UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark
One)
x
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Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
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For
the fiscal year ended December 31, 2007.
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o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
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For
the transition period from __________ to __________.
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Commission
File Number 000-06217
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
(Exact
name of registrant as specified in its charter)
Nevada
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22-3774845
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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23rd
Floor, Building A, Galaxy Century,
No.3069,
Caitian Road, Futian District,
Shenzhen,
the PRC
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518026
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code 86-755-2655-3580
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
stock, $0.001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the
Act. Yes
o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated
filer
o
x
Smaller
reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes
o
No
x
Aggregate
market value of voting and non-voting common equity held by non-affiliates
of
the registrant as of
June 30
, 2007, based upon
the closing price of the common stock as reported by the OTC Bulletin Board
under the symbol “DGNG” on such date, was approximately
$29,000,000
22,340,700
shares of common stock outstanding as of February 29, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
INDEX
Table
of Contents
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Page
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PART
I
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Item
1.
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Description
of Business
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1
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Item
1A.
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Risk
Factors
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20
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Item
1B.
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Unresolved
Staff Comments
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35
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Item
2.
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Property
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36
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Item
3.
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Legal
Proceedings
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37
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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37
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PART
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Issuer Purchases
of
Equity Securities
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37
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Item
6.
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Selected
Financial Data
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39
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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39
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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58
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Item
8.
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Financial
Statements and Supplementary Data
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58
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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59
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Item
9A.
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Controls
and Procedures
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59
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Item
9B
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Other
Information
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62
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PART
III
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Item
10.
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Directors
and Executive Officers, Corporate Governance and Board
Independence
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62
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Item
11.
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Executive
Compensation
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66
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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73
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Item
13.
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Certain
Relationships and Related Transactions
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74
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Item
14.
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Principal
Accountant Fees and Services
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77
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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78
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Signatures
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80
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Cautionary
Statement
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events
or the Company’s future financial performance. The Company has attempted
to identify forward-looking statements by terminology including “anticipates,”
“believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the
negative of these terms or other comparable terminology. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents the Company files with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. The Company’s expectations are as of the date this Form 10-K is
filed, and the Company does not intend to update any of the forward-looking
statements after the date this Annual Report on Form 10-K is filed to confirm
these statements to actual results, unless required by law.
PART
I
ITEM
1. DESCRIPTION OF BUSINESS.
Overview
We
specialize in the design, production and distribution of small to medium-sized
Light Emitting Diode, or “LED”, and Cold Cathode Fluorescent Lamp, or “CCFL”,
backlights for various Thin Film Transistor Liquid Crystal Displays, or
“TFT-LCD”, and Super-Twisted Nematic Liquid Crystal Display, or “STN-LCD”,
Twisted Nematic Liquid Crystal Display, or “TN-LCD”, and Mono LCDs, taken
together, these applications are referred to as “LCD” applications. Those
applications include color displays for cell phones, car televisions and
navigation systems, digital cameras, televisions, computer displays, camcorders,
PDAs and DVDs, CD and MP3/MP4 players, appliance displays and the
like.
We
conduct that business principally through the operations of Diguang Electronics
and Dihao (Yangzhou) Co., Ltd., thereafter “Dihao”. As of December 31,
2007, Diguang Electronics has approximately 2,000 full-time employees, which
changes from time to time as needed, Diguang is headquartered in Shenzhen,
China, with additional offices and its backlight manufacturing operations in
Dongguan, China. As of December 31, 2007, Dihao has approximately 330 full-time
employees, which changes from time to time as needed. Dihao is a subsidiary
of
North Diamond, 65% of which was acquired by us on January 3, 2007. Wuhan Diguang
Electronics Co., Ltd was established as in-house facilities mainly for a
Taiwan-based customer with the capacity to provide large inches of TFT-LCD
and
it has approximately 240 employees as of December 31, 2007. Dongguan Diguang
Electronics Science and Technology Co Ltd., or “Dongguan Diguang”, was
established for the purpose to be used as the production base of Shenzhen
Diguang Electronics Co Ltd. It is the legal owner of the land and buildings
which has been rented to Diguang Electronics since March 30, 2005. As of
December 31, 2007, Dongguan Diguang has approximately 10 full-time
employees.
Well
Planner is involved in the import of raw materials into China and export of
finished products from China. Well Planner currently has no fixed
assets.
Diguang
Technology is directly involved with the international buying of raw materials
and selling of backlight products for Diguang Electronics. Diguang
Technology purchases raw materials from international suppliers and acts as
an
international sales group for both Diguang Electronics and Well Planner.
Diguang Technology has no fixed assets.
In
2007,
we generated revenues of $45.9 million, net loss of $2.9 million and cash flow
from operations of $3.9 million. We have been profitable and cash flow positive
each year since 1999 to 2006, and 2007 is the first time we have recorded a
loss.
Our
Industry
The
backlight industry is closely associated with the consumer electronics industry.
LCDs are used to present data and images in a wide variety of applications,
ranging from cell phones to car navigation and entertainment systems to the
larger displays used in flat panel televisions and computer monitors, including
laptop computer screens.
LCD
technology allows for a higher level of light output than other types of panel
displays. It has become the mainstream technology in today’s display market with
demand for such technology increasing by 10 to 15 percent per year. According
to
Displaybank, a reputable Korean based research firm, the global LCD display
market was approximately $48.5 billion in 2004, and it is expected to grow
to
approximately $94 billion by 2010. This significant growth projection is being
driven by an increase in the breadth of applications utilizing LCDs to take
advantage of their increased brightness and clarity, the development of new
LCD-related technologies and the growing use of LCDs in larger screen
applications, e.g. television sets.
Generally,
companies that manufacture backlights supply them as a component to other
parties, which incorporate them into a finished display unit, which consists
of
a film, such as a thin film transistor, that bears the image and the case or
shell that is used to hold the backlight and film in place. As a result, our
customers are typically the assemblers of the LCD modules, although we have
some
customers who are the final assemblers of the products that are sold to
consumers.
Until
recently, the backlight industry was centered in Japan and Korea, where the
majority of modules used in the production of LCD displays, such as Samsung
and
Toshiba, are located. Based on certain cost advantages, Taiwan has become a
leading producer of backlights as well.
More
recently, a large number of backlight manufacturers, both independent ones
and
operations associated with Japanese and Korean companies, have begun production
in the PRC, including Diguang. This shift of backlight production to the PRC
is
based in large measure on the comparability of its technical workforce and
facilities to those of the traditional Asian producers, together with
significant labor cost advantages. Those factors have, to some extent, pulled
the assembly of display units into the PRC as well, even though a relatively
small amount of the modules used to make LCD displays are currently produced
in
the PRC.
We
consider our industry to be one that is expanding, as electronics are
incorporated into a growing number of products and devices that benefit from
the
display of information and images. We have benefited from certain cost and
strategic advantages relative to our competitors, and those advantages have
enabled us to maintain attractive margins on our products up to this point.
However, as a growing percentage of backlight production shifts to the PRC
from
higher-cost countries, price competition will increase, and our ability to
preserve margins will depend on our continuing to improve our product quality,
production efficiency and customer services relative to our
competitors.
(a)
General Development of Business Prior to the Share Exchange
Online
was organized under the laws of Nevada in 2000 as Online Processing, Inc.
Online’s initial business was to provide Internet-based mortgage
processing for mortgage brokers. Online was never able to achieve
profitability in that business, so it began searching for operating companies
to
acquire to increase shareholder value. On February 28, 2003, through a share
exchange, Online acquired 100% of the issued and outstanding stock of CFS,
a
company incorporated in Nevada on September 19, 2002 and engaged in the business
of providing installation, maintenance and servicing of communication
technologies. As a result of that transaction, CFS became Online’s
wholly-owned subsidiary and CFS’ shareholders acquired a majority of Online’s
voting stock. During January, February and March, 2003, CFS managed the
installation of wireless networks for telecommunication service providers.
Its
operations were focused in the State of California. In March 2003, Online
decided to cease commercial operations of CFS due to Online’s inability to
secure funding needed to operate the business of CFS. Thereafter, Online
began the process of reviewing new business opportunities with the intention
of
maximizing shareholders' interest and looking for a merger or acquisition
candidate for possible business acquisitions in North America and
internationally.
On
June
24, 2003, Roger Henley resigned as Online’s Chief Executive Officer, President,
Chief Financial Officer and a member of its board of directors. Mr. Henley
chose to pursue other interests because Online had ceased operations of CFS.
Online’s Board of Directors designated Peter Bow Thorpe as the
Chief Executive Officer and Chief Financial Officer and tasked him with
locating and reviewing several new business
opportunities to maximize shareholders’ interest, including possible business
acquisitions in North America and internationally. As part of this process,
Online began negotiating a purchase of CFS by Roger Henley, so that it could
pursue other opportunities. On January 21, 2004, Online agreed to sell all
of the stock of CFS to Roger Henley, in consideration for 2,934,000 of the
3,260,000 shares of Online’s common stock, which Mr. Henley owned.
On
January 21, 2004, Online also accepted the resignation of Peter Bowthorpe as
its
Chief Executive Officer, President and Chief Financial Officer and as a member
of its board of directors, effective immediately. In conjunction with the sale
of CFS, Mr. Bowthrope chose to pursue other interests. Online’s board of
directors designated Terri Wonderly, as its Chief Executive Officer and Chief
Financial Officer. On July 6, 2004, Online’s board of directors was
expanded to two members, and the Board elected Michael Kamps as the additional
director.
On
July
9, 2004, Terri Wonderly exercised her right to require Online to repurchase
410,000 shares of its common stock from her for $250,000, pursuant to that
certain option agreement dated February 28, 2003, between herself and Online.
Since Online did not have sufficient funds available to honor its
obligations under the Option Agreement, it informed Ms. Wonderly of its default.
Payment of Online’s obligations under the Option Agreement was secured by the
shares of certain of its shareholders who had received shares pursuant to
Online’s share exchange with CFS also on February 28, 2003. Under the terms of a
Stock Pledge Agreement dated February 28, 2003 and amended on January 21, 2004,
between these “Pledgors” and Ms. Wonderly, Online’s inability to purchase Ms.
Wonderly’s shares pursuant to the Option Agreement constituted an event of
default. In the event of a default by Online under the Option Agreement,
Ms. Wonderly was entitled to receive all of the Pledgors’ stock. As a
result of the transfer of the pledged stock, Ms. Wonderly came to own 8,281,000,
84.67%, of the 9,779,900 shares of Online then outstanding.
On
September 5, 2005, Online issued 1,333,333 shares of its common stock, 800,000
on a post-Reverse Split basis, to Chardan Capital, LLC, pursuant to a consulting
agreement, in exchange for Chardan’s consulting services provided to Online.
The fair value of these shares was approximately $532,000 at a price of
$0.40 per share, which was the market price on that day. Pursuant to the
signed consulting agreement, Chardan agreed to paid cash of $1,333.33 for those
shares. All of the shares were subject to Online’s right to repurchase
them for the same amount Chardan paid in cash to acquire the stock if Online
consummated a business combination with an operating company that Chardan did
not introduce to Online. Online acknowledges that Chardan introduced
Diguang Holdings to Online. Following the filing of a registration
statement, that right of repurchase expired, and none of the restricted shares
issued to Chardan are subject to repurchase. The issuance of this stock
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended, as being issued in a private transaction involving fewer than 35
persons.
Pursuant
to the placement agent agreement that Online entered into in September 2005
in
connection with the Offering, Online issued an aggregate of 405,000 shares
of
its common stock, 243,000 on a post-reverse split basis, in exchange for the
placement service provided by two placement agents. The fair value of
these shares on the issuance date, December 21, 2005, was approximately
$1,117,395 at a price of $2.76 per share, which was the market price on that
day. Pursuant to the signed placement agent agreement, the placement
agents agreed to pay cash of $405 for those shares. The issuance of this
stock was exempt from the registration under Section 4(2) of the Securities
Act
and Rule 506 of Regulation D promulgated under the Securities Act.
