**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 December 31, 2004**

 

**CommissionFile Number 1-10366**

 

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**WEIDA COMMUNICATIONS, INC.**

(ExactName 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 tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý   No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).Yes  o   No  ý

 

As of April 4, 2005,the registrant had 75,842,073 shares of common stock outstanding.

 

 

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**TABLE OFCONTENTS**

 
| **PART I—Financial  Information**                                                                                        |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|
| **ITEM  1—Condensed Consolidated Financial Statements**                                                                       |   |
| Condensed  Consolidated Balance Sheets—December 31, 2004 and June 30, 2004                                          |   |
| Condensed  Consolidated Statement of Operations—Three and six months ended  December 31, 2004 and December 31, 2003 |   |
| Condensed  Consolidated Statement of Cash Flows—Six months ended December 31, 2004  and December 31, 2003           |   |
| Notes  to Condensed Consolidated Financial Statements                                                                              |   |
| **ITEM 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                        |   |
| **ITEM 3—Quantitative and Qualitative Disclosures about  Market Risk**                                                        |   |
| **ITEM 4—Controls and  Procedures**                                                                                           |   |
| **PART II—Other  Information**                                                                                           |   |
| **ITEM 1—Legal Proceedings**                                                                                                  |   |
| **ITEM  2—Unregistered Sales of Equity Securities and Use of Proceeds**                                                       |   |
| **ITEM 3—Defaults  upon Senior Securities**                                                                                   |   |
| **ITEM  4—Submission of Matters to a Vote of Security Holders**                                                               |   |
| **ITEM 5—Other Information**                                                                                                  |   |
| **ITEM 6—Exhibits**                                                                                                           |   |
| **SIGNATURES**                                                                                                                     |   |

 

ii

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**PART I—FINANCIALINFORMATION**

 

**ITEM 1—Condensed Consolidated Financial Statements**

 

**Weida Communications, Inc. and Subsidiary**

**Condensed Consolidated Balance Sheets**

AtDecember 31, 2004 and June 30, 2004

 
| ** **                                                                                                                                                                   | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **(Unaudited)**             | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                   |       |                        |       |                    |       |
| Current Assets:                                                                                                                                                              |       |                        |       |                    |       |
| Cash                                                                                                                                                                         |       | $                           | 2,342,993  |                    | $          | 1,617,845 |   |
| Accounts receivable, net                                                                                                                                                     |       | 59,613                      |       | —                  |       |
| Interest receivable                                                                                                                                                          |       | 158,950                     |       | 80,968                  |       |
| Related party receivable                                                                                                                                                     |       | —                      |       | 438,640                 |       |
| Inventories                                                                                                                                                                  |       | 1,573,831                   |       | —                  |       |
| Prepaid expenses – current                                                                                                                                              |       | 218,968                     |       | 173,750                 |       |
| Total Current Assets                                                                                                                                                         |       | 4,354,355                   |       | 2,311,203               |       |
|                                                                                                                                                                         |       |                        |       |                    |       |
| Property, Plant, &  Equipment                                                                                                                                       |       | 2,092,277                   |       | 18,121                  |       |
|                                                                                                                                                                         |       |                        |       |                    |       |
| Other Assets:                                                                                                                                                                |       |                        |       |                    |       |
| Notes receivable                                                                                                                                                             |       | 2,200,000                   |       | 2,200,000               |       |
| Goodwill                                                                                                                                                                     |       | 9,059,413                   |       | —                  |       |
| Deferred acquisition costs                                                                                                                                                   |       | —                      |       | 5,704,004               |       |
| Prepaid expenses –  non-current portion                                                                                                                                 |       | 24,000                      |       | 62,500                  |       |
| Other assets                                                                                                                                                                 |       | 3,880                       |       | 3,880                   |       |
| Total Other Assets                                                                                                                                                           |       | 11,287,293                  |       | 7,970,384               |       |
| Total Assets                                                                                                                                                                 |       | $                           | 17,733,925 |                    | $          | 10,299,708 |   |
|                                                                                                                                                                         |       |                        |       |                    |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                               |       |                        |       |                    |       |
| Current Liabilities:                                                                                                                                                         |       |                        |       |                    |       |
| Accounts payable                                                                                                                                                             |       | $                           | 1,448,416  |                    | $          | 1,360,703 |   |
| Accrued expenses                                                                                                                                                             |       | 102,223                     |       | 158,100                 |       |
| Amounts due to shareholders                                                                                                                                                  |       | 200,582                     |       | —                  |       |
| Amounts due to related  parties                                                                                                                                              |       | 1,941,553                   |       | 756,386                 |       |
| Short term borrowing                                                                                                                                                         |       | 31,892                      |       | —                  |       |
| Bank loan                                                                                                                                                                    |       | 2,416,451                   |       | —                  |       |
| Total Current Liabilities                                                                                                                                                    |       | 6,141,117                   |       | 2,275,189               |       |
| Long term loan                                                                                                                                                               |       | 270,000                     |       | 270,000                 |       |
| Total Liabilities                                                                                                                                                            |       | 6,411,117                   |       | 2,545,189               |       |
| Common stock, $0 par value,  100,000,000 shares authorized, 74,195,497 and 72,334,486 issued and  outstanding at December 31, 2004 and June 30, 2004, respectively |       | 15,100,385                  |       | 9,408,958               |       |
| Common stock to be issued                                                                                                                                                    |       | 4,478,666                   |       | 1,375,955               |       |
| Accumulated deficit                                                                                                                                                          |       | (8,256,243                  | )          | (3,030,394              | )          |
| Total shareholders’ equity                                                                                                                                              |       | 11,322,808                  |       | 7,754,519               |       |
| Total Liabilities and  Shareholders’ Equity                                                                                                                             |       | $                           | 17,733,925 |                    | $          | 10,299,708 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**Weida Communications, Inc. and Subsidiary**

**Condensed Consolidated Statement of Oper****ations**

**(Unaudited)**

 

