SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act 1934
Date of Report: August 9, 2004
Techedge, Inc.
--------------
(Exact name of registrant as specified in charter)
Delaware
--------
(State or other jurisdiction of incorporation)
000-50005 04-3703334
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
33 Wood Avenue South, 7F, Iselin, New Jersey 08830
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 732-632-9896
ITEM 1. CHANGE IN CONTROL OF REGISTRANT
On June 9, 2004, Techedge, Inc., a Delaware company (the "Company"),
acquired all of the issued and outstanding stock of China Quantum
Communications, Ltd., a Cayman Islands company ("China Quantum"), pursuant to a
Share Exchange Agreement, dated as of June 9, 2004, by and among the Company,
the shareholders of the Company listed on Exhibit A thereto, China Quantum and
the shareholders of China Quantum listed on Exhibit B thereto (the "Exchange
Agreement").
Pursuant to the Exchange Agreement, China Quantum became a wholly-owned
subsidiary of the Company, and in exchange for the China Quantum shares, the
Company issued 72,000,000 shares of its common stock to the shareholders of
China Quantum, representing approximately 90% of the Company's outstanding stock
at the time. The following three persons were appointed to fill vacancies on the
Company's board of directors: Peter Wang, Charles Xue and Ya Li.
The Company is not aware of any arrangements which may at a subsequent
date result in a change in control.
OVERVIEW
The Company, through China Quantum and China Quantum's wholly-owned
subsidiaries, develops and provides advanced wireless voice, data, and
multimedia services to commercial and residential users in the U.S. and China.
The Company focuses its activities on the development and deployment of IP based
Personal Communication Service (PCS), a regional wireless VoIP service delivered
on unlicensed low power PCS frequency through IP-enabled local transceiver and
IP centric soft-switched networks, operating on an advanced proprietary software
centric multi-service global communication service platform and management
system.
OFFICERS AND DIRECTORS
Pursuant to the Exchange Agreement, on June 9, 2004, Messrs. Gregory A.
Konesky and Ehren Richardson resigned as officers and directors of the Company.
They were replaced on the Board of Directors by Messrs. Peter Wang, Charles Xue
and Ya Li. To the best of the Company's knowledge, none of the current directors
of the Company has been convicted in a criminal proceeding, excluding traffic
violations or similar misdemeanors, or has been a party to any judicial or
administrative proceeding during the past five years, except for matters that
were dismissed without sanction or settlement, that resulted in a judgment,
decree or final order enjoining the person from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
2
Below is biographical information for each of the new directors and
officers of the Company:
NAME AGE BUSINESS EXPERIENCE
Peter Wang 49 Mr. Wang is the President, Chief Executive Officer and Director of
the Company since June 9, 2004, and was the Chief Executive Officer
and director of China Quantum since 2000. Mr. Wang was the
President and director of World Communications Group, Inc. from
1995 to 2000 and Executive Vice-President and director of Unitech
Telecom, Inc. from 1990 to 1995. Mr. Wang has over 20 years'
experience in communications products. Mr. Wang was a co-founder
of UTStarcom as well as several other technology and service
ventures. Prior to becoming an entrepreneur, Mr. Wang worked for
AT&T and Racal-Milgo Information System in network planning and
network management.
Charles Xue 50 Mr. Xue is a Director of the Company since June 9, 2004. Mr. Xue
is the Chairman of Phoenix Technology Limited since 2002 and the
Chairman of 8848, Inc. since 1998. Mr. Xue was the Vice-Chairman
of UTStarcom from 1996 to 2002 and Chairman of UTStarcom from 1990
to 1996.
Ya Li 34 Mr. Li is the Chief Financial Officer, Chief Operating Officer and
a Director of the Company since June 9, 2004, and was the Chief
Operating Officer and director of China Quantum since 2002. Mr. Li
was the Chief Executive Officer and director of Global Villager
Inc. from 1996 to 2000. Mr. Li has worked as a senior consultant
and software developer in information, telecom and financial
industries for Bell Atlantic (n/k/a Verizon), DLJ, Lehman Brothers
and Morgan Stanley. Following the acquisition of Global Villager
Inc. by Startec Global Communications Inc. in March 2000, Mr. Li
managed Startec's Internet and Internet Telephony products and
services. Mr. Li has served as Director for Chinese Finance
Society, Council on U.S.-China Affairs.
Wind Chen 48 Mr. Chen is the Senior Vice President of Strategy of the Company
since June 9, 2004. Mr. Chen was the Vice President of business
strategy of Japan Telecom, in charge of international corporate
strategy & planning. Prior to Japan Telecom, Mr. Chen was the
Managing Director of Suppliers Market of Bellcore (Telcordia), in
charge of business development in Asian Pacific and northern Europe
(Scandinavia).
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements
The audited financial statements of China Quantum for the fiscal years ended
December 31, 2002 and 2003, the unaudited pro forma condensed financial
statements for the three months ended March 31, 2004 and the unaudited pro forma
condensed financial statements for the fiscal year ended December 31, 2003, are
filed herewith.
Exhibit No. Description
- ----------- -----------
2.1 Share Exchange Agreement, dated June 9, 2004
4
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.
TECHEDGE, INC.
