-cancelable operating leases are contractually due as
follows:
As of December 31, 2002
---------------------------------
RMB USD
Year ending December 31
2003 960 116
2004 - -
2005 - -
2006 - -
2007 - -
Thereafter - -
------------- -------------
Total 960 21
============= =============
There were no contingent rentals under the respective
lease contracts.
17. NON-CASH TRANSACTIONS
For the year ended December 31, 2001, the consideration for the
acquisition of 8.4746% equity interest in Wondial from WTI amounted to
Rmb 36,800 has not been paid and was recorded as due to related party
(see also Note 2(b) to the financial statements). As described in Notes
2 and 11, a dividend of Rmb 25,695 as a result of combination under
common control was not paid in cash but was charged to retained
earnings as of December 31, 2001.
An annual dividend of Rmb 25,500 for 2002 was not paid in cash but was
offset against the amounts due from director, Mr. Tsui Kit as he had
been paid in advance.
F-29
Broad Faith Limited
Notes to Combined Financial Statements
Years ended December 31, 2001 and 2002
- -------------------------------------------------------------------------------
(amount in thousands)
18. SUBSEQUENT EVENT
In January 2003, Wondial entered into an agreement to sell back
machines to the Vendor for an amount of Rmb 64,644. The disposal took
place in January 2003. These machines are classified separately as
"held-for-sales" in the combined balance sheet as of December 31, 2002
as described in "Recently issued accounting pronouncements" within Note
3 above.
As described in Note 1(b) above, pursuant to the INDI Agreement, INDI
issued Mr. Tsui Kit 15,003,140 shares of INDI common stock on February
10, 2003 in exchange for all issued and outstanding common stock of the
Company. Mr. Tsui Kit then holds 75% of the issued and outstanding
common stock of INDI, and thereby controls INDI.
F-30