**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-K**

 

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

 

**For The Fiscal Year Ended June 30, 2004**

 

**Commission File 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)

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None.**

 

Securitiesregistered pursuant to Section 12(g) of the Act: **Common Stock, no par value per share.**

 

Indicateby check 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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.    o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).    Yes o  No ý

 

Asof December 31, 2003, the aggregate market value of the common equity heldby non-affiliates of the registrant was approximately $2,685,089. Thedetermination of stock ownership by non-affiliates is based upon theregistrant’s knowledge of stock ownership as of December 31, 2003 and ismade solely for purposes of responding to the requirements of the form and theregistrant is not bound by this determination for any other purpose. Theaggregate market value is based upon the closing sales price of theregistrant’s common stock of $3.60, as reported by the Over-The-CounterBulletin Board on December 31, 2003.

 

Asof June 30, 2004, the aggregate market value of the common equity held bynon-affiliates of the registrant was approximately $231,571,675. Thedetermination of stock ownership by non-affiliates is based upon theregistrant’s knowledge of stock ownership as of June 30, 2004 and is madesolely for purposes of responding to the requirements of the form and theregistrant is not bound by this determination for any other purpose. Theaggregate market value is based upon the closing sales price of theregistrant’s common stock of $5.50, as reported by the Over-The-CounterBulletin Board on June 30, 2004.

 

Asof September 17, 2004, the registrant had 72,334,486 shares of commonstock issued and outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE: **None.**

 

 

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**WEIDA COMMUNICATIONS, INC.**

**Form 10-K**

**For the Fiscal Year Ended June 30, 2004**

 

**Index**

 
|          |          |                                                                                                     | **PAGE** |
|---------------|---------------|----------------------------------------------------------------------------------------------------------|----------|
| PART I   |          |                                                                                                     | 1        |
|          | ITEM 1.       | BUSINESS                                                                                                 | 1        |
|          | ITEM 2.       | PROPERTIES                                                                                               | 23       |
|          | ITEM 3.       | LEGAL  PROCEEDINGS                                                                                       | 23       |
|          | ITEM 4.       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                     | 24       |
|          |          |                                                                                                     |     |
| PART II  |          |                                                                                                     | 25       |
|          | ITEM 5.       | MARKET FOR REGISTRANT’S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS                              | 25       |
|          | ITEM 6.       | SELECTED  HISTORICAL CONSOLIDATED FINANCIAL DATA                                                         | 26       |
|          | ITEM 7.       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 28       |
|          | ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                              | 35       |
|          | ITEM 8.       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                             | 35       |
|          | ITEM 9.       | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                    | 35       |
|          | ITEM 9A.      | CONTROLS AND  PROCEDURES                                                                                 | 35       |
|          |          |                                                                                                     |     |
| PART III |          |                                                                                                     | 37       |
|          | ITEM 10.      | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                      | 37       |
|          | ITEM 11.      | EXECUTIVE COMPENSATION                                                                                   | 40       |
|          | ITEM 12.      | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                                          | 42       |
|          | ITEM 13.      | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                          | 44       |
|          | ITEM 14.      | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                                  | 50       |
|          |          |                                                                                                     |     |
| PART IV  |          |                                                                                                     | 53       |
|          | ITEM 15.      | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND  REPORTS ON FORM 8–K                                    | 53       |
|          |          |                                                                                                     |     |
| SIGNATURES    | 55            |

 

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes forward-looking statements as that term is definedin the Private Securities Litigation Reform Act of 1995. The words “believe,”“may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,”“expect” and similar expressions, as they relate to us, are intended toidentify forward-looking statements. Such statements are based on the currentexpectations of our management only, and are subject to a number of risks,uncertainties and assumptions described in this report, including, among otherthings: the need for equity financing in order to consummate the acquisition ofan equity interest in Guangzhou Weida Communications Technology Co., Ltd.(a/k/a Weida Communications Technology Company Limited), limited operatinghistory, our historical and likely future losses, uncertain regulatorylandscape in the People’s Republic of China, fluctuations in quarterlyoperating results, our reliance on the provision of VSAT-based communicationsservices for the majority of our revenues, changes in technology and marketrequirements, decline in demand for our products, inability to timely developand introduce new technologies, products and applications, difficulties ordelays in absorbing and integrating acquired operations, products, technologiesand personnel, loss of market share, and pressure on pricing resulting from competition,which could cause our actual results or performance to differ materially fromthose described herein. These risks are not exhaustive. Other sections of thisreport may include additional factors that could adversely impact our businessand financial performance. Moreover, we operate in a very competitive andrapidly changing environment. New risk factors emerge from time to time and itis not possible for our management to predict all risk factors, nor can weassess the impact of all factors on our business or the extent to which anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

You should read this report and the documents that we reference in thisreport and have filed as exhibits, completely and with the understanding thatour actual future results may be materially different from what we expect. Wequalify all of our forward-looking statements by these cautionary statements.

 

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*In this report, the terms “Company,” “Weida,” “we,” “us,” and “our”refer to Weida Communications, Inc., a New Jersey corporation, and itssubsidiaries.*

 

**PARTI**

 

**ITEM1.****                                     BUSINESS**

 

**Overview**

 

We were incorporated in March 1985 under the laws of the State ofNew Jersey as Laser Recording Systems, Inc. In June 2004, we changed our name to Weida Communications, Inc.

 

We conduct our business in China solely through certain contractualarrangements among our affiliates, Guangzhou Weida Communications TechnologyCo., Ltd. (a/k/a Weida Communications Technology Company Limited), acommunications service company organized under the laws of the People’sRepublic of China (“PRC” or “China”) and wholly-owned by PRC citizens (“WeidaPRC”) and the shareholders of Weida PRC. Although we do not have an equity interest in Weida PRC, we control andenjoy the economic benefits of Weida PRC through such contractual arrangements.

 

Our wholly-owned subsidiary, SCL Ventures, Ltd., a company organizedunder the laws of the British Virgin Islands (“SCL”), was formed in May 2003for the purpose of engaging in the telecommunications business in China andentered into a master agreement with Weida PRC which was ratified and approvedby the board of directors of SCL in May 2003. We recently acquired all of the issued and outstanding shares of SCL ina share exchange transaction in June 2004, which has been accounted forsimilar to a reverse acquisition in which SCL is the acquirer for accountingpurposes.

 

As part of the transactions contemplated by the master agreement, wecompleted in October 2004 the acquisition of 99.99% of the registeredcapital of Ocean International Holdings Limited, a company incorporated in theHong Kong Special Administrative Region of the PRC (“OIHL”).  The remaining .01% of the registered capitalof OIHL is held by one of our executives as a nominal holder in order to meetlocal Hong Kong legal requirements. OIHL is the sole owner and holder of all of the registered capital ofOcean Tian Di Communication Technology Co., Ltd. (Guangzhou), a wholly-ownedforeign enterprise (the “WOFE”).  TheWOFE has entered into an exclusive service and support agreement with WeidaPRC, effective as of September 1, 2004, which provides for the WOFE to providesupport services to Weida PRC in exchange for receiving fees equal to 51% ofall Weida PRC revenues above certain minimum amounts.

 

We were organized as the successor to severalother businesses of our original founder. From our organization until 1993, wedeveloped and marketed document imaging systems to the pharmaceutical industry,the legal profession and others having a need to manage large volumes ofdocuments. From 1988 to 1998, Poly Ventures Ltd. held approximately 70% of theoutstanding voting shares and maintained a controlling interest in the Company.In 1998, several investors acquired the remaining interest in the Company fromPoly Ventures Ltd.  As reported in ourQuarterly Report on Form 10-Q for the quarter ended October 31, 1993, weceased operations, terminated all of our employees on August 16, 1993 andcarried out an orderly winding up of our affairs, including transferring all ofour existing projects to our customers. From October 31, 1993 toJanuary 7, 2000, we did not file any reports with the SEC. OnJanuary 7, 2000, we filed an Annual Report on Form 10-K for the fiscalyear ended January 31, 1999 and the required Form 10-Q’s for the followingquarters and thereafter filed the required Form 10-K’s and Form 10-Q’s for thefollowing fiscal periods.

 

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**Our CorporateStructure**

 

The chart below sets forth our corporate and share ownership structureas of the date of this report.

 

 

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(1)          As of the date of this report, we do not havean equity interest in Weida PRC. Rather, we have control of and a 51% profit-sharing interest in WeidaPRC through contractual arrangements between the WOFE and Weida PRC.  Pursuant to the terms of a trust agreemententered into by SCL, Weida PRC and the shareholders of Weida PRC, theseshareholders hold 51% of the shares of Weida PRC and the Weida EJV (aSino-foreign Equity Joint Venture) in trust for the benefit of SCL for futuretransfer to SCL pursuant to the terms of the equity interest transfer agreementand the future equity interest transfer agreement described below.  These shareholders may only transfer ordispose of the shares held in trust upon written instructions from SCL and mustat all times exercise the voting rights of the shares held in trust at thedirection of SCL.  Upon consummation ofan equity interest transfer agreement between SCL and the current shareholdersof Weida PRC, SCL will own 25% of the equity interest in Weida PRC, at whichtime our 51% profit-sharing interest in Weida PRC will proportionallydecrease.  Upon consummation of a futureequity interest transfer agreement between SCL and the current shareholders ofWeida PRC, SCL will own between 25% and 51% of the equity interest in WeidaPRC, at which time our then-current percentage profit-sharing interest in WeidaPRC will proportionally decrease.

 

(2)          Upon consummation of an equity interesttransfer agreement between SCL and the current shareholders of Weida PRC, SCLwill own 25% of the equity interest in Weida PRC and the current shareholdersof Weida PRC will own 75% of the equity interest in Weida PRC.  Upon consummation of a future equityinterest transfer agreement between SCL and the current shareholders of WeidaPRC, SCL will own between 25% and 51% of the equity interest in Weida PRC andthe current shareholders of Weida PRC will own the remaining percentage of theequity interest in Weida PRC.

 

We do not have an equity interest in Weida PRC, but instead control andenjoy the economic benefits of Weida PRC through certain contractualarrangements among our affiliates, Weida PRC and the shareholders of Weida PRCas described below.  For a furtherdescription of each of these agreements, see Item 13, “Certain Relationshipsand Related Transactions – Related Party Agreements – Acquisition of Controland a Majority Profit-Sharing Interest in Weida PRC.”

 

As part of these contractual arrangements, SCL has entered into amaster agreement with Weida PRC and all of Weida PRC’s shareholders.   The master agreement, as modified by astock transfer memo executed by the Company, provides the framework for theacquisition, through a series of transactions, of control and a legal ownershipinterest in Weida PRC.

 

SCL, together with one of our officers (the latter as a nominal holderin order to meet local Hong Kong legal requirements), entered inAugust 2004 into a purchase and sale agreement with the shareholders

 

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of OIHL.  Pursuant to thisagreement, SCL and the executive recently acquired all of the registeredcapital of OIHL, with SCL owning 99.99% of the registered capital of OIHL andthe executive owning .01% of the registered capital. OIHL is the sole owner andholder of all of the registered capital of the WOFE.

 

SCL has also entered into a trust agreement with Weida PRC and theshareholders of Weida PRC.  Pursuant tothis agreement, the shareholders of Weida PRC will hold 51% of the shares ofWeida PRC and the Weida EJV (a Sino-foreign Joint Venture) in trust for thebenefit of SCL.

 

The WOFE has also entered into a service and support agreement withWeida PRC.  Pursuant to this agreement,the WOFE will provide to Weida PRC business support and services within thePRC, including but not limited to, assistance in selection, procurement andfinancing of satellite communication and network infrastructure equipment;outsourcing of employees; marketing research and consulting services; andbusiness promotion services, in exchange for service fees.  Also pursuant to this agreement, the WOFEwill be the sole and exclusive owner of all intellectual property rightsarising from the performance of this agreement, whether developed by the WOFEor Weida PRC, and whether based on the WOFE’s or Weida PRC’s intellectualproperty rights.  The shareholders ofWeida PRC have also entered into a pledge agreement with the WOFE, pursuant towhich these shareholders pledged their interest in Weida PRC to guarantee theperformance of Weida PRC’s payment and other obligations under the service andsupport agreement.

 

SCL has also entered into an equity interest transfer agreement withthe shareholders of Weida PRC.  Pursuantto this agreement, the shareholders of Weida PRC will sell and transfer to SCL25% of the equity interest in Weida PRC upon conversion of Weida PRC into aSino-foreign Equity Joint Venture (the “Weida EJV”).

 

SCL has also entered into (i) an equity joint venture contract and (ii)articles of association with the shareholders of Weida PRC.  Pursuant to these agreements, Weida PRC willbe converted into the Weida EJV upon the fulfillment of certain conditionsprecedent.  These agreements establishthe purpose and scope of the Weida EJV and set forth the capitalization andfinancing requirements, operations and corporate governance structure of theWeida EJV.

 

SCL has also entered into a future equity interest transfer agreementwith the shareholders of Weida PRC. Pursuant to this agreement, at such future time as the laws of the PRCallow, the shareholders of Weida PRC will sell and transfer to SCL, on a prorata basis, additional equity ownership in Weida PRC (over and above the 25%equity interest in Weida PRC being transferred to SCL pursuant to the equityinterest transfer agreement) up to the greater of (i) the maximum allowed byPRC law and (ii) a total of 51% of the equity interest in Weida PRC (includingthe 25% equity interest in Weida PRC being transferred to SCL pursuant to theequity interest transfer agreement).

 

In the opinion of our PRC legal counsel, Chen & Co. Law Firm, the ownershipstructures of the WOFE, Weida PRC and the Weida EJV (the latter when dulyapproved by the relevant PRC authorities), and our contractual arrangementswith these companies and their respective shareholders as described in thisreport, are (to the extent they purport to be governed by PRC law) incompliance with all existing PRC laws and regulations and are (to the extentthey purport to be governed by PRC law) enforceable in accordance with theirterms and conditions. Nevertheless, there are substantial uncertaintiesregarding the interpretation and implementation of current PRC laws andregulations. See this Item 1, “—Risks Related to Our Business and CorporateStructure—If the PRC government finds that the agreements that establish thestructure for operating our business do not comply with PRC governmentrestrictions, we could be subject to severe penalties” and “—Risks Related toOur Business and Corporate Structure—Our contractual arrangements with WeidaPRC may not be as effective in providing operational control as directownership of this business and may be difficult to enforce.”  As discussed in those risk factors, certainevents may cause us to lose the benefits and control intended to be created by thesearrangements.

 

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**Employees**

 

As of September 17, 2004 we had 35 full time equivalent employees.

 

**Guangzhou WeidaCommunications Technology Co., Ltd.**

 

*General*

 

Weida PRC is a wholly privately-owned company established in 2001 inresponse to the Chinese government recently allowing an individual company toobtain a 100% private, non-governmental and non-military, VSAT satellitelicense. VSAT (Very Small Aperture Terminal) is a relatively small satelliteantenna used by corporations and governments for satellite basedpoint-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. For privateapplications, companies can have total control of their own communicationsystem without dependence on other companies. Business and home users also getgreater bandwidth than if using ordinary telephone service.

 

Currently, Weida PRC is the only wholly privately-owned company holdinga VSAT satellite license in the PRC (the only other privately-owned company torecently hold a license was merged into a joint government venture inJanuary 2004).  The scope of thelicense permits the offer and sale of a variety of broadband satellitecommunications services, including audio and video services, Internetconnectivity, multimedia services, HDTV, and Voice Over IP. The license grantedprovides Weida PRC the opportunity to develop and deliver such satellitecommunications in China. Weida PRC is licensed to provide services in therapidly growing Voice Over IP telephone service market, and to provide suchservices as a phone operator.

 

Weida PRC is currently delivering service to over 56 customers, withmore than 250 VSAT terminals in regular revenue-generating use at June 30,2004, compared with 36 customers and 140 VSAT terminals at June 30, 2003,and has entered into contracts and negotiations with customer targets includingbrokerage firms, hotels, and national governmental ministries.

 

In August 2004 Weida PRC entered into a cooperation agreement witha subsidiary of China Telecommunications Corporation (“China Telecom”).  Pursuant to this agreement, Weida PRC willoffer its satellite transmission equipment and network as part of a disasterrecovery program and back-up system for China Telecom’s major accounts and willfurnish Internet capability. The arrangement covers all of China Telecom’sdivisions.  Pursuant to this agreement,the next step will be cooperative efforts between Weida PRC and each ChinaTelecom division to market and sell the satellite transmission equipment andnetwork as part of a disaster recovery program and back-up system for ChinaTelecom’s major accounts. Weida PRC expects to receive both equipment paymentsand continuing service-related fees from purchase orders from China Telecomaccounts.  Our revenues from thecooperation agreement depend on China Telecom’s end-user accounts placingpurchase orders.  No such purchaseorders have yet been obtained, and there is not likely to be a material amountof revenue for Weida PRC from this arrangement before the first quarter of2005.

 

Weida PRC does not launch or operate the space satellites. Instead, itprovides the ground based transmitters and receivers that allow corporate andgovernment customers to use satellite communications. Weida PRC negotiates forand provides satellite bandwidth, provides equipment sales and installations,and, equally important, manages and improves the communications data stream tothe customer.

 

*VSATs and Satellitesin the China Market*

 

VSAT is a rapidly growing method of transmission in China, as it can befar more efficient in many ways than landlines. For example, in the UnitedStates MCI is installing a system for the United States

 

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Postal Service to include 40,000 sites. Bass Hotels & Resorts,which owns and operates more than 3,000 hotels in nearly 100 countries, usesVSAT transmissions for about 70% of its networking.

 

In China, utilizing Weida PRC’s satellite transmission services andproducts can solve a key existing problem - the lack of telecommunications inmany zones that are difficult to wire because of geography or because existingtelecommunications facilities are held by monopoly in a particular area.Satellite is an ideal solution for residential hillsides, office buildings andstudent co-ops. Satellite transmission facilities can be implemented much morerapidly and at much lower cost than landlines. The large population bases ofmajor cities, coupled with extensive “old” buildings, means that re-wiring forbroadband services is not a practical venture in many instances. VSAT providesa much more cost-effective solution.

 

China has over 5,400 islands, many of which are populated, remote andcannot be efficiently hard-wired for high speed Internet access withtraditional landlines. Further, China has more than 40% of its land massdesignated as “mountainous.” “Flatlands” only account for 12% of China’s landarea. Moreover, China’s central government is aggressively promoting growth andinvestment westward to bring economic and social improvement to the poorerwestern provinces requiring additional communications infrastructure. Clearly,satellite provides an immediate, low cost solution to these infrastructurechallenges.

 

Wireless satellite communications are the only means currentlyavailable to resolve “moveable communications” demands, meaning the use ofremote wireless transmission vehicles. Such demands stem from a wide range ofapplications such as geologic exploration, archeological excavations and othercivil industries. This key area of opportunity comes from the ability ofsatellite transmissions to skip from city to city, providing for obviousbenefits versus large-scale projects requiring broadband wiring across thecountry’s large and difficult terrain. Satellite receivers can be deployedtoday, while subterranean broadband wiring requires substantial capital anddecades of deployment across the expansive country.

 

*Voice Over InternetProtocol in the China Market*

 

The market for Voice Over Internet Protocol (VOIP) telephone servicepresents a particular opportunity for Weida PRC. Approximately 900 millionChinese consumers do not presently have phone service. Weida PRC’s VOIP canrapidly create low-cost service to these non-users as well as providelower-cost telephone service to the existing users. This market provides both agrowth opportunity for Weida PRC in phone services and a market for Weida PRC’sother high-bandwidth, higher revenue services such as Internet, multimedia,gaming, and e-Learning, among others.

 

By using VOIP, consumers and businesses can greatly reduce their phonebills. Weida PRC has licensed technology to reduce potential low-quality audiothat had been an objection to VOIP. We expect VOIP to be a key choice for ruraltelephone users and anyone desiring lower phone costs, and VOIP is experiencingrapid growth in China.

 

*Prospective Marketsand Applications for Weida PRC Services*

 

Currently 99.5% of satellite data transmissions in China are one-wayonly, merely downloaded to a specific site. Weida PRC’s VSAT license allows forback-channel, bi-directional communications, the critical element necessary forinteractivity, Internet services, polling, remote metering and sensing, ande-learning, among others.

 

As the only private entity to hold a full array of VSAT licenses, WeidaPRC believes it can be a leader in the significant demand for satelliteservices within China. The license provides, among other things, for bothlow-speed and high-speed digital communications, including audio and videoservices, Internet, multimedia, HDTV, and VOIP.

 

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The large population bases of major cities, coupled with extensive“old” buildings, means that re-wiring for broadband services is not a practicalventure in many instances. VSAT provides a dramatically more cost-effectivesolution. Weida PRC believes that it can provide broadband Internet IP servicesat a substantially reduced cost to what is currently charged by the fixed linetelecom providers.

 

In addition to initial beta and test deployment sites, Weida PRC hasinstalled the first three of a chain of substations for military securitypurposes, and separate intranet/VPNs for a hotel chain, financial services andbroadcasting group. Currently, Weida PRC has several proposals under reviewwith hotel chains servicing major metropolitan areas in China. Weida PRC hassubmitted proposals to a number of potential users and intends to submitadditional proposals to two distance learning universities in China working incooperation with U.S. and European universities.

 

Another example of possible use is through the State Grid Corporationof China and China Southern Power Grid Company. Each has begun an initiative tohave dual communications links between its transformer substations and controlcenters, as a method to automate over 35,000 substations into non-mannedmetering centers. Only 20% are currently unmanned. Each has determined thatsatellite linkage is the ideal choice. As part of an initial proof of concept,Weida PRC has 76 VSAT substations running in the electricity system, which ishosted on the main satellite station of the National Bureau of Seismology.Weida PRC projects opening between 600 to 1,000 new substations per annum forthe next 5 years. Another example is the state’s program for grain depotmonitoring and Weida PRC is in discussions regarding monitoring solutions forits 9,000 depots.

 

Environmental protection is another government initiative requiringunmanned metering. Weida PRC is in discussions with several provincialdepartments of environmental protection concerning a pilot project forpollution monitoring in lakes, rivers, forests and urban areas.

 

Another major opportunity is in enterprise-wide networks forcorporations. Weida PRC can tie together a corporation’s offices in variousregions utilizing high security. Another advantage is speed, as a field officecan be quickly, easily and inexpensively incorporated into the enterprisenetwork with an installation time of only two hours for a satellite substation.In addition to common data communications, the enterprise can use Weida PRCsatellites to create an in-company TV network for visual meetings and trainingbroadcasting, along with remote monitoring (security and processes), andcontrolling devices (office automation systems).

 

Weida PRC’s satellites have similar advantages for the stock brokerageindustry. Weida PRC can publicly broadcast information and then completeordering and other instructions for transactions through their bi-directionalchannel capabilities.

 

Internet connections in hotels have become an important criterion fortourists choosing a hotel. For instance, the China Correspondents Associationset Internet connectivity as one of the first requirements in determining ahotel’s readiness to receive travelers in conjunction with the Asian qualifyinggames for the World Soccer Cup and the Summer Olympic Games in 2008. Atpresent, there are over 10,000 three-star hotels in China, of which fewer than10% have Internet connectivity. As many hotels were built at an earlier timewhen the Internet was not available, setting up a conventional network isexpensive and time-consuming for these hotels.

 

*Weida PRC’s Serviceand Product Offerings*

 

Weida PRC designs, engineers, integrates and installs satellite-basedground segment systems and network solutions for the business-to-businessmarket segment in China.  Our systems consistof an earth station and ancillary subsystems in what is referred to as a groundsegment.  An earth station is anintegrated system consisting of antennas, radio signal transmitting andreceiving equipment, modulation and demodulation equipment, monitor and controlsystems and voice, data and video network interface

 

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equipment.  Ancillary subsystemsmay include microwave links or fiber optic links for the transmission ofcommunication traffic to a central office, or generators for emergency powerrequirements.  Weida PRC’s customizablemodular earth stations may be sold individually as stand-alone ground segmentsystems or may be used as subsystems to integrate into a complete groundsegment system or network.  Weida PRCsegments this to create a modular capability allowing it to address itscustomers’ specific service and equipment needs, as well as affording it theflexibility to integrate to a wide variety of legacy systems and networkplatforms.  All of Weida PRC’s earthstations conform to China’s applicable satellite standards.

 

Weida PRC’s earth stations provide point-to-point high-capacity datalinks and hubs for satellite networks. Its earth stations are modular with all electronics enclosed in acompact unit.

 

*•  Weida PRC’s Terminals***. **Weida PRC provides a range ofgeneral purpose, medium-capacity earth stations, designed forbusiness-to-business networks.  All ofthe supporting electronics are housed in a light-weight weatherproof unit mountedon the antenna.  The modem is housed inan indoor enclosure.

 

Additionally, Weida PRC supplies a family of digital earth stations tobe used in environments requiring limited capacity in geographic areas withlimited or no telecommunications infrastructure.  These earth stations integrate radio frequency and satellitemodem components into one antenna mounted package.

 

Weida PRC also provides a transportable earth station designedprimarily for emergency communications and data gathering.  The group is comprised of portable modularearth stations designed for quick deployment and operate anywhere inChina.  All of the components aremounted in separate cases, which are small and compact enough to transport bytrucks and commercial carriers.

 

*•  CommunicationsService. *Weida PRC customizes itscommunications service to meet customer needs by offering standardized servicesand custom-engineered solutions.  Thestandard service can be sold separately or can be used as part of a customizedsolution.  Weida PRC uses its experiencein satellite communications, Internet Protocol, networks and informationtechnology in designing its customized solutions.

 

China is following the telecommunications path laid out by the westernworld by moving to Internet Protocol based networks and services based on thelower cost of integration and implementation, and the flexibility thesenetworks offer.  Satellite-basedcommunications complement this transition as many of the regions in China lackthe next generation terrestrial networks required to accommodate the rapid andreliable transmission of information and bandwidth underlying the growth intraffic.  Weida PRC is a network serviceprovider that offers next generation network services to service providers,ISP’s, enterprises, and government agencies in China.  It allows customers such as corporate headquarters and governmentagencies to combine satellite and terrestrial communications networks andconnect to China’s Internet backbone to obtain high-speed access services.

 

Weida PRC also provides point-to-multipoint delivery ofmultimedia.  It provides video, audioand data satellite solutions that service retail, business-to-businesscustomers and government agencies.  AsChina continues to convert into a market economy the retail sector continues todevelop ways to promote their products. Weida PRC provides video digital networks to support in-store messagingand training.  Training is becoming asignificant segment as government agencies look for cost effective ways to deployand educate employees.

 

Weida PRC’s Internet network offers point-to-point and multipointInternet connectivity for ISP’s, service providers, government andbusiness-to-business customers.  Theseservices provide asymmetrical forward and return links optimized for Internetapplications.  Weida PRC offers two waysatellite Internet connectivity as well as one-way satellite Internetconnectivity with terrestrial return.

 

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*•  ISDN Network. *Weida PRC’s services offer full-time connections atstandard rates of 64Kbps and 128Kbps to geographically dispersedlocations.  It can provide theseservices to organizations needing full-time digital connections for voice,data, and video conferencing in locations around China where the terrestrialinfrastructure is inadequate or unavailable.

 

Weida PRC also provides high-speed data connections for intermittentuse through an added value service subscription.  It provides data rates up to 2Mbps to geographically dispersedlocations.  Customers who have highbandwidth requirements use this service to reduce costs when they requireintermittent services (e.g., emergency agencies).

 

*Overview of Weida’sVSAT Network*

 

The Weida PRC VSAT satellite network hasthree main components:

 

*• **NetworkOperations Center (NOC)*.This is the central hub in Beijing where the data, video, voice and audiocontent originates from. The central hub is connected to a 7-meter earthstation, which transmits and receives the content from the satellite. The hubcontrols the network through a network management system (NMS) server, whichallows a network operator to monitor and control all the components of thenetwork.

 

*• **TheSatellite*. We currentlylease satellite transponder bandwidth from the ASIASAT satellite to transmitand receive content for our VSAT satellite network. The NOC transmits theoutbound information (from the NOC to the VSATs) at 64Kbps (2Mbps low-speedVSAT terminal subscribers) to the 128Kbps satellite, which beams it back to earthfor reception by the remote VSATs. The VSATs located in the remote locationsalso send inbound information (from the VSATs to the NOC) via the samesatellite transponder to the NOC.

 

*• **VSAT RemoteTerminal*. We use the 2Mbps(for one-way broadcast) and the ViaSat 2Mbps (for two-way communications) VSATequipment for our network. These VSATs have two main sub-systems: the dishantenna and the Indoor Unit. The VSAT dish antenna is usually installed at theremote customer site on a roof or wall, although a mobile unit is available andis in limited use by a few customers.****Acoaxial or Ethernet cable is then run from the VSAT dish antenna to the IndoorUnit, which is installed inside the customer site and connects to a customer’sPC/LAN, television or telephone system.

 

*Marketing and Sales*

 

We utilize distribution channels such as asmall direct sales force, distributors, resellers, Internet marketing as wellas joint marketing with strategic allies to reach our customers. We believethese channels are most appropriate because they enable us to market ourselvesin the shortest time, reduce our capital requirements and are good for closecustomer relationship building. Our primary focus is to jointly work with ChinaTelecom and our other partners to combine forces to adequately service thebusiness-to-business markets.

 

Our sales and marketing team currentlyconsists of nine personnel located in our offices in Beijing and Guangzhou. Atypical sales process involves relationship building, customer requirementsanalysis, product presentations, demonstrations, project implementation andafter-sales support. The following are some of the marketing activities that weconduct to reach out to new customers:

 

*• **DirectMarketing*.  The sales team conducts direct marketing topotential clients and existing customers. They conduct pre-sales presentationsthat demonstrate the nature and benefits of our products and services and howsuch services will enhance their operations and management. In particular, thesales team demonstrates how clients can take advantage of our solutions toimplement their networking and data

 

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transmission needs. The sales team is alsotrained to address the business concerns and networking requirements ofcustomers.

 

*• **JointMarketing*.  We work closely with China TelecomInformation Systems to promote our services, which are distributed by ChinaTelecom as a private labeled service, as well as under Weida PRC’s brand name.  Print, local media and telemarketing achievethis.** **We also participate in various road shows and seminarsorganized by our marketing department and our other strategic partners topresent our latest satellite transmission solutions to our potential customers.

 

*RegulatoryEnvironment*

 

The VSAT licensing structure in China was formerly under the control ofthe Ministry of Post and Telecommunication. It is now under the auspices of theMinistry of Information Industries (MII). Only the MII can grant VSAT licenseswithin the country.

 

The MII has deemed VSAT communications to be a “value-added business.”As such, a separate business license is required. Before 2000, any companyapplying for such a license had to show more than 50% ownership by state-ownedassets. After 2000, the requirement was lifted. However, the difficulties ofobtaining a VSAT license have only intensified, and Weida PRC remains the firstand currently the only such private licensee (the only other privately-ownedentity recently holding a license was merged into a joint government venture inJanuary 2004).  Weida PRC has noownership by the state.

 

A requirement for obtaining a license is the strict provision regardingregistered capital. The registered capital required for a VSAT operator has nowbeen raised to RMB 50,000,000 (more than US$ 6 million), a significant barrierto entry within China. However, such capital is not the only requirement. Anycompany applying must prove long-term service viability to MII. Early VSATfailures by inefficient state-owned entities have made MII particularlystringent, and leery of awarding any more licenses. Although the governmentappears to have in place sensible, quantitative requirements, in reality itmakes a highly qualitative decision in which few companies can prevail.

 

During 2001, more than 100 companies applied to the MII for VSATbusiness licenses and only five of them were granted (i.e., less than 5%). In2002, one additional VSAT license was granted, to a government-controlledenterprise, and three were rescinded. The government did not grant any VSATlicenses in 2003, and approximately three to five were rescinded, as thegovernment continued to shut down inefficient operators.  As of September 17, 2004, no VSATlicenses have been granted in 2004, the only other private operation was closedand merged into a joint venture with the government, and five more licenses hadbeen rescinded. There is a regulation within the MII that no more VSAT licenseswill be granted for the existing value-added business line. Although this informationis not publicly published, if a company applies for a business-line VSATlicense and there is an existing company already licensed, the applicant cannotgain a license. Instead, the MII suggests to the applicant that it seek sometype of cooperative agreement with the licensed entity.

 

*CurrentMarketplace and Competition*

 

Currently, there are approximately 34 VSAT licensed operators in China,operating a total of approximately 34,540 terminals, of which approximately 76%are receive-only (unidirectional) and 24% are bi-directional.  Weida PRC’s largest competitors in satellitetransmission are ChinaSat, China Orient, ChinaCast, Guangdong South SatelliteTelecom and Shanghai VSAT.  Othercompetitors include approximately 15 small single system and networkproviders.  Most of Weida PRC’scompetitors are substantially larger, with greater capital resources, longeroperating history and a larger base of installed revenue-producing VSATterminals.

 

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In terms of receive-only users, television receiving, stock quotesreceiving and receive-only distance learning stations account for 40%, 50% and10% respectively. In terms of bi-direction users, paging is the majorapplication. Owing to the decline and slower growth of the paging business inChina, many VSAT stations lie idle. Data acquisition and distance communicationstations form the other subset of two-way users. The speed of most two-waystations is low, ranging from 960bps to 64Kbps, as these operators use olderequipment and protocols.

 

Therefore, most operators are engaged in one-way broadcast services,and their original systems simply cannot meet the demands required for robust,two-way applications. Yet, this is the growth area of the market - hundreds ofbusiness-to-business customers who are demanding high-speed, two-way services.

 

With respect to technology, Weida PRC believes that there is littlecompetitive edge between operators in terms of equipment. All operators canselect from the same hardware manufacturers, and there is no exclusivity. Webelieve companies will compete for new applications and better services. Thisis where we believe Weida PRC has a decided edge due to its ability to createcustomized hardware and software solutions and services in response to itscustomers’ demands. We believe Weida PRC stands above other VSAT operators withrespect to its in-house technical capabilities for unique customer solutions.

 

This is where Weida PRC intends to excel, owing to the vision of itsmanagement team and high quality of its market-oriented personnel. Weida PRCplans to focus upon capturing market share through new services andimaginatively converging various technologies.

 

*Technology*

 

The communication rate and protocols of the early satellite system donot comply with the current communication requirements and market desires. Ifthese older systems are attempting IP communications, some new equipment mustbe added, such as routers, switches, etc. This previous equipment is based on aprivate line communication mode, which yields low efficiency when applied tothe current, widely-used TCP/IP acknowledgement scheme. Further, this pre-2000equipment does not contain the “spoofing” protocol as demanded by customers forTCP/IP applications.

 

Weida PRC believes it is ahead of others in China in the usage of theIP platform for satellite communications of data, audio and video (multimedia).At present, Weida PRC believes no other Chinese VSAT operator offers suchservices. Weida PRC has completed its pilot work, and is estimated to be oneyear ahead of competitors, both technologically and in terms of marketdelivery.

 

It is important to note that China Telecom examined 15 VSAT operatorsbefore selecting Weida PRC. China Telecom has indicated that they considerWeida PRC as the most technologically advanced operator owing to its greatexperimental work to date and ability to meet customer needs with specializedsolutions.

 

*IntellectualProperty*

 

Weida PRC’s VSAT license was issued in 2001and covers every province in China. This VSAT license expires on August 11, 2006 and is renewableautomatically for additional 2-year terms unless either party terminates inaccordance with the terms of the license. In addition, Weida PRC received anInternet ISP license in 2003, which covers 20 cities in China.  This Internet ISP license expires onAugust 11, 2008 and is renewable automatically for additional 2-year termsunless either party terminates in accordance with the terms of the license.