ForThe Three and Six Months Ended December 31, 2004 and December 31,2003

 
| ** **                                   | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                      |       |                                      |       |                                    |       |   |   |   |   |
| Sales of VSAT equipment                      |       | $                                         | 81,881     |                                    | $          | — |   | $ | 101,791 |   | $ | — |   |
| Transponder utilization  revenue             |       | 92,437                                    |       | —                                  |       | 93,044 |   | — |   |
|                                         |       | 174,318                                   |       | —                                  |       | 194,835 |   | — |   |
| Costs and expenses                           |       |                                      |       |                                    |       |   |   |   |   |
| Cost of sales                                |       | (345,898                                  | )          | —                                  |       | (467,366 | ) | — |   |
| Selling, general, and  administrative costs  |       | (1,707,280                                | )          | (989,324                                | )          | (4,982,828 | ) | (1,043,233 | ) |
|                                         |       | (2,053,178                                | )          | (989,324                                | )          | (5,450,194 | ) | (1,043,233 | ) |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Operating loss                               |       | (1,878,860                                | )          | (989,324                                | )          | (5,255,359 | ) | (1,043,233 | ) |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Other income (expenses)                      |       |                                      |       |                                    |       |   |   |   |   |
| Interest expense                             |       | (36,339                                   | )          | —                                  |       | (48,495 | ) | — |   |
| Interest income                              |       | 43,963                                    |       | 19,145                                  |       | 78,005 |   | (31,908 | ) |
|                                         |       | 7,624                                     |       | 19,145                                  |       | 29,510 |   | (31,908 | ) |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Net loss before provision  for income taxes  |       | (1,871,236                                | )          | (970,179                                | )          | (5,225,849 | ) | (1,011,325 | ) |
| Provision for income taxes                   |       | —                                    |       | —                                  |       | — |   | — |   |
| Net loss and comprehensive  loss             |       | $                                         | (1,871,236 | )                                       | $          | (970,179 | ) | $ | (5,225,849 | ) | $ | (1,011,325 | ) |
|                                         |       |                                      |       |                                    |       |   |   |   |   |
| Basic and diluted net loss  per common share |       | $                                         | (0.03      | )                                       | $          | (0.03 | ) | $ | (0.07 | ) | $ | (0.01 | ) |
| Weighted average shares  outstanding         |       | 73,843,981                                |       | 68,962,975                              |       | 73,089,233 |   | 68,962,975 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**Weida Communications, Inc. and Subsidiary**

**Condensed Consolidated Statement of Cash****Flows**

**(Unaudited)**

 

ForThe Six Months Ended December 31, 2004 and December 31, 2003

 
| ** **                                                                            | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Cash flows from operating  activities                                                 |       |                                    |       |   |   |
| Net loss                                                                              |       | $                                       | (5,225,849 | ) | $ | (1,011,325 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:          |       |                                    |       |   |   |
| Depreciation expense                                                                  |       | 327,346                                 |       | — |   |
| Non-cash compensation                                                                 |       | 1,988,011                               |       | — |   |
| (Increase) Decrease in  operating assets, net of the effect of subsidiaries acquired: |       |                                    |       |   |   |
| Accounts receivable, net                                                              |       | (46,535                                 | )          | — |   |
| Interest receivable                                                                   |       | (77,982                                 | )          | (31,908 | ) |
| Inventories                                                                           |       | (851,880                                | )          | — |   |
| Prepaid expenses                                                                      |       | 230,223                                 |       | — |   |
|                                                                                  |       |                                    |       |   |   |
| Accounts payable                                                                      |       | (667,395                                | )          | 621,927 |   |
| Accruals and other payables                                                           |       | (109,727                                | )          | — |   |
| Deferred revenue                                                                      |       | (70,657                                 | )          | — |   |
| Net cash used in operating  activities                                                |       | (4,504,445                              | )          | (421,306 | ) |
|                                                                                  |       |                                    |       |   |   |
| Cash flows from investing  activities                                                 |       |                                    |       |   |   |
| Acquisition of subsidiaries                                                           |       | 37,368                                  |       | — |   |
| Deferred acquisition cost                                                             |       | (619,197                                | )          | (671,376 | ) |
| Additions to property,  plant, and equipment                                          |       | (496,487                                | )          | — |   |
| Changes in amounts due from  related parties                                          |       | (400,000                                | )          | — |   |
| Net cash used in investing  activities                                                |       | (1,478,316                              | )          | (671,376 | ) |
|                                                                                  |       |                                    |       |   |   |
| Cash flows from financing  activities                                                 |       |                                    |       |   |   |
| Stock sales                                                                           |       | 6,806,127                               |       | — |   |
| Changes in  amounts due to shareholders                                               |       | (36,348                                 | )          | — |   |
| Changes in  amounts due to related parties                                            |       | (69,597                                 | )          | 51,856 |   |
| Proceeds  from short term borrowing                                                   |       | 7,727                                   |       | — |   |
| Capital contribution by  shareholders                                                 |       | —                                  |       | 1,040,826 |   |
| Cash provided by financing  activities                                                |       | 6,707,909                               |       | 1,092,682 |   |
|                                                                                  |       |                                    |       |   |   |
| Net decrease in cash                                                                  |       | 725,148                                 |       | — |   |
|                                                                                  |       |                                    |       |   |   |
| Cash - beginning of period                                                            |       | 1,617,845                               |       | — |   |
| Cash - end of period                                                                  |       | $                                       | 2,342,993  |   | $ | — |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**WEIDACOMMUNICATIONS, INC. AND SUBSIDIARY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIA****L STATEMENTS**

 

**1.****                                     ****ORGANIZATION AND NATURE OFTHE BUSINESS**

 

Weida Communications, Inc., formerly LaserRecording Systems, Inc. (“Weida” or the “Company”), provides productsand services for satellite-based communications networks in the People’sRepublic of China (“PRC” or “China”) through a series of contractualarrangements which give it control of and a 51% profit-sharing interest inGuangzhou Weida Communications Technology Co., Ltd. (a/k/a WeidaCommunications Technology Company Limited), a communications service companyorganized under the laws of the PRC and wholly-owned by PRC citizens (“WeidaPRC”). The Company conducts its business in China solely through certaincontractual arrangements among its affiliates, Weida PRC and the shareholdersof Weida PRC. Although the Company does not have an equity interest in WeidaPRC, it controls and enjoys the economic benefits of Weida PRC through suchcontractual 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.

