**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For TheQuarterly Period Ended September 30, 2004**

 

**CommissionFile Number 1-10366**

 

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| **WEIDA COMMUNICATIONS,  INC.**                                        |
|------------------------------------------------------------------------|
| (Exact  Name of Registrant as Specified in Its Charter)                |
| ** **                                                             | ** ** | ** ** |
| **New  Jersey**                                                        | ** ** | **22-2582847** |
| (State  or Other Jurisdiction of Incorporation  or Organization)  |   | (IRS  Employer Identification No.) |
| ** **                                                             | ** ** | ** ** |
| **515 East  Las Olas Boulevard, Suite 1350, Fort Lauderdale, Florida** | ** ** | **33301** |
| (Address  of Principal Executive Offices)                              |   | (Zip  Code) |
|                                                                   |   |   |
| **(954)  527-7750**                                                    |
| (Registrant’s  Telephone Number, Including Area Code)             |

 

Indicate bycheck mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý   No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes  o   No  ý

 

As of November 12,2004, the registrant had 74,195,497 shares of common stock outstanding.

 

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**TABLE OFCONTENTS**

 
| ** **                                                                                                         |       | **Page No.** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I—Financial Information**                                                                              |       | 1            |
|                                                                                                               |       |         |
| **ITEM  1—Consolidated Financial Statements**                                                                 | ** ** | 1            |
|                                                                                                               |       |         |
| Consolidated Balance  Sheets—September 30, 2004 and June 30, 2004                                   |       | 1            |
|                                                                                                               |       |         |
| Consolidated  Statement of Operations—Three months ended September 30, 2004 and September 30,  2003 |       | 2            |
|                                                                                                               |       |         |
| Consolidated Statement of Cash  Flows—Three months ended September 30, 2004 and September 30, 2003  |       | 3            |
|                                                                                                               |       |         |
| Notes to  Consolidated Financial Statements                                                                        |       | 4            |
|                                                                                                               |       |         |
| **ITEM  2—Management’s Discussion and Analysis of Financial Condition and Results of  Operations**       |       | 8            |
|                                                                                                               |       |         |
| **ITEM  3—Quantitative and Qualitative Disclosures about Market Risk**                                        |       | 10           |
|                                                                                                               |       |         |
| **ITEM 4—Controls and Procedures**                                                                            |       | 10           |
|                                                                                                               |       |         |
| **PART II—Other Information**                                                                                 |       | 12           |
|                                                                                                               |       |         |
| **ITEM 1—Legal Proceedings**                                                                                  |       | 12           |
|                                                                                                               |       |         |
| **ITEM  2—Unregistered Sales of Equity Securities and Use of Proceeds**                                       | ** ** | 12           |
|                                                                                                               |       |         |
| **ITEM 3—Defaults  upon Senior Securities**                                                                   |       | 12           |
|                                                                                                               |       |         |
| **ITEM  4—Submission of Matters to a Vote of Security Holders**                                               |       | 12           |
|                                                                                                               |       |         |
| **ITEM 5—Other Information**                                                                                  |       | 12           |
|                                                                                                               |       |         |
| **ITEM 6—Exhibits**                                                                                           |       | 12           |
|                                                                                                               |       |         |
| **SIGNATURES**                                                                                                     |       | 13           |

 

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**PARTI—FINANCIAL INFORMATION**

 

**ITEM 1—Consolidated Financial Statements**

 

 