 

Weida PRC’s VSAT license is a scarce andhard-to-obtain asset.  The governmenthas increased the capital investment requirement from $2,500,000 to over$6,000,000 to apply for a VSAT license. Additionally, new applicants are required to operate in a betaenvironment for a minimum of 2 years before they can officially apply for thegrant of a license.

 

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*Research andDevelopment*

 

Weida PRC purchases almost all of its equipment and software fromexisting industry vendors, but it maintains a limited development effortfocused on customer application development for satellite communications andintegration to legacy systems and networks. The costs of such efforts have notbeen material, and are included in operating expenses.

 

*Employees*

 

As of September 17, 2004 Weida PRC had 30 full time equivalentemployees, including 8 in product development, 9 in sales and marketing, 5 incustomer support services and 8 in distribution services and administration.

 

**Risks Related to OurBusiness and Corporate Structure**

 

*We are a recentlyestablished business.*

 

We are a recently established business as the result of the shareexchange transaction with SCL in June 2004 and are subject to all of therisks inherent in the creation of a new business, including the absence of ahistory of any significant operations or proven business plan.  In recent years, we have had only limitedoperations, which have been concentrated almost exclusively in development,organizational and start-up activities.  As a result, we continue to establish many functions that arenecessary to conduct our business, including managerial and administrativeservices, marketing activities, financial systems and personnel recruitment.  Our business and prospects must be consideredin light of the risks, expenses and difficulties frequently encountered bybusinesses in their early stages of development, particularly in established,highly competitive and continuously evolving markets.  We have not yet generated any revenues and expect to incuroperating losses, which could extend over a long period if any of our fundingor operational assumptions prove to be incorrect.   There can be no assurance that our operations will besuccessful, that we will be successful in meeting our stated businessobjectives, that we will ever generate revenues, or that we will becomeprofitable.

 

*We may not achieveprofitability if we are unable to maintain, improve and develop our productsand services or if our new or enhanced products or services fail to achievemarket acceptance.*

 

We believe that our future business prospects depend in part on ourability to maintain and improve our current products and services and todevelop new ones on a timely basis. Our products and services will have to achievemarket acceptance, maintain technological competitiveness and meet an expandingrange of customer requirements. As a result of the complexities inherent in ourproducts and service offerings, new products and services and enhancements tocurrent products and services require long development and testing periods. Wemay experience difficulties that could delay or prevent the successfuldevelopment, introduction or marketing of new or enhanced products andservices. Additionally, our new or enhanced products or services may notachieve market acceptance.

 

If we cannot effectively maintain, improve and develop products andservices, or if our new or enhanced products or services fail to achieve marketacceptance, we may not be able to recover our fixed costs or otherwise becomeprofitable.

 

*We will requiresignificant capital and financing to complete the acquisition of control and alegal ownership interest in Weida PRC and finance its continuing operations.*

 

In addition to issuing stock to the OIHL shareholders, we will have topay approximately $15.8 million to complete the acquisition, as follows:

 

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•                  $805,153 in cashto the shareholders of Weida PRC, which payment shall also be deemed to satisfyour obligation to contribute a capital contribution to the Sino-foreign EquityJoint Venture that Weida PRC is being converted into (the “Weida EJV”) (whichpayment has been deposited and is reserved for payment); and

 

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

 

These payments are required to be made only if the conditions to theformation of the Weida EJV discussed elsewhere in this report have beencompleted and the Weida EJV has been formed and has a valid business licenseshowing SCL’s 25% equity ownership.

 

We do not expect that our shareholders or the current Weida PRCshareholders will provide all of our financing requirements. Consequently, wecannot be sure that any additional financing will be available as and whenneeded, on commercially reasonable terms, or at all. If we cannot obtainadditional financing as and when needed, we may not be able to complete theacquisition of legal ownership of a 51% interest in Weida PRC, which could havea material adverse effect on our financial condition and results of operations.

 

Therefore, it is possible that the acquisition of a legal ownershipinterest in Weida PRC (as compared with our current contractual andprofit-sharing arrangements) may never be consummated, in which instance ourcommon stock may have lesser value than it has currently.

 

SCL was also originally obligated to provide or arrange forapproximately $159 million of working capital for the Weida EJV in the form ofequipment leasing, asset purchases, cash equivalents, or other commerciallyreasonable forms based on a business plan to be agreed upon by the board of theWeida EJV after SCL had appointed its members, but provision of this workingcapital was not a condition precedent to SCL’s acquiring control of, or aprofit-sharing or ownership interest in, Weida PRC. The terms of the equityjoint venture contract and articles of association of the Weida EJV enteredinto in August 2004 no longer specify any specific level of requiredfinancing, and any such financing will require approval of the Weida EJV’sboard.

 

Weida PRC’s future working capital needs have not yet been determined.Although there is no expressed date by which working capital is to be arranged,nonetheless, failure to successfully arrange for all or substantially all ofsuch working capital requirements could materially and adversely impact theviability or future profitability and growth of Weida PRC. SCL and we haverecently provided limited funding support for Weida PRC equipment purchases.  Neither we nor SCL currently has and we havenot yet made any other plans, proposals or arrangements for such workingcapital funding, and do not expect to pursue such financing requirements untila business plan for Weida PRC for the remainder of 2004 and for 2005 is prepared,reviewed and approved by us. Consequently, there is no assurance that thenecessary working capital financing for Weida PRC can or will be obtained.

 

*To raise capital, wemay have to issue equity or debt securities on terms that are detrimental toexisting shareholders.*

 

In order to complete the acquisition of control and a legal ownershipinterest in Weida PRC, we will be required to issue 16,296,296 shares of commonstock, representing approximately 18% of our outstanding common stock aftersuch issuance, to the former shareholders of OIHL. Further, in order to meetour capital requirements, we expect to offer equity securities for sale, andshareholders will experience additional dilution. Any new equity securities weissue may have rights, preferences or privileges senior to those of existingholders of common stock. We may issue debt securities with substantial debtservice requirements, high interest rates or other terms that limit our abilityto obtain financing or take advantage of business opportunities.

 

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*If the PRCgovernment finds that the agreements that establish the structure for operatingour business do not comply with PRC government restrictions, we could besubject to severe penalties.*

 

In December 2001, in order to comply with China’s commitments withrespect to its entry into the World Trade Organization (“WTO”), the StateCouncil promulgated the Administrative Rules for Foreign Investments inTelecommunications Enterprises, or the Telecom FIE Rules. The Telecom FIE Rulesset forth detailed requirements with respect to capitalization, investorqualifications and application procedures in connection with the establishmentof a foreign-invested telecommunications enterprise. Pursuant to the TelecomFIE Rules, the ultimate ownership interest of a foreign investor in aforeign-funded telecommunications enterprise shall not exceed 50%.

 

We and our subsidiaries are considered to be foreign persons orforeign-invested enterprises under PRC laws. As a result, we operate in Chinathrough Weida PRC, which is owned by PRC citizens. We do not have any equityinterest in Weida PRC and instead enjoy the economic benefit of Weida PRCthrough contractual arrangements, including agreements on provision ofservices, intellectual property, and certain capitalization and corporategovernance matters. Weida PRC conducts substantially all of our operations andgenerates substantially all of our revenues. It also holds the licenses andapprovals that are essential to our business.

 

There are substantial uncertainties regarding the interpretation andapplication of current or future PRC laws and regulations, including but notlimited to the laws and regulations governing the validity and enforcement ofour contractual arrangements. Accordingly, we cannot assure you that PRCregulatory authorities will not determine that our contractual arrangementswith Weida PRC violate PRC laws or regulations.

 

If we, our subsidiaries or our operating company were found to violateany existing or future PRC laws or regulations, the relevant regulatoryauthorities would have broad discretion in dealing with such violation,including, without limitation, the following:

 

•                  levying fines;

 

•                  confiscating ouror our operating company’s income;

 

•                  revoking our orour operating company’s business license;

 

•                  requiring us torestructure our ownership structure or operations; and/or

 

•                  requiring us orour operating company to discontinue our satellite telecommunications business.

 

Any of these or similar actions could cause significant disruptions toour business operations or render us unable to conduct our business operationsand may materially adversely affect our business, financial condition andresults of operations.

 

*Our contractual arrangementswith Weida PRC may not be as effective in providing operational control asdirect ownership of this business and may be difficult to enforce.*

 

PRC laws and regulations currently restrict foreign ownership ofcompanies that provide telecommunications services. As a result, we conductsubstantially all of our operations and generate substantially all of ourrevenues through Weida PRC pursuant to a series of contractual arrangementswith Weida PRC and its shareholders. These agreements may not be as effectivein providing control over our operations as direct ownership of this business.In particular, our operating company could fail to perform or make payments asrequired under the contractual agreements, and we will have to rely on the PRClegal system to enforce this agreement, which we cannot be sure would beeffective.

 

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*Holding companystructure and operating subsidiaries not wholly owned or controlled.*

 

An investment in our common stock represents an equity interest in aholding company and not in an operating company. We conduct operations throughsubsidiaries.  Even when the equityinterest in our major operating subsidiary, Weida PRC, is fully acquired bySCL, such equity interest will be only up to 51%.  This structure, and our less than 100% ownership, may result inus not realizing the full benefits of capital that we provide to subsidiaries,may require substantial management attention in dealing with minorityshareholders, and may reduce the value of an investment in us.

 

*The dividends andother distributions on equity we may receive from Weida PRC, or other paymentswe may receive are subject to restrictions under Chinese law or agreements thatthese entities may enter into with third parties.*

 

We are a holding company. We will operate, directly or indirectly,through Weida PRC, which has entered into contractual arrangements with oursubsidiaries through which we will conduct our business activities and willreceive substantially all of our revenues in the form of service fees. If WeidaPRC or our other subsidiaries incur debt in the future, the instrumentsgoverning the debt may restrict their ability to pay fees or make otherpayments or distributions to us. In addition, Chinese law requires that paymentof dividends by our subsidiaries that are incorporated in China can only bemade out of their net income, if any, determined in accordance with Chineseaccounting standards and regulations. Under Chinese law, those subsidiaries arealso required to set aside a portion, up to 10% of their after-tax net incomeeach year to fund certain reserve funds, and these reserves are notdistributable as dividends. Any limitation on the payment of fees by Weida PRCor dividends by our subsidiaries generally could materially adversely affectour ability to grow, fund investments, make acquisitions, pay dividends, andotherwise fund and conduct our business.

 

*If we are unable tomaintain Weida PRC’s VSAT license on acceptable terms, or at all, our businessand revenue, costs and expenses and financial condition would be seriouslyharmed.*

 

Weida PRC currently holds a VSAT satellitelicense in the PRC for a limited period, ending in 2006. The scope of thelicense permits the offer and sale of a variety of broadband satellitecommunications services, including audio and video services, Internetconnectivity, multimedia services, HDTV, and VOIP. The license granted providesWeida PRC the opportunity to develop and deliver such satellite communicationsin China. Weida PRC is licensed to provide services in the rapidly growing VOIPtelephone service market, and to provide such services as a phone operator.Although we believe Weida PRC’s VSAT license will be renewed when its currentterm expires, there can be no assurance that we will be able to renew WeidaPRC’s current VSAT license on acceptable terms, or at all, which would severelyharm our business and revenue, costs and expenses and financial condition, andwould require us to make radical changes in our business plans and operations.

 

*The markets in whichwe expect to operate are characterized by rapid technological changes andfrequent new products and service introductions.  We may not be able to keep up with these rapid technological andother changes.*

 

We expect to operate in several markets, each characterized by rapidlychanging technology and evolving industry standards.  The introduction of products embodying new technology and theemergence of new industry standards can render existing products obsolete andunmarketable and can exert price pressures on existing products.  We anticipate that a number of existing andpotential competitors will be introducing new and enhanced products that couldadversely affect the competitive position of our products.

 

Our ability to anticipate changes in technology and industry standardsand to successfully develop and introduce new, enhanced and competitiveproducts, on a timely basis, in all the markets where we

 

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operate, will be a critical factor in our ability to grow and becompetitive.  As a result, we expect tocontinue to make significant expenditures on research and development. Frequentnew products and service introductions could require substantial modificationand customization of our current products and business models, as well as theintroduction of new products.  Customeracceptance of these new technologies may be slower than we anticipate.  We cannot assure you that the market ordemand for our products and services will grow as rapidly as we expect, or ifat all, that we will successfully develop new products and services orintroduce new applications for existing products and services, that such newproducts and services will achieve market acceptance or that the introductionof new products and services or technological developments by others will notrender our products and services obsolete. In addition, our products and services must readily integrate with ourcustomers.  Our inability to developproducts that are competitive in technology and price and responsive tocustomer needs could have a material adverse effect on our business, financialcondition and results of operations.

 

*If we lose our keysuppliers, our business may suffer.*

 

Certain components and subassemblies that are used in the manufactureof Weida PRC’s existing products are purchased from a single or a limitednumber of suppliers.  In the event thatany of these suppliers are unable to meet our requirements in a timely manner,we may experience an interruption in production until an alternative source ofsupply can be obtained.  Any disruption,or any other interruption of a supplier’s ability to provide components to us,could result in delays in making product shipments, which could have a materialadverse effect on our business, financial condition and results ofoperations.  In addition, some of ourmajor suppliers use proprietary technology and software code that could requiresignificant redesign of our products in the case of a change in vendor.  Further, if suppliers discontinue theirproducts, or modify them in manners incompatible with our current use, or usemanufacturing processes and tools that could not be easily migrated to othervendors, we could have significant delays in product availability, which wouldhave a significant adverse impact on our results of operations and financialcondition.   Although Weida PRCgenerally maintains an inventory for some of our components and subassembliesto limit the potential for an interruption, and we believe that we can obtainalternative sources of supply in the event our suppliers are unable to meet ourrequirements in a timely manner, we cannot assure you that our inventory andalternative sources of supply would be sufficient to avoid a materialinterruption or delay in production.

 

*We may fail tosupport our anticipated growth in operations, which could reduce demand for ourproducts and services and could materially adversely affect our revenue.*

 

Our business strategy is based on the assumption that the number ofsubscribers to our products and services, the amount of information they wantto receive and the number of products and services we offer will all increase.We must continue to develop and expand our systems and operations toaccommodate this growth.  We may beunable to expand our operations for one or more of the following reasons:

 

•                  we may not beable to locate or hire at reasonable compensation rates qualified engineers andother employees necessary to expand our capacity;

 

•                  we may not beable to obtain or develop the hardware necessary to expand our capacity; and

 

•                  we may not beable to expand our required support systems.

 

The ability of our systems and operations to connect and manage asubstantially larger number of customers while maintaining superior performanceis uncertain. Any failure on our part to develop and maintain our products andservices as we experience rapid growth could significantly reduce demand forour products and services and materially adversely affect our revenue.

 

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*Our ability to sellnew and existing products and services at a profit could be impaired bycompetitors.*

 

Intense competition exists in the market for the products and serviceswe offer, with a large number of competitors, many of which have establishedmarket recognition. Our competitors may use the same products and services incompetition with us. With time and capital, it would be possible forcompetitors to replicate our products and services. Our competitors may havesignificantly greater resources than we do. Furthermore, competitors may develop a different approach to marketingthe products and services we provide. Competition could reduce our market shareor force us to lower prices to unprofitable levels.

 

*We depend onrecruiting and retaining key management and technical personnel and we may notbe able to develop new products and services or support existing products andservices if we cannot hire or retain qualified employees.*

 

Because of the technical nature of our products and services and thedynamic market in which we compete, our performance depends on attracting andretaining key employees. Competition for qualified personnel in our industry isintensifying and finding qualified personnel with experience may be difficultin the years to come.  There can be noassurance that we will be able to successfully recruit and integrate newemployees.  This difficulty may beexacerbated if we fail to make progress in achieving our business goals.Competitors and others have in the past attempted, and may in the futureattempt, to recruit our employees. An inability to attract and retain highlyqualified employees may have an adverse effect on our ability to develop new productsand services and enhancements for existing products and services and tosuccessfully market such products and services, all of which would likely havea material adverse effect on our results of operations and financial position.  Our success also depends, to a significantextent, upon the continued service of a number of key management, sales,marketing and technical employees, the loss of whom could materially adverselyaffect our business, financial condition and results of operations.

 

*Undetected problemsin our products could directly impair our financial results.*

 

If flaws in design, production, assembly or testing of our products (byus or our suppliers) were to occur, we could experience a rate of failure inour products that would result in substantial repair, replacement or servicecosts and potential liability and damage to our reputation.  There can be no assurance that our effortsto monitor, develop, modify and implement appropriate test and manufacturingprocesses for our products will be sufficient to permit us to avoid a rate offailure in our products that results in substantial delays in shipment,significant repair or replacement costs or potential damage to our reputation,any of which could have a material adverse effect on our business, results ofoperations and financial condition.

 

*We may not be ableto adequately protect our intellectual property, which could cause us to beless competitive.*

 

We rely on a combination of copyright, trademark and trade secret lawsand restrictions on disclosure to protect our intellectual property rights.Despite our efforts to protect our proprietary rights, unauthorized parties mayattempt to copy or otherwise obtain and use our technology. Monitoringunauthorized use of our products is difficult and costly, and we cannot becertain that the steps we have taken will prevent misappropriations of ourtechnology, particularly in countries where the laws may not protect ourproprietary rights as fully as in other countries such as the United States.From time to time, we may have to resort to litigation to enforce ourintellectual property rights, which could result in substantial costs anddiversion of our resources.

 

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*We may be exposed toinfringement claims by third parties, which, if successful, could cause us topay significant damage awards.*

 

Third parties may initiate litigation against us alleging infringementof their proprietary rights. In the event of a successful claim of infringementand our failure or inability to develop non-infringing technology or licensethe infringed or similar technology on a timely basis, our business could beharmed. In addition, even if we are able to license the infringed or similartechnology, license fees could be substantial and may adversely affect ourresults of operations.

 

*Terrorist activities, international conflictsand acts of war may seriously harm our business and revenue, costs and expensesand financial condition.*

 

Terrorist activities or acts of war (wherever located around the world)may cause damage or disruption to us, our employees, facilities, partners,suppliers, distributors or customers, which could significantly impact ourrevenue, costs and expenses and financial condition. The terrorist attacks thattook place in the United States on September 11, 2001 and subsequentterrorist attacks in other countries have created many economic and politicaluncertainties, some of which may materially harm our business and results ofoperations. The potential for future terrorist attacks, the national andinternational responses to terrorist attacks or perceived threats to nationalsecurity, and other actual or potential conflicts or acts of war, including theongoing military operations in Afghanistan and Iraq as well as the threat ofconflict with North Korea, have created many economic and politicaluncertainties that could adversely affect our business, results of operationsand stock price in ways that we cannot presently predict. We are predominantlyuninsured for losses and interruptions caused by terrorist activities and actsof war. Any political, economic or other instability in the United States,Taiwan or China in particular could adversely affect our suppliers and ourbusiness.

 

*We will continue toincur increased costs as a result of being a public company subject to theSarbanes-Oxley Act of 2002, as well as new rules implemented by the Securitiesand Exchange Commission, and our new management faces challenges inimplementing those requirements.*

 

As a public company, we incur significant legal, accounting and otherexpenses. In addition, the Sarbanes-Oxley Act of 2002, as well as new rulessubsequently implemented by the Securities and Exchange Commission (“SEC”), hasrequired changes in corporate governance practices of public companies. Weexpect these new rules and regulations to increase our legal and financialcompliance costs and to make some activities more time-consuming and costly.For example, as a result of the Sarbanes-Oxley Act and related rules adopted bythe SEC, we have created additional board committees and are adoptingcomprehensive new policies regarding internal controls and disclosure controlsand procedures. We are currently evaluating and monitoring developments with respectto these new rules, and we cannot predict or estimate the amount of additionalcosts we may incur, particularly those relating to implementation of newrequirements relating to assessment of internal controls, or the timing of suchcosts.

 

The burdens placed upon us by these requirements and changes inregulations on our new management following the share exchange are substantial.These burdens will increase even further as a result of our acquisition ofcontrol of, and a 51% profit-sharing interest in, Weida PRC. Therefore, wecannot predict with certainty our ability to achieve and maintain compliancewith all requirements at acceptable levels of cost and management attention.

 

*Together, a limitednumber of shareholders currently own a substantial percentage of our commonstock, and could significantly influence matters requiring shareholderapproval.*

 

Currently, ten of our shareholders own, collectively, approximately 50%of our outstanding common stock. If these shareholders act together, they wouldbe able to control virtually all matters

 

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requiring shareholder approval, including the election of directors andthe determination of significant corporate actions. This concentration ofownership may depress our stock price or delay or prevent a change in controlthat may otherwise be beneficial to our shareholders.

 

**Risks Related to thePRC**

 

*China’s economic,political and social conditions, as well as government policies, could affectour business.*

 

Substantially all of the assets owned by Weida PRC are located in Chinaand substantially all of our revenues will be derived from Weida PRC’soperations in China. Accordingly, our results of operations and prospects aresubject, to a significant degree, to economic, political and legal developmentsin China. The economy of China differs from the economies of most developedcountries in many respects, including:

 

•                  the extent ofgovernment involvement;

 

•                  economicstructure;

 

•                  level of capitalreinvestment;

 

•                  its level ofdevelopment;

 

•                  inflation rates;

 

•                  its growth rate;and

 

•                  its control offoreign exchange.

 

The economy of China has been transitioning from a planned economy to amore market-oriented economy. Although in recent years the Chinese governmenthas implemented measures emphasizing the utilization of market forces foreconomic reform, the reduction of state ownership of productive assets and theestablishment of sound corporate governance in business enterprises, asubstantial portion of productive assets in China is still owned by the Chinesegovernment. In addition, the Chinese government continues to play a significantrole in regulating industrial development. It also exercises significantcontrol over China’s economic growth through the allocation of resources,controlling payment of foreign currency-denominated obligations, settingmonetary policy and providing preferential treatment to particular industriesor companies.

 

While China’s economy has experienced significant growth in the pasttwenty years, growth has been uneven across both geographic regions and thevarious sectors of the economy. The Chinese government has implemented variousmeasures to encourage economic growth and guide the allocation of resources.Some of these measures benefit the overall economy of China but may have anegative effect on us. For example, our operating results and financialcondition could be materially and adversely affected by government monetarypolicies, changes in interest rate polices, tax regulations or policies andregulations affecting the securities markets and asset management industry.

 

*Extensive governmentregulation of the telecommunications industry may limit our flexibility inresponding to market conditions, competition or changes in our cost structure.*

 

The telecommunications business in China is subject to extensivegovernment regulation. The Ministry of Information Industry, which is theprimary telecommunications industry regulator under China’s State Council,regulates, among other things:

 

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•                  industrypolicies and regulations;

 

•                  licensing;

 

•                  tariffs;

 

•                  competition;

 

•                  telecommunicationsresource allocation;

 

•                  servicestandards;

 

•                  technicalstandards;

 

•                  interconnectionand settlement arrangements; and

 

•                  universalservice obligations.

 

Other Chinese governmental authorities also take part in regulatingtariff policies, capital investment and foreign investment in thetelecommunications industry. Major capital investments, includingtelecommunications network development projects, are subject to the approval ofrelevant Chinese government authorities. The regulatory framework within whichwe will operate may constrain our ability to implement our business strategiesand limit our flexibility to respond to market conditions or to change our coststructure.

 

*Future changes tothe regulations and policies governing the telecommunications industry in Chinamay have a material adverse effect on our business and operations.*

 

Possible future changes to regulations and policies of the Chinesegovernment governing the telecommunications industry could adversely affect ourbusiness and operations. For example, to provide a uniform regulatory frameworkfor the orderly development of the telecommunications industry, the Chinesegovernment is currently preparing a draft telecommunications law. If and whenthe telecommunications law is adopted by the Standing Committee of the NationalPeople’s Congress, it is expected to provide a new regulatory framework fortelecommunications regulation in China. The contents of the drafttelecommunications law have not yet been made public. While we expect that thetelecommunications law will have an overall positive effect on the developmentof the telecommunications industry in China, we cannot be certain how this lawwill affect our own business and operations. If it should contain provisionsmore stringent than the current telecommunications regulations, our ability tocarry out our business plan could be adversely affected.

 

*The legal system inChina has inherent uncertainties that could limit the legal protectionsavailable to us.*

 

Our equity interest in Weida PRC will be held through a joint ventureorganized under the laws of China and will be governed by its articles ofassociation. The Chinese legal system is based on written statutes. Prior courtdecisions may be cited for reference but are not binding on subsequent casesand have limited precedential value. Since 1979, the Chinese legislative bodieshave promulgated laws and regulations dealing with such economic matters asforeign investment, corporate organization and governance, commerce, taxationand trade. However, because these laws and regulations are relatively new, andbecause of the limited volume of published decisions and their non-bindingnature, the interpretation and enforcement of these laws and regulationsinvolve uncertainties.  Theseuncertainties could limit the legal protections available to foreign investors,including us.  In addition, the PRC mayenact new laws or amend current laws that may be detrimental to our currentcontractual arrangements with Weida PRC, which may in turn have a materialadverse effect on our business operations.

 

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*You may experiencedifficulties in effecting service of legal process or enforcing foreignjudgments based on United States or other foreign law.*

 

Weida PRC is a company incorporated under the laws of China, andsubstantially all of the assets of Weida PRC are located in China.  In addition, some members of management ofWeida PRC reside within China, and substantially all of the assets of thesepersons are located within China. As a result, it may not be possible to effectservice of process within the United States or elsewhere outside China upon ourmanagement, including with respect to matters arising under United Statesfederal securities laws or applicable state securities laws.  Moreover, China does not have treatiesproviding for the reciprocal recognition and enforcement of judgments of courtswith the United States or many other countries. Furthermore, Hong Kong has noarrangement for the reciprocal enforcement of judgments with the UnitedStates.  As a result, recognition andenforcement in China or Hong Kong of judgments of a court in the United Statesand many other jurisdictions in relation to any matter may be difficult orimpossible.

 

*Government controlof currency conversion may adversely affect our operations and financialresults.*

 

We will receive substantially all of our revenues in Renminbi, whichcurrently is not a freely convertible currency. A portion of these revenues mayhave to be converted into other currencies to meet our foreign currencyobligations. These foreign currency-denominated obligations include:

 

•                  payment ofinterest and principal on foreign currency-denominated debt;

 

•                  payment forequipment and materials purchased offshore; and

 

•                  payment of anydividends we may declare on our shares.

 

Under China’s existing foreign exchange regulations, followingcompletion of the acquisition of a controlling equity interest in Weida PRC, wewill be able to pay dividends in foreign currencies without prior approval fromthe State Administration of Foreign Exchange by complying with certainprocedural requirements. However, the Chinese government may take measures atits discretion in the future to restrict access to foreign currencies forcurrent account transactions if foreign currencies become scarce in China. Wemay not be able to pay dividends in dollars or other foreign currencies to ourshareholders if the Chinese government restricts access to foreign currenciesfor current account transactions.

 

Foreign exchange transactions under our capital account, includingforeign currency-dominated borrowings from Chinese or foreign banks andprincipal payments in respect of foreign currency-denominated obligations,continue to be subject to significant foreign exchange controls and require theapproval of the State Administration of Foreign Exchange. These limitationscould affect our ability to obtain foreign exchange through debt or equityfinancing, or to obtain foreign exchange for capital expenditures.

 

*Fluctuation of theRenminbi could materially affect our financial condition and results ofoperations.*

 

The value of the Renminbi fluctuates and is subject to changes inChina’s political and economic conditions. Since 1994, the conversion ofRenminbi into foreign currencies, including United States and Hong Kongdollars, has been based on rates set by the People’s Bank of China, which areset daily based on the previous day’s interbank foreign exchange market ratesand current exchange rates on the world financial markets. Since 1994, theofficial exchange rate for the conversion of Renminbi to United States dollarshas generally been stable. However, any devaluation of the Renminbi couldadversely affect the value of, and dividends, if any, payable on shares of ourcapital stock in foreign currency terms, since we will receive substantiallyall of our revenues in Renminbi. Fluctuations in exchange rates could alsoadversely affect the value, translated or converted into United States or HongKong dollars, of our net assets, earnings and any declared dividends.  Our financial condition and results ofoperations may also be

 

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adversely affected by changes in the value of certain currencies inwhich our obligations are denominated. In particular, a devaluation of theRenminbi is likely to increase the portion of our cash flow required to satisfyany foreign currency denominated obligations.

 

*Any future outbreakof Severe Acute Respiratory Syndrome (SARS) or any other epidemic in China mayhave a material adverse effect on our business operations, financial conditionand results of operations.*

 

From December 2002 to June 2003, China and certain othercountries experienced an outbreak of a new and highly contagious form ofatypical pneumonia now known as SARS. On July 5, 2003, the World HealthOrganization declared that SARS had been contained. However, in recent months,a few new cases of SARS have been reported in Asia since the initial outbreakof SARS was declared contained on July 5, 2003. An outbreak in the futuremay disrupt our business operations and have a material adverse effect on ourfinancial condition and results of operations. For instance, a new outbreak ofSARS or any other epidemic may reduce the level of economic activity inaffected areas, which may lead to a reduction in our revenue if our clientscancel existing contracts or defer future expenditures. In addition, health orother government regulations may require temporary closure of our offices, orthe offices of our customers or partners, which will severely disrupt ourbusiness operations and have a material adverse effect on our financialcondition and results of operations. Though Weida PRC took some emergencymeasures during the SARS outbreak in 2003, we have not adopted any writtenpreventive measures or contingency plans to combat any future outbreak of SARSor any other epidemic.

 

**Risks Related to OurCommon Stock**

 

*Sales of largeamounts of our common stock in the public market could depress the market priceof our common stock and impair the ability to raise capital through offeringsof equity securities.*

 

None of the shares of our common stock issued to SCL’s shareholders inthe share exchange were, and none of the shares of our common stock sold andissuable to investors and advisors in recent private placement transactions orto the former OIHL shareholders will be, registered under the Securities Act.Accordingly, most of our shareholders will not be able to sell their sharesunless they are later registered or covered by an available exemption such asRule 144. As a result of these restrictions, the market for our common stockhas remained “thin” for some time, with trading in the shares limited toapproximately 825,000 shares (excluding shares subject to a one-year lockup).  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 of the 69,809,480 shares issued toSCL’s shareholders in the exchange will be eligible to sell up to 1% of ouroutstanding common stock every three months commencing June 11, 2005, andeach of the future holders of shares of our common stock sold and issuable toinvestors and advisors in recent private placement transactions or to theformer OIHL shareholders will be eligible to sell up to 1% of our outstandingcommon stock every three months commencing 12 months after those shares areissued (subject in each case to the restrictions on volume, manner of sale andother conditions of Rule 144). SCL shareholders who received shares of ourcommon stock in the exchange and who are not “affiliates” of the Company willbe 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 commonstock commencing 24 months after those shares are issued. The number of shareseligible to be sold could be substantially increased if we determine toregister shares held by one or more holders of shares of common stock. The saleor prospective sale of these shares could impede the ability to raise capitalfor some time to come.

 

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*As a stock quoted onthe OTCBB, our common stock currently has limited liquidity.*

 

Holders of shares of our common stock, which are quoted on the OTCBB,may find that the liquidity of our common stock is impaired as compared withthe liquidity of securities listed on NASDAQ or one of the national or regionalexchanges in the United States. This impairment of liquidity may result fromreduced coverage by security analysts and news media of the Company and lowerprices for our common stock than might otherwise be attained.

 

Although we have applied for listing of our securities on NASDAQ, wecannot give you assurance as to when our application for listing will beapproved, if at all.

 

*Our common stock hasin the past been subject to the SEC’s “penny stock” rules which may limit itsliquidity.*

 

Our common stock has in the past been subject to the SEC’s “pennystock” rules. Penny stocks generally are equity securities that are notregistered on certain national securities exchanges or quoted by NASDAQ andhave a price per share of less than $5.00. Penny stocks are subject to “pennystock rules” that impose additional sales practice requirements onbroker-dealers who sell the stocks to persons other than established customersand accredited investors. For transactions covered by these rules, thebroker-dealer must make a special suitability determination for the purchase ofsuch securities and obtain the purchaser’s written consent to the transactionprior to the sale. Prior to the sale, broker-dealers must also deliver to thepotential purchaser a disclosure schedule prescribed by the SEC describingthe penny stock market and disclose the commissions payable to both thebroker-dealer and the registered representative and current quotations for thesecurities. Finally, broker-dealers must deliver to penny stock investorsmonthly statements disclosing recent price information for penny stocks held inthe account and information on the limited market in penny stocks. Theseadditional requirements restrict the ability of broker-dealers to sell ourcommon stock and make it more difficult for investors to dispose of our commonstock in the secondary market.

 

*The market price andmarketability of our common stock may not improve, and may even decrease.*

 

Currently, our common stock is thinly traded on the OTCBB. The marketprice and marketability of our common stock will depend on many factors, someof which will be outside our control. We cannot assure you that the marketprice per share of our common stock in the future will remain the same, equalor exceed the market price immediately after the share exchange.

 

*Our stock price maybe volatile, and you may not be able to resell shares of our common stock at orabove the price you paid, or at all.*

 

The trading price of our common stock could be subject to widefluctuations due to the factors discussed in this risk factors section andelsewhere in this report. In addition, the stock market in general, andtechnology companies in particular, have experienced extreme price and volumefluctuations. The average trading volume of our common stock is low, andcurrent trading prices and valuations may not be sustainable. These broadmarket and industry factors may decrease the market price of our common stock,regardless of our actual operating performance. In addition, in the past,following periods of volatility in the overall market and the market price of acompany’s securities, securities class action litigation has often beeninstituted against companies that have experienced significant declines inshare prices. This type of litigation, if instituted against us, could resultin substantial costs and a diversion of our management’s attention andresources.

 

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**ITEM2.****     PROPERTIES**

 

We maintain our principal executive offices at 515 Las Olas Boulevard,Suite 1350, Fort Lauderdale, Florida 33301 through leased office spaceconsisting of an aggregate of approximately 4,200 square feet. We believe thatthese facilities are adequate for our needs in the foreseeable future.

 

**Guangzhou WeidaCommunications Technology Co., Ltd.**

 

Weida PRC maintains offices in both Beijing and Suzhou.  Its principal executive offices are locatedat the 10th floor of building C in Binhe Mansion, No. 1 Che, Daogou, Haidian,Beijing 100089 through leased office space consisting of an aggregate ofapproximately 30,000 square feet. We believe that these facilities are adequatefor Weida PRC’s needs in the foreseeable future.

 

**ITEM3.****     LEGAL PROCEEDINGS**

 

Except as set forth below, there are no material legal proceedingspending to which we are a party or to which our property is subject. We aresubject to various claims that arise in the ordinary course of business. In theopinion of our board, the amount of any ultimate liability with respect tothese claims will not materially affect our financial position, liquidity orresults of operations.

 

An employee of SCL has recently asserted claims for unpaid salary inthe amount of $0.5 million and 3.3 million shares of SCL common stock based onan asserted employment agreement between him and SCL, and has indicated throughhis counsel that if terminated he will also assert a claim for severance in theadditional amount of $0.75 million. SCL’s management believes SCL hasmeritorious defenses to the claims, including that the employee in question didnot perform the services contemplated by the alleged agreement. A portion ofthe employee’s alleged unpaid salary had been and continues to be included inSCL’s financial statements as accounts payable.

 

SCL has commenced legal proceedings against the employee for breach ofcontract and declaratory relief and has given him notice of termination ofemployment. The employee has moved to compel arbitration of the matter.Litigation or arbitration proceedings with respect to the employee’s claims areprobable. There can be no assurance as to the outcome of any litigation orarbitration proceedings. Any adverse decision in such proceedings couldadversely affect the financial condition of SCL and/or the Company.