By: /s/ Peter Wang
------------------------------------------
Name: Peter Wang
Title: Chief Executive Officer
Dated: August 6, 2004
Unaudited Pro Forma Condensed Financial Statements
The following unaudited pro forma condensed financial statements of Techedge,
Inc. (the "Company") have been prepared to indicate how the financial statements
of the Company might have looked if the Merger with China Quantum
Communications, Ltd. and transactions related to that Merger had occurred as of
the beginning of the period presented.
The pro forma condensed financial statements have been prepared using the
unaudited historical financial statements of the Company and China Quantum
Communications, Ltd. as of and for the three months ended March 31, 2004 and for
the year ended December 31, 2003. For accounting purposes, because the Company
had become a shell company, the Merger will be treated as a recapitalization of
Techedge, Inc.
The pro forma condensed financial statements should be read in conjunction with
a reading of the historical financial statements of the Company and China
Quantum Communications, Ltd. The pro forma condensed financial statements are
presented for illustrative purposes only and are not intended to be indicative
of actual financial condition or results of operations had the Merger been in
effect during the periods presented, or of financial condition or results of
operations that may be reported in the future.
Unaudited Pro Forma Condensed Financial Statements (Continued)
Techedge, Inc.
Unaudited Pro Forma Condensed Balance Sheet
March 31, 2004
Historical
------------------------------
China Quantum Pro Forma
Techedge, Communications, -----------------------------
Inc. Inc. Adjustments Notes Combined
----------- ----------- ----------- ----- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ 506,407 $ -- $ 506,407
Accounts receivable, net -- 25,059 -- 25,059
Due from related party -- 45,163 -- 45,163
Prepaid expenses and other current assets -- 25,383 -- 25,383
----------- ----------- ----------- -----------
Total Current Assets -- 602,012 -- 602,012
Property and equipment, net -- 285,192 -- 285,192
Investment in unconsolidated subsidiary -- 527,912 -- 527,912
Other assets -- 31,357 -- 31,357
----------- ----------- ----------- -----------
Total Assets -- 1,446,473 -- 1,446,473
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 84,940 721,599 -- 806,539
Due to officers -- 573,904 -- 573,904
----------- ----------- ----------- -----------
Total Current Liabilities 84,940 1,295,503 -- 1,380,443
----------- ----------- ----------- -----------
Stockholders Equity:
Preferred Stock, Series A -- 501 (501)(a) --
Common Stock 800 5,111 2,089 (a) 8,000
Additional paid-in capital 3,400 4,351,190 (75,792)(a) 4,278,798
Deficit accumulated during development stage (89,140) (4,209,094) 74,204 (a) (4,224,030)
Accumulated other comprehensive income (loss) -- 3,262 -- 3,262
----------- ----------- ----------- -----------
Total stockholders' equity (84,940) 150,970 -- 66,030
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $ -- $ 1,446,473 $ -- $ 1,446,473
=========== =========== =========== ===========
(a) These adjustments reflect the recapitalization of Techedge, Inc., now the
Company.
1
Unaudited Pro Forma Condensed Financial Statements (Continued)
Techedge, Inc.
Unaudited Pro Forma Condensed Statement of Operations
For the Three Months Ended March 31, 2004
Historical
------------------------------
China Quantum Pro Forma
Techedge, Communications, -------------------------------
Inc. Inc. Adjustments Notes Combined
----------- ----------- ------------ ----- ------------
Revenues $ -- $ 79,179 $ -- $ 79,179
Cost of Sales -- 36,138 -- 36,138
------------ ------------ ------------ ------------
Gross Profit -- 43,041 -- 43,041
------------ ------------ ------------ ------------
Costs and expenses:
Research and development -- 83,146 -- 83,146
General and administrative 14,936 181,032 -- 195,968
Depreciation and Amortization -- 28,179 -- 28,179
------------ ------------ ------------ ------------
Total costs and expenses 14,936 292,357 -- 307,293
------------ ------------ ------------ ------------
Loss from operations (14,936) (249,316) -- (264,252)
------------ ------------ ------------ ------------
Other income (expense):
Loss from unconsolidated subsidiary -- -- --
Loss on foreign currency -- (3,068) (3,068)
Interest income (expense), net -- 2,359 -- 2,359
------------ ------------ ------------ ------------
Total other income (expense) -- (709) -- (709)
------------ ------------ ------------ ------------
Net Loss $ (14,936) $ (250,025) $ -- $ (264,961)
------------ ------------ ------------ ------------
Unrealized gain (loss) on foreign
currency translation, net of tax -- 3,526 -- 3,526
------------ ------------ ------------ ------------
Comprehensive Loss $ (14,936) $ (246,499) $ -- $ (261,435)
============ ============ ============ ============
Loss Per Common Share, $ 0.00 $ (0.02) $ $ 0.00
basic and diluted ============ ============ ============
Weighted Average Common Shares Outstanding, 8,000,000 51,000,298 80,000,000
basic and diluted ============ ============ ============
2
Unaudited Pro Forma Condensed Financial Statements (Continued)
Techedge, Inc.