 

The Share Exchange Transaction

 

As described in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004, the Company entered into a shareexchange agreement (the “Exchange Agreement”) with SCL Ventures, Ltd. (“SCL”)on May 20, 2003. The Exchange Agreement set forth the terms and conditionsof the exchange by the SCL shareholders of their shares of capital stock,representing all of the issued and outstanding shares of capital stock of SCLin exchange for the issuance by the Company to the shareholders of SCL of69,809,480 shares of common stock, representing approximately 96.5% of the thenissued and outstanding shares of the Company. The share exchange with SCL (the “Exchange”) was consummated on June 11,2004.  The Company then changed its nameto Weida Communications, Inc. and changed its fiscal year end from January 31to June 30.

 

The share exchange transaction was accounted for asa reverse acquisition in which SCL is the accounting acquirer and the Companyis the legal acquirer. Since the transaction was accounted for as a reverseacquisition and not a business combination, no goodwill has been recorded inconnection with the transaction and such excess of purchase price over netassets acquired (goodwill) and the costs incurred in connection with thetransaction have been accounted for as an expense.

 

As a result of the Exchange (i) the historicalfinancial statements of the Company for periods prior to the Exchange are thoseof SCL; (ii) all references to the financial statements of the Companyapply to the historical financial statements of SCL prior to the Exchange andthe consolidated financial statements of the Company and its subsidiariessubsequent to the Exchange; and (iii) all references to the Company applyto SCL prior to the Exchange, and Weida Communications, Inc. and itssubsidiaries subsequent to the Exchange.

 

Acquisition

 

As described in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004, SCL entered into a series ofcontractual arrangements subsequent to June 30, 2004, resulting in itobtaining control of, and a 51% profit-sharing interest in, Weida PRC since August 27,2004. In particular, SCL entered into a trust agreement (the “Trust Agreement”)with Weida PRC and the existing shareholders of Weida PRC (the “ExistingShareholders”) and pursuant to which, the Existing Shareholders hold 51% of theshares of Weida PRC in trust for the benefit of SCL. Also, as part of theconsideration for the acquisition of the equity interest in Weida PRC, theCompany is to issue 16,296,296 shares to the Existing Shareholders and to pay$15,805,135 to the Existing Shareholders. However, the issuance of the shareswill not be due until certain conditions have been met, and the payment of cashwill not be due until certain other conditions have been met. As of December 31,2004, these conditions had not been met and as a result, such share and cashconsiderations have not been accrued and have not been included in thecalculation of goodwill in the accompanying condensed consolidated financialstatements.

 

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

 

***Basis ofaccounting*** - Theunaudited condensed consolidated financial statements for the three monthsended December 31 2004 have been prepared on a going concern basis, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.  As shownin the condensed consolidated financial statements, during the period ended December 31,2004, the Company incurred a net loss of $1,871,236, as compared to the periodended September 30, 2004, when the Company incurred a net loss of$3,354,613 and, as of December 31, 2004, the Company’s current liabilitiesexceeded its current assets by $1,786,762, as compared to September 30,2004, when the Company’s current liabilities exceeded its current assets by$4,662,530.  These factors among othersmay indicate that the Company will be unable to continue as a going concern fora reasonable period of time.

 

The condensed consolidated financial statements donot include any adjustments relating to the recoverability and classificationof recorded asset amounts or the amounts and classification of liabilities thatmight be necessary should the Company be unable to continue as a goingconcern.  The Company’s continuation as a going concern is dependent uponits ability to generate sufficient cash flow to meet its obligations on atimely basis, to comply with the terms and covenants of its financingagreements, to obtain additional financing or refinancing as may be required,and ultimately to attain successful operations.  Management is continuingits efforts to obtain additional funds so that the Company can meet itsobligations and sustain operations from sources such as the credit facilityavailable to the Company (see Note 8 to the condensed consolidated financialstatements).

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America. Theydo not include all information and notes required by generally acceptedaccounting principles 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.  Theresults for the three months ended December 31, 2004 are not necessarilyindicative of results for a full year. The information included in thisQuarterly Report on Form 10-Q should be read in conjunction withManagement’s Discussion and Analysis and the consolidated financial statementsand notes thereto included in the Annual Report on Form 10-K of theCompany for the fiscal year ended June 30, 2004.

 

***Principle ofconsolidation*** -The condensed consolidated financial statements include the financialstatements of the Company and its subsidiaries. The Company consolidatescompanies in which it has a controlling interest of over 50%. All significantintercompany accounts, transactions and cash flows have been eliminated onconsolidation.

 

***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.

 

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

 
| 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 or 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 carryingamount of the assets to future undiscounted net cash flows expected to begenerated by the assets.  If the carrying amounts of long-lived assets arenot recoverable, 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 carry forwards. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in

 

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which those temporary differences are expected to berecovered or settled.  The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in income in the period that includesthe enactment date.  Valuation allowances are established when it is morelikely than not that some or all of the deferred tax assets will not berealized.

 

***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 deferred revenue 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*** – Alltransactions in currencies other than functional currencies during the periodare translated at the exchange rate prevailing on the respective transactions.Monetary assets and liabilities existing at the balance sheet date denominatedin currencies other than functional currencies are translated at the exchangerates existing on that date. Exchange differences are recorded in the condensedconsolidated statement of operations. The functional currency of the Companyand its subsidiaries are the United States dollar (“USD”) and the Renminbi (“RMB”),respectively. The financial statements of all subsidiaries with functionalcurrencies other than USD are translated into USD for reporting purposes. Allassets and liabilities are translated at the rates of exchange ruling at thebalance sheet date and all income and expenses are translated at the averagerates of exchange over the period. All exchange differences arising from thetranslation of subsidiaries’ financial statements are recorded as a componentof comprehensive income.