**Weida Communications, Inc. and Subsidiary**

**ConsolidatedBalance Sheets**

At September 30, 2004 and June 30, 2004

 
| ** **                                                                                                                                                     | ** ** | **September 30  2004** | ** ** | **June 30  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **(Unaudited)**             | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                     |       |                        |       |                   |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Current  Assets:                                                                                                                                               |       |                        |       |                   |       |
| Cash &  cash equivalent                                                                                                                                    |       | $                           | 412,390    |                   | $          | 1,617,845 |   |
| Accounts  receivable                                                                                                                                           |       | 108,693                     |       | —                 |       |
| Interest  receivable                                                                                                                                           |       | 114,987                     |       | 80,968                 |       |
| Related  party receivable                                                                                                                                      |       | 1,340,488                   |       | 438,640                |       |
| Inventories                                                                                                                                                    |       | 774,732                     |       | —                 |       |
| Advances to  suppliers                                                                                                                                         |       | —                      |       | —                 |       |
| Prepaid  expenses - current                                                                                                                                    |       | 415,958                     |       | 173,750                |       |
| Total  current assets                                                                                                                                          |       | 3,167,248                   |       | 2,311,203              |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Deposit for  purchase of property, plant, and equipment                                                                                                        |       | —                      |       | —                 |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Property,  Plant, & Equipment:                                                                                                                             |       | 1,908,098                   |       | 18,121                 |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Other  Assets:                                                                                                                                                 |       |                        |       |                   |       |
| Notes  receivable                                                                                                                                              |       | 2,200,000                   |       | 2,200,000              |       |
| Deferred  acquisition costs                                                                                                                                    |       | 6,212,254                   |       | 5,704,004              |       |
| Prepaid  expense - noncurrent portion                                                                                                                          |       | 50,000                      |       | 62,500                 |       |
| Other assets                                                                                                                                                   |       | 3,880                       |       | 3,880                  |       |
| Total Other  Assets                                                                                                                                            |       | 8,466,134                   |       | 7,970,384              |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Total Assets                                                                                                                                                   |       | $                           | 13,541,480 |                   | $          | 10,299,708 |   |
|                                                                                                                                                           |       |                        |       |                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                 |       |                        |       |                   |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Current  Liabilities:                                                                                                                                          |       |                        |       |                   |       |
| Accounts  payable                                                                                                                                              |       | $                           | 2,295,179  |                   | $          | 1,360,703 |   |
| Accrued  expenses                                                                                                                                              |       | 235,102                     |       | 158,100                |       |
| Amounts due  to shareholders                                                                                                                                   |       | 238,840                     |       | —                 |       |
| Amounts due  to related parties                                                                                                                                |       | 2,132,354                   |       | 756,386                |       |
| Short term  borrowing                                                                                                                                          |       | 24,165                      |       | —                 |       |
| Bank loan                                                                                                                                                      |       | 2,416,451                   |       | —                 |       |
| Total  Current Liabilities                                                                                                                                     |       | 7,342,091                   |       | 2,275,189              |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Long term  loan                                                                                                                                                |       | 270,000                     |       | 270,000                |       |
| Total  Liabilities                                                                                                                                             |       | 7,612,091                   |       | 2,545,189              |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Common stock, $0  par value, 100,000,000 shares authorized, 72,334,486 issued and outstanding  at June 30, 2004 and September 30, 2004, respectively |       | 723,095                     |       | 9,408,958              |       |
| Common stock  to be issued                                                                                                                                     |       | 1,375,955                   |       | 1,375,955              |       |
| Additional  paid-in capital                                                                                                                                    |       | 13,638,548                  |       | —                 |       |
| Accumulated  deficit                                                                                                                                           |       | (9,808,209                  | )          | (3,030,394             | )          |
| Total  shareholders’ equity                                                                                                                               |       | 5,929,389                   |       | 7,754,519              |       |
|                                                                                                                                                           |       |                        |       |                   |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                               |       | $                           | 13,541,480 |                   | $          | 10,299,708 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

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**Weida Communications, Inc. and Subsidiary**

 

**Consolidated Statement of Operations**

 

For The Three Months Ended September 30, 2004 and September 30,2003

 
| ** **                                    | ** ** | **September 30  2004** | ** ** | **September 30  2003** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **(Unaudited)**             | ** ** | **(Unaudited)**             | ** ** |
| Revenue                                       |       |                        |       |                        |       |
| Sales of  VSAT equipment                      |       | $                           | 19,910     |                        | $          | — |   |
| Transponder  utilization revenue              |       | 109,542                     |       | —                      |       |
|                                          |       | 129,452                     |       | —                      |       |
| Costs and  expenses                           |       |                        |       |                        |       |
| Cost of  goods sold                           |       | (127,459                    | )          | —                      |       |
| Selling,  general, and administrative costs   |       | 1,715,678                   |       | (53,909                     | )          |
|                                          |       | 1,588,219                   |       | (53,909                     | )          |
| ** **                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Operating  (loss)                             |       | (1,458,767                  | )          | (53,909                     | )          |
|                                          |       |                        |       |                        |       |
| Other income  and (expenses)                  |       |                        |       |                        |       |
| Interest  Expense                             |       | (15,776                     | )          | —                      |       |
| Interest  Income                              |       | 45                          |       | 12,763                      |       |
|                                          |       | (15,731                     | )          | 12,763                      |       |
|                                          |       |                        |       |                        |       |
| Net (loss)  before provision for income taxes |       | (1,474,498                  | )          | (41,146                     | )          |
|                                          |       |                        |       |                        |       |
| Provision  for income taxes                   |       | —                      |       | —                      |       |
| ** **                                    | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Net (loss)                                    |       | $                           | (1,474,498 | )                           | $          | (41,146 | ) |
|                                          |       |                        |       |                        |       |   |   |
| Basic and  diluted net loss per common share  |       | $                           | (0.02      | )                           |       |   |   |
| Weighted  average shares outstanding          |       |                        | 72,334,486 |                        |       |   |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

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**Weida Communications, Inc. and Subsidiary**

 

**Statementof Cash Flows**

 