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 2003
Historical
------------------------------
China Quantum Pro Forma
Techedge, Communications, -------------------------------
Inc. Inc. Adjustments Notes Combined
----------- -------------- ------------- ----- -----------
Revenues $ -- $ 437,361 $ -- $ 437,361
Cost of Sales -- 180,981 -- 180,981
------------ ------------ ------------ ------------
Gross Profit -- 256,380 -- 256,380
------------ ------------ ------------ ------------
Costs and expenses:
Research and development -- 386,775 -- 386,775
General and administrative 17,678 861,422 -- 879,100
Depreciation and Amortization -- 74,002 -- 74,002
------------ ------------ ------------ ------------
Total costs and expenses 17,678 1,322,199 -- 1,339,877
------------ ------------ ------------ ------------
Loss from operations (17,678) (1,065,819) -- (1,083,497)
------------ ------------ ------------ ------------
Other income (expense):
Loss from unconsolidated subsidiary -- (11,049) (11,049)
Loss on foreign currency -- (1,908) (1,908)
Interest income (expense), net -- 14,934 -- 14,934
------------ ------------ ------------ ------------
Total other income (expense) -- 1,977 -- 1,977
------------ ------------ ------------ ------------
Net Loss $ (17,678) $ (1,063,842) $ -- $ (1,081,520)
------------ ------------ ------------ ------------
Unrealized gain (loss) on foreign
currency translation, net of tax -- (3,155) -- (3,155)
------------ ------------ ------------ ------------
Comprehensive Loss $ (17,678) $ (1,066,997) $ -- $ (1,084,675)
============ ============ ============ ============
Loss Per Common Share, $ 0.00 $ (0.02) $ $ (0.01)
basic and diluted ============ ============ ============
Weighted Average Common Shares Outstanding, 8,000,000 51,000,298 80,000,000
basic and diluted ============ ============ ============
3
CHINA QUANTUM COMMUNICATIONS, LTD.
AND SUBSIDIARIES
(A CAYMAN ISLANDS CORPORATION IN
THE DEVELOPMENT STAGE)
FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-1
Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the years ended December 31, 2003
and 2002 and for the period from September 13, 2000 (date of
inception) through December 31, 2003 F-3
Consolidated Statements of Changes in Stockholders' Equity for the period
from September 13, 2000 (date of inception) to December 31, 2003 F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003
and 2002 and for the period from September 13, 2000 (date of
inception) through December 31, 2003 F-5
Notes to Consolidated Financial Statements F-6 - F-20
Additional Information
Schedule I, Valuation and Qualifying Accounts F-21
To the Board of Directors and Stockholders of
China Quantum Communications, Ltd.:
We have audited the accompanying consolidated balance sheets of China Quantum
Communications, Ltd. and Subsidiaries (a Cayman Islands corporation in the
development stage) as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years ended December 31, 2003 and 2002 and for the period from
September 13, 2000 (date of inception) to December 31, 2003. 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 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 financial
statements are free of material misstatement. 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, based on our audits, the financial statements referred to above
present fairly, in all material respects, the financial position of China
Quantum Communications, Ltd. and Subsidiaries as of December 31, 2003 and 2002
and the results of their operations and cash flows for the two years ended
December 31, 2003 and 2002 and for the period from September 13, 2000 (date of
inception) to December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information, Valuation and
Qualifying Accounts on page F-20 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, NJ
May 22, 2004
F-1
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2003 2002
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 710,694 $ 1,411,805
Accounts receivable, net of bad debt reserve of
$14,326 in both years 23,568 53,835
Due from related party 41,582 9,640
Prepaid expenses and other current assets 59,666 32,677
----------- -----------
Total Current Assets 835,510 1,507,957
Property and equipment, net 287,989 358,302
Investment in unconsolidated subsidiary 370,493 401,709
Other assets 31,330 34,208
----------- -----------
Total Assets 1,525,322 2,302,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 483,864 525,553
Due to officers 643,989 325,768
----------- -----------
Total Current Liabilities 1,127,853 851,321
----------- -----------
Commitments and Contingencies (Note 11) -- --
Stockholders Equity:
Preferred Stock, stated value $.0001, 6,250,000 shares authorized; 5,013,600 and
5,000,000 shares issued and outstanding, in 2003 and
2002, respectively 501 500
Common Stock, stated value $.0001, 75,000,000 shares authorized;
51,108,800 and 51,000,000 shares issued and outstanding, in 2003
and 2002, respectively 5,111 5,100
Additional paid-in capital 4,351,190 4,337,591
Deficit accumulated during development stage (3,959,069) (2,895,227)
Accumulated other comprehensive income (loss) (264) 2,891
----------- -----------
Total stockholders' equity 397,469 1,450,855
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,525,322 $ 2,302,176
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM
FOR THE YEAR ENDED SEPTEMBER 13, 2000
DECEMBER 31, (DATE OF INCEPTION)
2003 2002 TO DECEMBER 31, 2003
------------ ------------ --------------------
Revenues $ 437,361 $ 392,506 $ 844,540
Cost of Sales 180,981 205,463 431,248
------------ ------------ ------------
Gross Profit 256,380 187,043 413,292
------------ ------------ ------------
Costs and expenses:
Research and development 386,775 510,078 1,207,468
General and administrative (including
stock-based compensation of $13,611, $0 and
$13,611, respectively) 861,422 1,174,296 2,977,008
Depreciation and Amortization 74,002 30,034 174,581
------------ ------------ ------------
Total costs and expenses 1,322,199 1,714,408 4,359,057