(b)
The Acquisition of Diguang Holdings
On
January 10, 2006, Online entered into a share exchange agreement to acquire
all
of the issued and outstanding shares of the stock of Diguang Holdings in
exchange for 18,250,000 shares of Online common stock. In connection with
the Share Exchange, Online’s name was changed to Diguang. References to “we”,
“us” and “our” in this section refers to Diguang, formerly known as Online. We
also effected a 3-for-5 reverse split of our outstanding stock, which reduced
the shares issued and outstanding from 11,518,233 to 6,910,940, and Terri
Wonderly, our CEO, returned to us for cancellation 4,967,940 of our common
stock
that she owned. As a result, the total outstanding shares of common stock
immediately prior to the Share Exchange were 1,943,000. Taking into
account the shares issued in the Share Exchange and the private placement of
$12
million described below, the “Offering”, we now have 22,593,000 shares of common
stock issued and outstanding, 18,250,000 of which are owned by Diguang Holdings’
former shareholders, with the balance being held by a combination of our
shareholders prior to the Share Exchange and the investors in the Offering.
On
March
17, 2006, Online issued 2.4 million shares of its common stock in exchange
for
the gross proceeds of $12 million and issued another 18,250,000 shares of its
common stock in exchange for 100% equity interest in Diguang Holdings, making
Diguang Holdings a wholly-owned subsidiary of Online. Consummating the above
two
transactions simultaneously, Online and Diguang Holdings successfully fulfilled
its contractual obligations, respectively, under the Stock Exchange Agreement
on
March 17,
The
Share
Exchange is regarded as a reverse merger, since Diguang Holdings’ former
shareholders obtained control of us. As a result, Diguang Holdings is
considered to be the acquirer for accounting purposes. Also as a result of
the Share Exchange, we ceased being a shell company.
We
now
own 100% of the issued and outstanding stock of Diguang Holdings, which was
incorporated in the British Virgin Islands on July 27, 2004 to hold the equity
interest in the following entities:
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Shenzhen
Diguang Electronics Co., Ltd., a China based entity, or “Diguang
Electronics”;
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Well
Planner Limited, a Hong Kong based entity, or “Well Planner”;
and
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Diguang
Science and Technology (HK) Limited, a British Virgin Islands based
entity, or “Diguang Technology”.
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These
three companies, Diguang Electronics, Well Planner and Diguang Technology,
together comprise all of Diguang’s subsidiaries.
The
address of our executive and administrative offices is 8th Floor, Building
64,
Jinlong Industry District, Majialong, Nanshan District, Shenzhen, PRC. Our
telephone number is 86-755-2655-3580.
As
of
March 17, 2006, Diguang Holdings was 100% owned by Sino Olympics, a British
Virgin Island company that is owned by Yi Song and Hong Song, two of our
directors and officers as of the close of the Share Exchange. On March 17,
2006, in a private transaction completed just prior to the Share Exchange,
five
accredited investors acquired a total of 876,941, 6.85%, of Diguang Holding’s
shares from Sino Olympics for US$5,000,000, approximately $5.70 per share.
Those five shareholders and Sino Olympics were the only shareholders of
Diguang Holdings at the date of the Share Exchange.
Diguang
Electronics is the principal operating subsidiary of Diguang. Diguang
Electronics was established as an equity joint venture in Shenzhen under the
laws of China on January 9, 1996 with original registered capital of RMB
1,380,000, approximately $170,160 at an exchange rate of 8.11 RMB per dollar,
and an operating life of 20 years starting on that date. Diguang
Electronics was originally owned by three corporate entities, Shenzhen Diguang
Engine & Equipment Co., Ltd., 13.8%; Shenzhen Jingfang Machinery &
Electric Co., Ltd., 39%; and Cinema Systems Inc., 47.2%, a United States
entity.
On
July
22, 2003, Shenzhen Diguang Engine & Equipment acquired Shenzhen Jingfang
Machinery & Electric’s equity interest at its carrying value. After changing
the registration with the State Administration Bureau of Industry and Commerce,
Yi Song and Hong Song, became the owner of this equity joint venture on August
14, 2003. On September 8, 2003, the Board of Diguang Electronics resolved to
increase its registered capital to RMB5 million by transferring retained
earnings into capital and by infusing capital of $142,000 from Well Planner,
which accounted for 23.4% of the above RMB5 million, and thereby causing Well
Planner to became a new investor in this equity joint venture. Diguang
Electronics’ management increased the registered capital to RMB5 million,
approximate $616,000, by transferring retained earnings into capital. Well
Planner invested $142,000 of the approximately $616,000, as a result of
acquiring a 23.4% interest in this equity joint venture.
Diguang
Electronics is now a wholly-owned subsidiary of Diguang as a result of a
reorganization of Yi Song’s and Hong Song’s ownership interest in Diguang and
Diguang’s subsidiaries in June 2005. On October 8, 2005, Diguang Electronics
converted its retained earnings of RMB10 million, equivalent $1,236,445, into
the registered capital resulting in a total registered capital amount of RMB15
million, equivalent $1,840,845, which was approved by the relevant government
agency and verified by a CPA firm. On April 30, 2006, Diguang Electronics
increased its registered capital from RMB15 million to RMB85 million and the
total investment from RMB15 million to RMB150 million, which was also approved
by the relevant government agency.
Diguang
Electronics designs, develops and manufactures LED and CCFL backlight units.
These backlight units, as more fully described in the Narrative
Description of Business Section, are essential components used in illuminating
display panels such as TFT-LCD and color STN-LCD panels. These display
panels are used in products such as mobile phones, PDAs, digital cameras,
computers or television displays and other household and industrial electronic
devices. Diguang Electronics’ customers are located in both China and
overseas. Diguang Electronics’ address is 8th Floor, Building 64, Jinlong
Industry District Majialong, Nanshan District, Shenzhen, the PRC.
Well
Planner was established under the laws of Hong Kong, Special Administrative
Region on April 20, 2001. Originally owned directly by Yi Song and Hong
Song, it is now a wholly-owned subsidiary of Diguang as a result of a
reorganization of the Songs’ ownership interests in Diguang and the Diguang
subsidiaries in June 15, 2005. Well Planner’s principal business is custom
forwarding of Diguang Electronics’ products, which assists Diguang Electronics
in meeting export and import requirements that apply to the international sale
of its products and the importation into China of raw materials that Diguang
Electronics uses in its manufacturing operations. Well Planner performs
these services under a service agreement that provides for a service fee of
not
less than 2% of the goods Well Planner has handled for Diguang Electronics.
However, Well Planner’s only customer is Diguang Technology, making Well Planner
essential a pass-through entity. Well Planner’s address is 10/F, 579 Nathan
Road, Mongkok, Kowloon, Hong Kong SAR.
Diguang
Technology was established under the laws of British Virgin Islands on August
28, 2003. Originally owned directly by Yi Song and Hong Song, it is now a
wholly-owned subsidiary of Diguang as a result of a reorganization of the Songs’
ownership interests in Diguang and the Diguang subsidiaries in June 2005.
The business predecessor of Diguang Technology was an unlimited liability
company named Diguang Electronics (Hong Kong) Co., which was established under
Hong Kong laws on October 12, 1998, also owned directly by Yi Song and Hong
Song. Diguang Electronics (HK) was engaged in the business of distributing
Diguang Electronics’ products and purchasing electronic components and raw
materials for Diguang Electronics’ operations in international markets. On
October 31, 2003, all of the substantial business operations of Diguang
Electronics (HK) were transferred to Cheer Top Capital Limited, a company
incorporated in the British Virgin Islands that was acquired by the Songs for
the purpose of basing those operations in the British Virgin Islands. In
June 2004 the name was changed to Diguang Science and Technology (HK) Limited.
After businesses were transferred, a dividend of approximately $2.65
million was distributed. Diguang Technology’s address is Commonwealth
Trust Limited, Drake Chambers, Tortola, British Virgin Islands.
Under
a
reorganization agreement entered on June 15, 2005, the owners of Diguang’s
subsidiaries transferred their collective 100% equity interest in those three
entities to Diguang Holdings in exchange for a 100% equity interest in Diguang
Holdings. Being a receiving entity under common control, Diguang Holdings
recorded all the assets and liabilities transferred at their carrying amounts
in
the accounts of the three respective entities at the date of transfer under
the
guidance of SFAS No. 141, Appendix D. The effective date for this
reorganization was June 30, 2005. Prior to June 30, 2005, Diguang Holdings
did
not have any operations. As a result of the reorganization described in
the first sentence of this paragraph, Diguang Holdings became the 100% owner
of
Diguang’s subsidiaries, and the consolidated financial statements of Diguang
Holdings and Diguang Holdings’ subsidiaries became Diguang Holdings’ historical
financial statements.
Diguang
Holdings had and since the Share Exchange, we have been conducting operations
in
only one business segment, hence, there is only a segment disclosure requirement
based on geographical locations of the customers.
Diguang
Electronics has approximately 1,460 employees and is headquartered in Shenzhen,
China, with additional offices and its backlight manufacturing operations in
Dongguan, China. Our other subsidiaries only employ a few
employees.
Historically, the
capital expenditures have included the purchase of production equipment, office
equipment and leasehold improvements, all within the PRC. In connection with
the
expansion and ramp-up of our PRC production capability and capacity, Diguang
incurred capital expenditures of
$4.85
million $6.52 million and $6.17 million in 2005, 2006 and 2007
,
respectively. We depreciate our production equipment and office equipment on
a
straight-line basis over an estimated useful life of five to ten years.
Currently,
Diguang does not have any capital expenditures or divestitures in progress.
Additional
capital expenditures are being considered and may be made if the demand for
our
products justifies doing so.
(c)
Description of the Amended and Restated Share Exchange
Agreement
We
filed
a current report on Form 8-K on January 17, 2006 to disclose our entry into
a
definitive Share Exchange Agreement to acquire Diguang Holdings, a British
Virgin Islands company with operating subsidiaries in the People’s Republic of
China, Hong Kong and the British Virgin Islands.
The
Share
Exchange Agreement, which was filed as an exhibit to the 8-K, was amended and
restated as of March, 17, 2006 to reflect a change in the structure of the
transaction, principally the decision to leave Online domiciled in Nevada rather
than converting it to a British Virgin Islands corporation. Reference to
the Share Exchange Agreement in this registration statement is to the Share
Exchange Agreement as so amended and restated.
The
transactions contemplated by the Share Exchange Agreement closed on March 17,
2006. As a result, Diguang Holdings became our wholly owned subsidiary. We
had previously changed our name from Online Processing, Inc. to Diguang
International Development Co., Ltd., “Diguang” or the “Company” or “we” or
“our”. Pursuant to the name change, we have a new OTCBB trading symbol,
DGNG, which we disclosed in a Form 8-KA filed on March 6, 2006.
As
noted,
our and Diguang Holdings management believed that it was in our interest to
remain a Nevada corporation. Therefore, we and Diguang Holdings’ shareholders
agreed to amend the Share Exchange Agreement to eliminate as a closing condition
that Online redomicile to the British Virgin Islands. Accordingly, our
Articles of Incorporation and Bylaws, as amended, not the Association and
Memorandum of Association that were attached as an exhibit to the January 17,
2006 Form 8-K, will govern us. Our Articles of Incorporation, as amended, are
attached as an exhibit to a previous SEC filing.