For The Three Months Ended September 30, 2004 and September 30,2003

 
| ** **                                                                            | ** ** | **September 30  2004** | ** ** | **September 30  2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **(Unaudited)**             | ** ** | **(Unaudited)**             | ** ** |
| Cash flows  from operating activities                                                 |       |                        |       |                        |       |
| Net loss                                                                              |       | $                           | (1,474,498 | )                           | $          | (118,325 | ) |
| Adjustments  to reconcile earnings to net cash provided by operating activities: |       |                        |       |                        |       |
| (Increase)  Decrease in operating assets:                                             |       |                        |       |                        |       |
| Accounts  receivable                                                                  |       | (9,635                      | )          | —                      |       |
| Interest  receivable                                                                  |       | (114,987                    | )          | (31,908                     | )          |
| Inventories                                                                           |       | (17,136                     | )          | —                      |       |
| Advances to  suppliers                                                                |       | 13,920                      |       | —                      |       |
| Prepaid  expenses - current                                                           |       | (32,103                     | )          | —                      |       |
| Deferred  acquisition costs                                                           |       | (508,250                    | )          | (827,969                    | )          |
| Prepaid  expenses - noncurrent                                                        |       | 12,500                      |       | —                      |       |
|                                                                                  |       |                        |       |                        |       |
| Increase  (Decrease) in operating liabilities:                                        |       |                        |       |                        |       |
| Accounts  payable                                                                     |       | (166,585                    | )          | —                      |       |
| Accrued  expenses                                                                     |       | 77,002                      |       | —                      |       |
| Net cash  provided (used) by operating activities                                     |       | (2,219,772                  | )          | (978,202                    | )          |
|                                                                                  |       |                        |       |                        |       |
| Cash flows  from investing activities                                                 |       |                        |       |                        |       |
| Property,  plant, and equipment deposits                                              |       | 393,950                     |       | —                      |       |
| Additions to  property, plant, and equipment                                          |       | (336,312                    | )          | —                      |       |
| Net cash  provided (used) in investing activities                                     |       | 57,638                      |       | —                      |       |
|                                                                                  |       |                        |       |                        |       |
| Cash flows  from financing activities                                                 |       |                        |       |                        |       |
| Stock sales                                                                           |       | 2,536,234                   |       | 351,196                     |       |
| Related  party receivable                                                             |       | (1,740,488                  | )          | —                      |       |
| Amounts due  to shareholders                                                          |       | 60,757                      |       | —                      |       |
| Amounts due  to related parties                                                       |       | 127,629                     |       | —                      |       |
| Sales of  Founders Shares                                                             |       | —                      |       | 689,630                     |       |
| Net cash  provided (used) by financing activities                                     |       | 984,132                     |       | 1,040,826                   |       |
|                                                                                  |       |                        |       |                        |       |
| Net increase  (decrease) in cash                                                      |       | (1,178,002                  | )          | 62,624                      |       |
|                                                                                  |       |                        |       |                        |       |
| Cash -  beginning of period                                                           |       | 1,671,854                   |       | —                      |       |
| Cash - end  of period                                                                 |       | $                           | 439,843    |                        | $          | — |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

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**WEIDACOMMUNICATIONS, INC. AND SUBSIDIARY**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THETHREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)**

 

**1. ORGANIZATION AND NATURE OF THEBUSINESS**

 

Weida  provides products and services forsatellite-based communications networks in the People’s Republic of China (“PRC”or “China”) through a series of contractual arrangements which give us controlof and a 51% profit-sharing interest in Guangzhou Weida CommunicationsTechnology Co., Ltd. (a/k/a Weida Communications Technology CompanyLimited), a communications service company organized under the laws of the PRCand wholly-owned by PRC citizens (“Weida PRC”). We conduct our business inChina solely through certain contractual arrangements among our affiliates,Weida PRC and the shareholders of Weida PRC. Although we do not have an equityinterest in Weida PRC, we control and enjoy the economic benefits of Weida PRCthrough such contractual arrangements.

 

Weida PRC is a wholly privately-owned companyestablished in 2001 in response to the Chinese government allowing anindividual company to obtain a 100% private, non-governmental and non-military,VSAT satellite license. VSAT (Very Small Aperture Terminal) is a relativelysmall satellite antenna used by corporations and governments for satellitebased point-to-multipoint data communications, such as financial transactions,Internet services, multimedia and television. VSAT offers a number ofadvantages over terrestrial alternatives for businesses and homes.

 

The scope of the license permits the offer and saleof a variety of broadband satellite communications services, including audioand video services, Internet connectivity, multimedia services, HDTV, and VoiceOver IP. The license granted provides Weida PRC the opportunity to develop anddeliver such satellite communications in China. Weida PRC is licensed toprovide services in the rapidly growing Voice Over IP telephone service market,and to provide such services as a phone operator.

 

Our wholly-owned subsidiary, SCLVentures, Ltd., a company organized under the laws of the British VirginIslands (“SCL”), was formed in May 2003 for the purpose of engaging in thetelecommunications business in China and entered into a master agreement withWeida PRC which was ratified and approved by the board of directors of SCL inMay 2003.

 

Subsequent to September 30, 2004, SCL completeda series of contractual arrangements resulting in its acquisition of effectivemanagement control and a 51% profit-sharing interest in Weida PRC.

 

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**2.****                  ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Principle ofconsolidation*** -The consolidated financial statements include the financial statements of WeidaCommunication Inc. and its subsidiary.

 

***Use of estimates*** - The preparation of financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reported period.  Actual results coulddiffer from those estimates.

 

The accompanying unaudited consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America. They do notinclude all information and notes required by generally accepted accountingprinciples for complete consolidated financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals only) considered necessary for a fairpresentation have been included.

 

***Property, plantand equipment*** -These are recorded at cost less accumulated depreciation.  Depreciation isprovided on a straight-line basis over the estimated useful lives of theassets.  Estimated useful lives of property, plant and equipment are asfollows:

 
| VSAT and  other equipment |   | 5 years |   |
|---------------------------|--------|---------|--------|
| Office  equipment         |   | 5 years |   |
| Computers                 |   | 3 years |   |
| Motor  vehicles           |   | 5 years |   |

 

Major improvements of property, plant and equipmentare capitalized, while expenditures for repairs, maintenance and minor renewalsand betterments are expensed.