 

***Goodwill*** – The excess of the purchase price over thefair value of net assets acquired is recorded on the condensed consolidatedbalance sheet as goodwill. Goodwill will not be amortized but will be testedfor impairment at the reporting unit level on at least an annual basis. Theevaluation of goodwill for impairment involves two steps: (1) theidentification of potential impairment by comparing the fair value of areporting unit with its carrying amount, including goodwill and (2) themeasurement of the amount of goodwill loss by comparing the implied fair valueof the reporting unit goodwill with the carrying amount of that goodwill andrecognizing a loss by the excess of the latter over the former. For futureimpairment tests, the Company will measure fair value based either on internalmodels or independent valuations. As of December 31, 2004, the goodwill of$9,059,413 is subject to change pending a final analysis of the fair values ofthe assets acquired and liabilities assumed by the Company. Some of thegoodwill amount will be allocated to licenses with definite or indefinitelives. The impact of any such changes on future results of operations andreported assets and liabilities could be material.

 

***Fair value offinancial instruments*** - The carrying amounts of cash, short term borrowing and bank loanapproximate their fair values due to the short-term maturity of theseinstruments.  The carrying amounts of thelong term loan approximates its fair value due to the variable nature of theinterest calculations.

 

***Minority interest*** - No minority interest balance is presentedin the condensed consolidated financial statements because it is an amountreceivable from the minority interest as of December 31, 2004. There is nobinding agreements nor contractual arrangements in place in which the minorityinterest is obligated to fund the subsidiaries. Accordingly, no minorityinterest balance is presented.

 

***Recently issuedaccounting pronouncements*** - In November 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standard (“SFAS”) No. 151, “InventoryCosts - an amendment of ARB No. 43, Chapter 4”. SFAS No. 151clarifies the accounting that requires abnormal amounts of idle facilityexpenses, freight, handling costs, and spoilage costs to be recognized ascurrent-period charges. It also requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. SFAS No. 151 will be effective for inventory costsincurred on or after June 15, 2005. The Company is currently evaluatingthe impact of this standard on its consolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”.  This statement is a revision to SFAS No. 123and supercedes APB Opinion No. 25. This statement establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services,primarily focusing on the accounting for transactions in which an entityobtains employee services in share-based payment transactions.  Entities will be required to measure the costof employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service, the requisite serviceperiod (usually the vesting period), in exchange for the award.  The grant-date fair value of employee shareoptions and similar instruments will be estimated using option-pricingmodels.  If an equity award is modifiedafter the grant date, incremental compensation cost will be recognized in anamount equal to the excess of the fair value of the modified award over thefair value of the original award immediately before the modification.  This statement is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005.  In accordance with the standard,the Company will adopt SFAS No. 123R effective July 1, 2005.

 

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Upon adoption, the Company has two application methods to choose from:the modified-prospective transition approach or the modified-retrospectivetransition approach.  Under themodified-prospective transition method, the Company would be required torecognize compensation cost for share-based awards to employees based on theirgrant-date fair value from the beginning of the fiscal period in which therecognition provisions are first applied as well as compensation cost forawards that were granted prior to, but not vested as of the date ofadoption.  Prior periods remain unchangedand pro forma disclosures previously required by SFAS No. 123 continue tobe required.  Under themodified-retrospective transition method, the Company would restate priorperiods by recognizing compensation cost in the amounts previously reported inthe pro forma footnote disclosure under SFAS No. 123.  Under this method, the Company is permittedto apply this presentation to all periods presented or to the start of thefiscal year in which SFAS No. 123R is adopted.  The Company would follow the same guidelinesas in the modified-prospective transition method for awards granted subsequentto adoption and those that were granted and not yet vested.  As the Company has not exchanged any equityinstruments for employee service, nor does it anticipate the exchange of anyequity instruments for employee service to be provided, the adoption of SFAS No. 123Ris not expected to have a material impact on the Company’s consolidatedfinancial statements.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurementfor nonmonetary exchanges of similar productive assets in paragraph 21(b) ofAccounting Principles Board Opinion No. 29, “Accounting for NonmonetaryTransactions”, and replaces it with an exception for exchanges that do not havecommercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for the fiscal periods beginning after June 15, 2005.  The Company is currently evaluating theeffect that the adoption of SFAS No. 153 will have on its financialstatements but does not expect it to have a material impact.

 

**3.****                                     ****NOTE RECEIVABLE FROM 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 4.32% at December 31, 2004), with interest and principal due five yearsfrom the date of the note. Glendora has granted a general security interest inand to all of its tangible and intangible property and assets of any kind ascollateral for the note receivable. The carrying amount of this note receivableapproximates its fair value.

 

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 Company is located in a jurisdiction where ithas no actual operations and such jurisdiction does not impose income taxes. Assuch, no provision for income taxes for the Company has been provided.

 

The income tax rate applicable to enterprises in thePRC is generally 33%. However, preferential tax treatment of a wholly owned subsidiaryof the Company in the PRC has been agreed with the relevant tax authorities.The subsidiary is entitled to a one year exemption from income tax for anyprofit-making year commencing the calendar year 2003.

 

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

 

Basic and diluted net loss per share is computed bydividing the net loss for the period by the weighted average number of sharesof common stock outstanding during the period. For periods in which a net losshas been incurred, the calculation of diluted net loss per share excludespotential common stock equivalents, as their effect is anti-dilutive. Potentialcommon stock includes incremental shares of common stock issuable upon theexercise of 3,114,412 outstanding stock warrants as of December 31, 2004.

 

**6.****                                     ****BANK LOAN**

 

The bank loan outstanding as of December 31,2004 of $2,416,451 bears interest at 5.84% per annum and is due on May 13,2005.  The loan is guaranteed by related parties.