 

A shareholder and former chief financial officer of TeleflexTechnologies, Inc. (“Teleflex”), a currently inactive privately-held companywhich had attempted to pursue joint venture opportunities in China in late 2001and in 2002, and of which Mitchell Sepaniak, our President and Chief ExecutiveOfficer, was chief executive officer commencing early 2003, has recentlyasserted 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 profit and loss earnings statements. The former chief financialofficer has also asserted claims against SCL, Teleflex and Mr. Sepaniak forunpaid salary and compensation. The plaintiff’s claims and requests for reliefare not asserted against the Company, although the Company has been named as aparty by reason of its role as a party in the exchange offer with SCL. TheCompany has moved to dismiss the petition.

 

Litigation proceedings with respect to the plaintiff’s claims areprobable. The proceedings are at an early stage, and therefore there can be noassurance as to the outcome of such proceedings. Any adverse decision in suchproceedings could adversely affect the financial condition of SCL and/or theCompany.

 

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**Guangzhou WeidaCommunications Technology Co., Ltd.**

 

There are no material legal proceedings to which Weida PRC is a partyor to which any of its property is subject. Weida PRC is subject to variousclaims that arise in the ordinary course of business. In the opinion of ourboard, the amount of any ultimate liability with respect to these claims willnot materially affect our financial position, liquidity or results ofoperations.

 

**ITEM4.****     SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

The Company held a Special Meeting of Shareholders on June 10,2004 whereby the following actions were approved by shareholders holdingapproximately 67% of the Company’s then-outstanding common stock: (1) theCompany entering into the share exchange with SCL, (2) the Company changingauditors to Deloitte Touche Tohmatsu, (3) the Company changing its name fromLaser Recording Systems, Inc. to Weida Communications, Inc., and (4) theelection of Carl Lanzisera, Mitchell Sepaniak and Tilmon Holloway to serve asmembers of the board of directors.   Theresults of matters voted at that Special Meeting were reported in the Company’sCurrent Report on Form 8-K dated June 9, 2004, and filed with the SEC onJune 18, 2004.

 

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**PARTII**

 

**ITEM 5.****                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Price Range of OurCommon Stock**

 

Our common stock is traded on the Over-The-Counter Bulletin Board(“OTCBB”) under the symbol “WDAC.” The following table sets forth the range ofhigh and low closing sale prices for our common stock for the periods indicated(as adjusted to reflect the one-for-four reverse stock split that took effecton June 11, 2004):

 
|                                             |   | **High  Sale  Price** |   | **Low  Sale  Price** |   |
|--------------------------------------------------|--------|-----------------------|--------|----------------------|--------|
| ***Calendar2002:***                              |   |                  |   |                 |   |
| First Quarter                                    |   | $                     | 0.120  |                 | $      | 0.092 |   |
| Second Quarter                                   |   | $                     | 0.140  |                 | $      | 0.080 |   |
| Third Quarter                                    |   | $                     | 0.100  |                 | $      | 0.076 |   |
| Fourth Quarter                                   |   | $                     | 0.068  |                 | $      | 0.060 |   |
|                                             |   |                  |   |                 |   |
| ***Calendar 2003:***                             |   |                  |   |                 |   |
| First Quarter                                    |   | $                     | 0.080  |                 | $      | 0.068 |   |
| Second Quarter                                   |   | $                     | 5.200  |                 | $      | 0.080 |   |
| Third Quarter                                    |   | $                     | 4.680  |                 | $      | 2.560 |   |
| Fourth Quarter                                   |   | $                     | 3.600  |                 | $      | 1.440 |   |
|                                             |   |                  |   |                 |   |
| ***Calendar 2004:***                             |   |                  |   |                 |   |
| First Quarter                                    |   | $                     | 3.760  |                 | $      | 1.240 |   |
| Second Quarter                                   |   | $                     | 6.450  |                 | $      | 2.120 |   |
| Third Quarter (through September 17,  2004) |   | $                     | 6.100  |                 | $      | 5.050 |   |

 

On September 17, 2004, there were approximately 368 shareholdersof record of our common stock, and 72,334,486 shares issued and outstanding,which does not include (i) 1,661,245 shares of common stock to be issued toexisting and recent investors and advisors as of September 17, 2004, (ii)16,296,296 shares of common stock to be issued to the shareholders of OIHL and(iii) 3,014,526 shares of common stock to be issued upon exercise of issued andoutstanding warrants and warrants to be issued to existing and recent investorsas of September 17, 2004.

 

**Private Placements**

 

On June 18, 2004, we initiated a private placement transactionpursuant to which we sold through September 17, 2004 and will issue1,661,245 shares of our common stock, which includes 372,322 shares of ourcommon stock to be issued to advisors, at a price of $3.00 per share, andwarrants to purchase an additional 644,478 shares of our common stock at $2.75per share. The shares and warrant shares were sold and will be issued undercommon 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 to be issued to investors andadvisors were sold and will be issued pursuant to an exemption from theregistration requirements of the Securities Act pursuant to Regulation Dpromulgated thereunder.

 

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**ITEM 6.****                                                  SELECTEDHISTORICAL CONSOLIDATED FINANCIAL DATA**

 

The share exchange transaction between the Company and SCL inJune 2004 was accounted for similar to a reverse acquisition in which SCLis the accounting acquirer and the Company is the legal acquirer. As a resultof the share exchange transaction (i) the historical financial statements ofthe Company for periods prior to the date of the transaction are no longerpresented and (ii) the historical financial statements for periods prior to thedate of the transaction are those of SCL. Subsequent to June 30, 2004, the Company acquired control of and a51% profit-sharing interest in, Weida PRC through contractual arrangementsbetween the WOFE and Weida PRC, including a trust arrangement for the benefitof SCL with respect to 51% of the shares of Weida PRC. See Notes 1 and 9 to theConsolidated Financial Statements of the Company included elsewhere in thisreport.

 

The following selected financial data for the Company and Weida PRCshould be read in conjunction with our financial statements, the notes thereto,and Item 7, “Management’s Discussion and Analysis of Consolidated FinancialCondition and Results of Operations” appearing elsewhere in this report. Theselected statements of operations data for the Company for the six months endedJune 30, 2004, for the period from May 16, 2003 to June 30, 2003(unaudited) and for the period from May 16, 2003 to December 31, 2003, andthe selected balance sheet data for the Company as of June 30, 2004 andDecember 31, 2003, are derived from our audited and unaudited financialstatements included elsewhere in this report. The selected statements ofoperations data for Weida PRC for the six months ended June 30, 2004 and June 30,2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001,and the selected balance sheet data for Weida PRC as of June 30, 2004,June 30, 2003 (unaudited) and December 31, 2003, 2002 and 2001 arederived from Weida PRC’s audited and unaudited financial statements includedelsewhere in this report.

 

**Weida Communications, Inc.**

 

*Statement ofOperations Data*

 
|               |   | **Six Months  Ended  June 30, 2004** |   | **Period  From  May 16, 2003  (date of inception)  to June 30, 2003  (Unaudited)** |   | **Period  From  May 16, 2003  (date of inception)  to December 31, 2003** |   |
|--------------------|--------|-------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
|               |   | **US$**                                   |   | **US$**                                                                                 |   | **US$**                                                                        |   |
|               |   |                                      |   |                                                                                    |   |                                                                           |   |
| Operating expenses |   | (1,930,660                                | )      | (137,469                                                                                | )      | (1,180,702                                                                     | )      |
| Interest income    |   | 49,060                                    |   | —                                                                                  |   | 31,908                                                                         |   |
| Net loss           |   | (1,881,600                                | )      | (137,469                                                                                | )      | (1,148,794                                                                     | )      |

 

*Balance Sheet Data*

 
|                               |   | **As of  June 30, 2004** |   | **As of  December 31, 2003** |   |
|------------------------------------|--------|-------------------------------|--------|-----------------------------------|--------|
|                               |   | **US$**                       |   | **US$**                           |   |
|                               |   |                          |   |                              |   |
| Working capital                    |   | 36,014                        |   | (1,504,079                        | )      |
| Cash and cash-equivalents          |   | 1,617,845                     |   | —                            |   |
| Property, plant and equipment, net |   | 18,121                        |   | —                            |   |
| Total assets                       |   | 10,299,708                    |   | 6,929,966                         |   |
| Total liabilities                  |   | 2,545,189                     |   | 1,535,987                         |   |
| Accumulated deficit                |   | (3,030,394                    | )      | (1,148,794                        | )      |
| Stockholders’ equity          |   | 7,754,519                     |   | 5,393,979                         |   |

 

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**Guangzhou WeidaCommunications Technology Co., Ltd.**

 

*Statement ofOperations Data*

 
|            |   | **Six Months  Ended  June 30, 2004** |   | **Six Months  Ended  June 30, 2004** |   | **Six Months  Ended  June 30, 2003  (Unaudited)** |   |
|-----------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|--------------------------------------------------------|--------|
|            |   | **US$(1)**                                |   | **RMB**                                   |   | **RMB**                                                |   |
|            |   |                                      |   |                                      |   |                                                   |   |
| Revenue         |   | 56,669                                    |   | 469,023                                   |   | 712,108                                                |   |
| Cost of revenue |   | (868,115                                  | )      | (7,185,044                                | )      | (3,764,539                                             | )      |
| Operating loss  |   | (1,215,725                                | )      | (10,062,075                               | )      | (5,941,052                                             | )      |
| Net loss        |   | (1,320,513                                | )      | (10,929,367                               | )      | (6,646,195                                             | )      |

 

----

(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2766 RMB to the dollar.

 
|            |   | **January 1,  2003  to  December 31, 2003** |   | **January 1,  2002  to  December 31, 2002** |   | **April 2,  2001  to  December 31, 2001** |   |
|-----------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------|--------|-----------------------------------------------------|--------|
|            |   | **US$(1)**                                            |   | **RMB**                                               |   | **RMB**                                             |   | **RMB** |   |
|            |   |                                                  |   |                                                  |   |                                                |   |   |   |
| Revenue         |   | 158,134                                               |   | 1,310,517                                             |   | 537,427                                             |   | 448,718 |   |
| Cost of revenue |   | (1,308,903                                            | )      | (10,847,406                                           | )      | (2,821,249                                          | )      | (576,878 | ) |
| Operating loss  |   | (1,928,422                                            | )      | (15,981,601                                           | )      | (6,562,306                                          | )      | (2,319,933 | ) |
| Net loss        |   | (2,144,154                                            | )      | (17,769,459                                           | )      | (7,939,835                                          | )      | (3,269,912 | ) |

 

----

(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2874 RMB to the dollar.

 

*Balance Sheet Data*

 
|                                   |   | **As of  June 30, 2004** |   | **As of  June 30, 2004** |   | **As of  June 30, 2003  (Unaudited)** |   |
|----------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|--------------------------------------------|--------|
|                                   |   | **US$(1)**                    |   | **RMB**                       |   | **RMB**                                    |   |
|                                   |   |                          |   |                          |   |                                       |   |
| Working capital                        |   | (4,353,019                    | )      | (36,028,192                   | )      | (13,574,078                                | )      |
| Cash and cash-equivalents              |   | 54,009                        |   | 447,009                       |   | 1,974,918                                  |   |
| Property, plant and equipment, net     |   | 1,553,665                     |   | 12,859,052                    |   | 15,918,136                                 |   |
| Total assets                           |   | 3,001,335                     |   | 24,840,830                    |   | 55,243,571                                 |   |
| Bank debt                              |   | 2,416,451                     |   | 20,000,000                    |   | 40,000,000                                 |   |
| Total liabilities                      |   | 5,406,739                     |   | 44,749,403                    |   | 52,899,513                                 |   |
| Stockholders’ (deficiency) equity |   | (2,405,404                    | )      | (19,908,573                   | )      | 2,344,058                                  |   |

 

----

(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2766 RMB to the dollar.

 

27

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| ** **                             | ** ** | **As of December 31,** | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **2003**                    | ** ** | **2002**                    | ** ** | **2001** | ** ** |
| ** **                             | ** ** | **US$(1)**                  | ** ** | **RMB**                     | ** ** | **RMB** | ** ** | **RMB** | ** ** |
|                                   |       |                        |       |                        |       |   |   |   |   |
| Working capital                        |       | (4,416,609                  | )          | (36,602,206                 | )          | (218,038 | ) | 9,465,397 |   |
| Cash and cash-equivalents              |       | 65,443                      |       | 542,352                     |       | 721,096 |   | 5,892,872 |   |
| Property, plant and equipment, net     |       | 1,728,286                   |       | 14,323,000                  |       | 9,208,291 |   | 1,554,599 |   |
| Total assets                           |       | 4,524,369                   |       | 37,495,261                  |       | 33,347,945 |   | 43,678,767 |   |
| Bank debt                              |       | 4,826,604                   |       | 40,000,000                  |       | 20,000,000 |   | 25,000,000 |   |
| Total liabilities                      |       | 5,583,713                   |       | 46,274,467                  |       | 24,357,692 |   | 26,748,679 |   |
| Stockholders’ (deficiency) equity |       | (1,059,344                  | )          | (8,779,206                  | )          | 8,990,253 |   | 16,930,088 |   |

 

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(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2874 RMB to the dollar.

 
| **ITEM 7****.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------|

 

*The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our financial statements and notes thereto included elsewhere in thisreport. In addition to historical information contained herein, this discussionand analysis contains forward-looking statements. These statements involverisks and uncertainties and can be identified by the use of forward-lookingterminology such as “estimates,” “projects,” “anticipates,” “plans,” “future,”“may,” “should,” “predicts,” “potential,” “continue,” “expects,” “intends,”“believes,” and similar expressions. Examples of forward-looking statementsinclude those relating to the need for equity financing in order to consummatethe acquisition of legal ownership of an equity interest in Weida PRC, ourhistorical and likely future losses and our reliance on the provision ofVSAT-based communications services for the majority of our revenues. These andother forward-looking statements are only estimates and predictions. While webelieve that the expectations reflected in the forward-looking statements arereasonable, our actual results could differ materially due to a number offactors, including the risk factors set forth elsewhere in this report. Readersare cautioned not to place undue reliance on these forward-looking statements,which reflect management’s expectations only as of the date hereof.*

 

**Overview**

 

We are a United States-managed company that is participating in thefast-growing China telecommunications market through control of and a 51%profit-sharing interest, and our planned 51% combined equity ownership andprofit-sharing interest, in the only wholly privately-owned company in China****holding licenses for bi-directional VSATcommunications (the only other privately-owned company recently holding alicense was merged into a joint government venture in January 2004). WeidaPRC’s satellite operations in China provide ground-based equipment and relatedservices to support government and corporate applications, including broadbandInternet access, remote meter monitoring, and mission-critical data backupsystems.

 

*Results of Operations*

 

We were established as SCL on May 16, 2003 to acquire an interest intelecommunications and related service entities in Asia. On April 29,2003, SCL entered into a master agreement with Weida PRC, as more fullydescribed elsewhere in this report. SCL has had no sources of revenue, and itsoperations prior to September 2004 have been limited to activities tocomplete the transaction with Weida PRC. For the period from date of inception to June 30, 2004, SCLincurred total operating expenses of $3,111,362, and deferred acquisition costsof $5,704,004.

 

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*Professional, General and Administrative Expenses*

 

Operating expenses totaled $3,111,362 from inception to June 30,2004. These expenses reflect the expected one time costs associated with thenegotiation and execution of the share exchange agreement and share exchangebetween the Company and SCL. 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 SCL as well as their advisors.

 

*Liquidity and Capital Resources*

 

As shown in the consolidated financial statements, at June 30,2004 (following the consummation of the share exchange) we had positive workingcapital of approximately $0.04 million and an accumulated deficit ofapproximately $3.0 million. Since SCL’s formation in May 2003, we have fundedall of our operating expenses and deficit from the net proceeds of privateplacements of our shares and warrants to private investors and, to a lesserextent, from shareholder loans.

 

At June 30, 2004, we had total consolidated assets ofapproximately $10.3 million. Included in total assets is a promissory noteissued by Glendora Management Ltd. (“Glendora”), a British Virgin Islandscorporation, to SCL in the amount of $2.2 million. Certain of Glendora’sshareholders are also shareholders of the Company. Borrowings under the notebear interest at the London Interbank Offered Rate plus 200 basis points(effective rate of 4.46% at June 30, 2004), with interest and principaldue five years from the date of the note. Glendora has granted to SCL asecurity interest in and to certain of its property and assets as collateralfor repayment of the note. The carrying amount of this note receivableapproximates its fair value.

 

Additionally, SCL and Glendora signed an assignment agreement wherebySCL has granted Glendora the rights to enter into a transaction with GuangzhouSuntek New Tech R&D Co., Ltd (“Suntek”), which was previously held by SCL.No value has been designated to the assignment agreement as it assigns theright to pursue a purchase agreement with Suntek and not a negotiated purchaseagreement.

 

Our current cash and cash equivalents and funding commitments describedbelow are not sufficient for us to sustain present operations beyond the thirdcalendar quarter of 2005. We will need additional funding to continueoperations as an ongoing entity. We are in the process of negotiating to raiseadditional private funding to satisfy these requirements. We are also inpreliminary negotiations with certain banking and financial institutions tosecure a corporate credit line.

 

Effective as of September 3, 2004, a credit facility for up to $5million has been made available to us by Anthony Giordano, a Companyshareholder, together with one of Mr. Giordano’s family limited partnerships,to fund the Company’s future operations. This credit facility is unsecured,bears interest on any funds advanced at a rate equal to the London InterbankOffered Rate plus 200 basis points, has no equity component, and terminates onOctober 31, 2005. For additional disclosure concerning Mr. Giordano, seeItem 12, “Security Ownership of Certain Beneficial Owners and Management–Mattersconcerning a beneficial shareholder.”

 

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**Guangzhou Weida Communications Technology Co., Ltd.**

 

*Revenue and Costs of Revenue*

 

Weida PRC, in which we recently acquired a 51% profit-sharing interestand control, and therefore will report its operating results on a consolidatedbasis with our own with effect from October 1, 2004, currently receivesrevenue from two sources, equipment sales and from satellite bandwidthprovision agreements. The following tables set forth the revenues in thesecategories and costs of revenues for each of the 6 months ended June 30,2004 and June 30, 2003 (unaudited), and for the 12 months endedDecember 31, 2003, the 12 months ended December 31, 2002 and for theperiod from April 2, 2001 through December 31, 2001:

 
| ** **                  | ** ** | **January 1, 2004  to  June 30, 2004** | ** ** | **January 1, 2003  to  June 30, 2003  (Unaudited)** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **USD(1)**                                       | ** ** | **RMB**                                                       | ** ** | **RMB** | ** ** |
| Revenue:                    |       |                                             |       |                                                          |       |   |   |
| Sales of equipment          |       | 42,030                                           |       | 347,863                                                       |       | 591,112 |   |
| Satellite bandwidth revenue |       | 14,639                                           |       | 121,160                                                       |       | 120,996 |   |
| Total revenue               |       | 56,669                                           |       | 469,023                                                       |       | 712,108 |   |
|                        |       |                                             |       |                                                          |       |   |   |
| Cost of revenue             |       | (868,115                                         | )          | (7,185,044                                                    | )          | (3,764,539 | ) |

 

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(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2766 RMB to the dollar.

 
| ** **                  | ** ** | **January 1, 2003  to  December 31, 2003** | ** ** | **January 1, 2002  to  December 31, 2002** | ** ** | **April 2, 2001  to  December 31, 2001** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **US$(1)**                                           | ** ** | **RMB**                                              | ** ** | **RMB**                                            | ** ** | **RMB** | ** ** |
| Revenue:                    |       |                                                 |       |                                                 |       |                                               |       |   |   |
| Sales of equipment          |       | 121,744                                              |       | 1,009,189                                            |       | 418,803                                            |       | 448,718 |   |
| Satellite bandwidth revenue |       | 36,360                                               |       | 301,328                                              |       | 118,624                                            |       | — |   |
| Total revenue               |       | 158,134                                              |       | 1,310,517                                            |       | 537,427                                            |       | 448,718 |   |
|                        |       |                                                 |       |                                                 |       |                                               |       |   |   |
| Cost of revenue             |       | (1,308,903                                           | )          | (10,847,406                                          | )          | (2,821,249                                         | )          | (576,878 | ) |

 

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(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2874 RMB to the dollar.

 

Equipment sales are primarily VSAT equipment. Revenue is recognizedwhen the equipment is delivered, title has passed to the customers and WeidaPRC has no further obligations to provide services related to the operation of theequipment.

 

Revenue fromsatellite bandwidth provision agreements is recognized on a straight-line basisover the period of the agreements. The excess of the amounts received orreceivable from customers over the revenue recognized is included in accruedexpenses and other payables, and amounted to RMB 338,920 (US$40,949) and RMB130,480 at June 30, 2004 and June 30, 2003 (unaudited), respectively,and RMB 389,280 (US$46,973) and RMB 14,400 at December 31, 2003 andDecember 31, 2002, respectively.

 

During 2001 and 2002 Weida PRC was demonstrating to its customers thatits network and technology was operational and competitive. During 2002 revenuefrom equipment sales remained flat compared with 2001 while market demand forsatellite bandwidth increased due to network sharing of equipment by some ofWeida PRC’s customer base. As Weida PRC’s system and equipment sales efforts

 

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produced positive results, Weida PRC’s current customer base addedadditional equipment and utilization increased respectively.  Weida PRC did not sell additional equipmentduring that timeframe while it focused on implementing and operating in a betadevelopment phase with China Telecom.

 

During 2001and 2002 Weida PRC was offering special discounts to achieve a statisticalsample set to prove its product capability. In addition, during the first threequarters of 2002 Weida PRC intentionally did not accept orders until they hadobtained a significant statistical sample of production volume and servicequeries to make appropriate adjustments and enhancements before it would acceptadditional customers. As Weida PRC’s results from positive tests in the fieldand actual production continued to mount, Weida PRC’s revenue increased to RMB1,310,517 (US$158,134) in 2003 compared with revenues of RMB 537,427 in 2002,reflecting increases in both equipment sales and satellite bandwidth revenue.However, revenues decreased in the six months ended June 30, 2004 to RMB469,023 (US$56,669) compared with RMB 712,108 in the 6 months endedJune 30, 2003 a result of the beta development phase that Weida PRC wasimplementing with China Telecom. Utilization will consistently lag behindequipment purchases, as Weida PRC’s accounts require an average of three to sixmonths to integrate systems, test protocols with internal software and runquality assurance programs.

 

With any start up, in order to obtain distribution an organization mustprove they can deliver what they promise. The satellite communications marketis no exception to this rule. Weida PRC needed to obtain a customer base toprove that its technology and service were sound, worked and reliable. Toentice customers to take a risk and work with a new provider, Weida PRC neededto offer its customers equipment and service contracts at a highly competitiveand relatively low price point that would allow Weida PRC to enter the market.These service offerings were required to allow Weida PRC opportunities to proveits capability, but adversely affected revenues. Having now established itselfas a viable supplier of equipment and a qualified service provider, Weida PRCintends to eliminate its current early stage pricing structure and move to itsoperating plan pricing, which calls for increases in product equipment pricingand utilization pricing with the goal of achieving gross margins above 50% onsales for 2005 for all new accounts and any existing accounts upon expirationof the related satellite bandwidth provision agreements, which typically have a2 to 3 year term.

 

In addition, costs of revenues in 2002 were substantially higher as aresult of expenditures required to increase its bandwidth to meet anticipatedcustomer needs. Costs of revenues continued to increase dramatically in 2003 toRMB 10,847,406 (US$1,308,903), compared with RMB 2,821,249 in 2002, reflectingan increase in salaried employees and an expansion of Weida PRC’s facilities.Cost of revenue in the six months ended June 30, 2004 was RMB 7,185,044(US$868,155) compared with RMB 3,764,539 in the six months ended June 30,2003 because of an increase in the amount of infrastructure equipment deployedas well as an increase in the bandwidth needed for increased capacity.  Additionally Weida PRC is currently usingonly 5% of its bandwidth capacity, which adversely affects cost of revenues. AsWeida PRC adds additional customers this cost as a percentage can be expectedto decrease. In future periods depreciation expense will increase, reflectingthe increase in 2002 and 2003 in the capital expansion of the network and theasset levels resulting from that expansion.

 

*Operating Expenses*

 

Weida PRC’s operating expenses increased from RMB 2,191,773 in theperiod from April 2, 2001 (date of establishment) to December 31,2001, to RMB 4,278,484 in the 12 months ended December 31, 2002, and toRMB 6,444,712 (US$777,653) in the 12 months ended December 31, 2003.Similarly, operating expenses for the six months ended June 30, 2004increased to RMB 3,346,054 (US$404,279), compared with RMB 2,888,621 for thesix months ended June 30, 2003. These increases were related to increases in salaries associated withthe addition of employees in Weida PRC’s service department along withadditional employee and other costs relating to deployment and distribution.Weida PRC also realized increases in marketing expense and rent with theaddition of two network locations. This trend is expected to continue duringfiscal 2005, although it can be expected to decrease as a percent of sales.Weida PRC

 

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expects SG&A expenses to stabilize at lower levels (as a percentageof total revenue) by the end of fiscal year 2005.

 
| ** **         | ** ** | **January 1, 2004  to  June 30, 2004** | ** ** | **January 1, 2003  to  June 30, 2003  (Unaudited)** | ** ** |
|--------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **         | ** ** | **USD(1)**                                       | ** ** | **RMB**                                                       | ** ** | **RMB** | ** ** |
|               |       |                                             |       |                                                          |       |   |   |
| Operating expenses |       | (404,279                                         | )          | (3,346,054                                                    | )          | (2,888,621 | ) |

 

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(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2766 RMB to the dollar.

 
| ** **         | ** ** | **January 1, 2003  to  December 31, 2003** | ** ** | **January 1, 2002  to  December 31, 2002** | ** ** | **April 2, 2001  to  December 31, 2001** | ** ** |
|--------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **US$(1)**                                           | ** ** | **RMB**                                              | ** ** | **RMB**                                            | ** ** | **RMB** | ** ** |
|               |       |                                                 |       |                                                 |       |                                               |       |   |   |
| Operating expenses |       | (777,653                                             | )          | (6,444,712                                           | )          | (4,278,484                                         | )          | (2,191,773 | ) |

 

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(1)          Convenience translation into United Statesdollars, based on an exchange rate of 8.2874 RMB to the dollar.

 

*Liquidity and Capital Resources*

 

Weida PRC’s operations have been funded to date by both shareholderequity investment and shareholder loans, and bank loans. Weida PRC’s paid incapital reflects the approximately RMB 20 million direct investment byseveral founding shareholders in 2001.**** In addition, in 2001 Weida PRC obtained a bankloan for RMB 25 million, which was used for working capital and capitalexpenditures. The loan was repaid in April 2002.

 

Weida PRC’s cash position decreased by RMB 5.2 million during 2002as a result of equipment purchases and repayment of bank debt. In 2002, WeidaPRC obtained another bank loan for RMB 20 million, which was used forworking capital and capital expenditures. During the twelve months ended December 31,2003 Weida PRC incurred additional bank debt of RMB 40 million. Theseloans funded the repayment of RMB 20 million of earlier bank debt and alsofunded working capital needed for Weida PRC’s network and product inventoryneeds (RMB 13 million for advances and RMB 5 million for inventory).

 

During the six months ended June 30, 2004, Weida PRC’s bank debtdeclined from RMB 40 million to RMB 20 million as a result of meeting therepayment terms of the bank loan. Obtaining additional funding from Chinese banks became difficult becauseof the loan restrictions imposed upon these banks by the Chinese government. Asa partial replacement for these funds, Weida PRC increased its borrowings fromits shareholders and their affiliates by approximately RMB 9.8 million, andalso obtained advances of RMB 3.6 million from SCL. Cash and cash-equivalentsduring this period declined from approximately RMB 2 million to less than RMB0.5 million. The working capital deficiency decreased slightly fromapproximately RMB 36.6 million at December 31, 2003 to approximately RMB36.0 million (US$(4.4 million)) at June 30, 2004.

 

Weida PRC’s current cash and cash equivalents and credit facilities arenot sufficient for it to sustain present operations beyond the second calendarquarter of 2005. Weida PRC will need additional funding of at leastUS$35 million in 2005 to maintain and expand its network including thepurchase of additional earth

 

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stations to meet the China Telecom business requirements. Weida PRCanticipates utilizing and relying in large part on the Company’s potentialaccess to both private equity and public equity markets to obtain the necessaryfunding to satisfy these requirements, although it and the Company may seeksuch requirements other than through the Company. However, there is noassurance that such efforts will be successful in whole or in part, and theaudited consolidated financial statements of Weida PRC therefore reflect thatthere is substantial doubt about its ability to continue as a going concern.

 

**Management Changes**

 

On June 9, 2004, Walter J. Hinchcliffe resigned as a member of ourboard of directors.  This decision wasmade mutually by Mr. Hinchcliffe and the board of directors based on differencesregarding the future direction of the Company.

 

On June 10, 2004, the shareholders of the Company approved theelection of Mitchell Sepaniak, Tilmon Holloway and Carl Lanzisera as the newboard of directors of the Company following the share exchange.

 

On June 11, 2004, our board of directors approved the election ofMitchell Sepaniak as President, Chief Executive Officer and Chairman of theBoard of the Company; Joseph Zumwalt as Senior Vice President, Chief FinancialOfficer and Secretary of the Company; and Amanda Harmon as Vice President,Controller and Treasurer of the Company. On June 24, 2004, our board ofdirectors approved the election of Jack Chin as Vice President BusinessDevelopment of the Company. In July 2004, Ms. Harmon resigned from herpositions as Vice President, Controller and Treasurer of the Company, andterminated her employment with the Company.

 

On August 9, 2004, our board of directors approved the election ofJoseph Theismann and Shitotomo Yamauchi as additional members of the board ofdirectors of the Company.

 

**Critical accounting policies**

 

The preparation of our consolidated financial statements and relateddisclosures in conformity with generally accepted accounting principles in theUnited States requires management to make estimates and judgments that affectour reported amounts of assets and liabilities, revenues and expenses andrelated disclosures of contingent assets and liabilities. On an on-going basis,we evaluate our estimates and assumptions based upon experience and variousother factors and circumstances. Management believes that our estimates andassumptions are reasonable under the circumstances; however, actual results mayvary from these estimates and assumptions under different future circumstances.We have identified the following critical accounting policies that affect themore significant judgments and estimates used in the preparation of theconsolidated financial statements of the Company.

 

# ***Accruals and Provisions for LossContingencies***

# ** **

We make provisions for all loss contingencies when informationavailable to us prior to the issuance of the financial statements indicatesthat it is probable that an asset had been impaired or a liability had beenincurred at the date of the consolidated financial statements and the amount ofloss can be reasonably estimated.

 

For provisions or accruals related to litigations, we make provisionsbased on information from legal counsel and the best estimation of management.As discussed in Note 8 to the consolidated financial statements of the Company,we are involved in various legal proceedings and contingencies, and we have notyet recorded a liability in relation to an asserted claim by a former employeeof SCL. In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 5 Accounting for Contingencies, SFAS

 

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No. 5 requires a liability to be recorded based on our estimate of theprobable costs of the resolution of the contingency. The actual resolution ofthis contingency may differ from our estimates. If the contingency were settledfor an amount greater than our estimate, a future charge to income wouldresult. Likewise, if the contingency were settled for an amount that is lessthan our estimate, a future credit to income would result.

 

**Recently Issued Accounting Pronouncements**

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 150, Accounting for Certain Financial Instruments with Characteristicsof Both Liabilities and Equity, which establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth 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. 150 had no impact on the financial statementsas the Company did not have any financial instruments with characteristics ofboth liabilities and equity during the period ended December 31, 2003.

 

In April 2003, the FASB issued SFAS No. 149, Amendment ofStatement 133 on Derivative Instruments and Hedging Activities, which amendsand clarifies accounting for derivative instruments and for hedging activitiesunder SFAS No. 133. Specifically, SFAS No. 149 requires that contracts withcomparable characteristics be accounted for similarly. Additionally, SFAS No.149 clarifies the circumstances in which a contract with an initial netinvestment meets the characteristics of a derivative and when a derivativecontains a financing component that requires special reporting in the statementof cash flows.  This Statement isgenerally effective for contracts entered into or modified after June 30,2003 and did not have a significant impact on the Company’s financial positionor results of operations.

 

In January 2003, the FASB issued Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities (“FIN 46”) and, inDecember 2003, issued a revision to that interpretation (“FIN 46R”).  FIN 46R replaces FIN 46 and addressesconsolidation by business enterprises of variable interest entities thatpossess certain characteristics.  Avariable interest entity (“VIE”) is defined as (a) an ownership, contractual ormonetary interest in an entity where the ability to influence financialdecisions is not proportional to the investment interest, or (b) an entitylacking the invested capital sufficient to fund future activities without thesupport of a third party. FIN 46R establishes standards for determining underwhat circumstances VIEs should be consolidated with their primary beneficiary,including those to which the usual condition for consolidation does not apply.  The Company did not have any ownership in anyvariable interest entities as of June 30, 2004 or December 31, 2003.

 

**Contractual Obligations**

 

Asof June 30, 2004, our future contractual 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 purchaseobligations other than standard purchase orders in the ordinary course ofbusiness. We do not have any capital lease obligations or operating leaseobligations.

 

(2)                   Our long-term obligations areprimarily comprised of a long-term loan from a shareholder.  The shareholder has indicated that he willnot seek repayment prior to July 2005. Although there is no commitment that the loan will be repaid in2007-2008, our board of directors believes the loan will be repaid during suchtime period.

 

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**Off-Balance Sheet Arrangements**

 

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

 

•                  $805,153 in cashto the Weida PRC shareholders, which payment shall also be deemed to satisfyour obligation to contribute a capital contribution to the Weida EJV (whichpayment has been deposited and is reserved for payment); and

 

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

 

These payments are required to be made only if the conditions to theformation of the Weida EJV discussed elsewhere in this report have beencompleted and the Weida EJV has been formed and has a valid business licenseshowing SCL’s 25% equity ownership.

 

**ITEM 7A.****                                            QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**Market-Rate Sensitive Instruments and Risk Management**

 

We are exposed to certain market risks from transactions that areentered into during the normal course of business. Fluctuating foreign exchangerates for the Renminbi may impact our financial condition and results ofoperations.  Our foreign exchangeexposure is presently exclusively related to activities associated with WeidaPRC.  The Company does not attempt tomanage these risks by entering into forward exchange contracts.  We do not use derivative financialinstruments for speculative or trading purposes.  Therefore, no quantitative tabulardisclosures are required.

 

**ITEM 8.****                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Thefinancial statements and other financial information that are required by thisItem 8 are listed in Item 15 of Part IV. The financial statements andsupplementary financial information referenced in Item 15 are incorporated inthis Item 8 by reference.

 

**ITEM 9.****                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

A change in our certifying accountants was reported under Item 4 of ourCurrent Report on Form 8-K dated June 9, 2004, and filed with the SEC onJune 18, 2004.

 

**ITEM9A.****                                            CONTROLSAND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

Our management, with the participation of our principal executiveofficer and principal financial officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) asof the end of the period covered by this Annual Report on Form 10-K. Based onsuch evaluation, our principal executive officer and principal financialofficer have concluded, as of the end of such period, that our disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by us in ourreports that we file or submit under the Exchange Act.

 

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**Internal Control Over Financial Reporting**

 

We evaluate our internal control over financial reporting on a regularbasis. If we identify a problem in our internal control over financialreporting during the course of our evaluations, we consider what revision,improvement and/or correction to make in order to ensure that our internalcontrols 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 appropriate witha view towards making improvements.