On
March
17, 2006, we accepted subscriptions from 94 accredited investors, and not 91
as
was previously reported on our Current Report filed on Form 8-K on March 21,
2006, to acquire 2,400,000 shares of our common stock through a private offering
at a per share price of $5.00, generating gross proceeds of $12,000,000.
This private equity financing was made pursuant to the exemption from the
registration provisions of the Securities Act provided by Section 4(2) of the
Securities Act of 1933, as amended for issuances not involving a public offering
and Rule 506 of Regulation D promulgated thereunder.
In
addition to removing the closing condition that we convert to a British Virgin
Islands company, the parties also modified the Share Exchange Agreement to
provide for the assumption of an option plan adopted by Diguang Holdings prior
to the closing of the Share Exchange. Diguang Holdings had issued options under
that plan equivalent to approximately 540,000 shares of our stock to our
independent directors and certain members of its management. This varied from
the information regarding an option plan disclosed in the Current Report on
8-K
filed on January 17, 2006, which stated that an option plan would be adopted
by
us after closing, would reserve 1,500,000 shares for issuance under the plan
and
that no options would be issued prior to eighteen months following closing
without the consent of the member of the Board of Directors not appointed by
Diguang Holdings. The limit on options to be issued of 1,500,000 remains in
place, so that under the assumed plan approximately 960,000 shares remain
available for future issuance, and the grant of any of those options prior
to 18
months following the closing of the share exchange remains subject to the
consent of the member of the board of directors not appointed by Diguang
Holdings.
The
parties had intended to increase the authorized stock of Online to 50,000,000
shares as part of the process of converting to a British Virgin Islands
corporation. This increase was needed to provide for the issuance of additional
stock compensation to certain of Diguang Holdings’ shareholders in the event
that we achieve certain after-tax earnings objectives for the fiscal years
2006
through 2009. As the conversion to a British Virgin Islands corporation
did not take place, we amended our certificate of incorporation to increase
our
authorized capital from 25,000,000 to 50,000,000 shares of common stock, thus
satisfying that requirement of the Share Exchange Agreement. The Share
Exchange Agreement was also revised to require the parties to provide audited
financial statements as of December 31, 2005, rather than audited financial
statements as of December 31, 2004 and reviewed statements as of June 30, 2005.
The Share Exchange Agreement is attached as an exhibit to this
filing.
In
the
Share Exchange, we acquired all of Diguang Holdings’ issued and outstanding
shares of common stock in exchange for 18,250,000 shares of our common stock.
Prior to that, we effected a 3 for 5 reverse stock split, information regarding
which was provided in Online’s January 17, 2006 Form 8-K and its Current Reports
on Form 8-K filed on February 15, 2006 and February 24, 2006, and 4,967,940
shares of our stock standing in the name of Terri Wonderly were cancelled.
As a result of all of the foregoing and the issuance of 2,400,000 shares
in the Offering, we now have
22,340,700
shares of common stock issued and outstanding. Of that amount,
Diguang Holdings’ former shareholders own 80.8%, with the balance held by those
who held Online’s shares prior to the Share Exchange and the investors in the
Offering. As a result of the Share Exchange, Diguang Holdings’ former
shareholders obtained control of Diguang, and Diguang Holdings’ officers and
directors were appointed as Diguang’s officers and directors.
In
accordance with the Share Exchange Agreement, our shareholders will be granted
certain incentive shares if we, post reverse merger, meet certain financial
performance criteria. The incentive shares and financial performance criteria
are as follows:
|
|
Total
Incentive Shares
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Sino
Olympics Industries Limited
|
|
|
6,000,000
|
|
|
500,000
|
|
|
1,500,000
|
|
|
2,000,000
|
|
|
2,000,000
|
|
After-tax
Profit Target (in million) (1)
|
|
|
|
|
$
|
15.7
|
|
$
|
22.8
|
|
$
|
31.9
|
|
$
|
43.1
|
|
(1)
After-tax profit targets shall be the income from operation, less taxes paid
or
payable with regard to such income, excluding the effect on income from
operations, if any, resulting from issuance of incentive shares in any year.
By
way of example, if the incentive shares for 2006 are earned and issued in 2007
with an aggregate value of $7 million, and as a result the income from
operations for 2007 is reduced by $7 million, the determination of whether
the
after-tax profit targets are hit for 2007 will be made without deducting the
$7
million from income from operations. That is, if income from operations was
$20
million after the charge for issuance of the incentive shares, for purpose
of
issuance of incentive shares for 2007, income from operations will be deemed
to
be $27 million, and whether the target is hit will be determined by deducting
from $27 million the amount of taxes that would have been paid or payable had
income from operations actually been $27 million.
We
account for the transactions of issuing these incentive shares based on the
fair
value of grant date in accordance with SFAS 123R. Under SFAS 123R, the grant
date was effective March 17, 2006. Accordingly, the compensation expense has
been calculated, but will be recorded over the period (in which the shareholders
of Diguang can earn any of the amounts each year) only if meeting the prescribed
target in the Share Exchange Agreement is probable.
We
did
not meet the 2006 and 2007 after-tax profit target. No incentive shares have
been issued to date.
(d)
Financial Information About Geographic Areas
Total
revenues by category of activity and geographic market
We
currently operate only in one business segment and generate revenues only from
the sale of CCFL and LED backlights for LCDs. Since our major production
base is in China, and since export revenue and net income in overseas entities
accounted for a significant portion of total consolidated revenue and net
income, management believes that the following table presents useful information
for measuring business performance, financing needs, and preparing our corporate
budget, among other things.
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Sales
to China domestic customers
|
|
$
|
4,921,563
|
|
$
|
2,714,184
|
|
$
|
7,297,447
|
|
Sales
to overseas customers
|
|
|
30,726,555
|
|
|
31,528,433
|
|
|
38,611,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,648,118
|
|
$
|
34,242,617
|
|
$
|
45,909,256
|
|
Financial
Information about Geographic Areas
During
2005, 2006 and 2007, we derived $4,921,563, $
2,714,184
and $7,297,447 respectively, of our revenues from external customers in China,
including
Hong Kong and Taiwan, the domicile of our principal operating subsidiary,
Diguang Electronics.
Revenues
from customers outside of China for
2005,
2006 and 2007
totaled $30,726,555, $31,528,433 and $38,611,809
respectively. We attribute sales to individual foreign countries based on the
destination to which we ship the products.
There
are
certain risks associated with the concentration of our operations in China.
These include currency risks and political risks. See
Risk
Factors
below
.
Until
recently, the Chinese government pegged its currency, the renminbi (RMB) to
the
United States dollar, adjusting the relative value only slightly and on
infrequent occasion. Many people viewed this practice as leading to a
substantial undervaluation of the RMB relative to the dollar and other major
currencies, providing China with a competitive advantage in international trade.
China now allows the RMB to float to a limited degree against a basket of major
international currencies, including the dollar, the Euro and the Japanese yen.
This change in policy produced a cumulative revaluation of the RMB of about
16%
so far.
This
16%
increase in the value of the RMB is not expected to produce a material effect
on
our business or our financial performance. However, if the Chinese
government allows significant further revaluations of the RMB in the near
future, it could have adverse consequences on our ability to compete
internationally. In particular, such a revaluation would make our products
relatively more expensive in markets outside of China than before the
revaluation, representing about 88% of our product revenues, including those
from Hong Kong, which could slow or eliminate our anticipated
growth.
Offsetting
this risk to some degree is the fact that if further revaluation of the RMB
does
occur, it will result in an increase to our profits when stated in dollar terms
for a given level of profit in RMB. It is difficult to tell which of these
effects, if either will be more significant, and therefore we cannot know
whether the revaluation of the RMB would have an overall negative or positive
effect on the value of our business.
From
a
political standpoint, only recently has China moved away from a centrally
planned economy toward a market driven economy. It is not possible to predict
how rapidly the move to a market economy will continue, or if it will continue
at all or even reverse. Similarly, the government has recently been encouraging
the development and growth of privately owned enterprises. Both of those
political trends have benefited our expansion. Should the government modify
or
reverse those policies, it could prove detrimental to us.
Additionally,
China has historically been indifferent to the enforcement of intellectual
property rights, on which we currently depend and expect to continue to depend
to a significant degree. As a condition to its admission to the World Trade
Organization, China committed to improve the enforcement of intellectual
property rights, and there is evidence to show that it has done so, including
increased prosecutions of intellectual property pirates. Should China reverse
that policy, it could be detrimental to our business prospects due to our
Chinese competitors’ infringement on our intellectual property.
It
is not
yet clear to us whether our three-year geographic financial information is
indicative of our current or future operations, particularly with regard to
our
sources of revenues. Several factors make it difficult to tell whether we will
derive more or less of our revenues from countries other than China going
forward. This includes our rapid growth, the anticipated rapid rate of growth
of
businesses in China that make products incorporating our backlight products
and
our development of larger backlights. However, we do not anticipate a material
effect on our business if a shift in the geographic distribution of our sales
occurs.
(e)
Narrative Description of Business
Prior
to
entering into the memorandum of understanding with Diguang Holdings, we had
not
had any operations since March 2003. As a result of the Share Exchange, the
operations of Diguang Holdings’ subsidiaries became our principal operations,
and therefore all of the information provided below relates to the operations
of
Diguang Holdings’ subsidiaries.
We
specialize in the design, production and distribution of small to medium-sized
Light Emitting Diode and Cold Cathode Fluorescent Lamp backlights for various
Thin Film Transistor Liquid Crystal Displays, or “TFT-LCD”, and Super-Twisted
Nematic Liquid Crystal Display, or “STN-LCD”, Twisted Nematic Liquid Crystal
Display, or “TN-LCD”, and Mono LCDs, taken together, these applications are
referred to as “LCD” applications. Those applications include color displays for
cell phones, car televisions and navigation systems, digital cameras,
televisions, computer displays, camcorders, PDAs and DVDs, CD and MP3/MP4
players, appliance displays and the like.
We
conduct that business principally through the operations of Diguang Electronics,
headquartered in Shenzhen, China, with additional offices and its backlight
manufacturing operations in Dongguan, China. Diguang Electronics has
approximately 2,000 full-time employees, although the figure changes from time
to time as production demands require.
Well
Planner is involved with the import of raw materials into China and export
of
finished products from China. Well Planner currently has no fixed
assets.
Diguang
Technology is directly involved with the international buying of raw materials
and selling of backlight products for Diguang Electronics. Diguang Technology
purchases raw materials from international suppliers and acts as an
international sales group for both Diguang Electronics and Well Planner. Diguang
Technology has no fixed assets.
Between
them, Well Planner and Diguang Technology have only 4 employees.
LCDs
consist of a top layer that uses electronic impulses, filters and liquid crystal
molecules to create an image, often in color. However, the LCD component itself
generates relatively little in the way of luminance or light output, making
the
image on the screen impractical to use on its own under most conditions. A
second component to these displays is backlights, which provide the luminance
that enables viewers to see a distinct image on the screen in a wide variety
of
lighting conditions. In that sense, they operate much in the same way the bulb
in a film projector or a slide projector does, converting the dark image on
the
film to a bright image that can be readily viewed.
We
achieved some success in expanding our customer base and our geographic markets
during 2007. Sales to our largest customer generated 16% of our revenues for
2007 compared with 24% in 2006. Sales to our three largest customers increased
to 39% of 2007 revenue compared to 52% in 2006.
Our
top
three customers in 2007 are ALCO Electronics, Hot Tracks International Ltd
and
Transcend Optronics.
We are continuing our efforts to diversify and
broaden our customer base to become less reliant on these customers, including
the development of new products, such as backlights for flat panel
televisions.
Diguang
Electronics is one of the first companies in China to use patented light guide
panel technology by mould injection method to produce backlight units. We have
received various awards and accolades, including the Shenzhen Science and
Technology Progress Award in 2003. Additionally, Diguang’s products, namely CCFL
backlights and white LED backlights, were included in the National Important
New
Products Project, and we received the “Important New Products” certificate in
2003.