------------ ------------ ------------
Loss from operations (1,065,819) (1,527,365) (3,945,765)
------------ ------------ ------------
Other income (expense):
Loss from unconsolidated subsidiary (11,049) (28,289) (39,338)
Loss on foreign currency (1,908) (1,242) (4,150)
Interest income (expense), net 14,934 6,716 30,184
------------ ------------ ------------
Total other income (expense) 1,977 (22,815) (13,304)
------------ ------------ ------------
Net Loss $ (1,063,842) $ (1,550,180) $ (3,959,069)
------------ ------------ ------------
Unrealized gain (loss) on foreign
currency translation, net of tax (3,155) 3,716 (264)
------------ ------------ ------------
Comprehensive Loss $ (1,066,997) $ (1,546,464) $ (3,959,333)
============ ============ ============
Loss Per Common Share, $ (0.02) $ (0.03)
============ ============
basic and diluted
Weighted Average Common Shares Outstanding, basic
and diluted 51,000,298 48,854,795
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 13, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2003
PREFERRED SERIES A STOCK COMMON STOCK ADDITIONAL
---------------------------- ----------------------------- OTHER
$.0001 $.0001 PAID-IN
SHARES STATED VALUE SHARES STATED VALUE CAPITAL
------ ------------ ------ ------------ -------
BALANCE, September 13, 2000 -- $ -- 48,000,000 $ 4,800 $ --
(date of inception)
Net loss -- -- -- -- --
BALANCE, December 31, 2000 -- -- 48,000,000 4,800 --
Preferred stock issued in
private placement 4,000,000 400 -- -- 3,999,600
Foreign Currency Translation -- -- -- -- --
Net loss -- -- -- -- --
--------- ------------ ---------- ------------ -----------
BALANCE, December 31, 2001 4,000,000 400 48,000,000 4,800 3,999,600
Issuance of common stock in
consideration for all of the
assets of WCG Communications LLC
(see Note 8 on Related Party
Transactions) -- -- 3,000,000 300 111,563
Issuance of preferred stock in
consideration for 100%
ownership of Zhejiang VSAT
Satellite Communication Co., Ltd.
(see Note 8 on Related Party
Transactions) 1,000,000 100 -- -- 226,428
Foreign Currency Translation -- -- -- -- --
Net loss -- -- -- -- --
--------- ------------ ---------- ------------ -----------
BALANCE, December 31, 2002 5,000,000 500 51,000,000 5,100 4,337,591
Stock issued for services 1 108,800 11 13,599
Foreign Currency Translation -- -- --
Net loss -- -- -- -- --
--------- ------------ ---------- ------------ -----------
BALANCE, December 31, 2003 5,013,600 $ 501 51,108,800 $ 5,111 $ 4,351,190
========= ============ ========== ============ ===========
TOTAL
DEFICIT ACCUMULATED STOCKHOLDERS'
ACCUMULATED DURING COMPREHENSIVE EQUITY
DEVELOPMENT STAGE INCOME (LOSS) (DEFICIT)
----------------- ------------- ---------
BALANCE, September 13, 2000 $ -- $ -- $ 4,800
(date of inception)
Net loss (93,837) -- (93,837)
BALANCE, December 31, 2000 (93,837) -- (89,037)
Preferred stock issued in
private placement -- -- 4,000,000
Foreign Currency Translation -- (825) (825)
Net loss (1,251,210) -- (1,251,210)
------------------ --------------- -------------
BALANCE, December 31, 2001 (1,345,047) (825) 2,658,928
Issuance of common stock in
consideration for all of the
assets of WCG Communications LLC
(see Note 8 on Related Party
Transactions) -- -- 111,863
Issuance of preferred stock in
consideration for 100%
ownership of Zhejiang VSAT
Satellite Communication Co., Ltd.
(see Note 8 on Related Party
Transactions) -- -- 226,528
Foreign Currency Translation -- 3,716 3,716
Net loss (1,550,180) -- (1,550,180)
------------------ --------------- -------------
BALANCE, December 31, 2002 (2,895,227) 2,891 1,450,855
Stock issued for services -- -- 13,611
Foreign Currency Translation -- (3,155) (3,155)
Net loss (1,063,842) -- (1,063,842)
------------------ --------------- -------------
BALANCE, December 31, 2003 $ (3,959,069) $ (264) $ 397,469
================== =============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE PERIOD FROM
DECEMBER 31, SEPTEMBER 13, 2000
(DATE OF INCEPTION)
2003 2002 TO DECEMBER 31, 2003
----------- ----------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,063,842) $(1,550,180) $(3,959,069)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 105,048 40,766 247,536
Loss on unconsolidated subsidiary 11,051 28,289 39,339
Provision for doubtful accounts -- 14,326 14,326
(Gain) Loss on foreign currency exchange (3,155) 3,716 (264)
Stock-based compensation 13,611 -- 13,611
Changes in operating assets and liabilities:
Accounts receivable 30,267 (60,832) (37,894)
Due from related parties (31,942) (9,640) (41,582)
Prepaid expenses and other current assets (26,989) (37,980) (67,129)
Other assets 1,386 56,131 (28,220)
Accounts payable and accrued expenses (21,524) 247,689 483,865
----------- ----------- -----------
Net cash used in operating activities (986,089) (1,267,715) (3,335,481)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in unconsolidated subsidiary -- (226,528) (409,832)
Proceeds from officers' advances 318,221 325,768 643,989
Purchase of property and equipment (33,243) (19,515) (192,782)
----------- ----------- -----------
Net cash used in investing activities 284,978 79,725 41,375
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement of common stock -- -- 4,800
Net proceeds from private placement of preferred stock -- 135,000 4,000,000
----------- ----------- -----------
Net cash provided by financing activities -- 135,000 4,004,800
----------- ----------- -----------
Net increase (decrease) in cash (701,111) (1,052,990) 710,694
Cash and Cash Equivalents, beginning of period 1,411,805 2,464,795 --
----------- ----------- -----------
Cash and Cash Equivalents, end of period $ 710,694 $ 1,411,805 $ 710,694
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. ORGANIZATION AND NATURE OF BUSINESS
China Quantum Communications, Ltd. (the "Company") was organized on October 4,
2000. The primary business of China Quantum Communications, Ltd. is to provide
wireless, VoIP, and value-added communication services to commercial and
residential users in the U.S. and China.