 

7

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**7.****                                     ****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’s condensedconsolidated financial statements as accounts payable.

 

SCL has commenced legal proceedings against theemployee for breach of contract and declaratory relief and has given him noticeof termination of employment. The employee has moved to compel arbitration ofthe matter.  The employee’s motion has been granted, but no decision hasbeen made as to whether to appeal that decision.  Arbitration proceedingswith respect to the employee’s claims are probable. There can be no assuranceas to the outcome of the current litigation or any arbitrationproceedings.  Any adverse decision in such proceedings could adverselyaffect the financial condition of the Company.

 

The claim was recently settled by mutualagreement in late March 2005.

 

(ii)  A shareholder and former chief financialofficer of Teleflex Technologies, Inc. (“Teleflex”), a currently inactiveprivately-held company which had attempted to pursue joint ventureopportunities in the PRC in late 2001 and in 2002, and of which MitchellSepaniak, the president, chief executive officer and a shareholder of theCompany, was also a chief executive officer, commencing early 2003, hasrecently asserted claims in New York State court against SCL, Teleflex and Mr. Sepaniak.The plaintiff’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 earnings statements. The former chief financial officer has alsoasserted claims against SCL, Teleflex and Mr. Sepaniak for unpaid salaryand compensation.

 

Litigation proceedings with respect to the plaintiff’sclaims have commenced. The proceedings are at an early stage, and thereforethere can be no assurance as to the outcome of such proceedings. Any adversedecision in such proceedings could adversely affect the financial condition ofthe Company.

 

(iii)  The Company is also subject to variouslegal proceedings and claims that arise in the ordinary course of business. Inthe opinion of management, the amount of any ultimate liability with respect tothese actions will not materially affect the Company’s financial position,liquidity, or results of operations.

 

**8.****                                     ****RELATED PARTY TRANSACTIONS**

 

(i) On December 3, 2003, the Companyentered into a consulting agreement with Carl Lanzisera, the former presidentand current member of the Company’s board of directors. The agreement providesfor Mr. Lanzisera to assist the Company in structuring, operating andgrowing the 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.  This consulting agreement has expired andwill not be renewed.

 

(ii) SCL has entered into a consultingagreement with Anthony Giordano, a beneficial holder of the Company’s commonstock, effective as of April 1, 2004. The agreement provides for Mr. Giordanoto assist SCL or the Company as a consultant by evaluating prospective merger,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) Certain shareholders contributed capitalto fund the Company’s operations through to December 31, 2003. In 2004, a foundingshareholder of the Company contributed $600,000 capital and loaned $270,000 tothe Company to fund its operations. The shareholder has indicated it will notdemand the repayment of $270,000 prior to July 2006.

 

In addition, on September 3, 2004, Mr. Giordano,together with one of Mr. Giordano’s family limited partnerships, hasgranted a credit facility amounting to $5 million to fund the Company’sfuture operations. This credit facility is unsecured, bears interest equal tothe London Interbank Offered Rate plus 200 basis points, has no equitycomponent, and terminates on October 31, 2005.

 

8

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**9.****                                     ****ACQUISITIONS**

 

In August 2004, SCL completed a series ofcontractual arrangements. As part of the contractual arrangements, SCL acquired99.99% of the registered capital of Ocean International Holdings Limited (“OIHL”),a company 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”). OTDC hasentered 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 contractualarrangements, SCL has acquired effective majority ownership and control ofWeida PRC through trust agreements for 51% of its shares and an effective 51%profit-sharing interest in Weida PRC. Under the contractual arrangements, SCLcan designate three of Weida PRC’s five directors.

 

As part of the contractual arrangements, when theconversion of Weida PRC into a Sino-foreign Equity Joint Venture (the “WeidaEJV”) is approved by the PRC authorities, SCL’s profit-sharing interest will bereduced to 26% so as to maintain its effective 51% majority interest.

 

The following is a summary of the financial positionof Weida PRC as of the date of acquisition:

 
| Current  Assets:                |   |      |       |
|---------------------------------|--------|-----------|------------|
| Cash                            |   | $         | 37,368     |   |
| Accounts  receivable, net       |   | 13,078    |       |
| Inventories                     |   | 721,951   |       |
| Prepaid  expenses               |   | 236,941   |       |
| Total  current assets           |   | 1,009,338 |       |
|                            |   |      |       |
| Property,  plant and equipment  |   | 1,905,015 |       |
|                            |   |      |       |
| Total Assets                    |   | $         | 2,914,353  |   |
|                            |   |      |       |
| Current  Liabilities:           |   |      |       |
| Accounts  payable               |   | $         | 755,108    |   |
| Accrued  expenses               |   | 53,850    |       |
| Deferred  revenue               |   | 70,657    |       |
| Amounts due  to shareholders    |   | 236,930   |       |
| Amounts due  to related parties |   | 2,093,404 |       |
| Short term  borrowing           |   | 24,165    |       |
| Bank loan                       |   | 2,416,451 |       |
| Total  current liabilities      |   | $         | 5,650,565  |   |
|                            |   |      |       |
| Net  Liabilities                |   | $         | (2,736,212 | ) |

 

The following unaudited pro forma consolidatedresults of operations give effect to the acquisition of Weida PRC as if itoccurred as of the beginning of the period:

 
| ** **                                   | ** ** | **Six months ended** | ** ** |
|----------------------------------------------|------------|----------------------|------------|
| ** **                                   | ** ** | **June 30,**    | ** ** |
| ** **                                   | ** ** | **2004**             | ** ** | **2003** | ** ** |
| Revenue                                      |       | $                    | 242,274    |   | $ | 72,207 |   |
| Loss from  operations                        |       | $                    | (5,485,748 | ) | $ | (2,252,631 | ) |
| Net loss                                     |       | $                    | (5,480,157 | ) | $ | (2,351,368 | ) |
| Basic and  diluted net loss per common share |       | $                    | 0.07       |   | $ | 0.03 |   |

 

9

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

 