 

***Inventories*** - Inventories, which primarily consist ofVSAT equipment, are stated at the lower of cost market value.  Cost isdetermined by the first-in, first-out method.

 

***Long-lived assets*** - The Company evaluates its long-livedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of such assets may not be recoverable.  Recoverabilityof assets to be held and used is measured by a comparison of the carrying amountof the assets to future undiscounted net cash flows expected to be generated bythe assets.  If the carrying amounts of long-lived assets are notrecoverable, an impairment is recognized for the amount by which the carryingamounts of the assets exceed their fair values.  No impairment loss wasrecorded for the period presented.

 

***Income taxes*** - Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe carrying amounts of existing assets and liabilities and their respectivetax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  Valuationallowances are established when it is more likely than not that some or all ofthe deferred tax assets will not be realized.

 

***Revenuerecognition*** -Revenue from the satellite bandwidth provision agreement is recognized on astraight line basis over the period of the agreements.  The excess ofamounts received or receivable from customers over the revenue recognized isincluded in accrued expenses and other payables account.

 

Sales of VSAT equipment are recorded when theequipment is delivered, title has passed to the customers and the Company hasno further obligations to provide services related to the operation of suchequipment.

 

***Foreign currencytranslation*** - Thefunctional currency of the Company is the Renminbi (“RMB”).  Transactionsin other currencies are recorded in RMB at the rates of exchange prevailing whenthe transactions occur.  Monetary assets and liabilities denominated inother currencies are translated into RMB at rates of exchange in effect at thebalance sheet dates.  Exchange gains and losses are recorded in theconsolidated statements of operations.

 

***Fair value offinancial instruments*** - The carrying amounts of cash and cash equivalents, amounts due toshareholders, amounts due to other related parties, and bank loans approximatetheir fair values due to the short-term maturity of these instruments.

 

***Recently issuedaccounting pronouncements*** - In May 2003, the Financial Accounting Standard Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”.  It establishes standards for how an issuer classifies andmeasures certain financial instruments.  SFAS No. 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of

 

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the first interim period beginning after September 15,2003.  It requires that certain financial instruments that, under previousguidance, could be accounted for as equity be classified as liabilities, orassets in some circumstances.  It does not apply to features embedded in afinancial instrument that is not a derivative in its entirety.  SFAS No.150 also requires disclosures about alternative ways of settling theinstruments and the capital structure of entities whose shares are mandatorilyredeemable.  The adoption of SFAS No. 150 did not have an impact on theCompany’s financial position, results of operations, or cash flows.

 

In January 2003, the FASB issued InterpretationNo. (“FIN”) 46 (revised), “*Consolidation ofVariable Interest Entities*”.  FIN 46 (revised) requires that ifa business enterprise has a controlling financial interest in a variableinterest entity, the assets, liabilities and results of the activities of thevariable interest entity should be included in consolidated financialstatements of the business enterprise.  FIN 46 (revised) appliesimmediately to variable interest entities created after January 31,2003.  For variable interest entities created or acquired prior to February 1,2003, the provisions of FIN 46 (revised) are effective beginning January 1,2004.  The adoption of FIN 46 (revised) did not have a material impact onthe Company’s financial position, results of operations, or cash flows.

 

**3.****                  ****NOTE RECEIVABLE WITH RELATEDPARTY**

 

On August 1, 2003, SCL signed a promissory notereceivable with Glendora, Ltd. (“Glendora”), a British Virgin Islandscorporation, in the amount of $2.2 million. Glendora has certainshareholders that are also shareholders of SCL and the Company. Borrowingsunder the note receivable bear interest at the London Interbank Offered Rateplus 200 basis points (effective rate of 4.17% at September 30, 2004),with interest and principal due five years from the date of the note. Glendorahas granted a general security interest in and to all of its tangible andintangible property and assets of any kind as collateral for the notereceivable. The carrying amount of this note receivable approximates its fairvalue.

 

Additionally, SCL and Glendora signed an assignmentagreement whereby SCL has granted Glendora the rights to enter into atransaction with Guangzhou Suntek New Tech R&D Co., Ltd. (“Suntek”)which was previously held by SCL. Management of the Company has not assignedany value to the assignment agreement as the assignment agreement assigns theright to pursue a purchase agreement with Suntek and not a negotiated purchaseagreement and, therefore, does not have any measurable value.

 

**4.****                  ****INCOME TAXES**

 

The income tax rate applicable to enterprises in thePRC is generally 33%. However, preferential tax treatment of the Company’swholly owned subsidiary has been agreed with the relevant tax authorities. Thesubsidiary is entitled to a one year exemption from income tax commencing 2003.

 

**5.****                  ****NET LOSS PER SHARE**

** **

Basic and diluted net lossper share is computed by dividing the net loss for the period by the weightedaverage number of shares of common stock outstanding during the period. Forperiods in which a net loss has been incurred, the calculation of diluted netloss per share excludes potential common stock equivalents, as their effect isanti-dilutive. Potential common stock includes incremental shares of commonstock issuable upon the exercise of 2,370,000 outstanding stock warrants as of September 30,2004.