On December 29, 2000, the Company purchased 100% of the common stock of China
Quantum Communications, Inc., which was formed on September 13, 2000, and China
Quantum Communications, Inc. became a wholly owned subsidiary. Based on its
controlling interest in China Quantum Communications, Inc., the operating
results of China Quantum Communications, Inc. are included in the consolidated
results of the Company since December 29, 2000.
On January 21, 2001, the Company formed China Quantum Communications, Ltd.
(China), a wholly owned subsidiary. Based on its controlling interest in China
Quantum Communications, Ltd. (China), the operating results of China Quantum
Communications, Ltd. (China) are included in the consolidated results of the
Company since January 21, 2001.
In September 2002, the Company acquired 100% ownership of an entity owned in the
majority by the Company's CEO (see Note 5).
Currently the Company focuses its activities on the development & deployment of
IP based Personal Communication Service (PCS), a regional wireless VoIP service
operating on unlicensed low power PCS frequency through IP-enabled local
transceiver and IP centric soft-switched networks. The Company is also raising
capital, locating and acquiring equipment, obtaining qualified staff, installing
and testing equipment and experimenting, testing and developing the procedures
necessary to produce positive results and to lay the foundation for specific
development of service and various regulatory approvals.
2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
Through December 31, 2003 the Company had incurred development stage losses
totaling $3,959,069, and net cash used in operating activities of $3,335,481. At
December 31, 2003, the Company had $710,694 of cash and cash equivalents and
$23,568 of trade receivables to fund short-term working capital requirements.
The Company's ability to continue as a going concern and its future success is
dependent upon its ability to raise capital in the near term to: (1) satisfy its
current obligations, (2) continue its research and development efforts, and (3)
the successful wide scale development, deployment and marketing of its products.
F-6
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
2. LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS (Continued)
The Company believes that it will be able to complete the necessary steps in
order to meet its cash flow requirements throughout fiscal 2004 and continue its
development and commercialization efforts. Management's plans in this regard
include, but are not limited to, the following:
Management estimates that the Company will need additional minimum capital of
$1,000,000 by December 31, 2004 to continue its operations either through
revenues from sales, external independent or related party funding, further
expense reductions or some combination thereof.
The Company presently has ongoing discussions and negotiations with a number of
additional financing alternatives, one or more of which it believes will be able
to successfully close to provide necessary working capital, while maintaining
sensitivity to shareholder dilution issues. However, the Company has no
definitive agreements to provide funding at this time. Management believes that
actions presently being taken to complete the Company's development stage
through the commercial rollout of its cellular service platforms will be
successful.
Subsequent to year end the Company received proceeds of $504,000 in a private
placement of common stock. The proceeds from this offering, along with the
Company's cash position and a commitment by the Company's CEO to fund shortfalls
in the Company's cash flows should allow for the Company to operate for the next
twelve months.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of China Quantum
Communications, Ltd., its wholly owned and majority owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 from those estimates.
F-7
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
China Quantum Communications, Ltd. considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
STOCK BASED COMPENSATION
Financial Accounting Statement No. 123, Accounting for Stock Based Compensation,
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. The Company has adopted the
"disclosure only" alternative described in SFAS 123 and SFAS 148, which require
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied.
BAD DEBT RESERVE
The Company provides for an allowance for doubtful accounts equal to the
estimated losses that will be incurred in the collection of all receivables. The
estimated losses are based on a review of the current status of the existing
receivables. The allowance for doubtful accounts is $14,326 at December 31, 2003
and 2002.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of five years. Repairs and
maintenance expenditures, which do not extend the useful lives of the related
assets, are expensed as incurred.
REVENUE RECOGNITION
The Company recognizes revenue for its telecommunications services at the time
the services are provided to the end user.
F-8
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At times throughout the year, the Company may maintain certain bank accounts in
excess of FDIC insured limits.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and maintains allowances
for doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $38,116,
$103,093 and $149,408 for the years ended December 31, 2003, 2002 and for the
period from September 13, 2000 (date of inception) to December 31, 2003,
respectively.
COMPREHENSIVE INCOME (LOSS)
The Company adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes rules for the Reporting of Comprehensive Income and its components.
In addition to net loss, comprehensive income (loss) includes all changes in
equity during a period, except those resulting from investments by and
distributions to owners. Items of comprehensive income include foreign currency
exchanges.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred and
amounted to $386,775, $510,078 and $1,207,468 in 2003, 2002 and for the period
from September 13, 2000 (date of inception) to December 31, 2003, respectively.
LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," which became
effective for the Company July 1, 2002 for the year ended December 31, 2002.
Under SFAS No. 144, the Company reviews long-term assets for impairment whenever
events or circumstances indicate that the carrying amount of those assets may
not be recoverable. The Company also assesses these assets for impairment based
on their estimated future cash flows. The Company has not incurred any losses in
connection with the adoption of this statement.
F-9
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for China
Quantum Communications, Ltd.'s cash, accounts receivable, accounts payable, and
accrued expenses approximate their fair values due to the short maturities of
these financial instruments.
The carrying amounts reported in the consolidated balance sheets for China
Quantum Communications, Ltd.'s amounts recorded as other liabilities and due to
officers approximate their fair values based on current rates at which the
Company could borrow funds with similar maturities.
LOSS PER COMMON SHARE, BASIC AND DILUTED
China Quantum Communications, Ltd. accounts for net loss per common share in
accordance with the provisions of SFAS No. 128, "Earnings per Share" ("EPS").
SFAS No. 128 requires the disclosure of the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Common equivalent shares have been
excluded from the computation of diluted EPS since their effect would be
anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2003, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement covers restructuring type activities
beginning with plans initiated after December 31, 2002. Activities covered by
this statement that are entered into after that date will be recorded in
accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did not
have a significant impact on the Company's results of operations or financial
position.
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement is did not
have a significant impact on the Company's results of operations or financial
position.
F-10
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In April 2003, the FASB issued SFAS Statement No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This Statement is effective
for contracts entered into or modified after June 30, 2003, except for certain
hedging relationships designated after June 30, 2003. The adoption of this
statement did not have a significant impact on the Company's results of
operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The adoption of FIN 46 did not have a significant impact on
the Company' results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which provides alternative methods of
transition for a voluntary change to fair value based method of accounting for
stock-based employee compensation as prescribed in SFAS 123, Accounting for
Stock-Based Compensation. Additionally, SFAS No. 148 required more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The provisions of this Statement are effective for
fiscal years ending after December 15, 2002. The adoption of this statement did
not have a significant impact on the Company's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a Company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantees and elaborates on existing disclosure
requirements related to guarantees and warranties. The recognition requirements
are effective for guarantees issued or modified after December 31, 2002 for
initial recognition and initial measurement provisions. The adoption of FIN 45
did not have a significant impact on the Company's results of operations or
financial position.
F-11
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that statement, SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers, and SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
statement amends SFAS No. 13, Accounting for Leases, to eliminate
inconsistencies between the required accounting for sales-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions. Also, this statement
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the rescissions of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions affecting SFAS
No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a significant impact on the Company's
results of operations or financial position.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
DECEMBER 31,
-------------------
2003 2002
-------- --------
Interest paid $ -- $ --
======== ========
Income taxes paid $ 750 $ 923
======== ========
Schedule of Non-Cash Investing and Financing Activities:
Issuance of 108,800 shares of common stock and 13,600 shares of Series A
preferred stock to consultants for services $ 13,611 --
======== ========
Issuance of 3,000,000 shares of common stock in exchange for all of the
assets of WCG Communications, LLC $ -- $111,863
======== ========
Issuance of 1,000,000 shares of Series A preferred stock in exchange for
100% ownership of Zhejiang VSAT Satellite Communication Co., Ltd. $ -- $226,528
======== ========
F-12
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
5. BUSINESS ACQUISITION
In January 2001, the Company purchased 100% ownership of Zhejiang VSAT Satellite
Communication Co., Ltd. (later renamed Zhejiang Quantum Communications Co.,
Ltd.), owned in the majority by the Company's CEO. In December 2002, the Board
of Directors authorized the issuance of 1,000,000 shares of Series A preferred
stock as final consideration for the transaction. This transaction was accounted
for as a purchase pursuant to SFAS Statement No. 141, "Business Combinations".
The total purchase price of approximately $226,528, which was based on the fair
market value of the assets purchased, was allocated among the various assets
purchased in the acquisition. Following is a condensed balance sheet of VSAT at
the date of acquisition:
Current assets $ 214,580
Property, plant and equipment 7,913
Other assets 11,994
---------
Total assets 234,487
Current liabilities 7,959
---------
Net assets acquired $ 226,528
=========
The operations of Zhejiang VSAT Satellite Communication Co., Ltd. are included
in the accompanying consolidated statement of operations from the date of
acquisition through December 31, 2003
6. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
DECEMBER 31,
---------------------------
2003 2002
--------- ---------
Equipment $ 516,105 $ 482,862
Office furniture and equipment 15,067 15,067
--------- ---------
531,172 497,929
Less-Accumulated depreciation (243,183) (139,627)
--------- ---------
$ 287,989 $ 358,302
========= =========
F-13
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
6. PROPERTY AND EQUIPMENT (Continued)
In September 2002, the Company issued 3,000,000 shares of common stock in
exchange for the fixed assets of WCG Communications LLC from the Company's CEO.
The total purchase price of approximately $111,863, was allocated among the
various fixed assets purchased in the acquisition.
Depreciation expense for the years ended December 30, 2003, 2002 and for the
period from September 13, 2000 (date of inception) to December 31, 2003, was
$103,556, $40,766, and $243,183, respectively, of which $31,016, $12,230 and
$72,955, respectively, is included in research and development expense.