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with our condensed consolidated financial statements and notesthereto included elsewhere in this report. In addition to historical informationcontained herein, this discussion and analysis contains forward-lookingstatements. These statements involve risks and uncertainties and can beidentified by the use of forward-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- looking statements.For a more detailed description of the risk factors and uncertainties affectingthe Company, refer to the Company’s reports filed from time to time with theSecurities and Exchange Commission, including the information about riskfactors provided in Item 1, “Business,” in the Company’s Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004.*

 

**Overview**

 

We are a company organized under the laws of, andwith our executive offices in, the United States, and managed by United Statescitizens and residents, that is participating in the fast-growing Chinatelecommunications market through control of and a 51% profit-sharing interest,and our planned 51% combined equity ownership and profit-sharing interest, inthe only wholly privately-owned company in China****holding licenses for bi-directional VSAT communications (theonly other privately-owned company recently holding a license was merged into ajoint government venture in January 2004). Weida PRC’s satelliteoperations in China provide ground-based equipment and related services tosupport government and corporate applications, including broadband Internetaccess, remote meter monitoring, and mission-critical data backupsystems.  On May 20, 2003, we and three shareholders owning anaggregate of approximately 67% of our outstanding common stock (prior to givingeffect to a one-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 as a reverse acquisition in which SCL is the acquirer foraccounting purposes. Upon completion of the share exchange, we changed our namefrom Laser Recording Systems, Inc. to Weida Communications, Inc.

 

As a result of the Exchange (i) the historicalfinancial statements of the Company for periods prior to the Exchange are thoseof SCL; (ii) all references to the financial statements of the Companyapply to the historical financial statements of SCL prior to the Exchange andthe consolidated financial statements of the Company and its subsidiariessubsequent to the Exchange; and (iii) all references to the Company applyto SCL prior to the Exchange, and Weida Communications, Inc. and itssubsidiaries subsequent to the Exchange.

 

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 our AnnualReport on Form 10-K for the fiscal year ended June 30, 2004. Weida PRC is currentlyour only source of revenue, and our operations prior to December 2004 havebeen limited to activities to complete the transaction with Weida PRC. Consequently, management does not believe a period to period analysis of changein revenue, costs of goods sold and other expenses is relevant to anunderstanding of the Company’s results of operations for periods through December 31,2004. For the three months ended December 31, 2004, we incurred totaloperating expenses of $1,707,280.

 

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*Selling, General and AdministrativeExpenses*

 

Operating expenses totaled $1,707,280 for the threemonths ended December 31, 2004. These expenses reflect the expected onetime costs of building our infrastructure in order to fulfill certain contractsand prospective contracts. Included in these expenses are legal fees,accounting fees, and consultant fees paid. These expenses also reflect numerousdue diligence trips to China for certain executives of the Company as well astheir advisors.

 

*Liquidity and Capital Resources*

 

As shown in the condensed consolidated financialstatements, at December 31, 2004 we had consolidated negative workingcapital of approximately $1.79 million and an accumulated deficit ofapproximately $8.26 million.  Since SCL’sformation in May 2003, we have funded all of our operating expenses anddeficit from the net proceeds of private placements of our shares and warrantsto private investors and, to a lesser extent, from shareholder loans.

 

At December 31, 2004, we had total consolidatedassets of  $17,733,925. Included in totalassets is a promissory note issued by Glendora Management Ltd. (“Glendora”), aBritish Virgin Islands corporation, to SCL in the amount of $2.2 million.Certain of Glendora’s shareholders are also shareholders of the Company.Borrowings under the note bear interest at the London Interbank Offered Rateplus 200 basis points (effective rate of 4.32% at December 31, 2004), withinterest and principal due five years from the date of the note. Glendora hasgranted to SCL a security interest in and to certain of its property and assetsas collateral for repayment of the note. The carrying amount of this notereceivable approximates its fair value.

 

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’sfamily limited partnerships, to fund the Company’s future operations. Thiscredit facility is unsecured, bears interest on any funds advanced at a rateequal to the 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 CertainBeneficial Owners and Management–Matters concerning a beneficial shareholder”in our Annual Report on Form 10-K for the fiscal year ended June 30,2004.

 

**Certain Risks Associated with OurCompany and its Common Stock that May Impact our Future Liquidity andCapital Structure**

 

***Potentially dilutive business combination transactions.***

 

From time to time ourmanagement has, and may continue to, consider possible acquisition or businesscombination transactions with other parties, including enterprises engaged in,or seeking to engage in telecommunications or related technologies and servicesin the PRC. Such potential business combination parties may be privately ownedor publicly traded entities, and may be located in the PRC, elsewhere in Asia,in the United States, or in another jurisdiction.  In view of our limited operating history, ourlack of substantial revenues to date, our substantial operating losses, and, inparticular, the highly limited public “float”, otherwise limited liquidity andthin trading volume of our shares and the prospect of substantial numbers ofshares becoming freely tradeable within the next six to nine months (whichrisks are described in greater detail below), if we were to consummate abusiness combination transaction with a third party, there is a substantiallikelihood that the terms of such combination transaction will not fullyreflect the current market price of our Common Stock, and will in fact be at asubstantial discount to such market price.

 

***Sales of large amounts of our common stock in the public market coulddepress the market price of our common stock and impair the ability to raisecapital through offerings of equity securities.***

 

None of the shares of our common stock issuedto SCL’s shareholders in the June 2004 share exchange were, and none ofthe shares of our common stock sold and issuable to investors and advisors inrecent private placement transactions or which may be issued

 

11

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to the former OIHL shareholders will be, registered under theSecurities Act. Accordingly, most of our shareholders will not be able to selltheir shares unless they are later registered or covered by an availableexemption such as Rule 144. As a result of these restrictions, the marketfor our common stock has remained “thin” for some time, with trading in theshares limited to less than 1 million shares (excluding shares subject to aone-year lockup) out of almost 75 million shares outstanding.  We may determine to register the shares ofone or more other holders of common stock, at any time or from time to time. Ifholders of our common stock sell substantial numbers of shares in the publicmarkets, the price of our common stock may fall, making it more difficult toraise capital.