 

**6.****                  ****COMMITMENTS ANDCONTINGENCIES**

 

(i)  An employee of SCL has asserted claims forunpaid salary in the amount of $0.5 million and 3.3 million shares ofWeida’s common stock based on an asserted employment agreement between him andSCL, and has indicated through his counsel that if terminated he will alsoassert a claim for severance in the additional amount of $0.75 million.The Company’s management believes the Company has meritorious defenses to theclaims, including that the employee in question did not perform the servicescontemplated by the alleged agreement. A portion of the employee’s allegedunpaid salary had been and continues to be included in the Company’sconsolidated financial statements as account payable.

 

SCLhas commenced legal proceedings against the employee for breach of contract anddeclaratory relief and has given him notice of termination of employment. Theemployee has moved to compel arbitration of the matter. Litigation orarbitration proceedings with respect to the employee’s claims are probable.There can be no assurance as to the outcome of any litigation or arbitrationproceedings. Any adverse decision in such proceedings could adversely affectthe financial condition of the Company.

 

(ii)  Ashareholder and former chief financial officer of TeleflexTechnologies, Inc. (“Teleflex”), a currently inactive privately-heldcompany which had attempted to pursue joint venture opportunities in the PRC inlate 2001 and in 2002, and of which Mitchell

 

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Sepaniak,the president, chief executive officer and a shareholder of the Company, wasalso a chief executive officer, commencing early 2003, has recently assertedclaims in New York State court against SCL, Teleflex and Mr. Sepaniak. Theplaintiff’s petition alleges failure on the part of Mr. Sepaniak andTeleflex to comply with corporate formalities such as holding annual meetingsand also alleges corporate waste, and is seeking various relief, includingallowing shareholders to inspect the books and records, including balancesheets and profit and loss earnings statements. The former chief financialofficer has also asserted claims against SCL, Teleflex and Mr. Sepaniakfor unpaid salary and compensation.

 

Litigationproceedings with respect to the plaintiff’s claims have commenced. Theproceedings are at an early stage, and therefore there can be no assurance asto the outcome of such proceedings. Any adverse decision in such proceedingscould adversely affect the financial condition of the Company.

 

(iii)  TheCompany is also subject to various legal proceedings and claims that arise inthe ordinary course of business. In the opinion of management, the amount ofany ultimate liability with respect to these actions will not materially affectthe Company’s financial position, liquidity, or results of operations.

 

**7.****                  ****RELATED PARTY TRANSACTIONS**

 

(i)  On December 3, 2003, the Company enteredinto a consulting agreement with Carl Lanzisera, the former president andcurrent member of the Company’s board of directors. The agreement provides forMr. Lanzisera to assist the Company in structuring, operating and growingthe Company’s business. The agreement is for a term ending on December 31,2004 and provides for cash payments aggregating $100,000 and the issuance of25,000 restricted shares of the Company’s common stock. The shares were issuedin June 2004 at the market value of $5.5 per share. The totalconsideration under the agreement amounted to $237,500, of which $118,750 hasbeen recognized as expense in the consolidated statements of operations duringthe three months ended September 30, 2004.

 

(ii)  SCL has entered into a consulting agreementwith Anthony Giordano, a beneficial holder of the Company’s common stock,effective as of April 1, 2004. The agreement provides forMr. Giordano to assist SCL as a consultant by evaluating prospectivemerger, acquisition and financing transactions that are presented to SCL or theCompany. The agreement is for a term ending on March 30, 2006, withsubsequent one-year extensions unless otherwise terminated. The agreementprovides for a one-time initial consulting fee equal to $150,000, which waspaid to Mr. Giordano in April 2004. In addition, during the term ofthe agreement, commencing April 2004, Mr. Giordano will receive amonthly consulting fee, in arrears, in an amount equal to $20,000 plusreimbursement of expenses.

 

(iii)  Certainshareholders contributed capital to fund the Company’s operations through to December 31,2003. In 2004, a founding shareholder of the Company contributed $600,000capital and loaned $270,000 to the Company to fund its operations. Theshareholder has indicated it will not demand the repayment of $270,000 prior toJuly 2005.

 

In addition, on September 3, 2004, Mr. Giordano, togetherwith one of Mr. Giordano’s family limited partnerships, has granted acredit facility amounting to $5 million to fund the Company’s futureoperations. This credit facility is unsecured, bears interest equal to theLondon Interbank Offered Rate plus 200 basis points, has no equity component,and terminates on October 31, 2005.

 

**8.****                   RECENT ACQUISITIONS**

 

In August 2004, SCL completed a series of contractualarrangements. As part of the contractual arrangements, SCL acquired 99.99% ofthe registered capital of Ocean International Holdings Limited (“OIHL”), acompany incorporated in Hong Kong. The remaining 0.01% of the registeredcapital of OIHL is held by one of the Company’s executives as a nominal holderin order to meet local Hong Kong legal requirements. OIHL is the sole owner andholder of all the registered capital of Ocean Tian Di Communication TechnologyCo., Ltd. (Guangzhou), a wholly owned foreign enterprise (“OTDC”). OTDChas entered into an exclusive service and support agreement with Weida PRC,effective as of September 1, 2004, which provides for OTDC to providesupport services to Weida PRC in exchange for receiving service fees.

 

Pursuant to the terms of the contractual arrangements, SCL has acquiredeffective majority ownership and control of Weida PRC through trust agreementsfor 51% of its shares and an effective 51% profit-sharing interest in WeidaPRC. Under the contractual arrangements, SCL can designate three of Weida PRC’sfive directors.