 

We have made no changes during the fourth quarter of fiscal year 2004that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PARTIII**

 

**ITEM 10.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The following table sets forth the names, ages and positions of ourexecutive officers and directors as of September 17, 2004:

 
| **Name**                | ** ** | **Age** | ** ** | **Position**                                                 |
|-------------------------|------------|---------|------------|--------------------------------------------------------------|
| Mitchell Sepaniak (2)   |       | 47      |       | President, Chief Executive Officer and Chairman of the Board |
| Joseph Zumwalt          |       | 45      |       | Senior Vice President, Chief Financial Officer and Secretary |
| Jack Chin               |       | 69      |       | Vice President Business Development                          |
| Tilmon Holloway (1)     |       | 65      |       | Director                                                     |
| Carl Lanzisera (1)(2)   |       | 64      |       | Director                                                     |
| Joseph Theismann (1)    |       | 55      |       | Director                                                     |
| Shitotomo Yamauchi, PhD |       | 68      |       | Director                                                     |

 

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(1)          Messrs. Holloway, Lanzisera and Theismann aremembers of the audit committee.

(2)          Messrs. Sepaniak and Lanzisera are members ofthe compensation committee.

 

Mr. Sepaniak was appointed as our President, Chief Executive Officerand Chairman of the Board in June 2004. Mr. Sepaniak was a business consultant developing business plans forChina based companies from August 2001 until he founded SCL Ventures, Ltd.in May 2003. Prior to working as a consultant, Mr. Sepaniak was Senior VicePresident of Marketing with Healtheon/WebMD Corporation from January 1999to August 2001. Prior to serving with Healtheon/WebMD (HLTH), he was theSr. Executive VP of Marketing and Business Development for MedEAmericaCorporation from January 1998 to January 1999. From March 1996to January 1998, Mr. Sepaniak held the position of Sr. Vice President ofSales and Marketing with Automated Data Processing, (ADP), the largestoutsource payroll processing corporation in North America, where he wasresponsible for the marketing and sales activities with partner banks. Prior tothis position, he was the Executive Director of Marketing with National DataCorporation, where he managed all marketing activities in the Credit Card,Medical and International Treasury EDI markets. Previously, Mr. Sepaniak wasDirector of Marketing for Bausch & Lomb. He has over 20 years experience inglobal marketing of consumer, high-tech and medical/financial EDI ande-commerce markets.

 

Mr. Zumwalt was appointed as our Senior Vice President, Chief FinancialOfficer and Secretary in June 2004. Mr. Zumwalt has been Chief Operating Officer and Portfolio Manager ofBroadmoor Asset Management since May 2000. As COO, Mr. Zumwalt handled the day-to-day operations of Broadmoor.  As Portfolio Manager, Mr. Zumwalt has beeninstrumental in designing the asset allocation and economic models forBroadmoor. Prior to his joining Broadmoor, Mr. Zumwalt spent 21 years in thefinancial services industry with firms such as Prudential Bache Securities,Oppenheimer and Company and Southeast Bancorp as Vice President of MerchantBanking. Mr. Zumwalt also served as Executive Vice-President, InvestmentBanking to Morgenthau and Associates and as a Chief Financial Officer to WallStreet Review, Inc.

 

Mr. Chin was appointed as our Vice President Business Development inJune 2004.  Prior to joining theCompany, Mr. Chin was President of Dai Tong Co. Inc.  Prior to joining Dai Tong Co. Inc., Mr. Chinwas an executive partner at Plans Securities Investment, Inc. and prior tojoining Plans Securities Investment, Inc., Mr. Chin was a general partner andsecurities analyst at Hwa Hsing Investors, Inc.

 

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Mr. Holloway has served on our board of directors since June 2004.He has been President and Chief Executive Officer of Baptist Community Servicessince February 1996.

 

Mr. Lanzisera has served on our board of directors since August 1997.  Mr. Lanzisera served as President of theCompany from March 2003 to June 2004 and Treasurer of the Companyfrom August 1997 to June 2004. Since January 1999, he has been the President of FederatedSecurities, Inc., a registered broker dealer. Since July 2004, Mr.Lanzisera has been a member of the board of directors of Barricini FoodsInc.  From 1997 to 1998 he was branchmanager of an independent office of First Securities, Inc. Prior to that he wasbranch manager of an independent office of Myers Pollack & RobbinsSecurities. He has been registered with the NASD for more than 35 years and hasbeen a registered securities principal for 25 years.

 

Mr. Theismann has served on our board of directors sinceAugust 2004. He has served as an expert analyst for ESPN network coveringNational Football League games since 1988. Prior to joining ESPN, Mr. Theismannwas a professional football player from 1971 to 1985, playing in both theCanadian Football League and the National Football League.  Since 1975, Mr. Thiesmann has been thePresident of JRT Associates, Inc.  Mr.Theismann is also the owner and operator of a chain of restaurants bearing hisname and has served as chief executive officer of The Devils Inn, Inc. (d/b/aJoe Theismann’s Restaurant).

 

Dr. Yamauchi has served on our board of directors sinceAugust 2004. In 1998, Dr. Yamauchi founded KDL GmbH, a Tokyo-basedlicensing company for Pirfenidone, a drug used to treat pulmonaryfibrosis.  Dr. Yamauchi filed the patentfor Pirfenidone in 1989. Dr. Yamauchi also founded and operates a company thatholds the business license for a cell phone network and help desk supportcenter in Japan.

 

There is no family relationship between any of our directors orexecutive officers.

 

**Board Composition**

 

Currently, our board of directors has five (5) members, a majority ofwhom, including Messrs. Holloway, Theismann and Yamauchi, are “independentdirectors” as defined by the rules of the National Association of SecuritiesDealers, Inc. (“NASD”).

 

**Director Compensation**

 

Board members did not receive any compensation in fiscal 2004.  In June 2004, the board of directorsdetermined that outside directors would receive $1,200 per regularly scheduledboard meeting attended in person or telephonically and $1,200 per committeemeeting attended in person or telephonically. Directors are also to bereimbursed for certain expenses in connection with attendance at board andcommittee meetings.

 

**Board Committees**

 

Our board of directors has the authority to appoint committees to performcertain management and administrative functions. Our board of directorscurrently has an audit committee and a compensation committee.  Our board of directors does not currentlyhave a nominating and governance committee.

 

*Audit Committee*

 

Our audit committee is responsible for annually recommendingindependent accountants, preparing the reports, statements or charters as maybe required by the NASD or the SEC, and reviewing:

 

•                  the adequacy ofour system of internal accounting controls;

 

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•                  our auditedfinancial statements and reports and discussing the statements and reports withmanagement, including any significant adjustments, management judgments andestimates, new accounting policies and disagreements with management; and

 

•                  disclosures byindependent accountants concerning relationships with our company and theperformance of our independent accountants.

 

Our audit committee currently consists of Messrs. Lanzisera, Hollowayand Theismann.  Although we are notcurrently subject to the rules of the NASD, we note that Mr. Holloway and Mr.Theismann are each an ““independent director” as that term is defined underRule 4200(a)(15) of the NASD.  Mr.Lanzisera may not be deemed an “independent director” (in the event we weresubject to the rules of the NASD) as a result of having served as president ofthe Company from March 2003 to June 2004 and treasurer of the Companyfrom August 1997 to June 2004, although he was not an employee of anddid not receive a salary from the Company. However, pursuant to Rule 4350(d)(2)(B) of the NASD, the board ofdirectors has determined that if it is determined that Mr. Lanzisera is not an“independent director” under Rule 4200(a)(15) of the NASD, Mr. Lanzisera nonethelessmeets the requirements of Rule 10A-3(b)(1) promulgated under the Exchange Actand that his membership on the audit committee is in the best interests of theCompany and its shareholders due to Mr. Lanzisera’s past employment experienceand financial sophistication.

 

The board of directors has determined that no member of the auditcommittee satisfies all of the criteria to be a “financial expert” as definedin Item 401(h) of Regulation S-K. We currently do not have an audit committeefinancial expert. Our principal focus recently has been on the recentlycompleted share exchange, the Weida PRC acquisition and the reportingrequirements under the Exchange Act.  Asa result of those efforts, we were unable to allocate the resources necessaryto identify an individual with the expertise necessary to serve as a financialexpert on the audit committee.

 

*Compensation Committee*

 

Our compensation committee is primarily responsible for reviewing andapproving the compensation, benefits, corporate goals and objectives of ourchief executive officer and our other executive officers; evaluating theperformance and compensation of our executive officers in light of those goalsand objectives; administering any employee benefit plans and makingrecommendations to our board of directors regarding these matters.

 

Our compensation committee currently consists of Messrs. Sepaniak andLanzisera.  Although we are not currentlysubject to the rules of the NASD, we note that Mr. Sepaniak is not an“independent director” as that term is defined under Rule 4200(a)(15) of theNASD.  Mr. Lanzisera may not be deemed an“independent director” (in the event we were subject to the rules of the NASD)as a result of having served as president of the Company from March 2003to June 2004 and treasurer of the Company from August 1997 toJune 2004, although he was not an employee of and did not receive a salaryfrom the Company.

 

*Compensation Committee Interlocks and Insider Participation*

 

None of our executive officers serves as a member of the board ofdirectors or compensation committee of any entity that has one or moreexecutive officers serving as a member of our board of directors orcompensation committee (“Interlock”). There are no Interlocks between our boardof directors or compensation committee and boards of directors or compensationcommittees of other companies.

 

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Mr. Sepaniak, who is a member of our compensation committee, is alsoour President and Chief Executive Officer.

 

*Nominating and Governance Committee*

 

Our board of directors does not have a standing nominating andgovernance committee.  Our board ofdirectors does not believe that it is appropriate to have a standing nominatingand governance committee since we have a relatively small board and ourdirectors will serve in the capacity of a nominating and governance committeewhen necessary.  All of our directorsparticipate in the consideration of director nominees and matters relating togovernance.

 

**Code of Ethics**

 

We have approved and adopted a code of ethics for our directors andsenior executive, financial and accounting officers.  A copy of the code of ethics is attached asExhibit 14 to our Current Report on Form 8-K, dated August 9, 2004, filedwith the SEC on August 16, 2004 and will be available without charge uponwritten request directed to Secretary, Weida Communications, Inc., 515 East LasOlas Blvd., Suite 1350, Fort Lauderdale, Florida 33301.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Exchange Act requires executive officers,directors, and persons or entities that own more than 10% of the Company’scommon stock to file reports regarding ownership of and transactions in theCompany’s securities with the SEC and to provide the Company with copies ofthose filings. Based solely on its review of the copies of such forms receivedby the Company, or written representations from certain reporting persons, theCompany believes the following directors, officers and greater than 10%beneficial owners were inadvertently delinquent in their filing requirements:

 

•                  Each of MitchellSepaniak, Joseph Zumwalt, Amanda Harmon, Tilmon Holloway, EPG Limited Partners,Ltd. and A. Giordano Family Limited Partnership were delinquent in their Form 3filings by one (1) day.

 

•                  Jack Chin wasdelinquent in his Form 3 filing by two (2) days.

 

•                  Each of JosephTheismann and Shitotomo Yamauchi were delinquent in their Form 3 filings byfour (4) days.

 

•                  Carl Lanziserawas delinquent in his Form 3 filing and a Form 4 filing by more than four (4)days.

 

**ITEM11.****                                              EXECUTIVECOMPENSATION**

 

During and at all times prior to the fiscal year ended June 30,2004, none of our executive officers received any annual or long-termcompensation and there are no outstanding stock options or warrants issued toour executive officers.   InJune 2004, our board of directors approved the following executivecompensation for fiscal 2005:

 

•                  MitchellSepaniak, our President, Chief Executive Officer and Chairman of the Board, willreceive an annual base compensation of $150,000 once we are successful inraising $10 million (calculated from April 1, 2004).  As discussed below, the board of directorssubsequently amended these terms in August 2004.

 

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•                  Joseph Zumwalt,our Vice President, Chief Financial Officer and Secretary, will receive anannual base compensation of $82,000, which will be increased to $100,000 oncewe are successful in raising $10 million (calculated from April 1, 2004).

 

•                  Jack Chin, ourVice President Business Development, will receive an annual base compensationof $100,000 once we are successful in raising $10 million (calculated fromApril 1, 2004).

 

•                  Amanda Harmon,then our Vice President, Controller and Treasurer, was to receive an annualbase compensation of $58,000. However, Ms. Harmon terminated her employmentwith the Company in July 2004 and received a cash payment from the Companyin connection with such termination of $25,000.

 

In August 2004, our board of directors approved an amendment toMitchell Sepaniak’s executive compensation for fiscal 2005 that lowered thetriggering event for consummation of Mr. Sepaniak’s compensation from $10million to $7 million.  Pursuant to suchamendment, Mr. Sepaniak’s executive compensation for fiscal 2005 is as follows:

 

•                  MitchellSepaniak, our President, Chief Executive Officer and Chairman of the Board,will receive an annual base compensation of $150,000 once we are successful inraising $7 million (calculated from April 1, 2004).

 

We do not maintain any equity compensation plans and no options havebeen granted to our executive officers. Under an arrangement between SCL and Mitchell Sepaniak entered into in2003, Mr. Sepaniak has the right to acquire 285,000 shares of common stock uponthe completion of certain capital raising efforts for the Company, whichefforts have not been completed. The terms of this arrangement have not yetbeen reduced to writing and the Company’s board of directors has not yet adoptedand assumed such arrangement.

 

**Employment Agreements**

 

In June 2004, the board of directors adopted and assumed asCompany obligations the employment agreements of Mitchell Sepaniak, JosephZumwalt and Amanda Harmon with SCL.  InAugust 2004, the board of directors approved adopting the employmentagreement of Jack Chin.  Each of theemployment agreements has a one-year term and provides for an annual salary asdescribed above and a like severance payment if the agreement is terminated byus without cause.  In August 2004,the board of directors approved an amendment to Mr. Sepaniak’s employmentagreement that provides for an amended annual salary as described above.

 

**Limitation on Liability and Indemnification Matters**

 

Article Eighth of the Company’s Restated Certificate ofIncorporation authorizes the Company to indemnify its directors and officers inany proceeding by a third party or in actions by or in the right of the Companyto the maximum extent permitted under New Jersey law.

 

Article IX of the Company’s Amended and Restated Bylaws providesfor mandatory indemnification of its officers and directors to the maximumextent permitted under New Jersey law. The rights to indemnity thereundercontinue as to any person who has ceased to be a director, officer, employee oragent of the Company and shall inure to the benefit of the heirs, executors andadministrators of such person. In addition, the indemnity extends to personswho are or were serving at the request of the Company in any capacity ofanother corporation, partnership, join venture, trust, employee benefit plan orother enterprise.

 

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Insofar as indemnification for liabilities arising under the SecuritiesAct may be permitted to directors, officers or persons controlling theregistrant pursuant to the foregoing provisions, we have been informed that inthe opinion of the SEC such indemnification is against public policy asexpressed in the Securities Act and is therefore unenforceable.

 

**ITEM 12.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth certain information regarding thebeneficial ownership of our common stock as of September 17, 2004 as to(i) each person who is known by us to own beneficially more than five percent(5%) of the outstanding shares of our common stock, (ii) each director,(iii) each of the Company’s executive officers and (iv) all five percentshareholders, directors and executive officers as a group. This table is basedon information provided to us or filed with the SEC by our directors, executiveofficers and principal shareholders. Except as otherwise indicated, we believethat the beneficial owners of the shares listed below have sole investment andvoting power with respect to such shares, subject to community property laws.We do not know of any arrangements, including any pledge by any person ofsecurities of ours, the operation of which may at a subsequent date result in achange of control of our company. Unless otherwise noted above, the address foreach shareholder on this table is c/o Weida Communications, Inc., 515 East LasOlas Boulevard, Suite 1350, Fort Lauderdale, FL 33301.

 
| **Five  percent shareholders,  directors, and certain executive officers**          | ** ** | **Common stock  outstanding** | ** ** | **Options/Warrants  exercisable within  60 days** | ** ** | **Common  stock  beneficially  owned** | ** ** | **Approximate  percentage  owned** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| Mitchell Sepaniak (1)                                                                    |       | 8,387,268                          |       | 0                                                      |       | 8,387,268                              |       | 11.59                              | %          |
| Tilmon Holloway (2)                                                                      |       | 907,500                            |       | 0                                                      |       | 907,500                                |       | 1.25                               | %          |
| Carl Lanzisera                                                                           |       | 1,504,398                          |       | 0                                                      |       | 1,504,398                              |       | 2.08                               | %          |
| Joseph Zumwalt (3)                                                                       |       | 600,000                            |       | 0                                                      |       | 600,000                                |       |                               | *          |
| Joseph Theismann (4)                                                                     |       | 262,500                            |       | 0                                                      |       | 262,500                                |       |                               | *          |
| Shitotomo Yamauchi, PhD                                                                  |       | 2,000,000                          |       | 0                                                      |       | 2,000,000                              |       | 2.76                               | %          |
| Jack Chin (5)                                                                            |       | 4,969,500                          |       | 0                                                      |       | 4,969,500                              |       | 6.87                               | %          |
| A. Giordano Family Limited Partnership (6)                                               |       | 7,611,879                          |       | 0                                                      |       | 7,611,879                              |       | 10.52                              | %          |
| Deng Long Long                                                                           |       | 4,000,000                          |       | 0                                                      |       | 4,000,000                              |       | 5.53                               | %          |
| Norstar I, LLC (7)                                                                       |       | 5,000,000                          |       | 0                                                      |       | 5,000,000                              |       | 6.91                               | %          |
|                                                                                     |       |                               |       |                                                   |       |                                   |       |                               |       |
| All five percent shareholders, directors  and executive officers as a group (10 persons) |       | 35,243,045                         |       | 0                                                      |       | 35,243,045                             |       | 48.72                              | %          |

 

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Applicable percentage of ownership is based on 72,334,486 shares ofcommon stock outstanding as of September 17, 2004, but does not include(i) 1,661,245 shares of common stock sold but not yet issued to existing andrecent investors and advisors as of September 17, 2004 or (ii) 16,296,296shares of common stock to be issued to the shareholders of OIHL. Beneficialownership is determined in accordance with the rules of the SEC and includesvoting and investment power with respect to shares. Shares of common stocksubject to options or warrants currently exercisable or exercisable withinsixty (60) days after September 17, 2004 are deemed outstanding forcomputing the percentage ownership of the person holding such options orwarrants, but are not deemed outstanding for computing the percentage of anyother person.

 

*                 Less than 1% of common stockoutstanding.

 

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(1)          Includes (i) 8,187,268 shares of common stockheld of record by Mitchell Sepaniak, (ii) 100,000 shares of common stock heldof record by Ashley Sepaniak and (iii) 100,000 shares of common stock held ofrecord by Lindsay Sepaniak.  Does notinclude 1,000,000 shares of common stock held of record by Susan Sepaniak, asto which Mr. Sepaniak disclaims beneficial ownership.  Does not reflect an understanding between SCLand Mr. Sepaniak that gives him the right to acquire 285,000 shares of commonstock upon the completion of certain capital raising efforts for the Company,which efforts have not been completed.

(2)          Does not include 1,500,000 shares held byBaptist Community Services, of which Mr. Holloway is President and ChiefExecutive Officer. Mr. Holloway disclaims beneficial ownership of those 1,500,000shares of common stock.

(3)          Does not include 530,874 shares and warrantsto purchase 2,000,000 shares of common stock held by EPG Limited Partners,Ltd., which Mr. Zumwalt serves as the individual managing member. Mr. Zumwaltdisclaims beneficial ownership of those 530,874 shares and warrants to purchase2,000,000 shares of common stock.

(4)          Does not include 15,000 shares of commonstock held of record by Robin Theismann, as to which Mr. Theismann disclaimsbeneficial ownership.

(5)          Includes (i) 2,369,500 shares of common stockheld of record by Jack Chin, (ii) 1,000,000 shares of common stock held ofrecord by Jack Chin and Jane Chin jointly, (iii) 1,000,000 shares of commonstock held of record by Jane Chin and (iv) 600,000 shares of common stock heldof record by Penny June Chin.

(6)          Does not include 360,000 shares of commonstock owned by Bronwyn Kathryn Fulton, its general partner.  A. Giordano Family Limited Partnershipdisclaims beneficial ownership of those 360,000 shares of common stock.

(7)          Does not include 1,000,000 shares held byAllan Rothstein, its managing member. Norstar I LLC disclaims beneficial ownership of those 1,000,000 sharesof common stock.

 

**Matters concerning a beneficial shareholder**

 

Anthony Giordano, together with EPG Global Private Equity Fund, Ltd., ahedge fund founded by Mr. Giordano, were the subject of a civil complaint andadministrative proceeding instituted by the SEC alleging violations of thefederal securities laws in connection with activities unrelated to SCL, the Companyor the share exchange.  InFebruary 2004, Mr. Giordano and EPG Global Private Equity Fund, Ltd.consented to the entry of a final judgment (the “Final Judgment”) permanentlyenjoining them from further violations of the registration and anti-fraud provisionsof the federal securities laws without admitting or denying the allegationsraised in the SEC’s complaint.  Further,in connection with settlement of the administrative proceeding, Mr. Giordanohas also been barred from association with any broker-dealer or investmentadviser and has agreed to pay $50,000 in civil penalties.  EPG Global Private Equity Fund, Ltd., whichwas never funded, has since been terminated.

 

In connection with the share exchange, Mr. Giordano, who was then thebeneficial holder of more than 5% of our common stock assuming completion ofthe share exchange, agreed in April 2004 that he will not, without ourconsent, at any time, serve as an officer or member of the board of directorsof the Company and that he will not, at any time, beneficially own more thanfive percent of our common stock (exclusive of stock acquired and held as ofthe date he and we entered into this agreement).  Mr. Giordano may, however, provide certainconsulting services to SCL or the Company with respect to evaluatingprospective merger, acquisition and financing transactions presented to theCompany which will not involve association with any broker-dealer or investmentadviser required to be registered as such under the federal securities laws.Mr. Giordano also agreed not to sell or otherwise transfer any shares ofour common stock without our consent for a period of one year following theclose of the share exchange on the same terms and conditions applicable tocertain of our shareholders subject to the lock up under the share exchangeagreement entered into between the Company and SCL in 2003.

 

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See Item 13, “Certain Relationships and Related Transactions–OtherRelated Party Agreements”,  for informationrelating to Mr. Giordano’s consulting agreement with SCL and funding commitmentletter with the Company.

 

**ITEM 13.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**Overview**

 

We describe below the transactions in which we acquired control of anda majority profit-sharing interest in Weida PRC.

 

We also describe below transactions to which we were a party or will bea party, in which:

 

•                  the amountsinvolved exceeded or will exceed $60,000; and

 

•                  a director,executive officer, holder of more than 5% of our common stock or any member oftheir immediate family had or will have a direct or indirect material interest.

 

We also describe below certain other transactions with our directors,executive officers and shareholders.

 

**Related Party Agreements – Acquisition of Control and a MajorityProfit-Sharing Interest in Weida PRC**

 

In order to comply with PRC regulations, we currently operate ourbusiness in China through Weida PRC, a company wholly owned by Li Shun Xing, LiXiang Ning, Pang Da Qing and Xie Li, all of whom are PRC citizens. Certain ofour wholly-owned subsidiaries have entered into a series of contractualarrangements with Weida PRC and its shareholders, including agreements onprovision of services, intellectual property, and certain capitalization,corporate governance and future share acquisition and equity joint venturematters.

 

Below is a summary of the material provisions of these agreements.

 

*Master Agreement*.  SCL entered into a master agreement withWeida PRC and Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li, theshareholders of Weida PRC, on April 29, 2003.  Pursuant to this agreement, as modified by astock transfer memo, dated August 26, 2004, executed by the Company andthe shareholders of Weida PRC on August 27, 2004 that supplements certainprovisions of this agreement, SCL, Weida PRC and the shareholders of Weida PRCestablished the framework for the acquisition, through a series oftransactions, of control and a majority interest in Weida PRC.  The agreement provides for, among otherelements, the conversion of Weida PRC into the Weida EJV and the acquisition bySCL of up to a 51% interest in the Weida EJV.

 

In consideration for acquisition of this interest and control, SCL wasrequired to pay to the shareholders of Weida PRC a cash sum of approximately$15 million and to cause to be issued to the shareholders of OIHL approximately16.3 million shares of our common stock.

 

For purposes of this agreement, the shares to be delivered were deemedto have a value of $6.75 per share (or an aggregate value of $110 million). Thevalue fixed for our shares for purposes of this agreement was arrived at afterdiscussions between SCL and the shareholders of Weida PRC, and represented acompromise between the substantially lower market price of our common stock atthe time of the negotiations and estimates of possible future market prices ofour common stock following completion of the share exchange, the acquisition ofWeida PRC, and the provision of adequate working capital financing for the WeidaEJV. However, neither party to the negotiations regarding the Weida PRCtransaction

 

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conducted or obtained any appraisal, estimate or investment bankingadvice or opinion regarding the prospective value of the combined companies, orpossible future market prices of our common stock. Moreover, the value fixedfor purposes of this agreement is vastly higher than the market price of ourcommon stock during all periods during which the transaction was discussed,negotiated and documented and throughout 2003 and early 2004 (the market priceof our common stock ranging from a low of $.060 to a high of $5.20 during suchperiod on a post-reverse split basis). In addition, neither SCL nor the Companyduring the negotiation of the share exchange performed a separate valuation ofour common stock for purposes of calculating the share exchange ratio. Thevaluation amount therefore must be regarded as having been fixed at anegotiated value. It is not, and should not be construed as, an implied oractual estimate of any future value of our common stock following the shareexchange or the acquisition of an interest and control in the Weida EJV. Inaddition, it is not the actual valuation of the stock being issued foraccounting purposes.

 

The master agreement also originally provided for SCL to provide orarrange for approximately $159 million of working capital for the Weida EJV inthe form of equipment leasing, asset purchases, cash equivalents, or othercommercially reasonable forms based on a business plan to be agreed upon by theboard of the Weida EJV after SCL has appointed its members, but provision ofthis working capital was not a condition precedent to SCL’s acquiring controlof, or a profit-sharing or ownership interest in, Weida PRC.

 

This agreement with Weida PRC is subject to a number of conditionsincluding:

 

•                  the issuance ofa business license for the Weida EJV (showing SCL’s equity ownership);

 

•                  completion of adue diligence study by SCL’s legal and financial advisors satisfactory to SCLin its sole discretion;

 

•                  the shareholdersof Weida PRC entering into appropriate employment agreements with Weida PRCacceptable to SCL; and

 

•                  satisfying allof the state, local and foreign requirements for the transaction.

 

The parties to the agreement have agreed to make any modifications tothe overall investment plan contemplated by the agreement as the Chineselicensing and approval process may require. Currently applicable Chinese rulesand regulations limit foreign direct ownership in a telecommunications companyand the parties to the agreement have agreed to take all necessary steps tomodify the agreement to effectuate its central intent while complying with allsuch rules and regulations.

 

In August 2004 SCL, the Weida PRC shareholders and other partiesentered into a series of agreements and transactions intended to implement thebasic goals of the master agreement. These agreements and transactions aredescribed below.

 

*Purchase and Sale Agreement*.  SCL and Jack Chin, our Vice President,Business Development (the latter as a nominal holder in order to meet localHong Kong legal requirements), entered into a purchase and sale agreement,dated as of August 26, 2004, with Honest Link International Ltd., WorldwiseDevelopment Ltd., Magic Technology Development Ltd., Energic Development Ltd.,and Ocean Channel Investments Ltd., the shareholders of OIHL, onAugust 27, 2004.  Pursuant to thisagreement, as modified by a stock transfer memo, dated August 26, 2004,executed by the Company on August 27, 2004 that supplements certainprovisions of this agreement, SCL and Jack Chin have acquired all of the issuedand outstanding shares of OIHL, which is the owner and holder of 100% of theregistered capital stock of the WOFE. Mr. Chin received one (1) share of OIHL, which represents a .01% equityinterest, and SCL received the remaining shares of OIHL, which represent a99.99% equity interest.  Theconsideration for the sale of the shares of OIHL is (i) US$15 million and (ii)16,296,296 shares of the Company’s common stock.  Although SCL and Mr. Chin acquired the sharesof OIHL on the closing date,

 

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payment of consideration for such shares of OIHL will not be due and payableuntil the following conditions have been met:

 

•                  The 16,296,296shares of Company common stock to be issued pursuant to this agreement shall beissued upon consummation of the service and support agreement between the WOFEand Weida PRC, execution and delivery of all of the other agreements describedelsewhere in this report and satisfaction of certain due diligence requests ofSCL.

 

•                  The $15,000,000cash payment shall be payable to the former shareholders of OIHL if and whenthe conditions to the formation of the Weida EJV discussed elsewhere in thisreport have been completed and the Weida EJV has been formed and has a validbusiness license showing SCL’s 25% equity ownership.

 

The closing of the purchase of the shares of OIHL is currently in progress,the conditions to issuance of the 16,296,296 shares of our common stock are inthe process of being satisfied, and those shares will then be issued asrestricted stock pursuant to Section 4(2) of the Securities Act.

 

*Trust Agreement*.  SCL entered into a trust agreement, dated asof August 26, 2004, with Weida PRC and Li Shun Xing, Li Xiang Ning, PangDa Qing and Xie Li, the shareholders of Weida PRC, on August 27,2004.  Pursuant to this agreement, theseshareholders hold 51% of the shares of Weida PRC and the Weida EJV in trust forthe benefit of SCL for future transfer to SCL pursuant to the terms of theequity interest transfer agreement and the future equity interest transferagreement described below.  Theseshareholders may only transfer or dispose of the shares held in trust uponwritten instructions from SCL and will at all times exercise the voting rightsof the shares held in trust at the direction of SCL.

 

*Service and Support Agreement*.The WOFE entered into an exclusive service and support agreement, dated as ofAugust 26, 2004 and effective as of September 1, 2004, with Weida PRCon August 27, 2004, pursuant to which the WOFE will provide to Weida PRCbusiness support and services within the PRC on an exclusive basis.  The business support and services to beprovided under the agreement include, among others, assistance in selection,procurement and financing of satellite communication and network infrastructureequipment; outsourcing of employees; marketing research and consulting services;and business promotion services.  Theservice fees will be accrued monthly, and will be at the rate of 51% of allmonthly revenue, including any monthly equipment sales revenue, equipment leaserevenue, equipment maintenance revenue, other service and support revenue, andsubscription and transmission revenue package fees paid by Weida PRC’scustomers and end users to Weida PRC. The exact amount of service fees will be calculated and paid quarterlyin arrears.  The service fees will not bepayable until Weida PRC has net quarterly profits before taxes of at least RMB500,000 for at least one full fiscal quarter, as reported on Weida PRC’sregularly prepared consolidated financial statements.   The agreement also provides that the WOFEwill be the sole and exclusive owner of all intellectual property rightsarising from the performance of the agreement, whether developed by the WOFE orWeida PRC, and whether based on the WOFE’s or Weida PRC’s intellectual propertyrights.  The term of this agreement isfor 10 years and will automatically be extend for another 10-year term unlessterminated by the WOFE.

 

*Pledge Agreement*. LiShun Xing, Li Xiang Ning, Pang Da Qing and Xie Li, the shareholders of WeidaPRC, entered into a pledge agreement, dated as of August 26, 2004, withthe WOFE on August 27, 2004. Pursuant to this agreement, each of theseshareholders pledged all of his or her equity interest in Weida PRC to the WOFEto guarantee the performance by Weida PRC of its obligations under the serviceand support agreement described elsewhere in this report. The term of theagreement is from the date on which the pledges are recorded in the stockledger of Weida PRC until all obligations of Weida PRC under the service andsupport agreement have been terminated.

 

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*Equity Interest Transfer Agreement*.  SCL entered into an equity interest transferagreement, dated as of August 26, 2004, with Li Shun Xing, Li Xiang Ning,Pang Da Qing and Xie Li, the shareholders of Weida PRC, on August 27,2004.  Pursuant to this agreement, theseshareholders will sell and transfer a 25% equity interest in Weida PRC to SCLupon conversion of Weida PRC into the Weida EJV.  The aggregate consideration for the sale ofthe 25% equity interest in Weida PRC is the greater of US$805,153 and thelowest amount then permitted by PRC law.

 

This agreement provides that the shareholders of Weida PRC shall causeWeida PRC to appoint three of the five directors as directed by SCL.

 

In addition, pursuant to this agreement, these shareholders, Weida PRCand any affiliate of Weida PRC may not do any of the following without theprior written consent of SCL: (i) amend Weida PRC’s articles of association, orany document or agreement in connection with its establishment or in relationto its business and operations;  (ii)change Weida PRC’s business scope and nature, abandon any qualification orlicense already obtained and/or to be obtained by it, or cause such qualificationor license to lapse, or, except for any actions undertaken as required by law,depart from its business or the business procedures as disclosed to SCL; (iii)permit Weida PRC or its affiliates to invest in any other company; (iv) sell,transfer, let, permit, donate, assign or deal with the sale of any part or allof Weida PRC’s business, property or assets except in the ordinary course ofbusiness; (v) amend any terms of remuneration or bonuses payable to anydirector or officer, or enter into or amend the terms of service agreementswith any director or officer; (vi) provide any loan or any credit to any thirdparty or provide any indemnity, warranty or enter into any similar arrangement;(vii) devise or issue any bonds, mortgages, pledges or other guarantees, orincrease any loans secured thereby, including but not limited to, increasingthe sum guaranteed or extend the duration of guarantee; (viii) purchase, sell,mortgage or pledge any shares or bonds of any corporation or company, includingany shares or bonds of Weida PRC; (ix) purchase, acquire any interests orrights in land or assets or undertake any capital commitment; (x) do anythingwhich would have a material adverse impact on businesses or assets of Weida PRCor its affiliates; (xi) enter into any compromise, settlement, exemption, withdrawal,termination or waiver, of any rights in respect of any action, arbitration orother claim, legal action, demand or dispute of a material nature; (xii)declare or pay any dividend or distribution with respect to the 25% equityinterest in Weida PRC being transferred to SCL or any other shares of WeidaPRC;  (xiii) make any payments to anyshareholder of Weida PRC or any other related party of Weida PRC, including anypayment of any interest or principal with respect to Weida PRC shareholder orother related party loans to Weida PRC; or (xiv) let or agree to let or give upin any other form any part or all of the rights to use or rights of ownershipof the assets of Weida PRC or its affiliates, or enter into any agreement toacquire or rent or manage any property.

 

This agreement may be terminated by SCL prior to completion upon (i) amaterial breach by the shareholders of Weida PRC of their representations,warranties, obligations or undertakings set forth in this agreement; (ii) WeidaPRC sustaining a loss or damage which constitutes a material adverse change oreffect; or (iii) a petition for the winding up or liquidation of Weida PRC orWeida PRC conducting a reorganization, whether through an arrangement withcreditors or otherwise.

 

*Equity Joint Venture Contract/Articles ofAssociation*. SCL entered into (i) an equity joint venture contract, dated as ofAugust 26, 2004, and (ii) articles of association, dated as ofAugust 26, 2004, with Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li,the shareholders of Weida PRC, on August 27, 2004.  Pursuant to these agreements, the partiesestablished the purpose and scope of the Weida EJV and set forth the terms ofthe Weida EJV, including capitalization, operations and corporategovernance.  The obligations of theparties under these agreements are subject to fulfillment, unless waived bySCL, of each of the following conditions: (i) the equity interest transfer agreement between SCL and theshareholders of Weida PRC and any and all other documents needed to satisfy allnecessary authorities of the PRC, have been duly executed by theseshareholders, SCL, and Weida PRC; (ii) a business license for the Weida EJVfrom the appropriate PRC government authority has been issued; (iii) all PRCgovernment

 

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requirements have been satisfied; (iv) a due diligence study by thefinancial and legal counsel of SCL has been completed to the satisfaction ofSCL, in its sole discretion; (v) the necessary approval from SCL’s board ofdirectors has been obtained; (vi) the necessary resolutions of the board andthe general meeting of Weida PRC, duly approving the transactions contemplatedby these agreements and the equity interest transfer agreement, have beenobtained; and (vii) Weida PRC and its shareholders have executed therepresentations and warranties and undertakings, which is an attachment to theequity interest transfer agreement, and all of the matters described thereinare true and complete.