 

Under Rule 144, each of the holders ofthe 69,809,480 shares issued to SCL’s shareholders in the exchange will beeligible to sell up to 1% of our outstanding common stock every three monthscommencing June 11, 2005, and each of the holders of shares of our commonstock sold to investors and advisors in recent private placement transactionsor to the former OIHL shareholders will be eligible to sell up to 1% of ouroutstanding common stock every three months commencing 12 months after thoseshares are issued (subject in each case to the restrictions on volume, mannerof sale and other conditions of Rule 144). SCL shareholders who receivedshares of our common stock in the exchange and who are not “affiliates” of theCompany will be able to sell all of their shares of common stock commencing June 11,2006.  Recent investors and advisors inprivate placement transactions and the former OIHL shareholders who are not “affiliates”of the Company will be able to sell all of their shares of common stockcommencing 24 months after those shares are issued.  The sale or prospective sale of these sharescould impede the ability to raise capital for some time to come.

 

**Recently Issued Accounting Pronouncements**

 

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs – an amendment of ARB No. 43, Chapter 4”. SFAS No. 151clarifies the accounting that requires abnormal amounts of idle facilityexpenses, freight, handling costs, and spoilage costs to be recognized ascurrent-period charges. It also requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. SFAS No. 151 will be effective for inventory costsincurred on or after June 15, 2005. The Company is currently evaluatingthe impact of this standard on its consolidated financial statements.

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”.  This statement is a revision to SFAS No. 123and supercedes APB Opinion No. 25. This statement establishes standards for the accounting for transactionsin which an entity exchanges its equity instruments for goods or services,primarily focusing on the accounting for transactions in which an entity obtainsemployee services in share-based payment transactions.  Entities will be required to measure the costof employee services received in exchange for an award of equity instrumentsbased on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over the periodduring which an employee is required to provide service, the requisite serviceperiod (usually the vesting period), in exchange for the award.  The grant-date fair value of employee shareoptions and similar instruments will be estimated using option-pricingmodels.  If an equity award is modifiedafter the grant date, incremental compensation cost will be recognized in anamount equal to the excess of the fair value of the modified award over thefair value of the original award immediately before the modification.  This statement is effective as of thebeginning of the first interim or annual reporting period that begins after June 15,2005.  In accordance with the standard,the Company will adopt SFAS No. 123R effective July 1, 2005.

 

Upon adoption, the Company has two application methods to choose from:the modified-prospective transition approach or the modified-retrospectivetransition approach.  Under themodified-prospective transition method, the Company would be required torecognize compensation cost for share-based awards to employees based on theirgrant-date fair value from the beginning of the fiscal period in which therecognition provisions are first applied as well as compensation cost for awardsthat were granted prior to, but not vested as of the date of adoption.  Prior periods remain unchanged and pro formadisclosures previously required by SFAS No. 123 continue to berequired.  Under themodified-retrospective transition method, the Company would restate priorperiods by recognizing compensation cost in the amounts previously reported inthe pro forma footnote disclosure under SFAS No. 123.  Under this method, the Company is permittedto apply this presentation to all periods presented or to the start of thefiscal year in which SFAS No. 123R is adopted.  The Company would follow the same guidelinesas in the modified-prospective transition method for awards granted subsequentto adoption and those that were granted and not yet vested.  As the Company has not exchanged any equityinstruments for employee service, nor does it anticipate the exchange of anyequity instruments for employee service to be provided, the adoption of SFAS No. 123Ris not expected to have a material impact on the Company’s consolidatedfinancial statements.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurementfor nonmonetary exchanges of similar productive assets in paragraph 21(b) ofAccounting Principles Board Opinion No. 29, “Accounting for NonmonetaryTransactions”, and replaces it with an exception for exchanges that do not havecommercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for the fiscal periods beginning after June 15, 2005.  The Company is currently evaluating theeffect that the adoption of SFAS No. 153 will have on its financialstatements but does not expect it to have a material impact.

 

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**Contractual Obligations**

 

As of December 31, 2004, our future contractualcash obligations are as follows:

 
| ** **                      | ** ** | **Payments due by period** | ** ** |
|---------------------------------|------------|----------------------------|------------|
| **Contractual Obligations (1)** | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006 – 2007** | ** ** | **2008 – 2009** | ** ** | **2010 and  thereafter** | ** ** |
| Operating Leases                |       | 4,386,840                  |       | 1,363,484 |   | 2,592,023 |   | 431,333 |   | 0 |   |
| Long-Term Obligations (2)       |       | 270,000                    |       | 0 |   | 270,000 |   | 0 |   | 0 |   |
| **Total**                       |       | 5,019,783                  |       | 1,398,904 |   | 2,866,046 |   | 754,833 |   | 0 |   |

 

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(1) Wedo not have any purchase obligations other than standard purchase orders in theordinary course of business. We do not have any capital lease obligations.

 

(2) Our long-term obligations are primarilycomprised a long-term loan from a shareholder. The shareholder has agreed that he will not seek repayment prior to July 2006.This loan is a non-interest bearing note. Although there is no commitment that the loan will be repaid in 2007-2008,our board of directors believes the loan will be repaid during such time.

 

**Contingent Consideration**

 

In connection with our acquisition of control of anda 51% profit-sharing interest in Weida PRC, we will be required to issue16,296,296 shares of the Company’s common stock and to pay approximately $15.8million as follows:

 

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

 

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

 

The issuance of the shares is only required to bemade upon the consummation of a service and support agreement, execution anddelivery of all of the other agreements described in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004 and satisfaction of certain duediligence requests of SCL, as more fully described in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004. Not all of these conditions hadbeen satisfied as of December 31, 2004 or as of the date of this QuarterlyReport on Form 10-Q. The payments of cash are required to be made only ifthe conditions to the formation of the Weida EJV discussed in the Form 10-Kfor the fiscal year ended June 30, 2004 have been completed and the WeidaEJV has been formed and has a valid business license showing SCL’s 25% equityownership.  Such contingent considerationhave not been recorded as a liability or included in determining the cost ofthe acquired entities.