7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Investment in unconsolidated subsidiary represents a 100% ownership of Zhejiang
Kung Tong Network Co., Ltd (ZJQC), a Chinese telecommunications company which
was purchased on September 13, 2000, and is owned through a trust. In accordance
with document 17 as issued by the Ministry of Information Industry, Peoples'
Republic of China, foreign groups and/or individuals are prohibited from
directly conducting telecommunications activities, either in the form of
investment, joint venture or partnership. Additionally, telecommunication
companies are prohibited from soliciting foreign investment or allowing foreign
shareholders or other form of ownership. Accordingly the Company recognizes its
ownership in accordance with SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries", and ARB 51, "Consolidated Financial Statements", and has recorded
its investment using the equity investment method since China Quantum
Communications, Ltd. cannot exercise control or influence over management and/or
Board of Directors of the foreign subsidiary.
Following is a summary of financial position and results of operations of ZJQC:
DECEMBER 31,
2003 2002
Current assets $ 288,538 $ 275,591
Property, plant and equipment 55,598 78,796
Other assets 14,394 14,394
--------- ---------
Total assets 358,530 368,781
========= =========
Current liabilities 347,641 346,839
Owner's equity 10,889 21,941
--------- ---------
Total liabilities and owner's equity $ 358,530 $ 368,781
========= =========
Sales $ 33,658 $ 39,637
========= =========
Net loss $ (11,053) $ (28,299)
========= =========
F-14
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
8. STOCKHOLDERS' EQUITY
On October 4, 2000, in connection with its incorporation, China Quantum
Communications, Ltd. authorized capital of 75,000,000 shares of common stock
with a par value of $0.0001 and 6,250,000 Series A preferred stock with a par
value of $0.0001.
On December 29, 2000, the Company sold 48,000,000 shares of common stock in a
private placement with proceeds of $4,800.
On March 30, 2001, the Company sold 4,000,000 shares of Series A preferred stock
in a private placement for proceeds of $4,000,000.
On September 18, 2002, China Quantum Communications, Ltd. issued 3,000,000
shares of its common stock for all of the assets of WCG Communications, LLC, a
company owned in the majority by Company's CEO (Note 4) for $111,863, the fair
market value.
On September 18, 2002, China Quantum Communications, Ltd. issued 1,000,000
shares of its Series A preferred stock for 100% ownership of Zhejiang VSAT
Satellite Communication Co., Ltd. (later renamed Zhejiang Quantum Communications
Co., Ltd.), a company owned in the majority by the Company's CEO (Note 4) for
$226,528, the fair market value.
During the year ended December 31, 2003, China Quantum Communications, Ltd.
issued 108,800 shares of common stock and 13,600 shares of Series A preferred
stock to consultants for services performed. The Company recognized a charge to
operations of $13,611, based upon the fair market value of the services
provided.
Preferred Stock
The preferred stock is redeemable, cumulative and is convertible into shares of
common stock by a majority vote of the holders or shall automatically be
converted upon the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of 1933
of the United States of America. Preferred shares are convertible into common at
any time, without the payment of additional consideration, into such number of
fully paid common shares per preference share as is determined by dividing the
original purchase price by the conversion price (initially the original price).
Dividends may be declared for preferred shareholders at the discretion of the
Board of Directors. The Board of Directors has declared no dividends on
preferred stock for the period from September 13, 2000 (date of inception) to
December 31, 2003.
F-15
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plan
On December 29, 2000, the Company established its Stock Option Plan (the
"Plan"), in which incentive stock options and nonqualified stock options may be
granted to officers, employees and consultants of the Company. The vesting of
such options is four years and the options expire in ten years.
A summary of the stock option activity for the years ended December 31, 2003 and
2002 pursuant to the terms of the plan, which include incentive stock options
and non-qualified stock options, is set forth on the below:
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
Outstanding at December 31, 2001 2,702,000 $ 0.20
Granted 543,000 0.20
Exercised -- --
Canceled -- --
--------- --------
Outstanding at December 31, 2002 3,245,000 0.20
Granted -- --
Exercised -- --
Canceled/Expired (25,833) 0.20
--------- --------
Outstanding at December 31, 2003 3,219,167 $ 0.20
========= ========
Exercisable at December 31, 2003 2,209,188 $ 0.20
========= ========
The fair value of options granted in 2002 was estimated as of the date of grant
using the Black-Scholes stock option pricing model, based on the following
weighted average assumptions: annual expected return of 0%; annual volatility of
0%; and based upon a risk-free interest rate ranging from 3.2% to 5.9% and
expected option life of 4 years.
The per share weighted average fair value of stock options granted during 2002
was $0.03. The per share weighted average remaining life of the options
outstanding at December 31, 2003 and 2002 is 7.10 and 8.10 years, respectively.
F-16
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
8. STOCKHOLDERS' EQUITY (Continued)
China Quantum Communications, Ltd. has elected to continue to account for
stock-based compensation under APB Opinion No. 25, under which no compensation
expense has been recognized for stock options and certain compensating warrants
granted to employees at fair market value. Had compensation expense for stock
options granted under the Plan and certain warrants granted to employees in 2003
and 2002, been determined based on fair value at the grant dates, China Quantum
Communications, Ltd.'s net loss for 2003 and 2002 would have been increased to
the pro forma amounts shown below.