 

Pursuant to these agreements, the total amount of investment (includingloans required or obtained by the Weida EJV) of the Weida EJV will beUS$4,833,836 and the registered capital of the Weida EJV will be US$2,416,918, ofwhich SCL will contribute twenty-five percent (25%) and the shareholders ofWeida PRC will contribute seventy-five percent (75%).  Pursuant to these agreements, SCL will bedeemed to have fully paid its contribution to the Weida EJV upon its paying to theshareholders of Weida PRC the consideration set forth in the equity interest transferagreement described elsewhere in this report.

 

A party desiring to transfer its contribution to the registered capitalto the Weida EJV must first offer such contribution in writing to the otherparties, except that SCL has the right to transfer its contribution to theregistered capital of the Weida EJV to a successor in interest of its entirebusiness, to a person which is at least fifty percent (50%) controlled directlyor indirectly by SCL, or to a person which controls directly or indirectlyfifty percent (50%) or more of SCL. Notwithstanding the foregoing, subject to certain limited circumstances,SCL may not utilize the right of first offer to reduce the percentage of itsshare of the Weida EJV’s registered capital below twenty-five percent (25%).

 

The parties to these agreements will share the profits, risks andlosses of the Weida EJV in proportion to their respective contribution to theregistered capital of the Weida EJV and the liability of each party will be limitedto the amount of its contribution due or made to the registered capital of theWeida EJV.

 

The equity joint venture contract and articles of association providethat when the Weida EJV is established, the board of directors of the Weida EJVwill be composed of five (5) directors as follows:  two (2) directors will be appointed by SCL,two (2) directors will be appointed by the shareholders of Weida PRC, and theremaining director will be appointed jointly by (i) SCL and (ii) collectively,the shareholders of Weida PRC.  The boardof directors will have one chairman, who will be appointed by SCL.  The quorum necessary to hold meetings of theboard of directors of the Weida EJV will be three (3) directors, including atleast one director appointed by SCL.  Allresolutions of the board of directors of the Weida EJV will require a majorityof the votes of the directors present at the meeting who constitute thenecessary quorum.  The Weida EJV willhave one (1) general manager of the EJV, who will initially be appointed bySCL. The general manager will implement the resolutions of the board ofdirectors of the Weida EJV, be responsible for the daily management andoperation of the Weida EJV, and will appoint and dismiss subordinates.  SCL has the sole power to appoint and dismissthe controller and the chief financial officer of the Weida EJV.

 

These agreements set forth certain other terms of the Weida EJVincluding, but not limited to, certain additional responsibilities of theparties, licensing and sale of the Weida EJV products and services, labormanagement, financial affairs and accounting, taxation, confidentiality,termination and liquidation, non-competition and indemnification.

 

These agreements do not require SCL to provide or arrange for anyspecified amount of working capital for the Weida EJV.

 

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The term of the Weida EJV will commence on the date of issuance of abusiness license from the appropriate PRC government authority and will expire,unless extended or sooner terminated, thirty (30) years after the date ofissuance of such business license.

 

*Future Equity Interest Transfer Agreement*.  SCL entered into a future equity interesttransfer agreement, dated as of August 26, 2004, with Li Shun Xing, LiXiang Ning, Pang Da Qing and Xie Li, the shareholders of Weida PRC, onAugust 27, 2004.  Pursuant to thisagreement, at such future time as the laws of the PRC allow, and upon receiptof a legal opinion issued by SCL’s Chinese counsel confirming such allowance,these shareholders will sell and transfer additional equity interests in WeidaPRC to SCL (over and above the 25% equity interest in Weida PRC beingtransferred to SCL pursuant to the equity interest transfer agreement) up tothe greater of (i) the maximum allowed by PRC law and (ii) a total of 51%equity interest in Weida PRC (including the 25% equity interest in Weida PRCbeing transferred to SCL pursuant to the equity interest transferagreement).  The acquisition of theadditional equity interests may be made in increments, always to the maximumthen allowed by PRC law.  Theconsideration for the sale of the additional equity interests in Weida PRC willbe the lowest amount then permitted by PRC law.

 

This agreement also provides that the shareholders of Weida PRC shallcause Weida PRC to appoint three of the five directors as directed by SCL.

 

Pursuant to this agreement, these shareholders, Weida PRC and anyaffiliate of Weida PRC may not do any of the following without the priorwritten consent of SCL: (i) amend Weida PRC’s articles of association, or anydocument or agreement in connection with its establishment or in relation toits business and operations;  (ii) changeWeida PRC’s business scope and nature, abandon any qualification or licensealready obtained and/or to be obtained by it, or cause such qualification orlicense to lapse, or, except for any actions undertaken as required by law,depart from its business or the business procedures as disclosed to SCL; (iii)permit Weida PRC or its affiliates to invest in any other company; (iv) sell,transfer, let, permit, donate, assign or deal with the sale of any part or allof Weida PRC’s business, property or assets except in the ordinary course ofbusiness; (v) amend any terms of remuneration or bonuses payable to anydirector or officer, or enter into or amend the terms of service agreementswith any director or officer; (vi) provide any loan or any credit to any thirdparty or provide any indemnity, warranty or enter into any similar arrangement;(vii) devise or issue any bonds, mortgages, pledges or other guarantees, orincrease any loans secured thereby, including but not limited to, increasingthe sum guaranteed or extend the duration of guarantee; (viii) purchase, sell,mortgage or pledge any shares or bonds of any corporation or company, includingany shares or bonds of Weida PRC; (ix) purchase, acquire any interests orrights in land or assets or undertake any capital commitment; (x) do anythingwhich would have a material adverse impact on businesses or assets of Weida PRCor its affiliates; (xi) enter into any compromise, settlement, exemption,withdrawal, termination or waiver, of any rights in respect of any action,arbitration or other claim, legal action, demand or dispute of a materialnature; (xii) declare or pay any dividend or distribution with respect to the25% equity interest in Weida PRC being transferred to SCL or any other sharesof Weida PRC;  (xiii) make any paymentsto any shareholder of Weida PRC or any other related party of Weida PRC,including any payment of any interest or principal with respect to Weida PRCshareholder or other related party loans to Weida PRC; or (xiv) let or agree tolet or give up in any other form any part or all of the rights to use or rightsof ownership of the assets of Weida PRC or its affiliates, or enter into anyagreement to acquire or rent or manage any property.

 

This agreement may be terminated by SCL prior to completion upon (i) amaterial breach by the shareholders of Weida PRC of their representations,warranties, obligations or undertakings set forth in this agreement; (ii) WeidaPRC sustaining a loss or damage which constitutes a material adverse change oreffect; or (iii) a petition for the winding up or liquidation of Weida PRC orWeida PRC conducting a reorganization, whether through an arrangement withcreditors or otherwise.

 

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*Power of Attorney*.On August 23, 2004, Weida PRC and Li Shun Xing, Li Xiang Ning, Pang DaQing and Xie Li, the shareholders of Weida PRC (collectively, the “Grantors”),executed a power of attorney granting Deng Long Long full power and authorityto (i) negotiate the acquisition by SCL of a legal ownership interest in WeidaPRC, (ii) make commitments concerning the Grantors rights and obligationsconcerning such acquisition and (iii) sign all contracts, agreements anddocuments concerning such acquisition.

 

**Other Related Party Agreements**

 

On December 3, 2003, we entered into a consulting agreement with CarlLanzisera, our former president and current member of our board ofdirectors.  The agreement provides forMr. Lanzisera to assist us in structuring, operating and growing our business.The agreement is for a term ending on December 31, 2004 and provides forcash payments aggregating $100,000 and the issuance of 25,000 restricted sharesof our common stock.  All cash paymentsand the issuance of shares required under this agreement have been completed.

 

SCL has entered into an amended and restated consulting agreement withAnthony Giordano, a beneficial holder of our common stock followingconsummation of the share exchange, effective as of April 1, 2004. Theagreement provides for Mr. Giordano to assist SCL as a consultant by evaluatingprospective merger, acquisition and financing transactions that are presentedto SCL or the Company.  The agreement isfor a term ending on March 30, 2006, with subsequent one-year extensionsunless otherwise terminated.  Theagreement provides for a one-time initial consulting fee equal to $150,000,which was paid to Mr. Giordano in April 2004.  In addition, during the term of theagreement, commencing April 2004, Mr. Giordano will receive a monthlyconsulting fee, in arrears, in an amount equal to $20,000 plus reimbursement ofexpenses.  For additional disclosureconcerning Mr. Giordano, see Item 12, “Security Ownership of Certain BeneficialOwners and Management–Matters concerning a beneficial shareholder.”

 

Effective as of September 3, 2004, a credit facility amounting to$5 million has been made available to us by Anthony Giordano, a Companyshareholder, together with one of Mr. Giordano’s family limited partnerships,to fund the Company’s future operations. This credit facility is unsecured,bears interest on any funds advanced at a rate equal to the London InterbankOffered Rate plus 200 basis points, has no equity component, and terminates onOctober 31, 2005. For additional disclosure concerning Mr. Giordano, seeItem 12, “Security Ownership of Certain Beneficial Owners andManagement–Matters concerning a beneficial shareholder.”

 

On June 24, 2004, following the share exchange, our board ofdirectors approved our assumption of the obligations of SCL under certainemployment agreements entered into between it and various individuals, all ofwho had become officers of the Company and were providing services to theCompany and in August 2004, our board of directors approved a resolutionadopting the employment agreement of Jack Chin. The terms of these agreements are described above under “ExecutiveCompensation.”

 

We believe that the transactions described above were on terms no lessfavorable to us than could have been obtained from unaffiliated third parties.All future transactions between us and any director or executive officer aresubject to approval by a majority of the disinterested members of the board ofdirectors.

 

**ITEM14.****                                              PRINCIPALACCOUNTING FEES AND SERVICES**

 

*Auditor Fees*

 

The aggregate fees billed for professional services rendered by ourformer principal accountant, Tamas B. Revai, for the audit of our annualfinancial statements and review of financial statements

 

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included in our other filings with the SEC were $3,000 for the periodfrom February 1, 2003 to January 31, 2004 and $2,000 for the periodfrom February 1, 2002 to January 31, 2003.

 

The aggregate fees billed for professional services rendered by ourcurrent principal independent accountant, Deloitte Touche Tohmatsu, (theCompany changed its fiscal year end to June 30 and appointed DeloitteTouch Tohmatsu as its independent auditor on June 10, 2004) for the auditof our annual financial statements and review of financial statements includedin our other filings with the SEC were $172,267 for the six months period endedJune 30, 2004.

 

Our former principal accountant, Tamas B. Revai, did not perform orbill us for any audit-related services for the period from February 1,2003 to January 31, 2004 or the period from February 1, 2002 toJanuary 31, 2003.

 

Our current principal independent accountant, Deloitte Touche Tohmatsu,did not perform or bill us for any audit-related services for the six monthsperiod ended June 30, 2004.

 

Our former principal accountant, Tamas B. Revai, did not perform orbill us for any services rendered for tax compliance, tax advice and taxplanning for the period from February 1, 2003 to January 31, 2004 orthe period from February 1, 2002 to January 31, 2003.

 

Our current principal independent accountant, Deloitte Touche Tohmatsu,did not perform or bill us for any services rendered for tax compliance, taxadvice and tax planning for the six months period ended June 30, 2004.

 

Our former principal accountant, Tamas B. Revai, did not perform orbill us for any other services not reported in this section, for the periodfrom February 1, 2003 to January 31, 2004 or the period fromFebruary 1, 2002 to January 31, 2003.

 

Our current principal independent accountant, Deloitte Touche Tohmatsu,did not perform or bill us for any services not reported in thissection for the six months period ended June 30, 2004.

 

Thefollowing table sets forth fees paid to our current principal independentaccountant, Deloitte Touche Tohmatsu, for the six months period endedJune 30, 2004:

 
| **Fee  Category**      | ** ** | **Six months period  ended June 30, 2004** | ** ** | **% of Total** | ** ** |
|------------------------|------------|-------------------------------------------------|------------|----------------|------------|
| Audit Fees (1)         |       | $                                               | 172,267    |           | 100        | % |
| Audit-Related Fees (2) |       | $                                               | 0          |           | —     |   |
| Tax Fees (3)           |       | $                                               | 0          |           | —     |   |
| All Other Fees (4)     |       | $                                               | 0          |           | —     |   |
| Total Fees             |       | $                                               | 172,267    |           | 100        | % |

 

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(1)                Audit Fees are fees for professionalservices performed for the audit of our annual financial statements and reviewof financial statements included in our 10-Q filings, and services that arenormally provided in connection with statutory and regulatory filings orengagements.

 

(2)                Audit-Related Fees are fees forassurance and related services that are reasonably related to the performanceof the audit and review of our financial statements. This category consistsprimarily of employee benefit and compensation plan audits, and consulting on financialaccounting/reporting standards.

 

(3)                Tax Fees are fees for professionalservices performed with respect to tax compliance, tax advice and tax planning.

 

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(4)                All Other Fees are fees for other permissiblework that does not meet the above category descriptions and consists primarilyof internal audit strategic assessment fees.

 

*Independence*

 

The audit committee of the board of directors has considered whetherthe provision of services by Deloitte Touche Tohmatsu described above arecompatible with maintaining Deloitte Touche Tohmatsu’s independence as ourprincipal accountant.  Our auditcommittee believes that the provision of services by Deloitte Touche Tohmatsudescribed above were compatible with maintaining their independence.

 

*Pre-approval policy*

 

Ouraudit committee has policies and procedures that require the pre-approval bythe audit committee of all fees paid to, and all services performed by, ourindependent auditors. At the beginning of each year, the audit committeeapproves the proposed services, including the nature, type and scope ofservices contemplated and the related fees, to be rendered by our accountantsduring the year. In addition, audit committee pre-approval is also required forthose engagements that may arise during the course of the year that are outsidethe scope of the initial services and fees pre-approved by the audit committee.

 

All of the fees and services provided as noted above were authorizedand approved by the audit committee in compliance with the pre-approvalpolicies and procedures described herein.

 

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**PARTIV**

 

**ITEM15****.****                                              EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8–K**

 

(a)The following documents are filed as part of this report:

 
| ** ** | ** **                                                                                                                                                                                                           | **PAGE** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| 1.         | Table of Contents to Financial  Statements of Weida                                                                                                                                                                  | F-1      |
|       | Report  of Independent Registered Public Accounting Firm                                                                                                                                                             | F-2      |
|       | CONSOLIDATED FINANCIAL STATEMENTS AS OF AND  FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2004, AND THE PERIOD FROM MAY  16, 2003 (DATE OF INCEPTION) TO DECEMBER 31, 2003 AND JUNE 30, 2003  (UNAUDITED) |     |
|       | Consolidated Balance Sheets                                                                                                                                                                                          | F-3      |
|       | Consolidated Statements of Operations                                                                                                                                                                                | F-4      |
|       | Consolidated Statements of Changes  in Stockholders’ Equity                                                                                                                                                     | F-5      |
|       | Consolidated Statements of Cash Flows                                                                                                                                                                                | F-6      |
|       | Notes to Consolidated Financial Statements                                                                                                                                                                           | F-7      |
|       |                                                                                                                                                                                                                 |     |
| 2.         | Table of Contents to Financial Statements of  Weida PRC                                                                                                                                                              | F-14     |
|       | Independent Auditor’s  Report                                                                                                                                                                                   | F-15     |
|       | CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED  JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)                                                                                                    |     |
|       | Consolidated Balance Sheets                                                                                                                                                                                          | F-16     |
|       | Consolidated Statements of Operations                                                                                                                                                                                | F-17     |
|       | Consolidated Statements of Shareholders’  Deficiency                                                                                                                                                            | F-18     |
|       | Consolidated Statements of Cash Flows                                                                                                                                                                                | F-19     |
|       | Notes to Consolidated Financial Statements                                                                                                                                                                           | F-20     |
|       |                                                                                                                                                                                                                 |     |
| 3.         | Table of Contents to Financial Statements  of Weida PRC                                                                                                                                                              | F-29     |
|       | Independent Auditor’s Report                                                                                                                                                                                    | F-30     |
|       | CONSOLIDATED FINANCIAL STATEMENTS FOR THE  YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FOR THE PERIOD FROM  APRIL 2, 2001 (DATE OF ESTABLISHMENT) TO DECEMBER 31, 2001                                 |     |
|       | Consolidated Balance Sheets                                                                                                                                                                                          | F-31     |
|       | Consolidated Statements of Operations                                                                                                                                                                                | F-32     |
|       | Consolidated Statements of Shareholders’ Equity (Capital Deficiency)                                                                                                                                            | F-33     |
|       | Consolidated Statements of Cash Flows                                                                                                                                                                                | F-34     |
|       | Notes to Consolidated Financial Statements                                                                                                                                                                           | F-35     |
|       |                                                                                                                                                                                                                 |     |
| 4.         | UNAUDITED PRO FORMA COMBINED FINANCIAL  STATEMENTS                                                                                                                                                                   | F-44     |
|       | Pro Forma Combined Statement of Operations  for the Twelve Months Ended December 31, 2003                                                                                                                       | F-45     |
|       | Pro Forma Combined Balance Sheet as at  June 30, 2004                                                                                                                                                           | F-46     |
|       | Pro Forma Combined Statement of Operations  for the Six Months Ended June 30, 2004                                                                                                                              | F-47     |
|       | Notes to Pro Forma Financial Information                                                                                                                                                                             | F-48     |
|       |                                                                                                                                                                                                                 |     |
| 5.         | Exhibits                                                                                                                                                                                                             |     |
|       | The exhibits required by Item 601 of Regulation  S-K filed as part of, or incorporated by reference in, this report are listed  in the accompanying Exhibit Index found after the signature page to this  report.    |     |

 

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(b)  Reports on Form 8-K:

 

On June 18, 2004, we furnished to the Securities and ExchangeCommission a Current Report on Form 8-K, dated June 9, 2004,disclosing under Items 1, 2, 4, 5, 7 and 8, (a) our Share Exchange with SCL,(b) our acquisition of 100% of the outstanding capital stock of SCL pursuant tothe Exchange Agreement, (c) our change of public accountants, (d) our one-for-fourreverse stock split, (e) our name change, (f) the resignation of our formerdirector Walter J. Hinchcliffe, (g) SCL entering into a Registration RightsAgreement with certain SCL shareholders and (h) change in our fiscal year.

 

On August 9, 2004, we furnished to the Securities and ExchangeCommission a Current Report on Form 8-K/A, dated June 9, 2004,disclosing under Item 7, (a) SCL’s audited financial statements as atDecember 31, 2003 and for the period from May 16, 2003 (date of inception)to December 31, 2003 and (b) SCL’s unaudited financial statements as atMarch 31, 2004 and for the three months ended March 31, 2004.

 

On August 16, 2004, we furnished to the Securities and ExchangeCommission a Current Report on Form 8-K, dated August 9, 2004, disclosingunder Items 5 and 7, (a) our Restated Certificate of Incorporation, (b) ourAmended and Restated Bylaws, (c) the appointment of board members JosephTheismann and Shitotomo Yamauchi, Ph.D. as independent directors, (d) our AuditCommittee Charter and (e) our Code of Ethics.

 

On September 2, 2004, we furnished to the Securities and ExchangeCommission a Current Report on Form 8-K, dated August 27, 2004,disclosing under Items 1.01, 2.01, 2.03 and 9.01, (a) our acquisition ofcontrol and a majority profit-sharing interest in Weida PRC, (b) our agreementwith China Telecom, (c) Weida PRC’s audited financial statements as atDecember 31, 2001, 2002 and 2003 and for the period from April 2,2001 to December 31, 2001 and the two years ended December 31, 2003,(d) Weida PRC’s unaudited financial statements as at March 31, 2004 andfor the three months ended March 31, 2004, (e) an unaudited pro formacombined balance sheet as of April 30, 2004, (f) an unaudited pro formastatement of operations for the three-month period ended April 30, 2004and (g) an unaudited pro forma statement of operations for the year endedJanuary 31, 2004.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) 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. |
|------------------------------|----------------------------|
|                         | (the Registrant)           |
|                         |                       |
|                         |                       |
|                         | By:                        | /s/ Mitchell Sepaniak |   |
|                         |                       | Mitchell Sepaniak, President |
|                         |                       |
|                         |                       |
| Dated: October 12, 2004 |                       |

 

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Pursuant to the requirements of the Securities Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                                    | ** **                             | **Date** |
|------------------------|------------|----------------------------------------------|----------------------------------------|----------|
|                   |       |                                         |                                   |     |
| /s/ Mitchell Sepaniak  |       |                                         | President, Chief Executive Officer,    |     | October 12, 2004 |
| Mitchell Sepaniak      |       | Chairman of the Board and Director           |                                   |     |
|                   |       | (Principal Executive Officer)                |                                   |     |
|                   |       |                                         |                                   |     |
| /s/ Joseph Zumwalt     |       |                                         | Senior Vice President, Chief Financial |     | October 12, 2004 |
| Joseph Zumwalt         |       | Officer and Secretary                        |                                   |     |
|                   |       | (Principal Financial and Accounting Officer) |                                   |     |
|                   |       |                                         |                                   |     |
| /s/ Tilmon Holloway    |       |                                         | Director                               |     | October 12, 2004 |
| Tilmon Holloway        |       |                                         |                                   |     |
|                   |       |                                         |                                   |     |
| /s/ Carl Lanzisera     |       |                                         | Director                               |     | October 12, 2004 |
| Carl Lanzisera         |       |                                         |                                   |     |
|                   |       |                                         |                                   |     |
| /s/ Joseph Theismann   |       |                                         | Director                               |     | October 12, 2004 |
| Joseph Theismann       |       |                                         |                                   |     |
|                   |       |                                         |                                   |     |
| /s/ Shitotomo Yamauchi |       |                                         | Director                               |     | October 12, 2004 |
| Shitotomo Yamauchi     |       |                                         |                                   |     |

 

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**EXHIBIT INDEX**

 
| 2.1    |   | Share Exchange Agreement, dated as of May 20, 2003, by and among the  Registrant, SCL, certain shareholders of the Registrant signatory thereto and  certain shareholders of SCL signatory thereto (previously filed as Exhibit  2.1 to, and incorporated by reference from, the Registrant’s Current Report  on Form 8-K, dated May 20, 2003, filed with the SEC on June 4, 2003).                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.2    |   | Amendment to Share Exchange Agreement, dated as of November 30,  2003, by and among the Registrant, SCL, certain shareholders of the  Registrant signatory thereto and certain shareholders of SCL signatory  thereto (previously filed as Exhibit 10 to, and incorporated by reference  from, the Registrant’s Current Report on Form 8-K, dated December 3,  2003, filed with the SEC on December 18, 2003).                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.3    |   | Second Amendment to Share Exchange Agreement, dated as of  March 31, 2004, by and among the Registrant, SCL, certain shareholders  of the Registrant signatory thereto and certain shareholders of SCL signatory  thereto (previously filed as Exhibit 10.3 to, and incorporated by reference  from, the Registrant’s Current Report on Form 8-K, dated June 9, 2004,  filed with the SEC on June 18, 2004).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 2.4    |   | Share Lock Up and Escrow Agreement, dated as of April 16, 2004,  by and among Raice, Paykin & Krieg, as escrow agent, SCL, the Registrant,  certain shareholders of the Registrant signatory thereto, A. Giordano Family  Limited Partnership, EPG Limited and Anthony Giordano (previously filed as  Exhibit 10.4 to, and incorporated by reference from, the Registrant’s Current  Report on Form 8-K, dated June 9, 2004, filed with the SEC on  June 18, 2004). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1    |   | Restated Certificate of Incorporation of Registrant (previously filed  as Exhibit 3.1 to, and incorporated by reference from, the Registrant’s  Current Report on Form 8-K, dated August 9, 2004, filed with the SEC on  August 16, 2004).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2    |   | Amended and Restated Bylaws of Registrant (previously filed as  Exhibit 3.2 to, and incorporated by reference from, the Registrant’s Current  Report on Form 8-K, dated August 9, 2004, filed with the SEC on  August 16, 2004).                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1    |   | Specimen Common Stock Certificate of Registrant (previously filed as  Exhibit 4.1 to, and incorporated by reference from, the Registrant’s Form 8-A  filed with the SEC on September 30, 2004).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.2    |   | Registration Rights Agreement, dated as of June 25, 2004, by and  among the Registrant and the shareholders of the Registrant signatory thereto  (previously filed as Exhibit 4.2 to, and incorporated by reference from, the  Registrant’s Form 8-A filed with the SEC on September 30, 2004).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.3    |   | Form of Warrant Instrument dated as of June 11, 2004 (previously  filed as Exhibit 4.3 to, and incorporated by reference from, the Registrant’s  Form 8-A filed with the SEC on September 30, 2004).                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.4    |   | Form of Warrant Certificate dated June 11, 2004 (previously  filed as Exhibit 4.4 to, and incorporated by reference from, the Registrant’s  Form 8-A filed with the SEC on September 30, 2004).                                                                                                                                                                                                                                                                              |

 

57

----

 
| 4.5    |   | Form of Warrant Instrument to be issued in connection with the  June 18, 2004 private placement (previously filed as Exhibit 4.5 to, and  incorporated by reference from, the Registrant’s Form 8-A filed with the SEC  on September 30, 2004).                                                                                                                                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of Warrant Certificate to be issued in connection with the  June 18, 2004 private placement (previously filed as Exhibit 4.6 to, and  incorporated by reference from, the Registrant’s Form 8-A filed with the SEC  on September 30, 2004).                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1   |   | Master Agreement, dated as of April 29, 2003, by and among SCL,  Weida PRC, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously  filed as Exhibit 10.1 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Stock Transfer Memo dated as of August 26, 2004 (previously  filed as Exhibit 10.2 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Purchase and Sale Agreement, dated as of August 26, 2004, by and  among SCL, Jack Chin, Honest Link International Ltd., Worldwise Development  Ltd., Magic Technology Development Ltd., Energic Development Ltd., and Ocean  Channel Investments Ltd. (previously filed as Exhibit 10.3 to, and  incorporated by reference from, the Registrant’s Current Report on Form 8-K,  dated August 27, 2004, filed with the SEC on September 2, 2004). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Service and Support Agreement, dated as of August 26, 2004, by  and between the WOFE and Weida PRC (previously filed as Exhibit 10.4 to, and  incorporated by reference from, the Registrant’s Current Report on Form 8-K,  dated August 27, 2004, filed with the SEC on September 2, 2004).                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5   |   | Pledge Agreement, dated as of August 26, 2004, by and among the  WOFE, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously filed  as Exhibit 10.5 to, and incorporated by reference from, the Registrant’s  Current Report on Form 8-K, dated August 27, 2004, filed with the SEC on  September 2, 2004).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6   |   | Equity Interest Transfer Agreement, dated as of August 26, 2004,  by and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li  (previously filed as Exhibit 10.6 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Equity Joint Venture Contract, dated as of August 26, 2004, by  and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li  (previously filed as Exhibit 10.7 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Articles of Association, dated as of August 26, 2004, by and  among SCL, Li Shun Xing, Li Xiang Ning, Pang Da Qing and Xie Li (previously  filed as Exhibit 10.8 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   |   | Future Equity Interest Transfer Agreement, dated as of  August 26, 2004, by and among SCL, Li Shun Xing, Li Xiang Ning, Pang Da  Qing and Xie Li (previously filed as Exhibit 10.9 to, and incorporated by  reference from, the Registrant’s Current Report on Form 8-K, dated  August 27, 2004, filed with the SEC on September 2, 2004).                                                                                                      |

 

58

----

 
| 10.10  |   | Trust Agreement, dated as of August 26, 2004, by and among Li  Shun Xing, Li Xiang Ning, Pang Da Qing, Xie Li, SCL and Weida PRC (previously  filed as Exhibit 10.10 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated August 27, 2004, filed  with the SEC on September 2, 2004).                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11  |   | Power of Attorney dated as of August 23, 2004 (previously filed  as Exhibit 10.11 to, and incorporated by reference from, the Registrant’s  Current Report on Form 8-K, dated August 27, 2004, filed with the SEC on  September 2, 2004).                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12  |   | Business Expansion Cooperation Agreement, dated August 27, 2004,  by and between Weida PRC and China Telecom Group System Integration Co., Ltd.  (with certain confidential portions omitted) (previously filed as Exhibit  10.12 to, and incorporated by reference from, the Registrant’s Current Report  on Form 8-K, dated August 27, 2004, filed with the SEC on  September 2, 2004). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.13  |   | Employment Agreement of Mitchell Sepaniak effective June 11,  2004 (previously filed as Exhibit 10.5 to, and incorporated by reference  from, the Registrant’s Current Report on Form 8-K, dated June 9, 2004,  filed with the SEC on June 18, 2004).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14  |   | Amendment Number 1 to Employment Agreement of Mitchell Sepaniak  effective April 1, 2004.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15  |   | Employment Agreement of Joseph Zumwalt effective June 11, 2004  (previously filed as Exhibit 10.6 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with  the SEC on June 18, 2004).                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.16  |   | Employment Agreement of Amanda Harmon effective June 11, 2004  (previously filed as Exhibit 10.7 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with  the SEC on June 18, 2004).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Employment Agreement of Jack Chin effective April 1, 2004.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18  |   | Consulting Agreement with Carl Lanzisera dated December 3, 2003.                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19  |   | Amended and Restated Consulting Agreement with Anthony Giordano  effective April 1, 2004.                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.20  |   | Funding Commitment Letter of Anthony Giordano and The Anthony F.  Giordano Family Limited Partnership III dated September 27, 2004.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 14.1   |   | Code of Ethics for Directors, Senior Executive, Financial and  Accounting Officers, approved and adopted by the Board of Directors of Weida  Communications, Inc. on August 9, 2004 (previously filed as Exhibit 14  to, and incorporated by reference from, the Registrant’s Current Report on  Form 8-K, dated August 9, 2004, filed with the SEC on August 16,  2004).                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 16.1   |   | Letter re Change in Certifying Accountant, dated June 18, 2004  (previously filed as Exhibit 16.1 to, and incorporated by reference from, the  Registrant’s Current Report on Form 8-K, dated June 9, 2004, filed with  the SEC on June 18, 2004).                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 21.1   |   | Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certification of principal executive officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                 |

 

59

----

 
| 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 Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                           |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

60

----

 

WEIDA COMMUNICATIONS, INC.

 

**TABLEOF CONTENTS**

 
|                                                                                                                                                                                                                 | **PAGES** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC  ACCOUNTING FIRM                                                                                                                                                             | F-2       |
|                                                                                                                                                                                                                 |      |
| CONSOLIDATED  FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS PERIOD ENDED JUNE 30,  2004, AND THE PERIOD FROM MAY 16, 2003 (DATE OF  INCEPTION) TO DECEMBER 31, 2003 AND JUNE 30, 2003 (UNAUDITED) |      |
|                                                                                                                                                                                                                 |      |
| Consolidated Balance Sheets                                                                                                                                                                                          | F-3       |
|                                                                                                                                                                                                                 |      |
| Consolidated Statements of Operations                                                                                                                                                                                | F-4       |
|                                                                                                                                                                                                                 |      |
| Consolidated Statements of Changes in  Stockholders’ Equity                                                                                                                                                     | F-5       |
|                                                                                                                                                                                                                 |      |
| Consolidated Statements of Cash Flows                                                                                                                                                                                | F-6       |
|                                                                                                                                                                                                                 |      |
| Notes to Consolidated Financial Statements                                                                                                                                                                           | F-7       |

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders of

Weida Communications, Inc.

Fort Lauderdale, FL

 

We have audited the accompanying consolidated balance sheets of WeidaCommunications, Inc. (the “Company”) as of June 30, 2004 andDecember 31, 2003 and the related consolidated statements of operations,stockholders’ equity and cash flows for the six months ended June 30, 2004and the period from May 16, 2003 (date of inception) to December 31, 2003.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with Standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company atJune 30, 2004 and December 31, 2003, and the results of itsoperations and its cash flows for the six months ended June 30, 2004 andthe period from May 16, 2003 (date of inception) to December 31, 2003 inconformity with accounting principles generally accepted in the United Statesof America.

 

 

**Deloitte Touche Tohmatsu**Certified Public AccountantsHong Kong

 

September 27, 2004

 

F-2

----

 

WEIDA COMMUNICATIONS, INC.

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                                                                                                            |   | **June 30,  2004** |       | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
| ASSETS                                                                                                                                                                          |   |                    |       |                        |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Current assets                                                                                                                                                                  |   |                    |       |                        |   |
| Cash                                                                                                                                                                            |   | $                       | 1,617,845  |                        | $      | — |   |
| Interest receivable                                                                                                                                                             |   | 80,968                  |       | 31,908                      |   |
| Due from related party                                                                                                                                                          |   | 438,640                 |       | —                      |   |
| Prepaid expenses - current portion                                                                                                                                              |   | 173,750                 |       | —                      |   |
| Total current assets                                                                                                                                                            |   | 2,311,203               |       | 31,908                      |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Property, plant and equipment                                                                                                                                                   |   | 18,121                  |       | —                      |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Other assets                                                                                                                                                                    |   |                    |       |                        |   |
| Note receivable                                                                                                                                                                 |   | 2,200,000               |       | 2,200,000                   |   |
| Deposit in escrow                                                                                                                                                               |   | —                  |       | 58,346                      |   |
| Deferred acquisition costs                                                                                                                                                      |   | 5,704,004               |       | 4,639,712                   |   |
| Prepaid expenses - non-current portion                                                                                                                                          |   | 62,500                  |       | —                      |   |
| Other assets                                                                                                                                                                    |   | 3,880                   |       | —                      |   |
| Total other assets                                                                                                                                                              |   | 7,970,384               |       | 6,898,058                   |   |
| TOTAL ASSETS                                                                                                                                                                    |   | $                       | 10,299,708 |                        | $      | 6,929,966 |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                       |   |                    |       |                        |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Current liabilities                                                                                                                                                             |   |                    |       |                        |   |
| Accounts payable and accrued expenses                                                                                                                                           |   | $                       | 1,518,803  |                        | $      | 759,055 |   |
| Due to a related party                                                                                                                                                          |   | 756,386                 |       | 776,932                     |   |
| Total current liabilities                                                                                                                                                       |   | 2,275,189               |       | 1,535,987                   |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Long term loan from a related party                                                                                                                                             |   | 270,000                 |       | —                      |   |
| Total liabilities                                                                                                                                                               |   | 2,545,189               |       | 1,535,987                   |   |
| Commitments and contingencies                                                                                                                                                   |   |                    |       |                        |   |
|                                                                                                                                                                            |   |                    |       |                        |   |
| Stockholders’ equity                                                                                                                                                       |   |                    |       |                        |   |
| Common stock, $0 par value, 100,000,000  shares authorized and 72,334,486 and 71,462,981 issued and outstanding at  June 30, 2004 and December 31, 2003, respectively |   | 9,408,958               |       | 6,542,773                   |   |
| Common stock to be issued, US$0 par value,  538,332 shares at June 30, 2004                                                                                                |   | 1,375,955               |       | —                      |   |
| Accumulated deficits                                                                                                                                                            |   | (3,030,394              | )          | (1,148,794                  | )      |
| Total stockholders’ equity                                                                                                                                                 |   | 7,754,519               |       | 5,393,979                   |   |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                 |   | $                       | 10,299,708 |                        | $      | 6,929,966 |   |

 

See notes to consolidated financial statements.