Diguang
Electronics caters to the global demand for backlight products on the basis
of
quality, cost and order fulfillment time. Diguang Electronics’ focus on product
quality includes the use of quality materials obtained from selected
international suppliers, and thorough quality control inspection of raw
materials prior to use in production and finished products prior to shipment.
Diguang Electronics also strives to offer its products at a lower cost than
most
competitors. This is made possible through Diguang Electronics’ skilled labor
force of 1,500 people that, due to China’s low wage scale, is very low
cost. Existing economies of scale also contribute to keeping costs low. Diguang
Electronics also has the ability to deliver its initial run of products within
15 to 30 days from the time an order is placed, while many of its competitors
can require more time. This rapid fulfillment capability is possible because
of
Diguang Electronic’s large and skilled product development team, and it provides
an important advantage to Diguang Electronics in this competitive
market.
Diguang
Electronics’ commitment to quality is evidenced by the fact that in 1999,
Diguang Electronics received from Shenzhen Quality Certification Centre ISO9002
certification, in 2002 it received from Moody International Certification QS9000
certification and in 2005 from The TUVCERT Certification Body ISO9001
certification and in 2006 it received the certification from the ISO/TS16949.
These certifications signify that Diguang Electronics has established and
adheres to high quality standards in the conduct of its product design and
manufacturing operations.
As
a
full-service manufacturer of CCFL and LED backlights for LCDs, Diguang
Electronics works with its customers to design the proper backlight to meet
the
customers’ specifications for a particular product and application. Nearly all
of Diguang Electronics’ products are customized in terms of customers’ specific
applications. Diguang Electronics currently co-develops 30-50 new products
with
customers each month. Diguang Electronics has developed or co-developed more
than 2,600 different products and over 2300 sets of molds for LED/CCFL
backlights meeting different customer specifications to date and has put more
than 2,000 LED/CCFL products meeting unique customer specifications into mass
production. Diguang Electronics typically does not receive direct payments
from
customers to develop products, but it does include the costs of developing
products to meet customer specifications into its pricing.
Our
sales
are obtained either through our internal workforce, our Well Planner and Diguang
Technology subsidiaries or through commissioned sales agents that represent
us
in locations outside of China.
Historically,
the majority of the world’s backlight production was located in Japan and Korea,
although due to low cost advantages and recent improvements in product quality,
Taiwan and Mainland China have emerged as significant areas of backlight
production. By conducting our business related to the design, production and
distribution of backlights in China, principally through the operations of
Diguang Electronics, we are able to take advantage of the low labor and other
costs in China relative to other countries.
Our
business is subject to slight seasonal fluctuation. Many of the products that
incorporate our backlights are popular household electronic consumer goods
such
as home entertainment equipment and cellular phones, which enjoy a higher rate
of retail sales in the fourth calendar quarter compared with other times of
the
year. However, the varying lead times associated with those products and the
inclusion of many product lines that are not seasonal in nature, such as home
appliances and office equipment, limit the seasonal nature of our business.
Overall, we do not consider our business to vary from quarter to quarter to
the
extent that would justify describing us as a seasonal business.
There
are
no practices in our industry that have a significant effect on working capital
requirements. Most of our business is done on a relatively short cycle time
(on
average, less than a month from customer order to initial fulfillment and
between 1 to 3 months for payment). The capital costs associated with product
development are relatively small on an individual product basis, although the
aggregate of such costs is meaningful given the large number of products that
we
develop on an ongoing basis. Molds meeting customers’ size specifications are
needed to form the housings for the backlights, but these molds are not costly,
and we have accumulated approximately 2,300 of them during our years of
operation, many of which can be reused to make a new product with little or
no
adjustment. A significant aspect of our business model is providing a rapid
response to customer orders, which helps to minimize the amount of inventory
we
must carry. We also do not need to carry large amounts of raw material
inventories because raw materials have been readily available from a number
of
suppliers.
The
principal raw materials used in a LED backlight consist of LED chips, or SMD,
reflectors, brightness enhancing films, silica gels and plastics, PMMA or PC
etc. Those materials are available from numerous suppliers, most of them based
in Asia, such as Nanjing Longguang Electronics Co. Ltd., HI SPEED Company,
Toryota, Nicha, Kimoto, Hong Kong Panac Company, Global Trading Company and
Advanced OPTO Company, etc. We purchase our raw materials from over 20 suppliers
in Asia and from two United States based companies, 3M and Cree. We follow
a
practice of obtaining each of our raw materials from multiple suppliers as
a
means of ensuring supply, protecting against fluctuations in price, whether
producer or currency related, and making certain that our quality standards
are
consistently met.
(f)
Significant Recent Events
On
April
21, 2006, we entered into an option agreement with two of our major shareholders
and corporate officers, Yi Song, President and CEO, and Hong Song, COO, to
obtain an option to acquire the interest held by the Song Brothers in North
Diamond, which is a British Virgin Islands based company. North Diamond
established a wholly-owned subsidiary named Dihao Electronic (Yangzhou) Co.,
Ltd. in Yangzhou, Jiangsu Province, China on June 11, 2004, with registered
capital of $5 million. This wholly-owned foreign enterprise, or “WOFE”, in China
started operation in early 2006.
Sino
Olympics committed to infuse $3.25 million, accounting for 65% interest, to
North Diamond and the other investors committed to infuse $1.75 million,
accounting for a 35% interest, to North Diamond. As of June 30, 2006, Sino
Olympics has infused capital of $1 million, increasing its capital contribution
up to $1.4875 million, accounting for a 59.5% interest. The other investors
infused $1.0125 million, accounting for a 40.5% interest in North Diamond.
On
September 19, 2006, Sino Olympics infused another $392,857. By doing so, it
obtained the expected 65% equity ownership of North Diamond before exercising
the purchase option. On September 19, 2006, the 65% versus 35% equity interest
in North Diamond satisfied the original capital commitment.
Pursuant
to the signed option agreement, the Company has the right to acquire the 32.5%
interest currently held by the Song Brothers in North Diamond, in exchange
for
cash payment of $487,500 plus interest at 6% per annum from the date of capital
infused to the date of acquisition actually taken place. The Company also
obtained an option to acquire the entire 65% interest from Sino Olympics with
the expectation that the total investment could reach $3.25 million plus
interest at 6% per annum from the date at which the Song brothers infused their
capital into North Diamond to the date the Company exercises this acquisition
option. If the Company exercises, solely based on the Company’s discretion, the
aforementioned option, the Company will assume the obligation to contribute
$3.25 million of the registered capital of $5 million into this
WOFE.
On
May
12, 2006, the option agreement mentioned above was amended. Pursuant to the
new
purchase option agreement, the purchase price for the equity Interest and the
additional 32.5% interest should be the amount paid by Optionor for the Equity
Interest and $487,500, plus interest at the rate of 6% per annum which should
be
applied to both of the equity Interest and the additional 32.5% interest, and
assumption of any remaining obligation of Optionor to contribute the registered
capital to North Diamond. The interest at the rate of 6% per annum shall
commence on the date of payment made by Optionor towards its registered capital
of North Diamond and shall end on the date of the Exercise Notice.
On
January 3, 2007, we exercised the option and the purchase price determined
in
accordance with the Amended and Restated Purchase Option Agreement was
$1,977,864, of which $97,507 was the interest paid at an interest rate at 6%.
On
November 18, 2006, Shenzhen Diguang Electronics Co., Ltd., or “Diguang
Electronics”, and Diguang International Holdings Limited, or “Diguang Holdings”,
entered into a Sino-Foreign Equity Joint Venture Agreement, or the “Joint
Venture Agreement”, for the establishment of Wuhan Diguang Electronics Co.,
Ltd., or “Wuhan Diguang”. Pursuant to the Joint Venture Agreement, Diguang
Electronics and Diguang Holdings shall set up Wuhan Diguang in Wuhan, Hubei
Province, the People’s Republic of China, with a registered capital of $1
million, of which 70% shall be infused by Diguang Electronics and the remaining
30% by Diguang Holdings. The business scope of Wuhan Diguang shall be
“manufacture and sale of flat panel display, LED optical-electronic parts, fuse,
LCD module, back light and electronic spare parts”.
Wuhan
Diguang was then established on March 13, 2007 and its business license issued
by Wuhan Municipal Administrative Bureau for Industry and Commerce is valid
for
20 years expiring on March 12, 2027. In accordance with the Joint Venture
Agreement, the registered capital of Wuhan Diguang shall be contributed in
three
installments, with the first installment of $150,000 made in three months after
the issuance of the business license, the second installment of $300,000 made
in
twelve months after the issuance of the business license, and the last
installment of $550,000 made in eighteen months after the issuance of the
business license.
As
of December 31, 2007, $700,000 has been infused by Diguang Electronics, and
$300,000 has been infused by Diguang Holdings.
On
June
29, 2007, in accordance with the Board resolution, the Company made $2,198,992,
or RMB17 million, of investment for purchasing the land usage rights of 34,930
square meters of industrial land in Guangming High-Tech Industry Park in
Shenzhen, PRC, for 50 years, which was shown in Property and equipment. The
land
must be mainly used for developing and producing New-style Efficiency
Semiconductor, TFT-LCD, in accordance with agreement of High-Tech Industry
Park
Office.
On
December 29, 2007, Diguang International Holdings Ltd., or “Diguang
International Holdings”, our wholly-owned subsidiary, entered into a sale and
purchase agreement, or the “Agreement”, with Sino Olympics Industrial Limited,
or “Sino Olympics”, and Shenzhen Diguang Engine & Equipment Co., Ltd., or
“Shenzhen Diguang”, to acquire a 100% interest in Dongguan Diguang Electronics
Science and Technology Co. Ltd., or “Dongguan S&T”. The closing date of the
acquisition was December 30, 2007, which was deemed to be the date for the
purpose of financial consolidation. Pursuant to local law, the acquisition
is
not effective until the registration of change of shareholders is approved
by
the Industrial and Commercial Bureau in Donggu
an,
Administration of Foreign investment in enterprises in Dongguan and State
Administration in Foreign Exchange. Such approval is expected to be obtained
within six months.
The
above
acquisition was approved by the independent directors of the Registrant at
the
board of directors’ meeting held on November 28, 2007.
According
to the Agreement dated December 29, 2007, the consideration for the sale and
purchase is US$4,200,000 and the initial payment is US$2,000,000, which was
paid by the end of 2007, followed by four equal installments of
US$550,000 payable on June 30, 2008, December 31, 2008, March 31, 2009 and
June
30, 2009 respectively.
Research
and Development
In
addition to our product development work, taking existing, available technology
and adapting it to the specific needs of a customer for a particular product,
we
engage in research and development, which involves developing new, proprietary
techniques or products. Our growth rate is attributable to a number of
patents, especially in the area of light guides and other innovations that
improve the quality, a combination of brightness, evenness, color of the light
generated, and durability, of our products relative to other backlight
manufacturers.
We
are
engaged in efforts to develop some technologies that reduce energy consumption
and other environmental impacts of our devices. The innovations can be
used for a variety of applications in screens of almost all sizes. Management
believes that many of our new technologies will be patentable, and we expect
to
file for and maintain both Chinese and/or international patents where the value
of the invention warrants the expense and effort of doing so.
We
have
spent $727,000, $786,000 and $1,054,000 for the years ended 2005, 2006 and
2007
respectively on research and development efforts to improve existing products
and processes and to develop new products, not including the expenses to develop
particular backlight products utilizing existing technology to meet customer
specifications for products.