 

As part of the contractual arrangements, when the Weida EJV is formedand approved by the PRC authorities, its profit-sharing interest will bereduced to 26% so as to maintain its effective 51% majority interest.

 

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**ITEM 2—Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with our financial statements and notes thereto included elsewherein this report. In addition to historical information contained herein, thisdiscussion and analysis contains forward-looking statements. These statementsinvolve risks and uncertainties and can be identified by the use offorward-looking terminology such as “estimates,” “projects,” “anticipates,” “plans,”“future,” “may,” “should,” “predicts,” “potential,” “continue,” “expects,” “intends,”“believes,” and similar expressions.  Thesestatements are based on the current expectations of the management of theCompany only, and are subject to a number of risk factors and uncertainties,including but not limited to the need for equity financing in order toconsummate the acquisition of a legal ownership interest in Weida PRC, limitedoperating history, the Company’s historical and likely future losses, uncertainregulatory landscape in the People's Republic of China, fluctuations inquarterly operating results, the Company's reliance on the provision ofVSAT-based communications services for the majority of its revenues, changes intechnology and market requirements, decline in demand for the Company'sproducts, inability to timely develop and introduce new technologies, productsand applications, difficulties or delays in absorbing and integrating acquiredoperations, products, technologies and personnel, loss of market share, andpressure on pricing resulting from competition, which could cause the actualresults or performance of the Company to differ materially from those describedtherein. We undertake no obligation to update these forward- lookingstatements. For a more detailed description of the risk factors anduncertainties affecting the Company, refer to the Company's reports filed fromtime to time with the Securities and Exchange Commission, including theinformation about risk factors provided in Item 1, "Business," in theCompany's Annual Report on Form 10-K for the fiscal year ended June 30, 2004.*

* *

**Overview**

 

We are a United States-managed company that isparticipating in the fast-growing China telecommunications market throughcontrol of and a 51% profit-sharing interest, and our planned 51% combinedequity ownership and profit-sharing interest, in the only whollyprivately-owned company in China****holdinglicenses for bi-directional VSAT communications (the only other privately-ownedcompany recently holding a license was merged into a joint government venturein January 2004). Weida PRC’s satellite operations in China provideground-based equipment and related services to support government and corporateapplications, including broadband Internet access, remote meter monitoring, andmission-critical data backup systems.  Wewere organized as the successor to several other businesses of our originalfounder. On May 20, 2003, we and three shareholders owning an aggregate ofapproximately 67% of our outstanding common stock (prior to giving effect to aone-for-four reverse stock split that took effect on June 11, 2004)entered into a share exchange agreement with SCL and certain of itsshareholders. Upon satisfaction of the terms and conditions of the shareexchange agreement, as amended, the closing of the share exchange wasconsummated on June 11, 2004, at which time SCL became our wholly-ownedsubsidiary and the shareholders of SCL were issued shares representingapproximately 96.5% of our outstanding shares. The share exchange with SCL hasbeen accounted for similar to a reverse acquisition in which SCL is theacquirer for accounting purposes. Upon completion of the share exchange, wechanged our name from Laser Recording Systems, Inc. to WeidaCommunications, Inc.

 

Our principal executive offices are located at 515East Las Olas Boulevard, Suite 1350, Fort Lauderdale, Florida 33301. Ourtelephone number is (954) 527-7750. Our Internet address is *http://www.weida.com*.

 

*Results of Operations*

 

On April 29, 2003, SCL entered into a masteragreement with Weida PRC, as more fully described elsewhere in this report.Weida PRC is currently our only source of revenue, and our operations prior to September 2004have been limited to activities to complete the transaction with WeidaPRC.  Management does not believe a period to period analysis of change inrevenue, costs of goods sold and other expenses is relevant to an understandingof the Company's results of operations at this time. For the three months endedSeptember 30, 2004, we incurred total operating expenses of $1,588,219.00and deferred acquisition costs of $5,704,004.00.

 

*Professional, General andAdministrative Expenses*

 

Operating expenses totaled $1,588,219.00 for thethree months ended September 30, 2004. These expenses reflect the expectedone time costs of building our infrastructure in order to fulfill certaincontracts and prospective contracts. Included in these expenses are legal fees,accounting fees, and consultant fees paid to certain parties in relation tofunding activities. These expenses also reflect numerous due diligence trips toChina for certain executives of the Company as well as their advisors.

 

*Liquidity and Capital Resources*

 

As shown in the consolidated financial statements,at September 30, 2004 we had additional paid-in capital of approximately$13.63 million and an accumulated deficit of approximately $9.808 million.Since SCL’s formation in May 2003, we have funded all of our operating expensesand deficit from the net proceeds of private placements of our shares andwarrants to private investors and, to a lesser extent, from shareholder loans.

 

At September 30, 2004, we had totalconsolidated assets of approximately $14.38 million. Included in total assetsis a promissory note issued by Glendora Management Ltd. (“Glendora”), a BritishVirgin Islands corporation, to SCL in the amount of $2.2 million. Certain ofGlendora’s shareholders are also shareholders of the Company. Borrowings underthe note bear interest at the London Interbank Offered Rate plus 200 basispoints (effective rate of 4.17% at September 30, 2004), with interest andprincipal due five years from the date of the note. Glendora has granted to SCLa security interest in and to certain of its property and assets as collateral forrepayment of the note. The carrying amount of this note receivable approximatesits fair value.