 

F-3

----

 

WEIDA COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OFOPERATIONS

 
|                                        |   | **Six months  ended  June 30,  2004** |       | **Period  from  May 16, 2003  to  June 30,  2003** |   | **Period  from  May 16, 2003  to  December 31,  2003** |   |
|---------------------------------------------|--------|--------------------------------------------|------------|---------------------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                        |   |                                       |       | **(unaudited)**                                         |   |                                                        |   |
| OPERATING EXPENSES                          |   |                                       |       |                                                    |   |                                                        |   |
| Professional fees                           |   | $                                          | (1,508,715 | )                                                       | $      | (29,649                                                     | )      | $ | (737,353 | ) |
| General and administrative expenses         |   | (421,945                                   | )          | (107,820                                                | )      | (443,349                                                    | )      |
| Total operating expenses                    |   | (1,930,660                                 | )          | (137,469                                                | )      | (1,180,702                                                  | )      |
|                                        |   |                                       |       |                                                    |   |                                                        |   |
| INTEREST INCOME                             |   | 49,060                                     |       | —                                                  |   | 31,908                                                      |   |
| NET LOSS                                    |   | $                                          | (1,881,600 | )                                                       | $      | (137,469                                                    | )      | $ | (1,148,794 | ) |
|                                        |   |                                       |       |                                                    |   |                                                        |   |
| Basic and diluted net loss per common share |   | $                                          | (0.03      | )                                                       | $      | (0.00                                                       | )      | $ | (0.02 | ) |
|                                        |   |                                       |       |                                                    |   |                                                        |   |
| Weighted average shares outstanding         |   | 71,820,578                                 |       | 71,462,981                                              |   | 71,462,981                                                  |   |

 

See notes to consolidated financial statements.

 

F-4

----

 

WEIDA COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OFCHANGES IN STOCKHOLDERS’ EQUITY

 
|                                                                                                                     |   | **SCL  Ventures, Ltd.** |   |              |    |              |       | **Common  Stock** |   |       |   |       |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------|---------|-------------------|------------|-------------------|--------|------------|--------|------------|--------|
|                                                                                                                     |   | **common  stock**       |   | **Common  Stock** |    | **to be  issued** |       | **Accumulated**   |   |       |   |
|                                                                                                                     |   | **Shares**              |   | **Amount**        |    | **Shares**        |       | **Amount**        |   | **Shares** |   | **Amount** |   | **deficits** |   | **Total** |   |
|                                                                                                                     |   |                    |   |              |    |              |       |              |   |       |   |       |   |   |   |   |   |
| Issuance of common stock to founders                                                                                     |   | 68,962,975              |   | $                 | 689,630 |              | —     |              | $      | —     |   | —     |   | $ | — |   | $ | — |   | $ | 689,630 |   |
| Exchange of common stock (including 2,500,006  shares of stock held by Laser Recording System, Inc.’s shareholders) |   | (68,962,975             | )      | (689,630          | )       | 71,462,981        |       | 689,630           |   | —     |   | —     |   | — |   | — |   |
| Additional capital contribution by existing  shareholders                                                                |   | —                  |   | —            |    | —            |       | 5,853,143         |   | —     |   | —     |   | — |   | 5,853,143 |   |
| Net loss                                                                                                                 |   | —                  |   | —            |    | —            |       | —            |   | —     |   | —     |   | (1,148,794 | ) | (1,148,794 | ) |
| Balance as of December 31, 2003                                                                                     |   | —                  |   | —            |    | 71,462,981        |       | 6,542,773         |   | —     |   | —     |   | (1,148,794 | ) | 5,393,979 |   |
| Issuance of common stock for cash                                                                                        |   | 793,339                 |   | 2,053,685         |    | —            |       | —            |   | —     |   | —     |   | — |   | 2,053,685 |   |
| Exchange of common stock                                                                                                 |   | (793,339                | )      | (2,053,685        | )       | 793,339           |       | 2,053,685         |   | —     |   | —     |   | — |   | — |   |
| Issuance of common stock and warrants for service  rendered in connection with private placement                         |   | 53,166                  |   | —            |    | —            |       | —            |   | —     |   | —     |   | — |   | — |   |
| Exchange of common stock                                                                                                 |   | (53,166                 | )      | —            |    | 53,166            |       | —            |   | —     |   | —     |   | — |   | — |   |
| Common stock fully paid and to be issued                                                                                 |   | —                  |   | —            |    | —            |       | —            |   | 538,332    |   | 1,375,955  |   | — |   | 1,375,955 |   |
| Additional capital contribution by existing  shareholders                                                                |   | —                  |   | —            |    | —            |       | 675,000           |   | —     |   | —     |   | — |   | 675,000 |   |
| Issuance of common stock for services provided                                                                           |   | —                  |   | —            |    | 25,000            |       | 137,500           |   | —     |   | —     |   | — |   | 137,500 |   |
| Net loss                                                                                                                 |   | —                  |   | —            |    | —            |       | —            |   | —     |   | —     |   | (1,881,600 | ) | (1,881,600 | ) |
|                                                                                                                     |   |                    |   |              |    |              |       |              |   |       |   |       |   |   |   |   |   |
| Balance as of June 30, 2004                                                                                         |   | —                  |   | $                 | —  |              | 72,334,486 |              | $      | 9,408,958  |   | 538,332    |   | $ | 1,375,955 |   | $ | (3,030,394 | ) | $ | 7,754,519 |   |

 

See notes to consolidated financial statements.

 

F-5

----

 

WEIDA COMMUNICATIONS, INC.CONSOLIDATED STATEMENTS OF CASHFLOWS

 
|                                                                                        |   | **Six months  ended  June 30,  2004** |       | **Period  from  May 16, 2003  to  June 30,  2003** |   | **Period  from  May 16, 2003  to  December 31,  2003** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|---------------------------------------------------------|--------|-------------------------------------------------------------|--------|
|                                                                                        |   |                                       |       | **(unaudited)**                                         |   |                                                        |   |
| Cash flows from operating activities                                                        |   |                                       |       |                                                    |   |                                                        |   |
| Net loss                                                                                    |   | $                                          | (1,881,600 | )                                                       | $      | (137,469                                                    | )      | $ | (1,148,794 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities:  |   |                                       |       |                                                    |   |                                                        |   |
| Fair value of services provided by  shareholders at no cost                                 |   | 75,000                                     |       | —                                                  |   | —                                                      |   |
| Fair value of services provided by a  related party settled by the issuance of common stock |   | 68,750                                     |       | —                                                  |   | —                                                      |   |
| Changes in assets and liabilities - net of  acquisition                                     |   |                                       |       |                                                    |   |                                                        |   |
| Increase in interest receivable                                                             |   | (49,060                                    | )          | —                                                  |   | (31,908                                                     | )      |
| Decrease in deposit in escrow                                                               |   | 58,346                                     |       | —                                                  |   | 746,807                                                     |   |
| Increase in prepaid expenses                                                                |   | (167,500                                   | )          | —                                                  |   | —                                                      |   |
| Increase in other assets                                                                    |   | (3,880                                     | )          | —                                                  |   | —                                                      |   |
| Increase in accounts payable and accrued  expenses                                          |   | 759,748                                    |       | 137,128                                                 |   | 759,055                                                     |   |
| Net cash (used in) provided by operating  activities                                        |   | (1,140,196                                 | )          | (341                                                    | )      | 325,160                                                     |   |
| Cash flows from investing activities                                                        |   |                                       |       |                                                    |   |                                                        |   |
| Purchase of property, plant and equipment                                                   |   | (18,121                                    | )          | —                                                  |   | —                                                      |   |
| Increase in deposit in escrow                                                               |   | —                                     |       | (805,153                                                | )      | (805,153                                                    | )      |
| Increase in deferred acquisition costs                                                      |   | (1,064,292                                 | )          | (3,221,529                                              | )      | (4,639,712                                                  | )      |
| Changes in due from related party                                                           |   | (438,640                                   | )          | (2,200,000                                              | )      | —                                                      |   |
| Increase in notes receivable                                                                |   | —                                     |       | —                                                  |   | (2,200,000                                                  | )      |
| Cash used in investing activities                                                           |   | (1,521,053                                 | )          | (6,226,682                                              | )      | (7,644,865                                                  | )      |
| Cash flows from financing activities                                                        |   |                                       |       |                                                    |   |                                                        |   |
| Issuance of common stock to founders                                                        |   | —                                     |       | —                                                  |   | 689,630                                                     |   |
| Changes in due to a related party                                                           |   | (20,546                                    | )          | 725,076                                                 |   | 776,932                                                     |   |
| Loan from a related party                                                                   |   | 270,000                                    |       | —                                                  |   | —                                                      |   |
| Proceeds from issuance of restricted common  shares                                         |   | 3,429,640                                  |       | —                                                  |   | —                                                      |   |
| Shareholders’ contribution                                                             |   | 600,000                                    |       | 5,501,947                                               |   | 5,853,143                                                   |   |
| Cash provided by financing activities                                                       |   | 4,279,094                                  |       | 6,227,023                                               |   | 7,319,705                                                   |   |
| Net change in cash                                                                          |   | 1,617,845                                  |       | —                                                  |   | —                                                      |   |
| Cash at beginning of period                                                                 |   | —                                     |       | —                                                  |   | —                                                      |   |
| Cash at end of period                                                                       |   | $                                          | 1,617,845  |                                                    | $      | —                                                      |   | $ | — |   |
| Supplemental disclosure of non-cash  activities:                                            |   |                                       |       |                                                    |   |                                                        |   |
| Issuance of stock in connection with  private placement                                     |   | $                                          | 159,498    |                                                    | $      | —                                                      |   | $ | — |   |
|                                                                                        |   |                                       |       |                                                    |   |                                                        |   |
| Issuance of warrants to purchase common  stock                                              |   | $                                          | 217,000    |                                                    | $      | —                                                      |   | $ | — |   |

 

See notes to consolidated financial statements.

 

F-6

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**WEIDA COMMUNICATIONS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**AS OF AND FOR THE SIX MONTHS PERIOD ENDEDJUNE 30, 2004, AND FOR THE PERIOD FROM MAY 16, 2003 TO DECEMBER 31,2003 AND JUNE 30, 2003 (UNAUDITED)**

 

**1.****                                      ORGANIZATIONAND NATURE OF THE BUSINESS**

 

SCL Ventures, LTD (“SCL”), a British Virgin Islands corporation, wasestablished on May 16, 2003 to acquire an interest in telecommunications andrelated service entities in Asia.

 

On May 20, 2003, SCL entered a shares exchange agreement (the “ExchangeAgreement”) with Laser Recording Systems, Inc. (“Laser”), a New Jerseycorporation.

 

The Exchange Agreement set forth the terms and conditions of theexchange by the SCL shareholders of their shares of capital stock, representingall of the issued and outstanding shares of capital stock of SCL in exchangefor the issuance by Laser to the shareholders of SCL of 69,809,480 shares ofcommon stock, no par value per share. Pursuant to the Exchange Agreement, SCLshareholders acquired approximately 96.5% of the issued and outstanding sharesof Laser and can elect three designees of SCL to the Board of Directors.

 

Following the share exchange with Laser (the “Exchange”) onJune 11, 2004, Laser changed its name to Weida Communications, Inc.(“Weida” or the “Company”) and its fiscal year end from January 31 toJune 30.

 

The transaction was accounted similar to a reverse acquisition in whichSCL is the accounting acquirer and Laser is the legal acquirer. The managementof SCL has replaced the management of Laser. Since the transaction wasaccounted for similar to a reverse acquisition and not a business combination,no goodwill has been recorded in connection with the transaction and suchexcess of purchase price over net assets acquired (goodwill) and the costsincurred in connection with the transaction have been accounted for as anexpense.

 

As a result of the Exchange (i) the historical financial statements ofLaser for periods prior to the date of the transaction are no longer presented;(ii) the historical financial statements of the Company for periods prior tothe date of the transaction are those of SCL; (iii) all references to thefinancial statements of the Company apply to the historical financialstatements of SCL prior to the transaction and the financial statements of theCompany subsequent to the transaction; (iv) any reference to the Companyapplies solely to Weida.

 

SCL entered into an agreement (the “Agreement”) with Guangzhou WeidaCommunications Technology Co., Ltd. (“Weida PRC”) and the existing shareholdersof Weida PRC (“Existing Shareholders”) on April 29, 2003.  The Agreement, as modified by a stocktransfer memorandum dated August 26, 2004, established the framework forthe acquisition, through a series of contractual arrangements, of control and amajority interest in Weida PRC.  Underthe Agreement:

 

1.                           Weida PRC will be convertedinto a Sino-Foreign Equity Joint Venture (the “Weida EJV”)

 

F-7

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2.                           SCL will obtain a 51%participation interest in the Weida EJV through (i) a direct acquisition of a25% ownership interest and (ii) an acquisition of a 26% profit-sharing interestvia a 100% ownership interest in a Hong Kong entity (“HK Company”).  The HK Company will be established by theExisting Shareholders, which, in turn, will establish a wholly owned foreignenterprise (“WOFE”) to hold a direct 26% profit-sharing interest in the WeidaEJV.

 

The total consideration for the purchase of the 25% ownership interestand 26% profit-sharing interest in the Weida EJV shall consist of thefollowing: (a) $805,153 in cash as registered capital to the Weida EJV; (b)cash payment of $15 million to the Existing Shareholders upon the completion ofthe conditions to the formation of the Weida EJV and the Weida EJV having beenformed and having a valid business license showing SCL’s 25% equity ownership;(c) transfer to the Existing Shareholders of approximately 16.3 million commonshares of the Company (deemed aggregate value of $110 million); and (d)provision or an arrangement to provide working capital for the Weida EJV andWOFE up to an aggregate amount of $159.2 million.

 

Further, the Agreement provides for a number of condition precedentsrequired of SCL and the execution of necessary documents and agreements bycertain parties. In addition, the consummation of the Agreement is subject tothe People’s Republic of China (the “PRC”) licensing and approval process,which may necessitate modification of the above mentioned transaction.  However, the provision or the arrangement toprovide the $159.2 million working capital is not a condition precedent.

 

The deferred acquisition costs on the balance sheet represent amountsspent in connection with the acquisition of Weida PRC.

 

Subsequent to June 30, 2004, SCL completed a series of contractualarrangements (See Note 9) resulting in its acquisition of effective managementcontrol and a 51% profit-sharing interest in Weida PRC.

 

**2.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

***Principle of consolidation*** - The consolidated financial statementsinclude the financial statements of SCL and Laser.  All significantintercompany transactions and balances are eliminated in consolidation.

 

***Use of Estimates***- The preparation of consolidated financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amount of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. They do not include all information and notesrequired by generally accepted accounting principles for complete consolidatedfinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals only)considered necessary for a fair presentation have been included.

 

***New Accounting Pronouncements***- In May 2003, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 150, *Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity*, which establishes

 

F-8

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standards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003 and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003.  The adoption ofSFAS No. 150 had no impact on the financial statements as the Company did nothave any financial instruments with characteristics of both liabilities andequity during the period ended December 31, 2003.

 

In April 2003, the FASB issued SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*, which amends and clarifies accounting forderivative instruments and for hedging activities under SFAS No. 133.Specifically, SFAS No. 149 requires that contracts with comparablecharacteristics be accounted for similarly. Additionally, SFAS No. 149clarifies the circumstances in which a contract with an initial net investmentmeets the characteristics of a derivative and when a derivative contains afinancing component that requires special reporting in the statement of cashflows.  This Statement is generallyeffective for contracts entered into or modified after June 30, 2003 anddid not have a significant impact on the Company’s financial position orresults of operations.

 

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 replaces FIN 46and addresses consolidation by business enterprises of variable interestentities that possess certain characteristics. A variable interest entity (“VIE”) is defined as (a) an ownership,contractual or monetary interest in an entity where the ability to influencefinancial decisions is not proportional to the investment interest, or (b) anentity lacking the invested capital sufficient to fund future activitieswithout the support of a third party. FIN 46R establishes standards fordetermining under what circumstances VIEs should be consolidated with theirprimary beneficiary, including those to which the usual condition forconsolidation does not apply.  TheCompany did not have any ownership in any variable interest entities as ofJune 30, 2004 and December 31, 2003.

 

***Taxes***- The Company is located in a jurisdiction where it has no actual operations orthat does not impose income taxes.  Assuch, no provision for income taxes has been provided.

 

**3.****                          NOTERECEIVABLE WITH RELATED PARTY**

 

On August 1, 2003, SCL signed a promissory note receivable withGlendora, Ltd. (“Glendora”), a British Virgin Islands corporation, in theamount of $2.2 million.  Glendora hascertain shareholders that are also shareholders of SCL and the Company.  Borrowings under the note receivable bearinterest at the London Interbank Offered Rate plus 200 basis points (effectiverate of  3.47% at December 31, 2003and 4.46% at June 30, 2004), with interest and principal due five yearsfrom the date of the note.  Glendora hasgranted 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 thisnote receivable approximates its fair value.

 

Additionally, SCL and Glendora signed an assignment agreement wherebySCL has granted Glendora the rights to enter into a transaction with GuangzhouSuntek New Tech R&D Co., Ltd. (“Suntek”) which was previously held bySCL.  Management of the Company has notassigned any value to the assignment agreement as the assignment agreementassigns the right to pursue a purchase agreement with Suntek and not a negotiatedpurchase agreement and, therefore, does not have any measurable value.

 

F-9

----

 

**4.****                                      DUEFROM RELATED PARTY**

 

The amount represents an amount due from Weida PRC for payments made onits behalf.  The amount is unsecured,interest-free and has no fixed terms of repayment.

 

**5.****                                      STOCKHOLDERS’EQUITY**

 

SCL was incorporated on May 16, 2003 with 100,000,000 shares authorizedto be divided into such number of classes or series as designated by SCL.

 

In 2003, SCL issued 68,962,975 shares of restricted common stock, parvalue US$0.01 per share. The subscription agreements set the purchase price ofUS$0.01 per share. The initial purchase price of $689,630 was funded by thefunding shareholders.  The restrictedcommon stock have been recorded as the issuance of founders stock, as therestricted common stock was issued in exchange for contributions of variousrights and services related to the formation of SCL. The founding shareholdershave provided operating capital and contributed various services to SCL.

 

In connection with the Exchange (see Note 1), the number of shares inthe Company has been restated retrospectively to reflect the effect of theExchange.

 

As noted in Note 1 to the consolidated financial statements, theCompany has agreed to issue 16.3 million shares to the Existing Shareholders ofWeida PRC upon satisfaction of certain conditions.

 

In the first quarter of 2004, SCL issued 61,666****shares of restricted common stock for atotal gross proceeds of $195,000.  Thesubscription agreements set the purchase price of $3 to $3.75 per share.  In addition, 156,040 shares were issued toone of the founding shareholders for a total gross proceeds of $1,560.

 

In the second quarter of 2004, SCL issued 575,633 shares of restrictedcommon stock for a total gross proceeds of $1,857,125.  SCL also issued 53,166 shares of commonstock at a value of $3 per share, and 31,249 warrants to purchase the commonstock, which shares and warrants have been accounted for as financing costs, inconnection with the private placement.

 

As part of the private placement the Company also issued warrants topurchase 2.37 million shares of the Company’s common stock to the foundingshareholders and investors, including the 31,249 warrants mentioned in thepreceding paragraph. The warrants entitle the holders to exercise theirwarrants and purchase shares of common stock exercisable commencing 24 monthsafter the Exchange at exercise prices of $1.00 and $2.75 per share, which applyto 1.58 million and 790,000 warrants, respectively. These warrants were valuedat $217,000 using the Black-Scholes pricing model with the followingassumptions: (i) no expected dividends; (ii) a risk-free interest rate of1.887%; (iii) expected volatility of 195%; and (iv) an expected life of threeyears.  As of June 30, 2004, therehave been no exercises of warrants and all warrants issued remain outstanding.

 

Subsequent to June 11, 2004, the Company received a total grossproceeds of $1,375,955 in exchange for 458,332 shares of common stock andwarrants to purchase an additional 229,173 shares of common stock to be issuedto existing and new investors. The warrants carry a three and one-half yearterm from the time such warrants are exercisable. The Company is also obligatedto issue 80,000 shares of common stock to advisors, which have been accountedfor as financing costs, in connection with this private placement.  As of June 30, 2004, the Company hasnot issued these shares and warrants.

 

F-10

----

 

**6.****                                      NETLOSS PER SHARE**

 

Basic and diluted net loss per share is computed by dividing the netloss for the period by the weighted average number of shares of common stockoutstanding during the period. For periods in which a net loss has beenincurred, the calculation of diluted net loss per share excludes potentialcommon stock equivalents, as their effect is anti-dilutive. Potential commonstock includes incremental shares of common stock issuable upon the exercise of2,370,000 outstanding stock warrants as of June 30, 2004.

 

# **7.**                                      COMMITMENTS AND CONTINGENCIES

# ** **

(i)             An employee of SCL asserted claims forunpaid salary in the amount of $0.5 million and 3.3 million shares of SCL’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’s management believes theCompany has meritorious defenses to the claims, including that the employee inquestion did not perform the services contemplated by the allegedagreement.  A portion of the employee’salleged unpaid salary had been and continues to be included in the Company’sconsolidated financial statements as account payable.

 

SCL has commenced legal proceedings against the employee for breach ofcontract and declaratory relief and has given him notice of termination ofemployment.  The employee has moved tocompel arbitration of the matter. Litigation or arbitration proceedings with respect to the employee’s claimsare probable.  There can be no assuranceas to the outcome of any litigation or arbitration proceedings.  Any adverse decision in such proceedingscould adversely affect the financial condition of the Company.

 

(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. Sepaniakand Teleflex to comply with corporate formalities such as holding annualmeetings and also alleges corporate waste, and is seeking various relief,including allowing shareholders to inspect the books and records, includingbalance sheets and profit and loss earnings statements. The former chieffinancial officer has also asserted claims against SCL, Teleflex and Mr.Sepaniak for unpaid salary and compensation.

 

Litigation proceedings with respect to the plaintiff’s claims areprobable. The proceedings are at an early stage, and therefore there can be noassurance as to the outcome of such proceedings. Any adverse decision in suchproceedings could adversely affect the financial condition of the Company.

 

(iii)       The Company is also subject to various legalproceedings and claims that arise in the 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.

 

F-11

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**8.****                          RELATEDPARTY TRANSACTIONS**

 

(i)             OnDecember 3, 2003, the Company entered into a consulting agreement withCarl Lanzisera, the former president and current member of the Company’s boardof directors.  The agreement providesfor Mr. Lanzisera to assist the Company in structuring, operating and growingthe Company’s business.  The agreementis for a term ending on December 31, 2004 and provides for cash paymentsaggregating $100,000 and the issuance of 25,000 restricted shares of theCompany’s common stock.  The shares wereissued in June 2004 at the market value of $5.5 per share.  The total consideration under the agreementamounted to $237,500, of which $118,750 has been recognised as expense in theconsolidated statements of operations during the six months ended June 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 for Mr. Giordano toassist SCL as a consultant by evaluating prospective merger, acquisition andfinancing transactions that are presented to SCL or the Company.  The agreement is for a term ending onMarch 30, 2006, with subsequent one-year extensions unless otherwiseterminated.  The agreement provides fora one-time initial consulting fee equal to $150,000, which was paid to Mr.Giordano in April 2004.  Inaddition, during the term of the agreement, commencing April 2004, Mr.Giordano will receive a monthly consulting fee, in arrears, in an amount equalto $20,000 plus reimbursement of expenses.

 

(iii)       Certain shareholders contributed capital to fundthe Company’s operations through to December 31, 2003.  In 2004, a founding shareholder of theCompany contributed $600,000 capital and loaned $270,000 to the Company to fundits operations.  The shareholder hasindicated it will not demand the repayment of $270,000 prior to July 2005.  In addition, a company owned by theshareholder also advanced $756,386 and $776,932 at June 30, 2004 andDecember 31, 2003, respectively, to the Company to finance its operations.

 

In addition, subsequent to June 30, 2004, Mr. Giordano, togetherwith one of Mr. Giordano’s family limited partnerships, has granted a creditfacility amounting to $5 million to fund the Company’s future operations. Thiscredit facility is unsecured, bears interest equal to the London InterbankOffered Rate plus 200 basis points, has no equity component, and terminates onOctober 31, 2005.

 

(iv)      During the six months ended June 30, 2004,certain shareholders provided services to the Company at no cost.  The value of the services is estimated to be$75,000 and has been recorded as additional capital contribution byshareholders.

 

**9.****                          SUBSEQUENTEVENT**

 

In August 2004, SCL completed a series of contractualarrangements.  As part of thecontractual arrangements, SCL acquired 99.99% of the registered capital ofOcean 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 and holder of all the registered capitalof Ocean Tian Di Communication Technology Co., Ltd. (Guangzhou), a wholly ownedforeign 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.

 

F-12

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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 contractualarrangements, SCL can designate three of Weida PRC’s five directors.

 

As part of the contractual arrangements, when the Weida EJV is formed andapproved by the PRC authorities, its profit-sharing interest will be reduced to26% so as to maintain its effective 51% majority interest.

 

F-13

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GUANGZHOUWEIDA COMMUNICATIONS

TECHNOLOGYCO., LTD.

 

CONSOLIDATEDFINANCIAL STATEMENTS

FORTHE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)

ANDINDEPENDENT AUDITORS’ REPORT

 
|                                                      | **PAGES** |
|-----------------------------------------------------------|-----------|
| Table of Contents                                         |      |
|                                                      |      |
| Independent Auditors’ Report                         | F-15      |
|                                                      |      |
| Consolidated  Balance Sheets                              | F-16      |
|                                                      |      |
| Consolidated  Statements of Operations                    | F-17      |
|                                                      |      |
| Consolidated  Statements of Shareholders’ Deficiency | F-18      |
|                                                      |      |
| Consolidated  Statements of Cash Flows                    | F-19      |
|                                                      |      |
| Notes to  Consolidated Financial Statements               | F-20      |

 

F-14

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INDEPENDENT AUDITORS’ REPORT

 

Tothe Board of Directors of Guangzhou Weida Communications Technology Co., Ltd:

 

Wehave audited the accompanying consolidated balance sheet of Guangzhou Weida CommunicationsTechnology Co., Ltd. and its subsidiary (the “Company”) as of June 30,2004 and the related consolidated statements of operations, shareholders’deficiency and cash flows for the six months ended June 30, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as of June 30,2004 and the results of their operations and their cash flows for the sixmonths ended June 30, 2004 in conformity with accounting principlesgenerally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  As discussedin Note 2 to the consolidated financial statements, the Company’s recurring netlosses, negative working capital and net operating cash outflows raisesubstantial doubt about its ability to continue as a going concern.  The arrangements entered into by managementconcerning these matters are also described in Note 2.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

Ouraudit also comprehended the translation of Renminbi amounts into United Statesdollar amounts and, in our opinion, such translation has been made inconformity with the basis stated in Note 3. Such United States dollar amounts are presented solely for theconvenience of the readers.

 

**Deloitte Touche Tohmatsu**

Certified Public Accountants

Hong Kong

 

August 30, 2004

 

F-15

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GuangzhouWeida Communications Technology Co., Ltd.

CONSOLIDATEDBALANCE SHEETS

 
|                                                          |   | **June 30, 2004** |   | **June 30, 2004** |   | **June 30, 2003** |   |
|---------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                                                          |   | **USD**                |   | **RMB**                |   | **RMB**                |   |
|                                                          |   |                   |   |                   |   | **(unaudited)**        |   |
| ASSETS                                                        |   |                   |   |                   |   |                   |   |
|                                                          |   |                   |   |                   |   |                   |   |
| Current assets:                                               |   |                   |   |                   |   |                   |   |
| Cash and cash equivalents                                     |   | 54,009                 |   | 447,009                |   | 1,974,918              |   |
| Restricted cash                                               |   | —                 |   | —                 |   | 10,000,000             |   |
| Accounts receivables                                          |   | 18,090                 |   | 149,720                |   | 628,480                |   |
| Amounts due from other related parties                        |   | —                 |   | —                 |   | 14,320,000             |   |
| Inventories                                                   |   | 757,596                |   | 6,270,317              |   | 6,451,466              |   |
| Advances to suppliers                                         |   | 13,920                 |   | 115,210                |   | 141,300                |   |
| Prepaid expenses and other current assets                     |   | 210,105                |   | 1,738,955              |   | 5,809,271              |   |
| Total current assets                                          |   | 1,053,720              |   | 8,721,211              |   | 39,325,435             |   |
| Deposit for purchase of property, plant and  equipment        |   | 393,950                |   | 3,260,567              |   | —                 |   |
| Property, plant and equipment, net                            |   | 1,553,665              |   | 12,859,052             |   | 15,918,136             |   |
| TOTAL ASSETS                                                  |   | 3,001,335              |   | 24,840,830             |   | 55,243,571             |   |
|                                                          |   |                   |   |                   |   |                   |   |
| LIABILITIES AND SHAREHOLDERS’ (DEFICIENCY) EQUITY        |   |                   |   |                   |   |                   |   |
|                                                          |   |                   |   |                   |   |                   |   |
| Current liabilities:                                          |   |                   |   |                   |   |                   |   |
| Bank loans                                                    |   | 2,416,451              |   | 20,000,000             |   | 40,000,000             |   |
| Short-term loan                                               |   | 24,165                 |   | 200,000                |   | —                 |   |
| Accounts payable                                              |   | 942,961                |   | 7,804,511              |   | 10,090,000             |   |
| Accrued expenses and other payables                           |   | 158,100                |   | 1,308,526              |   | 817,634                |   |
| Amounts due to shareholders                                   |   | 178,083                |   | 1,473,918              |   | 991,879                |   |
| Amount due to SCL Ventures, Ltd.                              |   | 438,640                |   | 3,630,448              |   | —                 |   |
| Amounts due to other related parties                          |   | 1,248,339              |   | 10,332,000             |   | 1,000,000              |   |
| Total current liabilities                                     |   | 5,406,739              |   | 44,749,403             |   | 52,899,513             |   |
| Shareholders’ (deficiency) equity:                       |   |                   |   |                   |   |                   |   |
| Paid-in capital                                               |   | 2,416,451              |   | 20,000,000             |   | 20,200,000             |   |
| Accumulated deficits                                          |   | (4,821,855             | )      | (39,908,573            | )      | (17,855,942            | )      |
| Total shareholders’ (deficiency) equity                  |   | (2,405,404             | )      | (19,908,573            | )      | 2,344,058              |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’  (DEFICIENCY) EQUITY |   | 3,001,335              |   | 24,840,830             |   | 55,243,571             |   |

 

Seenotes to consolidated financial statements.

 

F-16

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GuangzhouWeida Communications Technology Co., Ltd.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
|                               |   | **January 1, 2004  to  June 30, 2004** |   | **January 1, 2004  to  June 30, 2004** |   | **January 1, 2003  to  June 30, 2003** |   |
|------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|--------|
|                               |   | **USD**                                          |   | **RMB**                                          |   | **RMB**                                          |   |
|                               |   |                                             |   |                                             |   | **(unaudited)**                                  |   |
| Revenue:                           |   |                                             |   |                                             |   |                                             |   |
| Sales  of equipment                |   | 42,030                                           |   | 347,863                                          |   | 591,112                                          |   |
| Satellite bandwidth revenue        |   | 14,639                                           |   | 121,160                                          |   | 120,996                                          |   |
| Total revenues                     |   | 56,669                                           |   | 469,023                                          |   | 712,108                                          |   |
| Cost of revenues                   |   | (868,115                                         | )      | (7,185,044                                       | )      | (3,764,539                                       | )      |
| Operating expenses:                |   |                                             |   |                                             |   |                                             |   |
| Salary expenses                    |   | (128,230                                         | )      | (1,061,313                                       | )      | (1,020,913                                       | )      |
| Office rental expenses             |   | (99,541                                          | )      | (823,860                                         | )      | (351,655                                         | )      |
| Advertising and promotion expenses |   | (36,568                                          | )      | (302,655                                         | )      | (609,599                                         | )      |
| Office expenses                    |   | (15,846                                          | )      | (131,139                                         | )      | (242,899                                         | )      |
| Others                             |   | (124,094                                         | )      | (1,027,087                                       | )      | (663,555                                         | )      |
| Loss  from operations              |   | (1,215,725                                       | )      | (10,062,075                                      | )      | (5,941,052                                       | )      |
| Interest  expenses                 |   | (116,576                                         | )      | (964,853                                         | )      | (712,854                                         | )      |
| Interest  income                   |   | 11,788                                           |   | 97,561                                           |   | 7,711                                            |   |
| Net  loss                          |   | (1,320,513                                       | )      | (10,929,367                                      | )      | (6,646,195                                       | )      |

 

Seenotes to consolidated financial statements.

 

F-17

----

 

GuangzhouWeida Communications Technology Co., Ltd.

CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ DEFICIENCY

 
|                                                         |   | **Paid-in  capital  RMB** |   | **Accumulated  deficits  RMB** |   | **Total  shareholders’  (deficiency)  RMB** |   |
|--------------------------------------------------------------|--------|---------------------------|--------|--------------------------------|--------|--------------------------------------------------|--------|
|                                                         |   |                      |   |                           |   |                                             |   |
| Balance at January 1, 2003                              |   | 20,200,000                |   | (11,209,747                    | )      | 8,990,253                                        |   |
| Net loss (unaudited)                                         |   | —                    |   | (6,646,195                     | )      | (6,646,195                                       | )      |
| Balance at June 30, 2003 (unaudited)                    |   | 20,200,000                |   | (17,855,942                    | )      | 2,344,058                                        |   |
|                                                         |   |                      |   |                           |   |                                             |   |
| Balance at January 1, 2004                              |   | 20,200,000                |   | (28,979,206                    | )      | (8,779,206                                       | )      |
| Reclassification of capital contribution to  short-term loan |   | (200,000                  | )      | —                         |   | (200,000                                         | )      |
| Net loss                                                     |   | —                    |   | (10,929,367                    | )      | (10,929,367                                      | )      |
| Balance at June 30, 2004                                |   | 20,000,000                |   | (39,908,573                    | )      | (19,908,573                                      | )      |

 

Seenotes to consolidated financial statements.