Our
major
manufacturing processes are “dry,” meaning that they do not involve significant
quantities of solvents, plating solutions or other types of materials that
lead
to the generation of large amounts of hazardous wastes, process wastewater
discharges or air pollutant emissions. We have only recently moved into
our state-of-the-art manufacturing facility in Dongguan, and as a result we
do
not anticipate any material capital expenditures for pollution control equipment
for 2006. We are contemplating the construction or acquisition of
additional manufacturing facilities if our current projections for increased
product demand are met, but environment-related costs are not expected to be
a
material portion of the costs of constructing that facility, given the nature
of
our processes.
Customers
Our
customer base consists of many large and medium sized companies, which include
PVI, ALCO, HOT TRACKS, HANNSTAR,TPV,
Transcend
Optronics
, LG Philips, IZTECHNOLOGY, Gree, Tianma, Seiko, Midea,
Affitronics, Samsung, CCT, Ellipse, Secure, Archos and Wintek, etc. In
2007, our largest customer by sales volume accounted for approximately 16%
of
total revenues. Our top two customers accounted for approximately 28% of
revenues and collectively, our top three customers that year generated about
39%
of revenues. Our top three customers included
Transcend
Optronics
, ALCO and HOT TRACKS. As a result, the loss of one or more of
our top customers or a significant decrease in the volume of business that
we do
with those customers would have a material adverse effect on our business.
To help protect against that risk, we continually seek to diversify our
customer base, in particular by expanding our international sales efforts.
We also expect to introduce new backlight technologies for a variety of
applications that will help expand and diversify our customer base.
Due
to
our current modest utilization of our production capacity and our practice
of
rapid turnaround of customer orders, we do not maintain a large backlog of
orders relative to our annual revenue figures. Also, because nearly all of
our products are custom made to customer specifications, experience has shown
that nearly our entire order backlog is firm; virtually all orders that are
placed are completed and delivered.
We
do not
do any business directly with governments, although many of our customers may
make products for sale to governments around the world.
Competition
The
display backlight market is highly competitive. It has traditionally been
centered in Japan and Korea, where the majority of LCDs and related components
continue to be made. Due to cost advantages and an increase in product
quality, Taiwan has recently emerged as a significant producer of backlights,
and China is growing in importance as a source of backlights.
To
management’s knowledge, there are no independently published industry statistics
that can be used to measure our market share among China-based companies
accurately. However, based on its general knowledge of the Chinese
backlight industry, management believes that we are one of the largest and
fastest growing manufacturers of backlight units in China.
Taking
into consideration factors such as geographic market, product mix and customer
base, we believe the following companies are our main competitors: Shian Yih
Electronics Ind. Co. Ltd. (Taiwan), Wai Chi Electronics Ltd. (Hong Kong),
Radiant Opto-Electronics Corporation (Taiwan) and K-Bridge Electronics Co.
Ltd.
(Taiwan) etc. Even though these competitors are based outside China, each
has significant manufacturing operations in China. Due to the advancements
that Taiwanese and Chinese producers have made within this industry, our main
competitors are no longer Japanese or Korean producers.
As
with
most other products, competitive advantages in backlights derive from a
favorable combination of price, quality and customer service. We believe
that we are well-positioned to compete effectively in all three of those areas.
We have only recently moved into a new state-of-the-art manufacturing
facility, which provides us with significant efficiencies and the space to
increase our output from 100,000 small and medium units per day to
200,000-300,000 units per day (depending on size). In addition, China’s
well-known labor cost advantages relative to Japan, Korea and Taiwan have
enabled us to put price pressure on our foreign rivals, thereby helping us
to
gain market share while maintaining profitability and margins, as our financial
results show. We currently expect that growth to continue. However,
as more of the world’s backlight production shifts to China, our comparative
advantage due to lower costs relative to other Asian countries will
diminish.
Our
quality enhancements include innovations in light guide technology with a
corresponding increase in backlight life. The improved overall performance
resulting from these enhancements is one of the reasons we have enjoyed a
history of rapid growth. We believe, based on our familiarity with other
products in the market, that we have a technological advantage relative to
other
producers. We expect that this existing technological advantage, combined
with our anticipated development of additional patented technology, will
continue to give us a competitive advantage.
Another
important factor in our ability to compete is our relative short cycle time
from
the receipt of a customer’s order to the initial delivery of products to the
customer. On average, this is a 15- to 30- day process for us, while many
of our competitors take longer to reach the same result. Our short cycle
time is due to, among other things, our modern facilities and equipment, along
with our large and skilled product development staff.
Intellectual
Property
Diguang
Electronics owns 1 current patent. The patent transfer agreement for seven
unexpired Chinese is in the process of being drafted as we are discussing with
Mr. Yi Song, the owner of the patents and Diguang’s Chairman and CEO, whether or
not any consideration, either cash or stock or both, would be paid for the
contemplated patents transfer. However, prior to the completed patent transfer,
Yi Song by way of a written license allowed Diguang Electronics to use his
backlight patents free of charge until the relevant patents have been
transferred to Diguang Electronics. Two of these patents expire in March 2008
and October 2009, which are not significant to our operation, respectively,
and
the remaining six have expiration dates ranging from 2010 to 2013.
These
patents include:
Patent
Name
|
|
Patent
Number
|
|
Holder
|
|
Effective date
of Patents
|
|
Expiry
date of Patents
|
|
|
|
|
|
|
|
|
|
|
1
|
Uniformly
Effective Front Backlight
|
|
ZL
99 2 48884.2
|
|
Yi
Song
|
|
28/10/1999
|
|
27/10/2009
|
|
|
|
|
|
|
|
|
|
|
2
|
Efficiency
Backlight and front Backlight of Side radiation
|
|
ZL
00 2 33726.6.
|
|
Yi
Song
|
|
12/05/2000
|
|
11/05/2010
|
|
|
|
|
|
|
|
|
|
|
3
|
Efficiency
Photosensitive Sensor for Graphic Content
|
|
ZL
01 2 01714.0
|
|
Yi
Song
|
|
20/01/2001
|
|
19/01/2011
|
|
|
|
|
|
|
|
|
|
|
4
|
Efficiency
Uniform Illuminance Equipment
|
|
ZL
02 2 05116.3
|
|
Yi
Song
|
|
10/02/2002
|
|
9/02/2012
|
|
|
|
|
|
|
|
|
|
|
5
|
Efficiency
Uniform Backlight of Side radiation
|
|
ZL
98 2 01487.2
|
|
Yi
Song
|
|
02/03/1998
|
|
01/03/2008
|
|
|
|
|
|
|
|
|
|
|
6
|
Advanced
Efficiency Backlight of Side radiation
|
|
ZL
01 2 19472.7
|
|
Yi
Song
|
|
13/04/2001
|
|
12/04/2011
|
|
|
|
|
|
|
|
|
|
|
7
|
Efficiency
Uniform Backlight of Front Backlight and White Backlight radiation
|
|
ZL
01 2 71009.1
|
|
Yi
Song
|
|
19/11/2001
|
|
18/11/2011
|
|
|
|
|
|
|
|
|
|
|
8
|
High
Efficiency of Light Source for Planar Fluorescent Lamp
|
|
ZL
200420006645.8
|
|
Yi
Song
|
|
11/03/2004
|
|
10/03/2014
|
|
|
|
|
|
|
|
|
|
|
9
|
Improved
Uniform and Luminous Side Backlight Device with High
Efficiency
|
|
ZL
090220868
|
|
Yi
Song
|
|
30/11/2001
|
|
29/11/2011
|
|
|
|
|
|
|
|
|
|
|
10
|
Efficiency
Fluorescent Lamp of New Model
|
|
ZL
200320130305.1
|
|
Diguang
Electronics
|
|
23/12/2003
|
|
22/12/2013
|
|
|
|
|
|
|
|
|
|
|
11
|
Efficiency
Photosensitive Sensor for Graphic Content
|
|
Taiwan
Patent
|
|
Yi
Song
|
|
22/03/2001
|
|
22/03/2011
|
|
|
|
|
|
|
|
|
|
|
12
|
LED
Optic Display
|
|
ZL200410074672.3
|
|
Yi
Song
|
|
13/09/2004
|
|
13/09/2024
|
|
|
|
|
|
|
|
|
|
|
13
|
LED
Grouping with Parallel Connected Backlight Modules for Big Sized
TFT-LCD
TV
|
|
ZL200620120892.X
|
|
Diguang
Electronics
|
|
11/07/2006
|
|
11/07/2016
|
|
|
|
|
|
|
|
|
|
|
14
|
LED
backlight moduel with adiabatic euphotic material radiator system
|
|
ZL200720005429.5
|
|
Diguang
Electronics
|
|
23/04/2007
|
|
23/04/2017
|
|
|
|
|
|
|
|
|
|
|
15
|
Backlight
Modules with LED Reflect Concave
|
|
ZL200620120893.4
|
|
Diguang
Electronics
|
|
11/07/2006
|
|
11/07/2016
|
|
|
|
|
|
|
|
|
|
|
16
|
arrayed
LED backlight moduels with direct type
|
|
ZL200620120894.9
|
|
Diguang
Electronics
|
|
11/07/2006
|
|
11/07/2016
|
|
|
|
|
|
|
|
|
|
|
17
|
Lightings
and Lamps
|
|
ZL200720001219.9
|
|
Diguang
Electronics
|
|
09/01/2007
|
|
09/01/2017
|
|
|
|
|
|
|
|
|
|
|
18
|
Inserted
CCFL Backlight Module
|
|
ZL200620139418.1
|
|
Diguang
Electronics
|
|
30/12/2006
|
|
30/12/2017
|
Almost
all of our products incorporate technology from one or more of the above
patents. As these patents expire, the technology that they represent will
become available to other backlight manufacturers. The expiration of one patent
in 2007 will not have material adverse impact on our operation results.
However, the pace of change in this field will generally mean that the
technology represented by the expired patents is out-of-date. Our efforts
will remain directed toward the development of new patents for leading-edge
technologies that will help us to maintain our technological advantage. We
also intend to patent our new inventions both in China and internationally,
and
we continue to work closely with leading Chinese universities and research
institutions in the development of such technology.
Management
is not aware of any current or previous infringement of the existing patents.
If any infringement occurs, management will vigorously prosecute actions
to halt the infringement and recover damages if the value of the patent is
judged at the time to be sufficient to justify that effort.
DOING
BUSINESS IN CHINA
CHINESE
LEGAL SYSTEM
The
practical effect of the Chinese legal system on the Company’s business
operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign
Invested Enterprise Laws provide significant protection from government
interference. In addition, these laws guarantee the full enjoyment of the
benefits of corporate articles and contracts to Foreign Invested Enterprise
participants. These laws, however, do impose standards concerning
corporate formation and governance, which are not qualitatively different from
the general corporation laws of the several provinces. Similarly, the
Chinese accounting laws mandate accounting practices, which are not consistent
with US Generally Accepted Accounting Principles. The Chinese accounting
laws require that an annual “statutory audit” be performed in accordance with
Chinese accounting standards and that the books of account of Foreign Invested
Enterprises be maintained in accordance with Chinese accounting laws.
Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
reports and statements to designated financial and tax authorities.
Otherwise there is risk that its business license will be revoked.
Second,
while the enforcement of substantive rights may appear less clear than those
in
the United States, the Foreign Invested Enterprises and Wholly Foreign-Owned
Enterprises are Chinese registered companies which enjoy the same status as
other Chinese registered companies in business dispute resolution. Because
the terms of the Company’s various Articles of Association provide that all
business disputes pertaining to Foreign Invested Enterprises will be resolved
by
the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm,
Sweden applying Chinese substantive law, the Chinese minority partner in the
Company’s joint venture companies will not assume any advantageous position
regarding such disputes. Any award rendered by this arbitration tribunal
is, by the express terms of the various Articles of Association, enforceable
in
accordance with the “United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (1958).” Therefore, as a practical
matter, although no assurances can be given, the Chinese legal infrastructure,
while different from its United States counterpart, should not present any
significant impediment to the operation of Foreign Invested
Enterprises.