 

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Additionally, SCL and Glendora signed an assignmentagreement whereby SCL has granted Glendora the rights to enter into atransaction with Guangzhou Suntek New Tech R&D Co., Ltd (“Suntek”), whichwas previously held by SCL. No value has been designated to the assignmentagreement as it assigns the right to pursue a purchase agreement with Suntekand not a negotiated purchase agreement.

 

Our current cash and cash equivalents and fundingcommitments described below are not sufficient for us to sustain presentoperations beyond the third calendar quarter of 2005. We will need additionalfunding to continue operations as an ongoing entity. We are in the process ofnegotiating to raise additional private funding to satisfy these requirements.We are also in preliminary negotiations with certain banking and financialinstitutions to secure a corporate credit line.

 

Effective as of September 3, 2004, a creditfacility for up to $5 million has been made available to us by AnthonyGiordano, a Company shareholder, together with one of Mr. Giordano’s familylimited partnerships, to fund the Company’s future operations. This creditfacility is unsecured, bears interest on any funds advanced at a rate equal tothe London Interbank Offered Rate plus 200 basis points, has no equitycomponent, and terminates on October 31, 2005. For additional disclosureconcerning Mr. Giordano, see Item 12, “Security Ownership of Certain BeneficialOwners and Management–Matters concerning a beneficial shareholder” in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2004.

 

**Critical accounting policies**

 

The preparation of our consolidated financialstatements and related disclosures in conformity with generally acceptedaccounting principles in the United States requires management to makeestimates and judgments that affect our reported amounts of assets andliabilities, revenues and expenses and related disclosures of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates andassumptions based upon experience and various other factors and circumstances.Management believes that our estimates and assumptions are reasonable under thecircumstances; however, actual results may vary from these estimates andassumptions under different future circumstances. We have identified thefollowing critical accounting policies that affect the more significantjudgments and estimates used in the preparation of the consolidated financialstatements of the Company.

 

# ***Accruals and Provisions for Loss Contingencies***

# ** **

We make provisions for all loss contingencies wheninformation available to us prior to the issuance of the financial statementsindicates that it is probable that an asset had been impaired or a liabilityhad been incurred at the date of the consolidated financial statements and theamount of loss can be reasonably estimated.

 

For provisions or accruals related to litigations,we make provisions based on information from legal counsel and the bestestimation of management. As discussed in Note 7 to the consolidated financialstatements of the Company, we are involved in various legal proceedings andcontingencies, and we have not yet recorded a liability in relation to anasserted claim by a former employee of SCL. In accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 5 Accounting for Contingencies,SFASNo. 5 requires aliability to be recorded based on our estimate of the probable costs of theresolution of the contingency. The actual resolution of this contingency maydiffer from our estimates. If the contingency were settled for an amountgreater than our estimate, a future charge to income would result. Likewise, ifthe contingency were settled for an amount that is less than our estimate, afuture credit to income would result.

 

**Recently Issued AccountingPronouncements**

 

In May 2003, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 150, Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity, whichestablishes standards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  SFAS No.150 is effective for financial instruments entered into or modified after May31, 2003 and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003.  The adoption of SFAS No. 150had no impact on the financial statements as the Company did not have anyfinancial instruments with characteristics of both liabilities and equityduring the period ended September 30, 2004.

 

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities,which amends and clarifies accounting for derivative instruments and forhedging activities under SFAS No. 133. Specifically, SFAS No. 149 requires thatcontracts with comparable characteristics be accounted for similarly.Additionally, SFAS No. 149 clarifies the circumstances in which a contract withan initial net investment meets the characteristics of a derivative and when aderivative contains a financing component that requires special reporting inthe statement of cash flows.  This Statement is generally effective forcontracts entered into or modified after June 30, 2003 and did not have asignificant impact on the Company’s financial position or results ofoperations.

 

In January 2003, the FASB issued Interpretation(“FIN”) No. 46, Consolidation of Variable Interest Entities (“FIN 46”) and, in December 2003,issued a revision to that interpretation (“FIN 46R”).  FIN 46R replacesFIN 46 and addresses consolidation by business enterprises of variable interestentities that possess certain characteristics.  A variable interest entity(“VIE”) is defined as (a)

 

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an ownership, contractual or monetary interest in anentity where the ability to influence financial decisions is not proportionalto the investment interest, or (b) an entity lacking the invested capitalsufficient to fund future activities without the support of a third party. FIN46R establishes standards for determining under what circumstances VIEs shouldbe consolidated with their primary beneficiary, including those to which theusual condition for consolidation does not apply.  The Company did nothave any ownership in any variable interest entities as of June 30, 2004or September 30, 2004.

 

**Contractual Obligations**

 

As of September 30, 2004, our futurecontractual cash obligations are as follows:

 
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **Contractual Obligations (1)** | ** ** | **Total**                  | ** ** | **2004** | ** ** | **2005 – 2006** | ** ** | **2007 – 2008** | ** ** | **2009 and  thereafter** | ** ** |
| Long-Term  Obligations (2)      |       | 270,000                    |       | 0 |   | 0 |   | 270,000 |   | 0 |   |
| **Total**                       |       | 270,000                    |       | 0 |   | 0 |   | 270,000 |   | 0 |   |

 

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(1)               We do not have any purchase obligations otherthan standard purchase orders in the ordinary course of business. We do not haveany capital lease obligations or operating lease obligations.