 

F-18

----

 

GuangzhouWeida Communications Technology Co., Ltd.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                                                 |   | **January 1, 2004  to  June 30, 2004** |   | **January 1, 2004  to  June 30, 2004** |   | **January 1, 2003  to  June 30, 2003** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                                                                 |   | **USD**                                          |   | **RMB**                                          |   | **RMB**                                          |   |
|                                                                                                                 |   |                                             |   |                                             |   | **(unaudited)**                                  |   |
| Cash flows from operating activities:                                                                                |   |                                             |   |                                             |   |                                             |   |
| Net loss                                                                                                             |   | (1,320,513                                       | )      | (10,929,367                                      | )      | (6,646,195                                       | )      |
| Adjustment to reconcile net loss to net  cash used in operating activities:                                          |   |                                             |   |                                             |   |                                             |   |
| Depreciation expense                                                                                                 |   | 222,157                                          |   | 1,838,709                                        |   | 1,047,009                                        |   |
| Changes in operating assets and  liabilities:                                                                        |   |                                             |   |                                             |   |                                             |   |
| Accounts receivable                                                                                                  |   | 1,559                                            |   | 12,900                                           |   | 531,600                                          |   |
| Inventories                                                                                                          |   | 63,242                                           |   | 523,427                                          |   | (5,395,915                                       | )      |
| Advances to suppliers                                                                                                |   | 22,073                                           |   | 182,690                                          |   | (16,300                                          | )      |
| Prepaid expenses and other current assets                                                                            |   | 16,515                                           |   | 136,690                                          |   | (4,652,396                                       | )      |
| Accounts payables                                                                                                    |   | 708,044                                          |   | 5,860,196                                        |   | 10,090,000                                       |   |
| Accrued expenses and other payables                                                                                  |   | 29,028                                           |   | 240,253                                          |   | 127,006                                          |   |
| Net cash used in operating activities                                                                                |   | (257,895                                         | )      | (2,134,502                                       | )      | (4,915,191                                       | )      |
| Cash flows from investing activities:                                                                                |   |                                             |   |                                             |   |                                             |   |
| Refund of deposits for purchases of  property, plant and equipment                                                   |   | 1,631,105                                        |   | 13,500,000                                       |   | —                                           |   |
| Purchases of property, plant and equipment                                                                           |   | (590                                             | )      | (4,880                                           | )      | (7,756,854                                       | )      |
| Changes in restricted cash                                                                                           |   | —                                           |   | —                                           |   | (10,000,000                                      | )      |
| Changes in amounts due from other related  parties                                                                   |   | —                                           |   | —                                           |   | 5,601,052                                        |   |
| Net cash from (used in) investing  activities                                                                        |   | 1,630,515                                        |   | 13,495,120                                       |   | (12,155,802                                      | )      |
| Cash flows from financing activities:                                                                                |   |                                             |   |                                             |   |                                             |   |
| Changes in amounts due to shareholders                                                                               |   | 35,285                                           |   | 292,039                                          |   | (109,261                                         | )      |
| Changes in amounts due to other related  parties                                                                     |   | 997,028                                          |   | 8,252,000                                        |   | (1,565,924                                       | )      |
| Proceeds from bank loan                                                                                              |   | 2,416,451                                        |   | 20,000,000                                       |   | 40,000,000                                       |   |
| Repayment of bank loans                                                                                              |   | (4,832,903                                       | )      | (40,000,000                                      | )      | (20,000,000                                      | )      |
| Net cash (used in) provided by financing  activities                                                                 |   | (1,384,139                                       | )      | (11,455,961                                      | )      | 18,324,815                                       |   |
| Net (decrease) increase in cash and cash  equivalents                                                                |   | (11,519                                          | )      | (95,343                                          | )      | 1,253,822                                        |   |
|                                                                                                                 |   |                                             |   |                                             |   |                                             |   |
| Cash and cash equivalents at beginning of the  period                                                                |   | 65,528                                           |   | 542,352                                          |   | 721,096                                          |   |
| Cash and cash equivalents at end of the  period                                                                      |   | 54,009                                           |   | 447,009                                          |   | 1,974,918                                        |   |
| Supplemental disclosure of cash flows  information:                                                                  |   |                                             |   |                                             |   |                                             |   |
| Interest paid                                                                                                        |   | 116,576                                          |   | 964,853                                          |   | 712,854                                          |   |
| Non-cash transactions                                                                                                |   |                                             |   |                                             |   |                                             |   |
| Payments for purchases of property, plant  and equipment settled through the current account with SCL Ventures, Ltd. |   | 44,690                                           |   | 369,881                                          |   | —                                           |   |
| Payment of deposit for property, plant and  equipment settled through the current account with SCL Ventures, Ltd.    |   | 393,950                                          |   | 3,260,567                                        |   | —                                           |   |

 

See notesto consolidated financial statements.

 

F-19

----

 

GuangzhouWeida Communications Technology Co., Ltd.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003 (UNAUDITED)

AND INDEPENDENTAUDITORS’ REPORT

 

# **1.**                                      ORGANIZATIONAND NATURE OF OPERATIONS

 

GuangzhouWeida Communications Technology Co., Ltd., a company incorporated in thePeople’s Republic of China (the “PRC”), and its wholly owned subsidiary(collectively the “Company”), is engaged in designing, engineering, integrationand installation of satellite-based ground segment systems and networksolutions for the business-to-business market segment in the PRC, and sales ofdomestic very small aperture terminal (“VSAT”) communication equipment in thePRC.

 

TheCompany, its existing shareholders (“Existing Shareholders”) and SCL Ventures,Ltd. (“SCL”, a company incorporated in the British Virgin Islands and a whollyowned subsidiary of Weida Communications, Inc.) entered into an agreement (the“Agreement”) on April 29, 2003. The Agreement, as modified by a stock transfer memorandum datedAugust 26, 2004, established the framework for the acquisition, through aseries of contractual transactions, of control and a majority interest in theCompany.  Under the Agreement:

 

a.                                       The Companywill be converted into a Sino-Foreign Equity Joint Venture (“Weida EJV”);

 

b.                                      SCL willobtain a 51% participation in the Weida EJV through: (a) a direct acquisitionof 25% ownership interest; and (b) an acquisition of a 26% profit sharinginterest via a 100% ownership interest in a Hong Kong entity (“HKCompany”).  The HK Company will beestablished by Existing Shareholders; which, in turn, will establish a whollyowned foreign entity (“WOFE”) to hold a direct 26% profit sharing interest inthe Weida EJV.

 

The total consideration for the purchase of the 25% ownership interestand 26% profit-sharing interest in the Weida EJV shall consist of thefollowing: (a) USD805,153 in cash as registered capital to the Weida EJV; (b)cash payment of USD15 million to the Existing Shareholders upon the completionof the conditions to the formation of the Weida EJV and the Weida EJV havingbeen formed and having a valid business license showing SCL’s 25% equityownership; (c) transfer to the Existing Shareholders of approximately 16.3million common shares of Weida Communications, Inc. (deemed aggregate value ofUSD110 million); and (d) provision or an arrangement to provide working capitalfor the Weida EJV and WOFE up to an aggregate amount of USD159.2 million.

 

Further, the Agreement provides for a number of condition precedentsrequired of SCL and the execution of necessary documents and agreements bycertain parties. In addition, the consummation of the Agreement is subject tothe PRC licensing and approval process, which may necessitate modification ofthe above mentioned transaction. However, the provision or the arrangement to provide the USD159.2million working capital is not a condition precedent.

 

F-20

----

 

Subsequent to June 30, 2004, the Company completed a series ofcontractual arrangements (See Note 13) resulting in SCL acquiring an effectivemanagement control and a 51% profit-sharing interest in the Company.

 

# **2.**                                      BASISOF PRESENTATION

 

Theconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the United Statesof America, and assuming that the Company will continue as a going concern.  The Company had net losses and net operatingcash outflows since its inception and as of June 30, 2004, had negativeworking capital and a capital deficiency. These factors, among others, raise substantial doubts about its abilityto continue as a going concern.  Asdiscussed in Note 1, pursuant to the terms of the Agreement, additional fundingfrom SCL BVI is expected.  Provided thatthe new funding and working capital will be available to the Company uponcompletion of the Agreement, management believes that the Company will be ableto continue as a going concern.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

The accompanying unaudited consolidated financial statements as of and forthe six months ended June 30, 2003 have been prepared in accordance withaccounting principles generally accepted in the United States of America.  They do not include all information andnotes required by generally accepted accounting principles for completeconsolidated financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals only) considered necessary for a fair presentation have been included.

 

# **3.**                                      SUMMARYOF PRINCIPAL ACCOUNTING POLICIES

 

***Principle of consolidation*** - The consolidated financial statementsinclude the financial statements of Guangzhou Weida Communication TechnologyCo., Ltd. and its wholly-owned subsidiary. All significantintercompany transactions and balances are eliminated in consolidation.

 

***Use of estimates*** - Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period.  Actual results coulddiffer from those estimates.

 

***Property, plant and equipment*** - These are recorded at cost lessaccumulated depreciation.  Depreciationis provided on a straight-line basis over the estimated useful lives of theassets.  Estimated useful lives ofproperty, 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 equipment are capitalized, while expenditures for repairs,maintenance and minor renewals and betterments are expensed.

 

F-21

----

 

***Inventories*** - Inventories, which primarily consist of VSAT equipment, are statedat the lower of cost or market value. Cost is determined by the first-in, first-out method.

 

***Long-lived assets*** - The Company evaluatesits long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of the assets to futureundiscounted net cash flows expected to be generated by the assets.  If the carrying amounts of long-lived assetsare not recoverable, an impairment is recognized for the amount by which thecarrying amounts of the assets exceed their fair values.  No impairment loss was recorded for theperiod presented.

 

***Income taxes*** - Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the carrying amounts ofexisting assets and liabilities and their respective tax bases as well asoperating 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 on deferred tax assets and liabilities of a change intax rates is recognized in income in the period that includes the enactmentdate.  Valuation allowances areestablished when it is more likely than not that some or all of the deferredtax assets will not be realized.

 

***Revenue recognition*** - Revenue from the satellite bandwidth provision agreement isrecognized on a straight line basis over the period of the agreements.  The excess of amounts received or receivablefrom customers over the revenue recognized is included in accrued expenses andother payables account amounted to RMB 338,920 (USD 40,949) and RMB130,480 atJune 30, 2004 and 2003 (unaudited), respectively.

 

Sales of VSAT equipment arerecorded when the equipment is delivered, title has passed to the customers andthe Company has no further obligations to provide services related to theoperation of such equipment.

 

***Foreign currency translation*** - The functional currency of theCompany is the Renminbi (“RMB”). Transactions in other currencies are recorded in RMB at the rates ofexchange prevailing when the transactions occur.  Monetary assets and liabilities denominated in other currenciesare translated into RMB at rates of exchange in effect at the balance sheetdates.  Exchange gains and losses arerecorded in the consolidated statements of operations.

 

***Translation into United States Dollars*** - The financial statements of theCompany are stated in RMB.  Thetranslation of RMB amounts at and for the six months ended June 30, 2004into United States dollars (“USD”) are included solely for the convenience ofreaders and have been made at the rate of RMB 8.2766 to USD 1 at June 30,2004.  Such translations should not beconstrued as representations that RMB amounts could be converted into USD atthat rate or any other rate.

 

***Fair value of financial instruments*** - Thecarrying amounts of cash and cash equivalents, amounts due to shareholders,amounts due to other related parties, and bank loans approximate their fairvalues due to the short-term maturity of these instruments.

 

***Recently issued accounting pronouncements*** - In May 2003, the Financial AccountingStandard Board (“FASB”) issued Statement of Financial Accounting Standards(“SFAS”) No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and

 

F-22

----

 

Equity”.  It establishes standards for how an issuerclassifies and measures certain financial instruments.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterSeptember 15, 2003.  It requiresthat certain financial instruments that, under previous guidance, could beaccounted for as equity be classified as liabilities, or assets in somecircumstances.  It does not apply tofeatures embedded in a financial instrument that is not a derivative in itsentirety.  SFAS No. 150 also requiresdisclosures about alternative ways of settling the instruments and the capitalstructure of entities whose shares are mandatorily redeemable.  The adoption of SFAS No. 150 did not have animpact on the Company’s financial position, results of operations, or cashflows.

 

In January 2003, the FASBissued Interpretation No. (“FIN”) 46 (revised), “*Consolidation of Variable Interest Entities*”.  FIN 46 (revised) requires that if a businessenterprise has a controlling financial interest in a variable interest entity,the assets, liabilities and results of the activities of the variable interestentity should be included in consolidated financial statements of the businessenterprise.  FIN 46 (revised) appliesimmediately to variable interest entities created after January 31, 2003.  For variable interest entities created oracquired prior to February 1, 2003, the provisions of FIN 46 (revised) areeffective beginning January 1, 2004. The adoption of FIN 46 (revised) did not have a material impact on theCompany’s financial position, results of operations, or cash flows.

 

# **4.**                                      PROPERTY,PLANT AND EQUIPMENT

# ** **

|                                                     |   | **June 30, 2004** |   | **June 30, 2004** |   | **June 30, 2003** |   |
|----------------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                                                     |   | **USD**                |   | **RMB**                |   | **RMB**                |   |
|                                                     |   |                   |   |                   |   | **(unaudited)**        |   |
| Property, plant and equipment consist of  the following: |   |                   |   |                   |   |                   |   |
|                                                     |   |                   |   |                   |   |                   |   |
| VSAT and other equipment                                 |   | 1,933,899              |   | 16,006,100             |   | 15,824,509             |   |
| Office equipment                                         |   | 33,878                 |   | 280,396                |   | 270,936                |   |
| Computers                                                |   | 175,028                |   | 1,448,631              |   | 981,429                |   |
| Motor vehicles                                           |   | 46,249                 |   | 382,785                |   | 382,785                |   |
| Total                                                    |   | 2,189,054              |   | 18,117,912             |   | 17,459,659             |   |
| Less: Accumulated depreciation and amortization          |   | (635,389               | )      | (5,258,860             | )      | (1,541,523             | )      |
| Property, plant and equipment, net                       |   | 1,553,665              |   | 12,859,052             |   | 15,918,136             |   |

 

# **5.**                                      BANKLOANS

# ** **

Thebank loan outstanding as of June 30, 2004 of RMB 20,000,000 (USD2,416,451) bears interest at 5.84% per annum and is due on May 13, 2005.  The loan is guaranteed by related parties.

 

Asof June 30, 2003 (unaudited), the Company had 2 short-term loans with twodifferent banks in the amounts of RMB 20,000,000 (“Loan A”) and RMB 20,000,000(“Loan B”).  Loan A bore interest at5.31% per annum and was due on May 6, 2004. Loan B bore interest at 5.84%, was due on April 24, 2004 and wascollateralized by a bank deposit of RMB 10,000,000.  These loans were guaranteed by related parties.

 

F-23

----

 

# **6.**                                      SHORT-TERM LOAN

# ** **

The amount represents a loan from Mr. Li YaJun.  It is unsecured, interest-free andis expected to be repaid within one year.

 

# **7.**                                      INCOMETAXES

# ** **

Theincome tax rate applicable to enterprises in the PRC is generally 33%.  However, preferential tax treatment of theCompany’s wholly owned subsidiary has been agreed with the relevant taxauthorities.  The subsidiary is entitledto a one year exemption from income tax commencing 2003.  The Company had tax losses for the sixmonths ended June 30, 2004.

 

The Company’sdeferred tax assets as of June 30, 2004 and 2003 (unaudited) areattributable to the following:

 
|                                                              |   | **June 30, 2004****USD** |   | **June 30, 2004****RMB** |   | **June 30, 2003****RMB** |   |
|-------------------------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                                                              |   |                          |   |                          |   | **(unaudited)**               |   |
| Property, plant and equipment - difference  in depreciation rates |   | 96,507                        |   | 798,750                       |   | 271,910                       |   |
| Net operating losses                                              |   | 1,361,137                     |   | 11,265,589                    |   | 5,074,883                     |   |
|                                                              |   | 1,457,644                     |   | 12,064,339                    |   | 5,346,793                     |   |
| Valuation allowance                                               |   | (1,457,644                    | )      | (12,064,339                   | )      | (5,346,793                    | )      |
|                                                              |   | —                        |   | —                        |   | —                        |   |

 

Therealization of the recorded deferred tax assets is dependent on generatingsufficient taxable income prior to the expiration of net operating losscarryforwards.  As the management doesnot believe that it is more likely than not that all of the deferred tax assetwill be realized, a full valuation allowance has been established atJune 30, 2004 and 2003.

 

AtJune 30, 2004, the Company has net operating loss carryforwards of RMB10,155,586(USD 1,227,024), RMB 14,695,047 (USD 1,775,493), RMB 6,268,521 (USD 757,379)and RMB 3,018,996 (USD 364,763) which will expire in 2009, 2008, 2007 and 2006,respectively.

 

AtJune 30, 2003 (unaudited), the Company had net operating loss carryforwards of RMB6,090,915, RMB6,268,521 and RMB3,018,996, which would expire in2008, 2007 and 2006, respectively.

 

# **8.**                                      COMMITMENTS

# ** **

(a)                                  The Companyhas operating lease agreements principally for its office facilities and transponderutilization services.  Such leases haveremaining terms of 6 months to 46 months. Rental expense was RMB 6,123,632 (USD 739,873) for the six months ended June 30,2004 and RMB3,048,588 for the six months ended June 30, 2003 (unaudited).

 

F-24

----

 

Futureminimum lease payments under non-cancelable operating leases agreements were asfollows:

 
|        |   | **June 30, 2004** |   | **June 30, 2004** |   |
|-------------|--------|------------------------|--------|------------------------|--------|
|        |   | **USD**                |   | **RMB**                |   |
|        |   |                   |   |                   |   |
| Fiscal year |   |                   |   |                   |   |
| 2005        |   | 1,442,540              |   | 11,939,325             |   |
| 2006        |   | 1,302,046              |   | 10,776,512             |   |
| 2007        |   | 1,296,011              |   | 10,726,568             |   |
| 2008        |   | 1,078,333              |   | 8,924,934              |   |
| Total       |   | 5,118,930              |   | 42,367,339             |   |

 

(b)                                 During thesix months period ended June 30, 2004, the Company entered into anagreement to purchase VSAT equipment with a third party.  The contract sum was RMB 7,035,110 (USD850,000), of which RMB 3,260,567 (USD 393,950) had been paid during the six monthsperiod ended June 30, 2004.  Theremaining balance of RMB 3,774,543 (USD 456,050) will be settled upon thedelivery of the equipment in 2004.

 

# **9.**                                      RELATEDPARTY BALANCES AND TRANSACTIONS

# ** **

|                                                                                                     |   | **June 30, 2004** |   | **June 30, 2004** |   | **June 30, 2003** |   |
|----------------------------------------------------------------------------------------------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|                                                                                                     |   | **USD**                |   | **RMB**                |   | **RMB**                |   |
|                                                                                                     |   |                   |   |                   |   | **(unaudited)**        |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| Related  party balances                                                                                  |   |                   |   |                   |   |                   |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| ***Amounts due from  other related parties***                                                            |   |                   |   |                   |   |                   |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| Nin Xia Wei Lin Huo Xin Tan Co., Ltd. (note  i)                                                          |   | —                 |   | —                 |   | 250,000                |   |
| Guangzhou Suntek New Technology Research  & Design Co., Ltd. (“Guangzhou Suntek”) (note i) |   | —                 |   | —                 |   | 14,070,000             |   |
|                                                                                                     |   | —                 |   | —                 |   | 14,320,000             |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| ***Amounts due to  shareholders***                                                                       |   |                   |   |                   |   |                   |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| Mr. Pang Da Qing                                                                                         |   | (27,245                | )      | (225,500               | )      | (50,000                | )      |
| Ms. Xie Li                                                                                               |   | (149,322               | )      | (1,235,871             | )      | (941,879               | )      |
| Mr. Li Ya Jun                                                                                            |   | (1,516                 | )      | (12,547                | )      | —                 |   |
|                                                                                                     |   | (178,083               | )      | (1,473,918             | )      | (991,879               | )      |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| ***Amount due to SCL***                                                                                  |   | (438,640               | )      | (3,630,448             | )      | —                 |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| ***Amounts due to other related parties***                                                               |   |                   |   |                   |   |                   |   |
|                                                                                                     |   |                   |   |                   |   |                   |   |
| Mr. Deng Long Long (note ii)                                                                             |   | (120,823               | )      | (1,000,000             | )      | (1,000,000             | )      |
| Guangzhou Suntek (note i)                                                                                |   | (1,127,516             | )      | (9,332,000             | )      | —                 |   |
| Total                                                                                                    |   | (1,248,339             | )      | (10,332,000            | )      | (1,000,000             | )      |

 

F-25

----

 

Theamounts due to shareholders, SCL and other related parties represent borrowingsfrom them, were unsecured and interest-free.

 

Notes:

 

(i)                                     A directorand major shareholder of Nin Xia Wei Lin Huo Xin Tan Co., Ltd. and GuangzhouSuntek exercises significant influence on the operations of the Company byproviding direct and indirect financial support.

 

(ii)                                  Mr. Deng LongLong is a related party because he can exercise significant influence on theoperations of the Company through direct and indirect financial support.

 

Relatedparty transactions

 

Asof June 30, 2004, the Company’s bank loan (see Note 5) was guaranteed by ashareholder and other related parties at no charge.  A director and major shareholder of these other related partiesexercises significant influence on the operations of the Company.  Management believes that the estimated costof the guarantee was immaterial.

 

Inaddition, certain related parties provided administrative services, such assecondment of staff, to the Company at no cost.  Management believes that the estimated value of those serviceswas immaterial.

 

# **10.**                               PAID-INCAPITAL

# ** **

Theshareholders and their respective capital contributions as of June 30,2004 and 2003 (unaudited) are as follows:

 
|              |   | **June 30, 2004** |   | **June 30, 2004** |   | **June 30, 2003** |   |
|-------------------|--------|------------------------|--------|------------------------|--------|------------------------|--------|
|              |   | **USD**                |   | **RMB**                |   | **RMB**                |   |
|              |   |                   |   |                   |   |                   |   |
| Ms. Li Shun Xing  |   | 2,295,629              |   | 19,000,000             |   | 16,400,000             |   |
| Mr. Pang Da Qing  |   | 48,329                 |   | 400,000                |   | 1,200,000              |   |
| Mr. Li Xiang Ning |   | 48,329                 |   | 400,000                |   | 1,200,000              |   |
| Ms. Xie Li        |   | 24,164                 |   | 200,000                |   | 1,200,000              |   |
| Mr. Li Ya Jun     |   | —                 |   | —                 |   | 200,000                |   |
|              |   | 2,416,451              |   | 20,000,000             |   | 20,200,000             |   |

 

Theshareholders have the right to vote and to receive dividends in proportion totheir registered shareholding percentages.

 

F-26

----

 

Mr.Li Ya Jun contributed capital of RMB200,000 to the Company in 2001.  This contribution has not been registered inaccordance with the relevant PRC regulations. As a result of the series of contractual arrangements set out in Note 1,the Company will return this RMB200,000 to Mr. Li Ya Jun.  Accordingly, the amount has beenreclassified as short-term loan as of June 30, 2004 (see Note 6).

 

# **11.**                               MAJORCUSTOMERS

# ** **

Details of the customersaccounting for 10% or more of total sales are as follows:

 
|       |   | **January ****1,  2004** |   | **January ****1,  2003** |   |
|------------|--------|-------------------------------|--------|-------------------------------|--------|
|       |   | **to**                        |   | **to**                        |   |
|       |   | **June 30, 2004**        |   | **June 30, 2003**        |   |
|       |   |                          |   | **(unaudited)**               |   |
|       |   |                          |   |                          |   |
| Company  A |   | 53.58                         | %      | 83.01                         | %      |
| Company  B |   | 12.76                         | %      | —                        |   |
| Company  C |   | 10.66                         | %      | —                        |   |

 

The accounts receivable fromthe 3 customers with the largest receivable balances represents 87.63% of thebalance of the account at June 30, 2004, while the accounts receivablefrom the 2 customers with the largest receivable balances represented 97.76% ofthe balance of the account at June 30, 2003 (unaudited).

 

# **12.**                               EMPLOYEEBENEFIT PLANS

# ** **

Certainemployees of the Company in the PRC are entitled to retirement benefitscalculated with reference to their salaries upon retirement and their length ofservice in accordance with a PRC government-managed retirement plan.  The PRC government is directly responsiblefor the payments of the benefits to these retired employees.  The Company is required to makecontributions to the government-managed retirement plan at 11% to 20% of themonthly basic salaries of certain employees. The expense of such arrangements to the Company for the six months endedJune 30, 2004 and the six months ended June 30, 2003 (unaudited) were RMB82,577 (USD 9,977) and RMB41,312, respectively.

 

Inaddition, the Company is required by law to contribute approximately 0.4% to10% of total salaries of certain employees for medical and unemploymentbenefits and workers compensation.  ThePRC government is directly responsible for the payments of the benefits tothese employees.  The amountscontributed amounted to RMB 37,725 (USD 4,558) and RMB22,202 for the six monthsended June 30, 2004 and six months ended June 30, 2003 (unaudited),respectively.

 

# **13.**                               SUBSEQUENT EVENT

# ** **

In August 2004, a series of contractual arrangements werecompleted.  As part of the contractualarrangements, SCL acquired 99.99% of the registered capital of OceanInternational Holdings Limited (“OIHL”), a company incorporated in Hong Kong.  The remaining 0.01% of the registeredcapital of OIHL is held by one of SCL’s executives as a nominal holder in orderto meet local Hong Kong legal requirements. OIHL is the sole owner and holder of all the registered capital of OceanTian Di Communication Technology Co., Ltd. (Guangzhou), a wholly

 

F-27

----

 

owned foreign enterprise (“OTDC”). OTDC has entered into an exclusive service and support agreement withthe Company, effective as of September 1, 2004, which provides for OTDC toprovide support services to the Company in exchange for receiving service fees.

 

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

 

As part of the contractual arrangements, when the Weida EJV is formed andapproved by the PRC authorities, SCL’s profit-sharing interest will be reducedto 26% so as to maintain its effective 51% majority interest.

 

F-28

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GUANGZHOUWEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

 

CONSOLIDATEDFINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 ANDFOR THE PERIOD FROM APRIL 2, 2001 (DATE OF ESTABLISHMENT) TODECEMBER 31, 2001

 

Table ofContents

 
|                                                     | **PAGES** |
|----------------------------------------------------------|-----------|
| Independent Auditors’ Report                        | F-30      |
|                                                     |      |
| Consolidated  Balance Sheets                             | F-31      |
|                                                     |      |
| Consolidated Statements of Operations                    | F-32      |
|                                                     |      |
| Consolidated Statements of Shareholders’ Deficiency | F-33      |
|                                                     |      |
| Consolidated Statements of Cash Flows                    | F-34      |
|                                                     |      |
| Notes to Consolidated Financial Statements               | F-35      |

 

F-29

----

 

INDEPENDENT AUDITORS’REPORT

 

To the Board of Directors and Shareholders of Guangzhou WeidaCommunications Technology Co., Ltd:

 

We have audited the accompanying consolidated balance sheets ofGuangzhou Weida Communications Technology Co., Ltd. and its subsidiary(the “Company”) as of December 31, 2003 and 2002 and the relatedconsolidated statements of operations, shareholders’ equity (capitaldeficiency) and cash flows for the years ended December 31, 2003 and 2002and for the period from April 2, 2001 (date of establishment) to December 31,2001. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as ofDecember 31, 2003, 2002 and December 31, 2001, and the results oftheir operations and their cash flows for the years ended December 31,2003 and 2002 and for the period from April 2, 2001 to December 31,2001 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 tothe consolidated financial statements, the Company had net losses and netoperating cash outflows since its inception and, as of December 31, 2003,had negative working capital and a capital deficiency. These factors, amongothers, raise substantial doubts about its ability to continue as a goingconcern. The arrangements entered into by management concerning these mattersare also described in Note 2. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

Our audits also comprehended the translation of Renminbi amounts intoUnited States dollar amounts and, in our opinion, such translation has beenmade in conformity with the basis stated in Note 3. Such United Statesdollar amounts are presented solely for the convenience of the readers.

 

Deloitte Touche Tohmatsu

Hong Kong

April 16, 2004

 

F-30

----

 

GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

CONSOLIDATED BALANCE SHEETS

 
|                                                                  |   | **December 31,** |   |
|-----------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                  |   | **2003**              |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                  |   | **USD**               |   | **RMB** |   | **RMB** |   | **RMB** |   |
|                                                                  |   |                  |   |   |   |   |   |   |   |
| ASSETS                                                                |   |                  |   |   |   |   |   |   |   |
| Current assets:                                                       |   |                  |   |   |   |   |   |   |   |
| Cash                                                                  |   | 65,443                |   | 542,352 |   | 721,096 |   | 5,892,872 |   |
| Accounts receivable                                                   |   | 19,622                |   | 162,620 |   | 1,160,080 |   | 525,000 |   |
| Amounts due from related parties                                      |   | —                |   | — |   | 19,921,052 |   | 26,680,000 |   |
| Inventories                                                           |   | 819,768               |   | 6,793,744 |   | 1,055,551 |   | 1,919,337 |   |
| Advances to suppliers                                                 |   | 35,946                |   | 297,900 |   | 125,000 |   | — |   |
| Prepaid expenses                                                      |   | 226,325               |   | 1,875,645 |   | 1,156,875 |   | 1,196,867 |   |
| Total current assets                                                  |   | 1,167,104             |   | 9,672,261 |   | 24,139,654 |   | 36,214,076 |   |
| Deposits for purchases of property, plant  and equipment              |   | 1,628,979             |   | 13,500,000 |   | — |   | 5,910,092 |   |
| Property, plant and equipment, net                                    |   | 1,728,286             |   | 14,323,000 |   | 9,208,291 |   | 1,554,599 |   |
| TOTAL ASSETS                                                          |   | 4,524,369             |   | 37,495,261 |   | 33,347,945 |   | 43,678,767 |   |
|                                                                  |   |                  |   |   |   |   |   |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY  (CAPITAL DEFICIENCY)       |   |                  |   |   |   |   |   |   |   |
| Current liabilities:                                                  |   |                  |   |   |   |   |   |   |   |
| Bank loans                                                            |   | 4,826,604             |   | 40,000,000 |   | 20,000,000 |   | 25,000,000 |   |
| Accounts payable                                                      |   | 234,611               |   | 1,944,315 |   | — |   | — |   |
| Accrued expenses and other payables                                   |   | 128,903               |   | 1,068,273 |   | 690,628 |   | 33,679 |   |
| Amounts due to shareholders                                           |   | 142,612               |   | 1,181,879 |   | 1,101,140 |   | — |   |
| Amounts due to other related parties                                  |   | 250,983               |   | 2,080,000 |   | 2,565,924 |   | 1,715,000 |   |
| Total current liabilities                                             |   | 5,583,713             |   | 46,274,467 |   | 24,357,692 |   | 26,748,679 |   |
| Commitments                                                           |   | —                |   | — |   | — |   | — |   |
| Shareholders’ equity (capital deficiency):                       |   |                  |   |   |   |   |   |   |   |
| Paid-in capital                                                       |   | 2,437,435             |   | 20,200,000 |   | 20,200,000 |   | 20,200,000 |   |
| Accumulated deficits                                                  |   | (3,496,779            | )      | (28,979,206 | ) | (11,209,747 | ) | (3,269,912 | ) |
| Total shareholders’ equity (capital  deficiency)                 |   | (1,059,344            | )      | (8,779,206 | ) | 8,990,253 |   | 16,930,088 |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  (CAPITAL DEFICIENCY) |   | 4,524,369             |   | 37,495,261 |   | 33,347,945 |   | 43,678,767 |   |

 

See notes to consolidated financial statements.

 

F-31

----

 

GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                          |   | **Year ended  December 31,** |   | **April 2,  2001 to** |   |
|-----------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
|                                          |   | **2003**                          |   | **2003**                   |   | **2002** |   | **December 31,  2001** |   |
|                                          |   | **USD**                           |   | **RMB**                    |   | **RMB** |   | **RMB** |   |
|                                          |   |                              |   |                       |   |   |   |   |   |
| Revenues:                                     |   |                              |   |                       |   |   |   |   |   |
| Sales of equipment                            |   | 121,774                           |   | 1,009,189                  |   | 418,803 |   | 448,718 |   |
| Transponder utilization revenue               |   | 36,360                            |   | 301,328                    |   | 118,624 |   | — |   |
| Total revenues                                |   | 158,134                           |   | 1,310,517                  |   | 537,427 |   | 448,718 |   |
| Cost of revenues                              |   | 1,308,903                         |   | 10,847,406                 |   | 2,821,249 |   | 576,878 |   |
|                                          |   | (1,150,769                        | )      | (9,536,889                 | )      | (2,283,822 | ) | (128,160 | ) |
| Selling, general and administrative  expenses |   | 777,653                           |   | 6,444,712                  |   | 4,278,484 |   | 2,191,773 |   |
| Loss from operations                          |   | (1,928,422                        | )      | (15,981,601                | )      | (6,562,306 | ) | (2,319,933 | ) |
| Interest expense                              |   | (222,713                          | )      | (1,845,715                 | )      | (1,388,636 | ) | (966,975 | ) |
| Interest income                               |   | 6,981                             |   | 57,857                     |   | 11,107 |   | 16,996 |   |
| Net loss                                      |   | (2,144,154                        | )      | (17,769,459                | )      | (7,939,835 | ) | (3,269,912 | ) |

 

See notes to consolidated financial statements.

 

F-32

----

 

GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)

 
|                              |   | **Paid-in  capital** |   | **Accumulated  deficits** |   | **Total  shareholders’  equity  (capital deficiency)** |   |
|-----------------------------------|--------|----------------------|--------|---------------------------|--------|-------------------------------------------------------------|--------|
|                              |   | **RMB**              |   | **RMB**                   |   | **RMB**                                                     |   |
|                              |   |                 |   |                      |   |                                                        |   |
| Capital contributions             |   | 20,200,000           |   | —                    |   | 20,200,000                                                  |   |
| Net loss                          |   | —               |   | (3,269,912                | )      | (3,269,912                                                  | )      |
| Balance at December 31, 2001 |   | 20,200,000           |   | (3,269,912                | )      | 16,930,088                                                  |   |
| Net loss                          |   | —               |   | (7,939,835                | )      | (7,939,835                                                  | )      |
| Balance at December 31, 2002 |   | 20,200,000           |   | (11,209,747               | )      | 8,990,253                                                   |   |
| Net loss                          |   | —               |   | (17,769,459               | )      | (17,769,459                                                 | )      |
| Balance at December 31, 2003 |   | 20,200,000           |   | (28,979,206               | )      | (8,779,206                                                  | )      |

 

See notes to consolidated financial statements.

 

F-33

----

 

GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                         |   | **Year ended  December 31,** |   | **April 2,  2001 to** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------|--------|
|                                                                         |   | **2003**                          |   | **2003**                   |   | **2002** |   | **December 31,  2001** |   |
|                                                                         |   | **USD**                           |   | **RMB**                    |   | **RMB** |   | **RMB** |   |
|                                                                         |   |                              |   |                       |   |   |   |   |   |
| Cash flows from operating activities:                                        |   |                              |   |                       |   |   |   |   |   |
| Net loss                                                                     |   | (2,144,154                        | )      | (17,769,459                | )      | (7,939,835 | ) | (3,269,912 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                              |   |                       |   |   |   |   |   |
| Depreciation expense                                                         |   | 353,022                           |   | 2,925,637                  |   | 487,794 |   | 6,720 |   |
| Changes in operating assets and  liabilities:                                |   |                              |   |                       |   |   |   |   |   |
| Accounts receivable                                                          |   | 120,359                           |   | 997,460                    |   | (635,080 | ) | (525,000 | ) |
| Inventories                                                                  |   | (692,400                          | )      | (5,738,193                 | )      | 863,786 |   | (1,919,337 | ) |
| Advances to suppliers                                                        |   | (20,863                           | )      | (172,900                   | )      | (125,000 | ) | — |   |
| Prepaid expenses                                                             |   | (86,730                           | )      | (718,770                   | )      | 39,992 |   | (1,196,867 | ) |
| Accounts payable                                                             |   | 234,611                           |   | 1,944,315                  |   | — |   | — |   |
| Accrued expenses and other payables                                          |   | 45,568                            |   | 377,645                    |   | 656,949 |   | 33,679 |   |
| Net cash used in operating activities                                        |   | (2,190,587                        | )      | (18,154,265                | )      | (6,651,394 | ) | (6,870,717 | ) |
| Cash flows from investing activities:                                        |   |                              |   |                       |   |   |   |   |   |
| Changes in deposits for purchases of  property, plant and equipment          |   | (1,628,979                        | )      | (13,500,000                | )      | 5,910,092 |   | (5,910,092 | ) |
| Purchases of property, plant and equipment                                   |   | (970,189                          | )      | (8,040,346                 | )      | (8,141,486 | ) | (1,561,319 | ) |
| Changes in amounts due from related parties                                  |   | 2,403,776                         |   | 19,921,052                 |   | 6,758,948 |   | (26,680,000 | ) |
| Net cash (used in) provided by investing  activities                         |   | (195,392                          | )      | (1,619,294                 | )      | 4,527,554 |   | (34,151,411 | ) |
| Cash flows from financing activities:                                        |   |                              |   |                       |   |   |   |   |   |
| Capital contribution                                                         |   | —                            |   | —                     |   | — |   | 20,200,000 |   |
| Proceeds from bank loans                                                     |   | 4,826,604                         |   | 40,000,000                 |   | 20,000,000 |   | 25,000,000 |   |
| Repayment of bank loans                                                      |   | (2,413,302                        | )      | (20,000,000                | )      | (25,000,000 | ) | — |   |
| Changes in amounts due to shareholders                                       |   | 9,743                             |   | 80,739                     |   | 1,101,140 |   | — |   |
| Changes in amounts due to other related  parties                             |   | (58,634                           | )      | (485,924                   | )      | 850,924 |   | 1,715,000 |   |
| Net cash provided by (used in) financing  activities                         |   | 2,364,411                         |   | 19,594,815                 |   | (3,047,936 | ) | 46,915,000 |   |
| Net (decrease) increase in cash and cash  equivalents                        |   | (21,568                           | )      | (178,744                   | )      | (5,171,776 | ) | 5,892,872 |   |
| Cash at beginning of the period                                              |   | 87,011                            |   | 721,096                    |   | 5,892,872 |   | — |   |
| Cash at end of the period                                                    |   | 65,443                            |   | 542,352                    |   | 721,096 |   | 5,892,872 |   |
|                                                                         |   |                              |   |                       |   |   |   |   |   |
| Supplemental disclosure of cash flows  information:                          |   |                              |   |                       |   |   |   |   |   |
| Interest paid                                                                |   | 222,713                           |   | 1,845,715                  |   | 1,388,636 |   | 966,975 |   |

 

See notes to consolidated financial statements.