ECONOMIC
REFORM ISSUES
Although
the Chinese Government owns the majority of productive assets in China, in
the
past several years the Government has implemented economic reform measures
that
emphasize decentralization and encourage private economic activity.
Because these economic reform measures may be inconsistent or ineffectual,
there
is no assurance that:
·
The
Company will be able to capitalize on economic reforms
;
·
The
Chinese Government will continue its pursuit of economic reform
policies;
·
The
economic policies, even if pursued, will be successful;
·
Economic
policies will not be significantly altered from time to time; and
·
Business
operations
in China will not become subject to the risk of nationalization.
Negative
impact on economic reform policies or nationalization could result in a total
investment loss in the Company’s common stock.
Since
1979, the Chinese Government has reformed its economic systems. Because
many reforms are unprecedented or experimental, they are expected to be refined
and readjusted. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This
refining and readjustment process may negatively affect the Company’s
operations.
Over
the
last few years, China’s economy has registered a high growth rate.
Recently, there have been indications that the rate of inflation has
increased. In response, the Chinese Government recently has taken measures
to curb the excessively expansive economy. These measures included
implementation of a unitary and well-managed floating exchange rate system
based
on market supply and demand for the exchange rates of Renminbi, restrictions
on
the availability of domestic credit, reduction of the purchasing capability
of
certain of its citizens, and centralization of the approval process for
purchases of certain limited foreign products. These austerity measures
alone may not succeed in slowing down the economy’s excessive expansion or
control inflation, and may result in severe dislocations in the Chinese
economy. The Chinese Government may adopt additional measures to further
combat inflation, including the establishment of freezes or restraints on
certain projects or markets.
To
date
reforms to China’s economic system have not adversely affected the Company’s
operations and are not expected to adversely affect the Company’s operations in
the foreseeable future; however, there can be no assurance that reforms to
China’s economic system will continue or that the Company will not be adversely
affected by changes in China’s political, economic, and social conditions and by
changes in policies of the Chinese Government, such as changes in laws and
regulations, measures which may be introduced to control inflation, changes
in
the rate or method of taxation, imposition of additional restrictions on
currency conversion and remittance abroad, reduction in tariff protection and
other import restrictions.
ITEM
1A. RISK FACTORS.
The
Company’s business, financial conditions and results of operations could be
materially and adversely affected by many risk factors. Because of these
risk factors, actual results might differ significantly from those projected
in
the forward-looking statements. Factors that might cause such differences
include, among others, the following:
Risks
Related to our Business
Adverse
trends in the electronics industry, such as an overall decline in price or
a
shift away from products that incorporate our backlights, may reduce our
revenues and profitability.
Our
business depends on the continued vitality of the electronics industry, which
is
subject to rapid technological change, short product life cycles and profit
margin pressures. In addition, the electronics industry historically has been
cyclical and subject to significant downturns characterized by diminished
product demand, accelerated erosion of average selling prices and production
over-capacity.
It
is also characterized by sudden upswings in the cycle, which can lead to
shortages of key components needed for our business, for which there is not
always an alternative source. Economic conditions affecting the electronics
industry in general or our major customers may adversely affect our operating
results by reducing the level of business that they furnish to us or the price
they are willing to pay for our products. If our customers’ products
fail to gain widespread commercial acceptance, become obsolete or otherwise
suffer from low sales volume, our revenues and profitability may stagnate or
decline.
If
OLED technology matures, it may lessen the demand for LCDs and LED/CCFL
Backlights, which could reduce our revenues and profits.
Organic
Light Emitting Diode technology is an alternative to traditional LED technology
that is still in the development phase, with companies attempting to create
an
OLED solution for cell phones and other small size applications. This
technology has the potential to supplant traditional LEDs in many applications,
but it still faces many performance issues related to the life span, processing
technology, restrictions of sizes, etc. and for many applications it is still
cost prohibitive. If development of this technology overcomes those
drawbacks, it will compete with existing LCD display technologies and may reduce
the demand for LCDs and the backlights that we supply to the makers of LCDs.
Our client base is currently diverse and involved with manufacturing
products in a variety of different sizes and for many different applications.
Due to the current diverse product base of our customers, a currently
perceived growing demand for our backlights in medium and large size
applications and enhancements in LCD technology, we believe that OLED technology
will have little or no short term or medium-term effect on our levels of LCD
backlight sales. However, if the OLED technology matures or our current
beliefs or understandings materially change, it may lessen the demand for LCDs
and related components, leading to a reduction of our revenues or profits or
both.
A
few customers and applications account for a significant portion of our sales,
and the loss of any one of these customers may reduce our revenues and profits.
A
significant portion of our revenue is generated from a small number of
customers. The aggregate percentage of the revenue contributed by our top
three customers in
the
year
ended December 31, 2007
was 39%,
with roughly 28% coming from the two largest customers. Under present
conditions, the loss of any of these customers, or a significant reduction
in
our level of sales to any or all of them, could have a material adverse effect
on our business and operating results.
We
do not have long-term purchase commitments from our customers and may have
to
rely on customer forecasts in making production decisions, and any cancellation
of purchase commitments or orders may result in the waste of raw materials
or
work in process associated with those orders, reducing both our revenues and
profitability.
As
a
backlight manufacturer, we must provide increasingly rapid product turnaround.
A
variety of conditions, both specific to individual customers and generally
affecting the demand for these products, may cause customers to cancel, reduce
or delay orders. Cancellations, reductions or delays by a significant customer
or by a group of customers would result in a material reduction in revenue.
Those customer decisions could also result in excess and obsolete
inventory and/or unabsorbed manufacturing capacity, which could reduce our
profits or impair our cash flow. On occasion, customers require rapid increases
in production, which can strain our resources, leading to a reduction in our
margins as a result of the additional costs necessary to meet those demands.
Our
customers generally do not provide us with firm, long-term volume purchase
commitments. In addition, industry trends over the past five years have led
to
dramatically shortened lead times on purchase orders, as rapid product cycles
have become the norm. Although we sometimes enter into manufacturing contracts
with our customers, these contracts principally clarify order lead times,
inventory risk allocation and similar matters, rather than providing for firm,
long-term commitments to purchase a specified volume of products at a fixed
price. As a result, customers can generally cancel purchase commitments or
reduce or delay orders at any time. The large percentage of our sales to
customers in the electronics industry, which is subject to severe competitive
pressure, rapid technological change and product obsolescence, increases our
inventory and overhead risks, among others, as we must maintain inventories
of
raw materials, work in process and finished goods to meet customer delivery
requirements, and those inventories may become obsolete if the anticipated
customer demand does not materialize.
We
also
make significant decisions, including determining the levels of business that
we
will seek and accept, production schedules, component procurement commitments,
facility requirements, personnel need, and other resource requirements, based
upon our estimates of customer requirements. The short-term nature of our
customers’ commitments and the possibility of rapid changes in demand for these
products reduce our ability to estimate accurately the future requirements
of
those customers. Because many of our costs and operating expenses are fixed,
a
reduction in customer demand can reduce our gross margins and operating results.
In order to transact business, we assess the integrity and creditworthiness
of
our customers and suppliers and we may, based on this assessment, incur design
and development costs that we expect to recoup over a number of orders produced
for the customer. Such assessments are not always accurate and expose us
to potential costs, including the write off of costs incurred and inventory
obsolescence if the orders anticipated do not materialize. We may also
occasionally place orders with suppliers based on a customer’s forecast or in
anticipation of an order that is not realized. Additionally, from time to time,
we may purchase quantities of supplies and materials greater than required
by
customer orders to secure more favorable pricing, delivery or credit terms.
These purchases can expose us to losses from cancellation costs, inventory
carrying costs or inventory obsolescence, and hence adversely affect our
business and operating results.
Failure
to optimize our manufacturing potential and cost structure could materially
increase our overhead, causing a decline in our margins and profitability.
We
strive
to utilize the manufacturing capacity of our facilities fully but may not do
so
on a consistent basis. Our factory utilization is dependent on our success
in
accurately forecasting demand, predicting volatility, timing volume sales to
our
customers, balancing our productive resources with product mix, and planning
manufacturing services for new or other products that it intends to produce.
Demand for contract manufacturing of these products may not be as high as we
expect, and we may fail to realize the expected benefit from our investment
in
our manufacturing facilities. Our profitability and operating results are also
dependent upon a variety of other factors, including: utilization rates of
manufacturing lines, downtime due to product changeover, impurities in raw
materials causing shutdowns, and maintenance of contaminant-free operations.
Failure to optimize our manufacturing potential and cost structure could
materially and adversely affect our business and operating results.
Moreover,
our cost structure is subject to fluctuations from inflationary pressures in
China and other geographic regions where we conduct business. China is currently
experiencing dramatic growth in its economy. This growth may lead to continued
pressure on wages and salaries that may exceed increases in productivity. In
addition, these may not be compensated for and may be exacerbated by currency
movements.
We
face intense competition, and many of our competitors have substantially greater
resources than we have. Increased competition from these competitors may
reduce our revenues or decrease our margins, either or both of which would
reduce our profitability and could impair cash flow.
We
operate in a competitive environment that is characterized by price deflation
and technological change. We compete with major international and domestic
companies. Our major competitors include Shian Yih Electronics Ind. Co. Ltd.,
Wai Chi Electronics Ltd., Radiant Opto-Electronics Corporation, K-Bridge
Electronics Co. Ltd., etc. and other similar companies primarily located in
Japan, Taiwan, Korea, Hong Kong and China Mainland. Our competitors may have
greater market recognition and substantially greater financial, technical,
marketing, distribution, purchasing, manufacturing, personnel and other
resources than we do. Furthermore, some of our competitors have
manufacturing and sales forces that are geographically diversified, allowing
them to reduce transportation expenses, tariff costs and currency fluctuations
for certain customers in markets where their facilities are located. Many
competitors have production lines that allow them to produce more sophisticated
and complex devices than we currently do and to offer a broader range of display
devices to our target customers. Other emerging companies or companies in
related industries may also increase their participation in the display and
display module markets, which would intensify competition in our markets. We
might lose some of our current or future business to these competitors or be
forced to reduce our margins to retain or acquire that business, which could
decrease our revenues or slow our future revenue growth and lead to a decline
in
profitability.
We
depend on the market acceptance of our customers’ products, and significant
slowdown in demand for those products would reduce our revenues and our profits.
Currently,
we do not sell products to end users. Instead, we design and manufacture various
display product solutions that our customers incorporate into their products.
As
a result, our success depends almost entirely upon the widespread market
acceptance of our customers’ products. Any significant slowdown in the demand
for our products would likely reduce our revenues and profits. Therefore,
we must identify industries that have significant growth potential and establish
strong, long-term relationships with manufacturers in those industries. Our
failure to identify potential growth opportunities or establish these
relationships would limit our revenue growth and profitability.
We
extend credit to our customers and may not be able to collect all receivables
due to us, and our inability to collect such receivables may have an adverse
effect on our immediate and long-term liquidity.
We
extend
credit to our customers based on assessments of their financial circumstances,
generally without requiring collateral. As of December 31, 2007, our
accounts receivable, after deducting an allowance for bad debts, was nearly
$12.7 million. Our overseas customers may be subject to economic cycles
and conditions different from those of our domestic customers. We may also
be
unable to obtain satisfactory credit information or adequately secure the credit
risk for some of these overseas customers. The extension of credit
presents an exposure to risk of uncollected receivables. Additionally, we
may not realize from receivables denominated in a foreign currency the
anticipated amounts in United States dollar terms due to fluctuations in
currency values. Our inability to collect on these accounts may reduce on our
immediate and long term liquidity.