 

**ITEM 3****—Quantitative and Qualitative Disclosures about MarketRisk**

 

**Market-Rate Sensitive Instrumentsand 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.  Our foreign exchange exposure ispresently exclusively related to activities associated with Weida PRC. The Company does not attempt to manage these risks by entering into forwardexchange contracts.  We do not use derivative financial instruments forspeculative or trading purposes.  Therefore, no quantitative tabulardisclosures are required.

 

Our interest income is sensitive to changes ininterest rates. Note receivable of $2,200,000 as of December 31, 2004 issubject to interest rate changes as it bears interest at the London InterbankOffered Rate plus 200 basis points. As such, interest income will fluctuatewith changes in interest rates.

 

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**ITEM 4—Controls and Procedures**

 

The Company is required to maintain disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) that aredesigned to ensure that information that is required to be disclosed by theCompany in the reports it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms.

 

In conjunction with the Company’s decision to restateits condensed consolidated financial statements for the period ended September 30,2004, the Company identified a material weakness in its internal control overfinancial reporting (as defined in Public Company Accounting Oversight Board,Auditing Standard No. 2, a material weakness is a significant deficiency, ora combination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected) and, as a result thereof,reevaluated its disclosure controls and procedures over the consolidation ofthe Company’s acquisition and concluded that these controls were not effective.In addition, the Company also identified that the Company’s disclosure controland procedures are not effective in view of the delay of its Form 10-Qfiling for the period ended December 31, 2004. The Company is taking stepsto identify, rectify and prevent the recurrence of the circumstances thatresulted in the determination to restate the condensed consolidated financialstatements for the period ended September 30, 2004 and the delay in thefiling of the Form 10-Q for the period ended December 31, 2004. Aspart of this undertaking, the Company intends to incorporate additional levelsof review of the processes and supporting documentation, including but notlimited to those for the consolidation process. The Company believes theseenhancements to its systems of internal control over financial reporting anddisclosure controls and procedures will be adequate to provide reasonableassurance that the control objectives will be met.

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1—Legal Proceedings**

 

(a)  An employee of SCL has asserted claims forunpaid salary in the amount of $0.5 million and 3.3 million shares of Weida’scommon stock based on an asserted employment agreement between him and SCL, andhas indicated through his counsel that if terminated he will also assert aclaim for severance in the additional amount of $0.75 million. The Company’smanagement believes the Company has meritorious defenses to the claims,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’s condensedconsolidated financial statements as accounts payable.

 

SCL has commenced legal proceedings against theemployee for breach of contract and declaratory relief and has given him noticeof termination of employment. The employee has moved to compel arbitration ofthe matter. The employee’s motion has been granted, but no decision has beenmade as to whether to appeal that decision. Arbitration proceedings with respect to the employee’s claims areprobable. There can be no assurance as to the outcome of the current litigationor any arbitration proceedings. Any adverse decision in such proceedings couldadversely affect the financial condition of the Company.

 

The claim was recently settled by mutual agreement inlate March 2005.

 

(b)  A shareholder and former chief financialofficer of Teleflex Technologies, Inc. (“Teleflex”), a currently inactiveprivately-held company which had attempted to pursue joint ventureopportunities in the PRC in late 2001 and in 2002, and of which MitchellSepaniak, the president, chief executive officer and a shareholder of theCompany, was also a chief executive officer, commencing early 2003, hasrecently asserted claims in New York State court against SCL, Teleflex and Mr. Sepaniak.The plaintiff’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 earnings statements. The former chief financial officer has alsoasserted claims against SCL, Teleflex and Mr. Sepaniak for unpaid salaryand compensation.

 

Litigation proceedings with respect to the plaintiff’sclaims have commenced. The proceedings are at an early stage, and thereforethere can be no assurance as to the outcome of such proceedings. Any adversedecision in such proceedings could adversely affect the financial condition ofthe Company.

 

(c)  The Company is also subject to variouslegal proceedings and claims that arise in the ordinary course of business. Inthe opinion of management, the amount of any ultimate liability with respect tothese actions will not materially affect the Company’s financial position,liquidity, or results of operations.

 

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

 

*Recent Sales of UnregisteredSecurities*

 

During the three months ended December 31, 2004,we sold (i) to investors 1,731,031 shares of Weida common stock in aprivate placement transaction at a price of $3.00 per share (121,600 shares ofwhich were issued on October 18, 2004 and 1,609,431 shares of which willbe issued in the third quarter) and warrants to purchase an additional 865,516shares of our common stock at an exercise price of $2.75 per share (60,800 ofwhich were issued on October 18, 2004 and 804,716 of which will be issuedin the third quarter) and (ii) to advisors 37,145 shares of our commonstock in connection with the services provided by these advisors (all of whichwill be issued in the third quarter).  The shares and warrants were sold under common individual purchaseagreements and advisory agreements. The warrants carry a three and one-halfyear term from the time such warrants are exercisable. Our common stock andwarrants were sold and are issuable pursuant to an exemption from theregistration requirements of the Securities Act of 1933, as amended, pursuantto Regulation D promulgated thereunder.

 

**ITEM 3—Defaults upon Senior Securities**

 

Not applicable.

 

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**ITEM 4—Submission of Matters to Vote of SecurityHolders**

 

Not applicable.

 

**ITEM 5—Other Information**

 

Not applicable.

 

**ITEM 6—Exhibits**

 
| (a)    |   | Exhibits:                                                                                                                                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                        |
| 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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**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: April 7, 2005 | By:                                 |   |   | /s/ Mitchell Sepaniak |   |   |
|                      |                                |   | **Mitchell  Sepaniak** |   |
| ** **                |                                | **President  and Chief Executive Officer** |   |
| ** **                | ** **                          | ** ** | ** ** | ** ** |
| Dated: April 7, 2005 | 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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