DECEMBER 31,
------------------------------------
2003 2002
------------- -------------
Net Loss:
As reported $ (1,063,842) $ (1,550,180)
============= =============
Proforma $ (1,088,180) $ (1,573,728)
============= =============
Net Loss Per Share:
As reported $ (0.02) $ (0.03)
============= =============
Proforma $ (0.02) $ (0.03)
============= =============
The following summarizes information about stock options outstanding at December
31, 2003:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ---------------- ----- ----------- -----
$0.20 3,219,167 7.10 $ 0.20 2,209,188 $ 0.20
9. RELATED PARTY TRANSACTIONS
The Company records material related party transactions. The Company incurs
costs for certain administrative expenses from a related party. Those charges
are included in general and administrative expenses. The Company also provides
services to a related party and those amounts are included in revenue. Following
is a summary of transactions and balances with affiliates for 2003 and 2002:
F-17
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
9. RELATED PARTY TRANSACTIONS (Continued)
DECEMBER 31,
------------------
2003 2002
------- -------
Revenues from related party $ 360 $ 360
General and administrative expenses to related party $ 8,484 $ 8,892
Due from related party $41,582 $ 9,640
During the year ended December 31, 2002, the Board of Directors approved the
consideration for the acquisition of a company owned in the majority by the
Company's CEO. In exchange for shares of the Company's preferred Series A stock,
the Company acquired 100% ownership in the entity. The Board of Directors also
approved the acquisition of the assets of a company owned in the majority by the
Company's CEO in exchange for shares of the Company's common stock. See Footnote
4 for more details regarding those transactions.
Amounts due to officers consist of advances from the Company's CEO to fund the
Company's operations. It also includes compensation deferred by the Company's
CEO and COO. No written repayment agreements exist with either officer. Amounts
are unsecured, non-interest bearing and due upon demand.
10. INCOME TAXES
No provision has been made for corporate income taxes due to cumulative losses
incurred. At December 31, 2003, China Quantum Communications, Inc. has operating
loss carryforwards of approximately $987,000 and $261,000 to offset future
federal and state income taxes, respectively. Certain changes in stock ownership
can result in a limitation in the amount of net operating loss and tax credit
carryovers that can be utilized each year. The federal and state net operating
loss carryforwards expire as follows:
FEDERAL STATE TOTAL
------- ------- ---------
2007 -- 8,445 8,445
2008 -- 96,080 96,080
2009 -- 96,966 96,966
2010 -- 59,758 59,758
2020 31,905 -- 31,905
2021 362,970 -- 362,970
2022 366,316 -- 366,316
2023 225,752 -- 225,752
------- ------- ---------
986,943 261,249 1,248,192
======= ======= =========
F-18
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
10. INCOME TAXES (Continued)
At December 31, 2003 the Company has net deferred income tax assets of
approximately $1,248,000 comprised principally of the future tax benefit of net
operating loss carryforwards, which represents an increase of $286,000 for the
fiscal year ended December 31, 2003. A full valuation reserve has been recorded
against such assets due to the uncertainty as to their future realizability. The
total change in the valuation allowance amounted to $286,000 and $463,000 for
the years ended December 31, 2003 and 2002, respectively.
The differences between income tax benefits in the financial statements and the
tax benefit computed at the U.S. Federal statutory rate of 34% are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---- ----
Federal Income Tax (Benefit) (34)% (34)%
Valuation allowance 34 % 34 %
----- -----
Effective tax rate -- % -- %
===== =====
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company leases office equipment and certain office space in New Jersey, New
York and the Peoples' Republic of China under operating leases. Lease agreements
vary from two to three-year lease agreements with a renewal option for New
Jersey for two additional years.
The following is a schedule of future minimum rental payments (exclusive of
common area charges) required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December 31,
2003.
YEAR ENDING DECEMBER 31,
- ------------------------
2004 $126,302
2005 95,443
2006 15,120
--------
Total minimum payments required $236,865
========
The leases also contain provisions for contingent rental payments based upon
increases in taxes and common area maintenance expense.
Subsequent to year-end, the Company exercised its renewal option for New Jersey
office space for an additional 2 years under the same terms as the original
lease agreement.
F-19
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
11. COMMITMENTS AND CONTINGENCIES (Continued)
Following is a summary of rental expenses under all operating leases:
DECEMBER 31,
2003 2002
-------- --------
Minimum rentals $111,902 $130,149
Contingent rentals 9,247 10,755
-------- --------
Total rent expense $121,149 $140,904
======== ========
12. SUBSEQUENT EVENTS
On June 4, 2004, the Company sold 2,520,000 shares of common stock in a private
placement for proceeds of $504,000.
On June 9, 2004 the Company completed a merger with a publicly traded company.
Pursuant to the agreement, China Quantum Communications, Ltd. exchanged all of
their outstanding preferred and common shares (5,013,600 and 49,308,800,
respectively) on June 9, 2004 for 72,000,000, or 90%, of the outstanding shares
of the public company.
F-20
CHINA QUANTUM COMMUNICATIONS, LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS END OF YEAR
----------- ------- -------- -------- -----------
Year ended December 31, 2003:
Allowance for doubtful accounts
(deducted from accounts receivable) $ 14,326 -- -- $ 14,326
Year ended December 31, 2002:
Allowance for doubtful accounts
(deducted from accounts receivable) $ -- 14,326 -- $ 14,326
F-21