The
growth of our business depends on our ability to finance new products and
services and these increased costs may reduce our cash flows and, if the
products and services in which we have invested do not succeed, it would reduce
our profitability.
We
operate in the consumer electronics industry, which is characterized by rapid
change. New technologies are appearing with increasing frequency to
supplant existing technologies. In order to capture increased market
share, manufacturers are adopting a shorter product life cycle from a cosmetic,
if not functional, standpoint, but those cosmetic changes generally have a
direct effect on the backlight products that the new designs incorporate.
Technological advances, the introduction of new products, new designs and new
manufacturing techniques could render our inventory obsolete, or it could shift
demand into areas where we are not currently engaged. If we fail to adapt
to those changing conditions in a timely and efficient manner, our revenues
and
profits would likely decline. To remain competitive, we must continue to incur
significant costs in product development, equipment and facilities and to make
capital investment. These costs may increase, resulting in greater fixed costs
and operating expenses. As a result, we could be required to expend substantial
funds for and commit significant resources to the following:
|
|
research
and development activities on existing and potential product solutions;
|
|
|
|
additional
engineering and other technical personnel;
|
|
|
|
|
|
advanced
design, production and test equipment;
|
|
|
|
|
|
manufacturing
services that meet changing customer needs;
|
|
|
|
|
|
technological
changes in manufacturing processes; and
|
|
|
|
|
|
expansion
of manufacturing capacity.
|
|
|
Our
future operating results will depend to a significant extent on our ability
to
continue to provide new product solutions and electronic manufacturing services
that compare favorably on the basis of time to market, cost and performance
with
the design and manufacturing capabilities and competing third-party suppliers
and technologies. Our failure to increase our net sales sufficiently to offset
these increased costs would reduce our profitability.
We
are subject to lengthy sales cycles, and it could take longer than we anticipate
before our sales and marketing efforts result in revenue.
Our
focus
on developing a customer base that requires custom displays and devices means
that it may take longer to develop strong customer relationships. Moreover,
factors specific to certain industries have an impact on our sales cycles.
In
particular, those customers who operate in or supply to the medical and
automotive industries require longer sales cycles, as qualification processes
are longer and more rigorous, often requiring extensive field audits. These
lengthy and challenging sales cycles may mean that it could take longer before
our sales and marketing efforts result in revenue to us, if at all. As a
result, the return on the time and effort invested in developing these
opportunities may be deferred, or may not be realized at all, reducing our
profitability.
Products
we manufacture may contain design or manufacturing defects, which could result
in reduced demand for our services and customer claims, causing us to sustain
additional costs, loss of business reputation and legal liability.
We
manufacture products to our customers’ requirements, which can be highly complex
and may at times contain design or manufacturing errors or failures. Any defects
in the products we manufacture, whether caused by a design, manufacturing or
component failure or error, may result in returns, claims, delayed shipments
to
customers or reduced or cancelled customer orders. If these defects occur,
we
will incur additional costs, and if in they occur in large quantity or
frequently, we may sustain additional costs, loss of business reputation and
legal liability.
We
could become involved in intellectual property disputes, resulting in
substantial costs and diversion of our management resources. Such disputes
could materially and adversely affect our business by increasing our expenses
and limiting the resources that we can devote to expansion of our business,
even
if we ultimately prevail.
Diguang
Electronics currently possesses two Chinese patents, and we utilize the
additional patented technologies that are material to our business, which are
in
the process of being transferred to Diguang Electronics from Yi Song, referred
to in our prior filings as Song Yi to conform to Chinese convention of last
name
first, our Chairman, CEO and the current owner of the patents. If the patents
are not successfully transferred, we will not be able to use the same patents,
which would hamper our production and this would have a material and adverse
effect on our business and revenues. If a patent is infringed upon by a third
party, we may need to devote significant time and financial resources to attempt
to halt the infringement. We may not be successful in defending the patents
involved in such a dispute. Similarly, while we do not knowingly infringe on
patents, copyrights or other intellectual property rights owned by other
parties; we may be required to spend a significant amount of time and financial
resources to resolve any infringement claims against us. We may not be
successful in defending our position or negotiating an alternative remedy.
Any litigation could result in substantial costs and diversion of our
management resources and could reduce our revenues and profits.
Our
customers may decide to design and/or manufacture the products that they
currently purchase from us, which may reduce our revenues and profits, as we
may
not be able to compete successfully with these in-house developments.
Our
competitive position could also be adversely affected if one or more of our
customers decide to design and/or manufacture their own backlights and display
modules. We may not be able to compete successfully with these in-house
developments by our customers, which would tend to favor their in-house supply
over us, even in cases where price and quality may not be comparable.
We
may develop new products that may not gain market acceptance, and our
significant costs in designing and manufacturing services for new product
solutions may not result in sufficient revenue to offset those costs or to
produce profits.
We
operate in an industry characterized by frequent and rapid technological
advances, the introduction of new products and new design and manufacturing
technologies. As a result, we may be required to expend funds and commit
resources to research and development activities, possibly requiring additional
engineering and other technical personnel; purchasing new design, production,
and test equipment; and continually enhancing design and manufacturing processes
and techniques. We may invest in equipment employing new production techniques
for existing products and new equipment in support of new technologies that
fail
to generate adequate returns on the investment due to insufficient productivity,
functionality or market acceptance of the products for which the equipment
may
be used. We could, therefore, incur significant sums in design and manufacturing
services for new product solutions that do not result in sufficient revenue
to
make those investments profitable. Furthermore, customers may change or
delay product introductions or terminate existing products without notice for
any number of reasons unrelated to us, including lack of market acceptance
for a
product. Our future operating results will depend significantly on our ability
to provide timely design and manufacturing services for new products that
compete favorably with design and manufacturing capabilities and third party
suppliers.
Our
component and materials suppliers may fail to meet our needs, causing us to
experience manufacturing delays, which may harm our relationships with current
or prospective customers and reduce sales.
We
do not
have long term supply contracts with the majority of our suppliers or for
specific components. This generally serves to reduce our commitment risk but
does expose us to supply risk and to price increases that we may not be able
to
pass on to our customers. In our industry, at times, there are shortages
of some of the materials and components that it uses. If we are unable to obtain
sufficient components on a timely basis, we may experience manufacturing delays,
which could harm our relationships with current or prospective customers and
reduce sales. Moreover, some suppliers may offer preferential terms to our
competitors, who may have greater buying power or leverage in negotiations.
That would place us at a competitive disadvantage.
We
may be affected by power shortages, causing delays in delivery of products
to
our customers, resulting in possible loss of business or claims against us
and
cause us to lose future business from those or other customers.
Our
Dongguan factory consumes a significant amount of electricity, and there are
a
significant number of industrial facilities in the area where this factory
is
located. Therefore, power shortages may occur and the facility may be
deprived of electricity for undetermined periods of time. This may result
in longer production timeframes and delays in delivery of product to our
customers. Failure to meet delivery deadlines may result in the loss of
business or claims against us, which may have a material and adverse effect
on
our business, profitability and reputation.
Our
financial performance could be harmed if compliance with new environmental
regulations becomes too burdensome.
Although
we believe that we are operating in compliance with applicable Chinese
government environmental laws, there is no assurance that we will be in
compliance consistently, as such laws and regulations or their interpretation
and implementation change. Failure to comply with environmental regulation
could
result in the imposition of fines, suspension or halting of production or
closure of manufacturing operations.
We
may not be able to secure financing needed for future operating needs on
acceptable terms, or on any terms at all.
From
time
to time, we may seek additional equity or debt financing to provide the capital
required to maintain or expand our design and production facilities and
equipment and/or working capital, as well as to repay outstanding loans if
cash
flow from operations is insufficient to do so. We cannot predict with certainty
the timing or amount of any such capital requirements. If such financing is
not
available on satisfactory terms, we may be unable to expand our business or
to
develop new business at the rate desired.
Failure
to manage growth effectively could result in inefficiencies that could increase
our costs, reducing our profitability.
We
have
increased the number of our manufacturing and design programs and intend to
expand further the number and diversity of our programs. The number of
locations where we manufacture may also increase. Our ability to manage
our planned growth effectively will require us to:
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enhance
quality, operational, financial and management systems;
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expand
facilities and equipment; and
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successfully
hire, train and motivate additional employees, including the technical
personnel necessary to operate our production facilities.
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An
expansion and diversification of our product range, manufacturing and sales
will
result in increases in our overhead and selling expenses. We may also be
required to increase staffing and other expenses as well as expenditures on
plant, equipment and property in order to meet the anticipated demand of our
customers. Customers, however, generally do not commit to firm production
schedules for more than a short time in advance. Any increase in expenditures
in
anticipation of future orders that do not materialize would adversely affect
our
profitability. Customers also may require rapid increases in design and
production services that place an excessive short-term burden on our resources
and reduce our profitability.
Potential
strategic alliances may not achieve their objectives, which could lead to wasted
effort or involvement in ventures that are not profitable and could harm our
company’s reputation.
We
are
currently exploring strategic alliances designed to enhance or complement our
technology or to work in conjunction with our technology, increase our
manufacturing capacity, provide additional know-how, components or supplies,
and
develop, introduce and distribute products and services utilizing our technology
and know-how. Any strategic alliances entered into may not achieve their
strategic objectives, and parties to our strategic alliances may not perform
as
contemplated. As a result, the alliances themselves may run at a loss,
which would reduce our profitability, and if the products or customer service
provided by such alliances were of inferior quality, our reputation in the
marketplace could be harmed, affecting our existing and future customer
relationships.
We
may not be able to retain, recruit and train adequate management and production
personnel. We rely heavily on those personnel to help develop and execute
our business plans and strategies, and if we lose such personnel, it would
reduce our ability to operate effectively.
Our
success is dependent, to a large extent, on our ability to retain the services
of our executive management, who have contributed to our growth and expansion
to
date. The executive directors play an important role in our operations and
the development of our new products. Accordingly, the loss of their services,
in
particular Messrs. Yi Song and Hong Song, referred to in our prior filings
as
Song Hong to conform to Chinese convention of last name first, without suitable
replacements, will have an adverse affect on our business generally, operating
results and future prospects.
In
addition, our continued operations are dependent upon our ability to identify
and recruit adequate management and production personnel in China. We require
trained graduates of varying levels and experience and a flexible work force
of
semi-skilled operators. Many of our current employees come from the more remote
regions of China as they are attracted by the wage differential and prospects
afforded by Shenzhen and our operations. With the economic growth currently
being experienced in China, competition for qualified personnel will be
substantial, and there can be no guarantee that a favorable employment climate
will continue and that wage rates we must offer to attract qualified personnel
will enable us to remain competitive internationally. Inability to attract
such
personnel may or the increased cost of doing so could reduce our competitive
advantage relative to other backlight producers, reducing or eliminating our
growth in revenues and profits.
Mr.
Yi Song, our Chief Executive Officer, controls approximately 69% of our
outstanding common shares and may have conflict of interest with our minority
shareholders.
Mr.
Yi
Song, our Chief Executive Officer, beneficially owns approximately 69% of the
outstanding shares of our common stock. As a result of being the majority
shareholder, for transactions that require
shareholders approval, he has control over decisions to enter into any of them,
which could result in the approval of transactions that might not maximize
shareholders’ value, and has the ability to prevent entry into any of
them. In addition, he can control the election of members of the Company’s
board, have the ability to appoint new members to the Company’s management team
and control the outcome of matters submitted to a vote of the holders of the
Company’s common
stock.
The interests of Mr. Yi Song may at times conflict with the interests of our
other shareholders.