 

F-34

----

 

GUANGZHOU WEIDA COMMUNICATIONS TECHNOLOGY CO., LTD.

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDEDDECEMBER 31, 2003 AND 2002 AND FOR THE PERIOD FROM APRIL 2, 2001(DATE OF ESTABLISHMENT) TO DECEMBER 31, 2001

 

1.  ORGANIZATION AND NATURE OFOPERATIONS

 

Guangzhou Weida Communications Technology Co., Ltd., a companyincorporated in the People’s Republic of China (the “PRC”), and its whollyowned subsidiary, Guangzhou Weida Saite Communications Equipment Co., Ltd.(collectively the “Company”), is engaged in providing communication networktechnology services, sales of communication network equipment and operations ofdomestic very small aperture terminal (“VSAT”) communication business in thePRC.

 

The Company, its existing shareholders (“Existing Shareholders”) andSCL Ventures Ltd. (“SCL BVI”, a company incorporated in the British VirginIslands) entered into an Agreement (“Agreement”) on April 29, 2003. Underthe Agreement:

 

a.                                       The Company isconverted into a Sino-Foreign Equity Joint Venture (“EJV”);

 

b.                                      SCL BVI obtains a51% participation in the EJV through: (i) a 25% ownership interest; and(ii) a 26% profit sharing interest via a 100% ownership interest in a HongKong entity (“HK Company”). The HK Company will be established by ExistingShareholders; which, in turn, will establish a wholly owned foreign entity(“WOFE”) to hold a direct 26% profit sharing interest in the EJV.

 

The total consideration from SCL BVI for the 25% ownership interest and26% profit sharing interest in the EJV shall consist of the following:(i) cash capital contribution of USD 805,153 to the EJV; (ii) cashpayment to Existing Shareholders of USD 15,000,000; (iii) transfer toExisting Shareholders of SCL common shares valued at USD 110,000,000; and(iv) SCL BVI using its best efforts to provide or arrange for workingcapital to the EJV and WOFE up to an aggregate amount of USD 159,194,847.

 

Further, the Agreement provides for, among others, a number ofcondition precedents required of SCL BVI and the execution of necessarydocuments and agreements by certain parties. In addition, the consummation ofthe Agreement is subject to the PRC licensing and approval process, which maynecessitate modification of the abovementioned transaction. As ofApril 16, 2004, the Company has not yet been converted into an EJV andWOFE has not yet been established, and the considerations stipulated in thepreceding paragraph have not yet been paid/provided/transferred.

 

2.  BASIS OF PRESENTATION

 

The consolidated financial statements of the Company have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America, and assuming that the Company will continue as a goingconcern. The Company had net losses and net operating

 

F-35

----

 

cash outflows since inception and, as of December 31, 2003, hadnegative working capital and a capital deficiency. These factors, among others,raise substantial doubts about its ability to continue as a going concern. Asdiscussed in Note 1, pursuant to the terms of the Agreement, additionalfunding from SCL BVI is expected. Provided that the new funding and workingcapital will be available to the Company upon completion of the agreement,management believes that the Company will be able to continue as a goingconcern. The financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

3.  SUMMARY OF PRINCIPALACCOUNTING POLICIES

 

***Principle ofconsolidation***-The consolidated financialstatements include the financial statements of Guangzhou Weida CommunicationsTechnology Co., Ltd. and its wholly owned subsidiary. All significant intercompanytransactions and balances are eliminated in consolidation.

 

***Use of estimates***-Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period. Actual results could differ from those estimates.

 

***Property, plant andequipment***-These are recorded at cost lessaccumulated depreciation. Depreciation is provided on a straight-line basisover the estimated useful lives of the assets. Estimated useful lives ofproperty, 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 equipment are capitalized,while expenditures for repairs, maintenance and minor renewals and bettermentsare expensed.

 

***Inventories***-Inventories,which primarily consist of VSAT equipment, are stated at the lower of cost ormarket. Cost is determined by the first-in, first-out method.

 

***Long-lived assets***-TheCompany evaluates its long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be recoverable. Recoverability of assets to be held and used is measured bya comparison of the carrying amount of the assets to future undiscounted netcash flows expected to be generated by the assets. If the carrying amounts oflong-lived assets are not recoverable, an impairment is recognized for theamount by which the carrying amounts of the assets exceed their fair values. Noimpairment loss was recorded in any period presented.

 

F-36

----

 

***Income taxes***-Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the carrying amounts of existing assets andliabilities and their respective tax bases as well as operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date. Valuation allowancesare established when it is more likely than not that some or all of thedeferred tax assets will not be realized.

 

***Revenue recognition***-Revenuefrom transponder utilization agreements is recognized on a straight line basisover the period of the agreements. The excess of lease rental received orreceivable from customers over the revenue recognized is deferred and includedin accrued expenses and other payables account amounted to RMB 389,280 (USD46,973), RMB 14,400 and RMB NIL at December 31, 2003, 2002 andDecember 31, 2001, respectively.

 

Sales of VSAT equipment are recorded when the equipment is delivered,title has passed to the customers and the Company has no further obligations toprovide services related to the operation of such equipment.

 

***Foreign currencytranslation***-The functional currency of the Companyis the Renminbi (“RMB”). Transactions in other currencies are recorded in RMBat the rates of exchange prevailing when the transactions occur. Monetaryassets and liabilities denominated in other currencies are translated into RMBat rates of exchange in effect at the balance sheet dates. Exchange gains andlosses are recorded in the consolidated statements of operations.

 

***Translation intoUnited States Dollars***-The financial statements ofthe Company are stated in RMB. The translation of RMB amounts at and for theyear ended December 31, 2003 into United States dollars (“USD”) areincluded solely for the convenience of readers and have been made at the rateof RMB 8.2874 to USD 1 at December 31, 2003. Such translations should notbe construed as representations that RMB amounts could be converted into USD atthat rate or any other rate.

 

***Fair value offinancial instruments***-The carrying amounts ofcash, amounts due from (to) related parties, amounts due to shareholders, andbank loans approximate their fair values due to the short-term maturity ofthese instruments.

 

***Recently IssuedAccounting Pronouncements***-In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”. It establishes standardsfor how an issuer classifies and measures certain financial instruments. SFASNo. 150 is effective for financial instruments entered into or modifiedafter May 31, 2003, and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003. It requires thatcertain financial instruments that, under previous guidance, could be accountedfor as equity be classified as liabilities, or assets in some circumstances. Itdoes not apply to features embedded in a financial instrument that is not aderivative in its entirety. SFAS No. 150 also requires disclosures aboutalternative ways of settling the instruments and the capital

 

F-37

----

 

structure of entities whose shares are mandatorily redeemable. Theadoption of SFAS No. 150 did not have an impact on the Company’s resultsof operations or financial position.

 

In January 2003, the FASB issued FIN No. 46, “Consolidationof Variable Interest Entities-an Interpretation of Accounting Research BulletinNo. 51”. FIN No. 46 requires the primary beneficiary to consolidate avariable interest entity if it has a variable interest that will absorb amajority of the entity’s expected losses if they occur, receive a majority ofthe entity’s expected residual returns if they occur, or both. FIN No. 46applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interest entities in which the entityobtains an interest after that date. For variable interest entities acquiredbefore February 1, 2003, the effective date for the Company isJanuary 1, 2004. The Company believes the adoption of FIN No. 46 didnot have a material impact on its results of operations or financial position.

 

4.  PROPERTY, PLANT ANDEQUIPMENT

 

Property, plant and equipment consist of the following:

 
|                                             |   | **December 31** |   |
|--------------------------------------------------|--------|----------------------|--------|
|                                             |   | **2003**             |   | **2003** |   | **2002** |   | **2001** |   |
|                                             |   | **USD**              |   | **RMB** |   | **RMB** |   | **RMB** |   |
|                                             |   |                 |   |   |   |   |   |   |   |
| VSAT and other equipment                         |   | 1,930,789            |   | 16,001,220 |   | 8,747,308 |   | 857,701 |   |
| Office equipment                                 |   | 33,429               |   | 277,036 |   | 248,523 |   | 172,393 |   |
| Computers                                        |   | 130,573              |   | 1,082,110 |   | 443,689 |   | 267,940 |   |
| Motor vehicles                                   |   | 46,189               |   | 382,785 |   | 263,285 |   | 263,285 |   |
| Total                                            |   | 2,140,980            |   | 17,743,151 |   | 9,702,805 |   | 1,561,319 |   |
| Less: Accumulated depreciation and  amortization |   | (412,694             | )      | (3,420,151 | ) | (494,514 | ) | (6,720 | ) |
| Property, plant and equipment, net               |   | 1,728,286            |   | 14,323,000 |   | 9,208,291 |   | 1,554,599 |   |

 

5.  BANK LOANS

 

The bank loan outstanding as of December 31, 2001 of RMB25,000,000 bore interest at 5.85% per annum and was repaid on April 26,2002.

 

The bank loan outstanding as of December 31, 2002 of RMB20,000,000 bore interest at 5.31% per annum and was repaid on March 1,2003.

 

As of December 31, 2003, the Company has 2 short-term loans withtwo different banks in the amounts of RMB 20,000,000 (USD 2,413,302, “Loan A”)and RMB 20,000,000 (USD 2,413,302, “Loan B”).

 

Loan A bears interest at 5.31% per annum and is due on May 5,2004. Loan B bears interest at 5.84%, is due on April 24, 2004. Theseloans are guaranteed by related parties.

 

F-38

----

 

6.  INCOME TAXES

 

The income tax rate applicable to enterprises in the PRC is generally33%. However, preferential tax treatment of the Company’s wholly ownedsubsidiary has been agreed with the relevant tax authorities. The subsidiary isentitled to a one year exemption from income tax commencing 2003. The Companyhad tax losses for the years ended December 31, 2003 and 2002 and theperiod from April 2, 2001 to December 31, 2001.

 

The Company’s deferred tax assets as of September 30, 2003,December 31, 2002 and December 31, 2001 are attributable to thefollowing:

 
|                                                            |   | **December 31** |   |
|-----------------------------------------------------------------|--------|----------------------|--------|
|                                                            |   | **2003**             |   | **2003** |   | **2002** |   | **2001** |   |
|                                                            |   | **USD**              |   | **RMB** |   | **RMB** |   | **RMB** |   |
|                                                            |   |                 |   |   |   |   |   |   |   |
| Property, plant and equipment-difference in  depreciation rates |   | 65,570               |   | 543,402 |   | 82,798 |   | — |   |
| Net operating losses                                            |   | 954,973              |   | 7,914,246 |   | 3,064,881 |   | 996,269 |   |
|                                                            |   | 1,020,543            |   | 8,457,648 |   | 3,147,679 |   | 996,269 |   |
| Valuation allowance                                             |   | (1,020,543           | )      | (8,457,648 | ) | (3,147,679 | ) | (996,269 | ) |
|                                                            |   | —               |   | — |   | — |   | — |   |

 

The realization of the recorded deferred tax assets is dependent ongenerating sufficient taxable income prior to the expiration of net operatingloss carryforwards. As management does not believe that it is more likely thannot that all or a portion of the deferred tax asset will be realized, a fullvaluation allowance has been established at December 31, 2003, 2002 andDecember 31, 2001.

 

At December 31, 2003, the Company has net operating losscarryforwards of RMB14,695,047 (USD1,773,179), RMB6,268,521 (USD756,392) andRMB3,018,996 (USD364,287), which will expire in 2008, 2007 and 2006,respectively.

 

7.  COMMITMENTS

 

a.                                       The Company hasoperating lease agreements principally for its office facilities andtransponder utilization services. Such leases have remaining terms of7 months to 52 months. Rental expense was RMB 9,198,152 (USD1,109,896), RMB 2,818,139 and RMB 739,848 for the years ended December 31,2003 and 2002 and the period from April 2, 2001 to December 31, 2001,respectively.

 

Future minimum lease payments under non-cancellable operating leaseagreements were as follows:

 

F-39

----

 
|        |   | **December 31,  2003** |   | **December 31,  2003** |   |
|-------------|--------|-----------------------------|--------|-----------------------------|--------|
|        |   | **USD**                     |   | **RMB**                     |   |
|        |   |                        |   |                        |   |
| Fiscal year |   |                        |   |                        |   |
| 2004        |   | 1,451,045                   |   | 12,025,393                  |   |
| 2005        |   | 1,327,095                   |   | 10,998,168                  |   |
| 2006        |   | 1,299,636                   |   | 10,770,600                  |   |
| 2007        |   | 1,294,000                   |   | 10,723,896                  |   |
| 2008        |   | 431,333                     |   | 3,574,632                   |   |
| Total       |   | 5,803,109                   |   | 48,092,689                  |   |

 

b.                                      The Company hasentered into an agreement to purchase a Global Positioning System with a thirdparty. The contract sum was RMB 28,000,000 (USD 3,378,623), of which RMB13,500,000 (USD 1,678,979) had been paid during the year endedDecember 31, 2003. The remaining balance of RMB 14,500,000 (USD 1,749,644)will be settled upon delivery of the system in 2004.

 

8.  RELATED PARTY BALANCES AND TRANSACTIONS

 
|                                                   |   | **December 31** |   |
|--------------------------------------------------------|--------|----------------------|--------|
|                                                   |   | **2003**             |   | **2003** |   | **2002** |   | **2001** |   |
|                                                   |   | **USD**              |   | **RMB** |   | **RMB** |   | **RMB** |   |
|                                                   |   |                 |   |   |   |   |   |   |   |
| *Related Party  Balances*                              |   |                 |   |   |   |   |   |   |   |
| ***Amounts  due from related parties***                |   |                 |   |   |   |   |   |   |   |
| Hai Tian Chang Xin Technology Co., Ltd.  (note i) |   | —               |   | — |   | 19,671,052 |   | — |   |
| Ning Xia Wei Lin Huo Xin Tan Co. Ltd.  (note i)   |   | —               |   | — |   | 250,000 |   | 250,000 |   |
| Shenzhen Rui Shi Te Shi Ye Co., Ltd.  (note i)    |   | —               |   | — |   | — |   | 1,000,000 |   |
| Guangzhou Si Ma Te Zhi Ji Ka Co., Ltd.  (note i)  |   | —               |   | — |   | — |   | 25,430,000 |   |
| Total                                                  |   | —               |   | — |   | 19,921,052 |   | 26,680,000 |   |

 

F-40

----

 
|                                                                           |   | **December 31** |   |
|--------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                           |   | **2003**             |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                           |   | **USD**              |   | **RMB** |   | **RMB** |   | **RMB** |   |
|                                                                           |   |                 |   |   |   |   |   |   |   |
| ***Amounts  due to shareholders***                                             |   |                 |   |   |   |   |   |   |   |
| Mr. Pang Da Qing                                                               |   | (6,034               | )      | (50,000 | ) | (50,000 | ) | — |   |
| Ms. Xie Li                                                                     |   | (136,578             | )      | (1,131,879 | ) | (1,051,140 | ) | — |   |
|                                                                           |   | (142,612             | )      | (1,181,879 | ) | (1,101,140 | ) | — |   |
|                                                                           |   |                 |   |   |   |   |   |   |   |
| ***Amounts  due to other related parties***                                    |   |                 |   |   |   |   |   |   |   |
| Mr. Deng Long Long (note ii)                                                   |   | (120,665             | )      | (1,000,000 | ) | (1,100,000 | ) | (1,000,000 | ) |
| Liaoning Suntek Technology Co., Ltd.  (note i)                            |   | —               |   | — |   | (110,000 | ) | — |   |
| Guangdong Xin Te Communication Co., Ltd.  (note i)                        |   | —               |   | — |   | (762,000 | ) | — |   |
| Guangzhou Suntek New Technology Research  & Design Co., Ltd. (note i) |   | (118,252             | )      | (980,000 | ) | (593,924 | ) | — |   |
| Zhejiang Topper Wireless Co., Ltd.  (note i)                              |   | —               |   | — |   | — |   | (715,000 | ) |
| Hai Tian Cheng Xin Technology Co., Ltd.  (note i)                         |   | (12,066              | )      | (100,000 | ) | — |   | — |   |
| Total                                                                          |   | (250,983             | )      | (2,080,000 | ) | (2,565,924 | ) | (1,715,000 | ) |

 

The amounts due from related parties, amounts due to shareholders andamounts due to other related parties represent cash advances to or borrowingsfrom them, and were unsecured, non-interest bearing and had no fixed repaymentterms.

 

In addition, the Company advanced to/from certain related parties(note i) during the year ended December 31, 2003. These advances wereunsecured, non-interest bearing and had been repaid in full as ofDecember 31, 2003.

 

Notes:

 

(i)                                     A director andmajor shareholder of these related parties exercises significant influence onthe operations of the Company by providing direct and indirect financialsupport.

 

(ii)                                  Mr. Deng Long Long is a relatedparty because he can exercise significant influence on the operations of theCompany through direct and indirect financial support.

 

F-41

----

 

*Related party transactions*

 

The Company’s bank loans (see Note 5) were guaranteed by ashareholder and other related parties at no charge. A director and majorshareholder of these related parties exercises significant influence on theoperations of the Company. Management believes that the estimated cost of theguarantee was immaterial.

 

In addition, certain related parties provided administrative services,such as secondment of staff, to the Company at no cost. Management believesthat the estimated value of those services was immaterial.

 

9.  PAID-IN CAPITAL

 

The shareholders and their respective capital contributions as ofDecember 31, 2003, December 31, 2002 and December 31, 2001 areas follows:

 

 
|              |   | **USD**   |   | **RMB**    |   |
|-------------------|--------|-----------|--------|------------|--------|
|              |   |      |   |       |   |
| Ms. Li Shun Xing  |   | 1,978,908 |   | 16,400,000 |   |
| Mr. Pang Da Qing  |   | 144,798   |   | 1,200,000  |   |
| Mr. Li Xiang Ning |   | 144,798   |   | 1,200,000  |   |
| Mr. Li Ya Jun     |   | 24,133    |   | 200,000    |   |
| Ms. Xie Li        |   | 144,798   |   | 1,200,000  |   |
|              |   | 2,437,435 |   | 20,200,000 |   |

 

The shareholders have the right to vote and to receive dividends inproportion to their shareholding percentages.

 

10.  MAJOR CUSTOMERS

 

Details of the customers accounting for 10% or more of total sales areas follows:

 
|      |   | **Year ended  December 31** |   | **April 2,  2001  to** |   |
|-----------|--------|----------------------------------|--------|-----------------------------|--------|
|      |   | **2003**                         |   | **2002**                    |   | **December 31,  2001** |   |
|      |   |                             |   |                        |   |   |   |
| Company A |   | 75                               | %      | 78                          | %      | 100 | % |
| Company B |   | —                           |   | 11                          | %      | — |   |

 

The accounts receivable from the 2 customers with the largestreceivable balances represents 80%, 93% and 100% respectively, of the balanceof the account at December 31, 2003, December 31, 2002 andDecember 31, 2001, respectively.

 

F-42

----

 

11.  EMPLOYEE BENEFIT PLANS

 

Certain employees of the Company in the PRC are entitled to retirementbenefits calculated with reference to their salaries upon retirement and theirlength of service in accordance with a PRC government-managed retirement plan.The PRC government is directly responsible for the payments of the benefits tothese retired employees. The Company is required to make contributions to thegovernment-managed retirement plan at 11% to 20% of the monthly basic salariesof certain employees. The expense of such arrangements to the Company for theyears ended December 31, 2003 and 2002 and the period from April 2,2001 to December 31, 2001 was RMB 104,526 (USD 12,613), RMB 56,659 and RMBNil, respectively.

 

In addition, the Company is required by law to contribute approximately0.4% to 10% of total salaries of certain employees for medical and unemploymentbenefits and workers compensation. The PRC government is directly responsiblefor the payments of the benefits to these employees. The amounts contributedamounted to RMB 64,309 (USD 7,760), RMB 34,129 and RMB Nil for the years endedDecember 31, 2003 and 2002 and the period from April 2, 2001 toDecember 31, 2001, respectively.

 

F-43

----

 

**UNADITEDPRO FORMA COMBINED FINANCIAL STATEMENTS**

 

**Unaudited Pro Forma Combined FinancialStatements**

 

The following unaudited pro forma combined financial statements givepro forma effect to the recently completed acquisition of Weida PRC****by Weida, by using the purchase method ofaccounting and the assumptions set forth in the accompanying notes to the proforma combined financial statements. Weida has a 51% profit and loss participation agreement and the right toappoint a majority of the board of directors of Weida PRC and the right toappoint the general manager and chief financial officer of Weida PRC, both ofwhich rights it intends to exercise. Weida therefore has operational and financial control of Weida PRC.  This presentation assumes that the purchaseprice has been allocated based on preliminary estimates of the fair marketvalue of Weida PRC’s assets and liabilities. The pro forma assumptions are subject to change pending a final analysisof the fair values of the assets acquired and liabilities assumed by Weida. Theimpact of these changes could be material.

 

The unaudited pro forma combined balance sheet as of June 30, 2004is presented to give effect to the acquisition of Weida PRC as if it hadoccurred on June 30, 2004.  Theunaudited pro forma statement of operations for the six-month period endedJune 30, 2004 is presented as if the acquisition of Weida PRC had takenplace on January 1, 2003 and, combines (i) the historical results of Weidafor the six-month period ended June 30, 2004 and (ii) the historicalresults of Weida PRC for the six-month period ended June 30, 2004.  The unaudited pro forma statement ofoperations for the year ended December 31, 2003 is presented as if theacquisition of Weida PRC had taken place on January 1, 2003 and combines(i) the historical results of Weida for the period from May 16, 2003 (date ofinception) to December 31, 2003 and (ii) the historical results of WeidaPRC for the year ended December 31, 2003.

 

The unaudited pro forma combined financial statements are based onestimates and assumptions.  Theseestimates and assumptions are preliminary and have been made solely forpurposes of developing this pro forma combined financial statement.  Unaudited pro forma combined financialstatements are presented for illustrative purposes only and are not necessarilyindicative of the operating results that would have been achieved if theacquisition of control of, and a majority profit-sharing interest in Weida PRChad been consummated as of the beginning of the period indicated, nor are theynecessarily indicative of future results of operations.  The pro forma combined financial statementsdo not give effect to any cost savings or restructuring and integration coststhat may result from the integration of Weida’s and Weida PRC’s businesses.Costs related to restructuring and integration have not yet been determined.

 

F-44

----

 

**Weida Communications,Inc.**

**Pro Forma Combined Statement of Operations**

**For the twelve monthsended December 31, 2003**

 
|                                          |   | **Weida *** |   | **Weida PRC** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined  Weida** |   |
|-----------------------------------------------|--------|-------------|--------|---------------|--------|----------------------------|--------|--------------------------------|--------|
|                                          |   | **US$**     |   | **US$**       |   |                       |   | **US$**                        |   |
| Revenues:                                     |   |        |   |          |   |                       |   |                           |   |
| Sales of equipment                            |   | —      |   | 121,774       |   | —                     |   | 121,774                        |   |
| Satellite bandwidth revenue                   |   | —      |   | 36,360        |   | —                     |   | 36,360                         |   |
| Total revenue                                 |   | —      |   | 158,134       |   |                       |   | 158,134                        |   |
|                                          |   |        |   |          |   |                       |   | —                         |   |
| Cost of revenue                               |   | —      |   | 1,308,903     |   | —                     |   | 1,308,903                      |   |
|                                          |   | —      |   | (1,150,769    | )      |                       |   | (1,150,769                     | )      |
| Selling, general and administrative  expenses |   | 1,180,702   |   | 777,653       |   | —                     |   | 1,958,355                      |   |
|                                          |   |        |   |          |   |                       |   |                           |   |
| Loss from operations                          |   | (1,180,702  | )      | (1,928,422    | )      |                       |   | (3,109,124                     | )      |
| Interest expense                              |   | —      |   | (222,713      | )      | —                     |   | (222,713                       | )      |
| Interest income                               |   | 31,908      |   | 6,981         |   | —                     |   | 38,889                         |   |
|                                          |   |        |   |          |   |                       |   |                           |   |
| Net loss                                      |   | (1,148,794  | )      | (2,144,154    | )      |                       |   | (3,292,948                     | )      |

 

----

* Weidacommenced operations on May 16th 2003. 

 

F-45

----

 

**WeidaCommunications, Inc.**

**Pro Forma Combined Balance Sheet**

**As atJune 30, 2004**

 
|                                                   |   | **Weida**  |   | **Weida PRC** |   | **Pro Forma  Adjustments** |        | **Pro Forma  Combined  Weida** |   |
|--------------------------------------------------------|--------|------------|--------|---------------|--------|----------------------------|-------------|--------------------------------|--------|
|                                                   |   | **US$**    |   | **US$**       |   |                       |        | **US$**                        |   |
| **Assets**                                             |   |       |   |          |   |                       |        |                           |   |
| Current assets:                                        |   |       |   |          |   |                       |        |                           |   |
| Cash in bank                                           |   | 1,617,845  |   | 54,009        |   | —                     |        | 1,671,854                      |   |
| Accounts receivable                                    |   | 80,968     |   | 18,090        |   | —                     |        | 99,058                         |   |
| Due from related party                                 |   | 438,640    |   | —        |   | (438,640                   | )(vii)      | 0                              |   |
| Inventories                                            |   | —     |   | 757,596       |   | —                     |        | 757,596                        |   |
| Advances to suppliers                                  |   | —     |   | 13,920        |   | —                     |        | 13,920                         |   |
| Prepaid expenses and deposits                          |   | 173,750    |   | 210,105       |   | —                     |        | 383,855                        |   |
| Total current assets                                   |   | 2,311,203  |   | 1,053,720     |   |                       |        | 2,926,283                      |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Deposit for purchase of property, plant and  equipment |   | —     |   | 393,950       |   |                       |        | 393,950                        |   |
| Property, plant and equipment, net                     |   | 18,121     |   | 1,553,665     |   | —                     |        | 1,571,786                      |   |
| Note receivable                                        |   | 2,200,000  |   | —        |   | —                     |        | 2,200,000                      |   |
| Goodwill                                               |   | —     |   | —        |   | 24,115,226                 | (a)(i)-(vi) | 24,115,226                     |   |
| Deferred acquisition costs                             |   | 5,704,004  |   | —        |   | (5,704,004                 | )(a)(v)     | —                         |   |
| Deferred expenses - non-current portion                |   | 62,500     |   | —        |   |                       |        | 62,500                         |   |
| Other assets                                           |   | 3,880      |   | —        |   |                       |        | 3,880                          |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| **Total Assets**                                       |   | 10,299,708 |   | 3,001,335     |   |                       |        | 31,273,625                     |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| **Liabilities and  stockholders’ equity**         |   |       |   |          |   |                       |        |                           |   |
| Current liabilities:                                   |   |       |   |          |   |                       |        |                           |   |
| Bank loans                                             |   | —     |   | 2,416,451     |   | —                     |        | 2,416,451                      |   |
| Short term loan                                        |   | —     |   | 24,165        |   | —                     |        | 24,165                         |   |
| Accounts payable                                       |   | 1,518,803  |   | 942,961       |   | —                     |        | 2,461,764                      |   |
| Accrued expenses and other payables                    |   | —     |   | 158,100       |   | 15,805,153                 | (a)(i)(ii)  | 15,963,253                     |   |
| Amounts due to shareholders                            |   | —     |   | 178,083       |   | —                     |        | 178,083                        |   |
| Amount due to SCL Ventures, Ltd.                       |   | —     |   | 438,640       |   | (438,640                   | )(vii)      | —                         |   |
| Amounts due to other related parties                   |   | 756,386    |   | 1,248,339     |   | —                     |        | 2,004,725                      |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Total current liabilities                              |   | 2,275,189  |   | 5,406,739     |   |                       |        | 23,048,441                     |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Non—current liabilities                           |   |       |   |          |   |                       |        |                           |   |
| Long term loan                                         |   | 270,000    |   | —        |   | —                     |        | 270,000                        |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Total Liabilities                                      |   | 2,545,189  |   | 5,406,739     |   |                       |        | 23,318,441                     |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Minority interests                                     |   | —     |   | —        |   | (1,804,053                 | )(a)(vi)    | —                         |   |
|                                                   |   |       |   |          |   | 1,804,053                  | (a)(vi)     |                           |   |
| Stockholders’ equity                              |   |       |   |          |   |                       |        |                           |   |
| Capital stocks and paid in capital                     |   | 10,784,913 |   | 2,416,451     |   | (2,416,451                 | )(a)(iv)    | 10,985,578                     |   |
|                                                   |   |       |   |          |   | 2,004,718                  | (a)(iii)    |                           |   |
|                                                   |   |       |   |          |   | (1,804,053                 | )(a)(vi)    |                           |   |
| Deficit                                                |   | (3,030,394 | )      | (4,821,855    | )      | 4,821,855                  | (a)(iv)     | (3,030,394                     | )      |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| Total stockholders’ equity                        |   | 7,754,519  |   | (2,405,404    | )      |                       |        | 7,955,184                      |   |
|                                                   |   |       |   |          |   |                       |        |                           |   |
| **Total liabilities  and stockholders’ equity**   |   | 10,299,708 |   | 3,001,335     |   |                       |        | 31,273,625                     |   |

 

F-46

----

 

**Weida Communications,Inc.**

**ProForma Combined Statement of Operations**

**For the six monthsended June 30, 2004**

 
|                                          |   | **Weida**  |   | **Weida PRC** |   | **Pro Forma  Adjustments** |   | **Pro Forma  Combined  Weida** |   |
|-----------------------------------------------|--------|------------|--------|---------------|--------|----------------------------|--------|--------------------------------|--------|
|                                          |   | **US$**    |   | **US$**       |   |                       |   | **US$**                        |   |
| Revenues:                                     |   |       |   |          |   |                       |   |                           |   |
| Sales of equipment                            |   | —     |   | 42,030        |   | —                     |   | 42,030                         |   |
| Satellite bandwidth revenue                   |   | —     |   | 14,639        |   | —                     |   | 14,639                         |   |
| Total revenue                                 |   | —     |   | 56,669        |   |                       |   | 56,669                         |   |
|                                          |   |       |   |          |   |                       |   |                           |   |
| Cost of revenue                               |   | —     |   | 868,115       |   | —                     |   | 868,115                        |   |
|                                          |   |       |   | (811,446      | )      |                       |   | (811,446                       | )      |
| Selling, general and administrative  expenses |   | 2,057,313  |   | 404,279       |   | —                     |   | 2,461,592                      |   |
|                                          |   |       |   |          |   |                       |   |                           |   |
| Loss from operations                          |   | (2,057,313 | )      | (1,215,725    | )      |                       |   | (3,273,038                     | )      |
| Interest expense                              |   | —     |   | (116,576      | )      | —                     |   | (116,576                       | )      |
| Interest income                               |   | 49,060     |   | 11,788        |   | —                     |   | 60,848                         |   |
|                                          |   |       |   |          |   |                       |   |                           |   |
| Net loss                                      |   | (2,008,253 | )      | (1,320,513    | )      |                       |   | (3,328,766                     | )      |

 

F-47

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**NOTES TO PRO FORMA FINANCIAL INFORMATION**

 

**Basis of Pro Forma Presentation**

 

The acquisition of Weida PRC by Weida has been accounted for using thepurchase method of accounting.

 

The financial statements of Weida PRC are stated in RMB. Thetranslations of assets and liabilities as at December 31, 2003 from RMBinto USD in the pro forma combined balance sheet have been made at the rate ofRMB 8.2874 to USD 1 while the translations of assets and liabilities as atJune 30, 2004 from RMB into USD in the pro forma combined balance sheethave been made at the rate of RMB8.2766. The translations of income and expenses from RMB into USD in the proforma combined statement of operations for the year ended December 31,2003 have been made at the rate of RMB8.2874 to USD 1 and RMB 8.2766 to USD 1for the six-month period ended June 30, 2004.  Such translations should not be construed as representations thatRMB amounts could be converted into USD at that rate or any other rate duringsuch period or at any other time.

 

The value of the Registrant’s shares issued to Weida PRC was based uponthe market capitalization of the Registrant, using an average closing price ofthe Registrant’s common stock two days prior to and two days after May 20,2003, the date the proposed share exchange was announced. The value used of$0.1230 per share is the market value of $1.09 per share adjusted for allshares issued in connection with the transactions.

 

**Pro Forma Adjustments**

 

(a)                                  Adjustmentsreflecting the acquisition of Weida PRC by Weida to reflect that uponacquisition:

 

(i)                                     Weida will providea cash capital contribution to Weida PRC of $805,153;

 

(ii)                                  Weida will make acash payment of $15,000,000 due to the existing shareholders of Weida PRC;

 

(iii)                               Weida will transfer toexisting shareholders of Weida PRC 16,296,296 shares of Weida common stockvalued at $0.1230 per share (an amount based on $1.09 per share, the averageclosing price of Weida’s common stock two days prior to and two days after May20, 2003, the date the proposed share exchange was announced, which share pricewas adjusted (1) first, for the proposed 1-for-4 reverse split of Weida’scommon stock prior to the share exchange, and (2) second, for the issuance ofapproximately 86.1 million additional shares which were issued in the exchangeand are assumed to be issued to the Weida PRC shareholders, consisting ofapproximately 69.8 million shares issued to Weida shareholders, andapproximately 16.3 million shares assumed to be issued to the Weida PRCshareholders), or $2,004,718 in the aggregate. The determination of the shareprice used in recording the transaction is for accounting purposes only. It isnot the value ($6.25) used for determining the fixed amount of shares to beissued in the acquisition of Weida PRC by Weida or the value of theRegistrant’s shares to be received by shareholders of Weida in connection withthe merger;

 

(iv)                              Weida PRC’s equityaccounts will be eliminated;

 

(v)                                 deferred acquisitioncosts will be reclassified to goodwill;

 

F-48

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(vi)                              a minority interest in(receivable from) Weida PRC will be eliminated; and

 

(vii)                           intercompany balances willbe eliminated.

 

The foregoing adjustments, including, without limitation, theallocation of purchase price to goodwill, are subject to change pending a finalanalysis of the fair values of the assets acquired and liabilities assumed byWeida. Some of the goodwill amount will be allocated to licenses with definiteor indefinite life.  The impact of anysuch changes on future results of operations and reported assets andliabilities could be material.

 

**Additional Equity**

 

Weida is in the process of raising additional equity, in connectionwith the acquisition of Weida PRC, to satisfy the $15,000,000 due to WeidaPRC’s shareholders, which is payable upon the completion of the conditions tothe formation of the Weida EJV and the Weida EJV having been formed and havinga valid business license showing SCL’s 25% equity ownership.

 

F-49

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