 

(2)               Our long-term obligations are primarilycomprised of a long-term loan from a shareholder.  The shareholder hasindicated that he will not seek repayment prior to July 2005. Although there is no commitment that the loan will be repaid in 2007-2008, ourboard of directors believes the loan will be repaid during such time period.

 

**Off-Balance Sheet Arrangements**

 

In connection with our acquisition of control of anda 51% profit-sharing interest in Weida PRC, we will be required to payapproximately $15.8 million as follows:

 

•                       $805,153 in cash to the Weida PRCshareholders, which payment shall also be deemed to satisfy our obligation tocontribute a capital contribution to the Weida EJV (which payment has beendeposited and is reserved for payment); and

 

•                       $15,000,000, payable in cash to the formershareholders of OIHL.

 

These payments are required to be made only if theconditions to the formation of the Weida EJV discussed elsewhere in this reporthave been completed and the Weida EJV has been formed and has a valid businesslicense showing SCL’s 25% equity ownership.

 

**ITEM 3—Quantitative and Qualitative Disclosures aboutMarket Risk**

 

**Market-Rate SensitiveInstruments and Risk Management**

 

We are exposed to certain market risks fromtransactions that are entered into during the normal course of business.Fluctuating foreign exchange rates for the Renminbi may impact our financialcondition and results of operations.  Ourforeign exchange exposure is presently exclusively related to activitiesassociated with Weida PRC.  The Companydoes not attempt to manage these risks by entering into forward exchangecontracts.  We do not use derivativefinancial instruments for speculative or trading purposes.  Therefore, no quantitative tabulardisclosures are required.

 

**ITEM 4—Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

Our management, with the participation of ourprincipal executive officer and principal financial officer, has evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,(the “Exchange Act”)) as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on such evaluation, our principal executive officerand principal financial officer have concluded, as of the end of such period,that our disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by us in our reports that we file or submit under the ExchangeAct.

 

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**Internal Control Over FinancialReporting**

 

We evaluate our internal control over financialreporting on a regular basis. If we identify a problem in our internal controlover financial reporting during the course of our evaluations, we consider whatrevision, improvement and/or correction to make in order to ensure that ourinternal controls are effective. Our principal executive and financial officersrecognize that any set of controls and procedures, no matter how well designedand operated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Accordingly, we intend to continue to refine our internalcontrol over financial reporting on an ongoing basis as we deem appropriatewith a view towards making improvements.

 

We have made no changes during the first quarter offiscal year 2005 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PARTII—OTHER INFORMATION**

 

**ITEM 1—Legal Proceedings**

 

Information required for Part II, Item 1 is setforth in Note 6 of the Consolidated Financial Statements in Part I, Item 1of this Form 10-Q and is incorporated herein by reference.

 

We are subject to various claims that arise in theordinary course of business. In the opinion of our board, the amount of any ultimateliability with respect to these claims will not materially affect our financialposition, liquidity or results of operations.

 

**ITEM 2—Unregistered Sales of Equity Securities and Useof Proceeds**

 

*Recent Sales of UnregisteredSecurities*

 

During the three months ended September 30,2004, we issued (i) to investors in a private placement transaction 969,424shares of our common stock at a price of $3.00 per share and warrants topurchase an additional 484,724 shares of our common stock at an exercise priceof $2.75 per share and (ii) to advisors 372,322 shares of our common stock inconnection with the private placement transaction.   The shares and warrant shares were issuedunder common individual purchase agreements and advisory agreements. The warrantscarry a three and one-half year term from the time such warrants areexercisable. Our common stock and warrants issued to investors and advisorswere issued pursuant to an exemption from the registration requirements of theSecurities Act of 1933, as amended, pursuant to Regulation D promulgatedthereunder.

 

**ITEM 3—Defaults upon Senior Securities**

 

Not applicable.

 

**ITEM 4—Submission of Matters to Vote of Security Holders**

 

Not applicable.

 

**ITEM 5—Other Information**

 

Not applicable.

 

**ITEM 6—Exhibits**

 

(a)                   Exhibits:

 

31.1            Certificationof principal executive officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2            Certificationof principal financial officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1            Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** **                    | **Weida Communications, Inc.** |
|-------------------------------|--------------------------------|
| ** **                    | ** **                     | ** ** |
| Dated: November 22, 2004 | By:                            |   | /s/ Mitchell Sepaniak |   |
|                          |                           | **Mitchell  Sepaniak** |
| ** **                    | ** **                     | **President  and Chief Executive Officer** |
| ** **                    | ** **                     | ** ** |
| Dated: November 22, 2004 | By:                            |   | /s/ Joseph Zumwalt |   |
| ** **                    | ** **                     | **Joseph  Zumwalt** |
| ** **                    | ** **                     | **Chief  Financial Officer** |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                             |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1            |       | Certification of principal executive officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |
|            |       |                                                                                                                                                                                        |
| 31.2            |       | Certification of principal financial officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                               |
|            |       |                                                                                                                                                                                        |
| 32.1            |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350 (as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). |

 

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