Risks
Related to International Operations
If
China does not continue its policy of economic reforms, it could, among other
things, result in an increase in tariffs and trade restrictions on products
we
produce or sell following a business combination, making our products less
attractive and potentially reducing our revenues and profits.
China’s
government has been reforming its economic system since the late 1970s. The
economy of China has historically been a nationalistic, “planned economy,”
meaning it has functioned and produced according to governmental plans and
pre-set targets or quotas.
However,
in recent years, the Chinese government has implemented measures emphasizing
the
utilization of market forces for economic reform and the reduction of state
ownership in business enterprises. Although we believe that the changes adopted
by the government of China have had a positive effect on the economic
development of China, additional changes still need to be made. For example,
a
substantial portion of productive assets in China are still owned by the Chinese
government. Additionally, the government continues to play a significant role
in
regulating industrial development. We cannot predict the timing or extent of
any
future economic reforms that may be proposed, but should they occur, they could
reduce our operating flexibility or require us to divert our efforts to products
or ventures that are less profitable than those we would elect to pursue on
our
own.
A
recent
positive economic change has been China’s entry into the World Trade
Organization, the global international organization dealing with the rules
of
trade between nations. It is believed that China’s entry will ultimately result
in a reduction of tariffs for industrial products, a reduction in trade
restrictions and an increase in trading with the United States. However,
China has not fully complied with all of its WTO obligations to date, including
fully opening its markets to American goods and easing the current trade
imbalance between the two countries. If actions are not taken to rectify these
problems, trade relations between the United States and China may be strained,
and this may have a negative impact on China's economy and our business by
leading to the imposition of trade barriers on items that incorporate our
products, which would reduce our revenues and profits.
We
are dependent on our Chinese manufacturing operations to generate the majority
of our income and profits, and the deterioration of any current favorable local
conditions may make it difficult or prohibitive to continue to operate or expand
the manufacturing facilities in China.
Our
current manufacturing operations are located in China, our administrative
offices are in the United States and we have additional establishments in Hong
Kong and the British Virgin Islands. The geographical distances between these
facilities create a number of logistical and communications challenges,
including time differences and differences in the cultures in each location,
which makes communication and effective cooperation more difficult. In
addition, because of the location of the manufacturing facilities in China,
we
could be affected by economic and political instability there, including
problems related to labor unrest, lack of developed infrastructure, variances
in
payment cycles, currency fluctuations, overlapping taxes and multiple taxation
issues, employment and severance taxes, compliance with local laws and
regulatory requirements, greater difficulty in collecting accounts receivable,
and the burdens of cost and compliance with a variety of foreign laws. Moreover,
inadequate development or maintenance of infrastructure in China, including
adequate power and water supplies, transportation, raw materials availability
or
the deterioration in the general political, economic or social environment
could
make it difficult, more expensive and possibly prohibitive to continue to
operate or expand the manufacturing facilities in China.
The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could leave us unable to use the assets we have
accumulated for the purpose of generating profits for the benefit of our
shareholders.
Over
the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time
without notice. Changes in policies by the Chinese government that result in
a
change of laws, regulations, their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion or imports and
sources of supply could materially reduce the value of our business by making
us
uncompetitive or, for example, by reducing our after-tax profits. The
nationalization or other expropriation of private enterprises by the Chinese
government could result in the total loss of our investment in China, where
a
significant portion of our profits are generated.
The
Chinese legal system may have inherent uncertainties that could materially
and
adversely impact our ability to enforce the agreements governing our operations.
The
performance of the agreements and the operations of our factories are dependent
on our relationship with the local government. Our operations and prospects
would be materially and adversely affected by the failure of the local
government to honor our agreements or an adverse change in the laws governing
them. In the event of a dispute, enforcement of these agreements could be
difficult in China. China tends to issue legislation, which is followed by
implementing regulations, interpretations and guidelines that can render
immediate compliance difficult. Similarly, on occasion, conflicts arise between
national legislation and implementation by the provinces that take time to
reconcile. These factors can present difficulties in our ability to achieve
compliance. Unlike the United States, China has a civil law system based on
written statutes in which judicial decisions have limited precedential value.
The Chinese government has enacted laws and regulations to deal with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, our experience in implementing,
interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes in China
is therefore unpredictable. These matters may be subject to the exercise of
considerable discretion by agencies of the Chinese government, and forces and
factors unrelated to the legal merits of a particular matter or dispute may
influence their determination.
Because
our operations are international, we are subject to significant worldwide
political, economic, legal and other uncertainties that may make collection
of
amounts owed to us difficult or costly, or conducting operations more difficult
should materials needed from certain places be unavailable for an indefinite
or
extended period of time.
We
have
subsidiaries in the British Virgin Islands, China and Hong Kong. Because we
manufacture all of our products in China, substantially all of the net book
value of our total fixed assets is located there. However, we sell our products
to customers worldwide, with concentrations of customers in Taiwan, Hong Kong,
North America, Europe, Japan, Southeast Asia and China Mainland. As a
result, we will have receivables from and goods in transit to those locations.
Protectionist trade legislation in the United States or foreign countries,
such
as a change in export or import legislation, tariff or duty structures, or
other
trade policies, could adversely affect our ability to sell products in these
markets, or even to purchase raw materials or equipment from foreign suppliers.
Moreover, we are subject to a variety of United States laws and regulations,
changes to which may affect our ability to transact business with certain
customers or in certain product categories.
We
are
also subject to numerous national, state and local governmental regulations,
including environmental, labor, waste management, health and safety matters
and
product specifications. We are subject to laws and regulations governing our
relationship with our employees, including: wage and hour requirements, working
and safety conditions, citizenship requirements, work permits and travel
restrictions. These include local labor laws and regulations, which may require
substantial resources for compliance. We are subject to significant government
regulation with regard to property ownership and use in connection with our
leased facilities in China, import restrictions, currency restrictions and
restrictions on the volume of domestic sales and other areas of regulation,
all
of which can limit our ability to react to market pressures in a timely or
effective way, thus causing us to lose business or miss opportunities to expand
our business.
Fluctuation
of the Renminbi could make our pricing less attractive, causing us to lose
sales, or could reduce our profitability when stated in terms of another
currency, such as the U.S. dollar.
The
value
of the Renminbi, the main currency used in China, fluctuates and is affected
by,
among other things, changes in China’s political and economic conditions. The
conversion of Renminbi into foreign currencies such as the dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day's interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, China recently adopted
a
floating rate with respect to the Renminbi, with a 0.3% fluctuation. As a
result, the exchange rate of the Renminbi rose to 7.29 against the dollar as
at
December 31, 2007, amounting to a 6.5% appreciation of the Renminbi within
one
year. This floating exchange rate, and any appreciation of the Renminbi that
may
result from such rate, could have various effects on our business, which include
making our products more expensive relative to those of our competitors than
has
been true in the past, or increasing our profitability when stated in dollar
terms. It is not possible to predict if the net effects of the
appreciation of the Renminbi, if it occurred, would be positive or negative
for
our business.
Changes
in foreign exchange regulations in China may affect our ability to pay dividends
in foreign currency or conduct other business for which we would need access
to
foreign currency exchange.
Renminbi,
or RMB, is not currently a freely convertible currency, and the restrictions
on
currency exchanges may limit our ability to use revenues generated in RMB to
fund business activities outside China or to make dividends or other payments
in
United States dollars. The Chinese government strictly regulates conversion
of
RMB into foreign currencies. For example, RMB cannot be converted into
foreign currencies for the purpose of expatriating the foreign currency, except
for purposes such as payment of debts lawfully owed to parties outside of China.
Over the years, foreign exchange regulations in China have significantly
reduced the government’s control over routine foreign exchange transactions
under current accounts.
The
State
Administration for Foreign Exchange, or “SAFE”, regulates the conversion of the
RMB into foreign currencies. Currently, Foreign Invested Enterprises, or “FIE”,
are required to apply for “Foreign Exchange Registration Certificates,” which
permit the conversion of RMB into foreign exchange for the purpose of
expatriating profits earned in China to a foreign country. Our China
subsidiary, Diguang Electronics, is a FIE that has obtained the registration
certifications, and with such registration certifications, which need to be
renewed annually, Diguang Electronics is allowed to open foreign currency
accounts including a “current account” and “capital account.” Currently,
conversion within the scope of the “current account”, e.g. remittance of foreign
currencies for payment of dividends, etc., can be effected without requiring
the
approval of SAFE. However, conversion of currency in the “capital account”, e.g.
for capital items such as direct investments, loans, securities, etc., still
requires the approval of SAFE. In accordance with the existing foreign
exchange regulations in China, Diguang Electronics is able to pay dividends
in
foreign currencies, without prior approval from the SAFE, by complying with
certain procedural requirements.
Although
we have not experienced any difficulties in the repatriation of our profits
out
of China or in meeting our foreign exchange needs to date, there can be no
assurance that the current foreign exchange measures will not be changed in
a
way that will make payment of dividends and other distributions outside of
China
more difficult or unlawful. As a result, if we intend to distribute profits
outside of China, there can be no assurance that we will be able to obtain
sufficient foreign exchange to do so.
In
addition, on October 21, 2005, SAFE promulgated Notice 75, Notice on Issues
concerning Foreign Exchange Management in People’s Republic of China Residents’
Financing and Return investments through Overseas Special Intention Company.
Notice 75 provides that Chinese residents shall apply for Foreign Exchange
Investment Registration before establishing or controlling an OSIC, which is
defined by Notice 75 as a foreign enterprise directly established or indirectly
controlled by Chinese residents for foreign equity capital financing with their
domestic enterprise assets and interests.
Notice
75
further requires that Chinese residents shall process the modification of
foreign investment exchange registration for the interests of net assets held
by
Chinese residents in an OSIC and its alteration condition, if Chinese residents
contributed their domestic assets or shares into the OSIC, or processed foreign
equity capital financing after contributing their domestic assets or shares
into
the OSIC.
Pursuant
to Notice 75, Chinese residents are prohibited, among other things, from
distributing profits or proceeds from a liquidation, paying bonuses, or
transferring shares of the OSIC outside of China if Chinese residents have
not
completed or do not maintain the Foreign Investment Exchange Registration.
Yi
Song
and Hong Song, our principals, have filed the requisite application for foreign
investment exchange registration under the relevant laws of China and the
regulations of Notice 75, and their registration application has been approved
by SAFE. Their foreign investment exchange registration is valid, legal and
effective for the purpose of Notice 75.
However,
we cannot provide any assurance that Chinese regulatory authorities will not
impose further restrictions on the convertibility of the RMB. Since our
subsidiary in China generates a significant proportion of our revenue and these
revenues are denominated mainly in RMB, any future restrictions on currency
exchanges may limit our ability to repatriate such revenues for the distribution
of dividends to our shareholders or for funding our other business activities
outside China.
We
are subject to various tax regimes, which may adversely affect our profitability
and tax liabilities in the future.
Diguang
Development has subsidiaries and/or operations or other presence in the U.S.,
China, Hong Kong and the British Virgin Islands, and it will be subject to
the
tax regimes of these countries. Although virtually all of Diguang
Development’s profits will be earned outside of the U.S., under U.S. tax laws it
is possible that some or much of Diguang Development’s earnings will be subject
to U.S. taxation. That may be true even if Diguang Development does not
repatriate any of its foreign earnings to the U.S. If that occurs, Diguang
Development’s after-tax profits could decrease significantly. Diguang
Development will attempt to structure its operations in a manner that minimizes
its overall corporate tax costs, but there is no assurance that it will be
able
to avoid having to pay significantly higher taxes than we have paid
historically.
As
we
were established under the laws of the state of Nevada, we are subject only
to
federal income tax and state income tax. Because our main operating activities
are located outside the U.S., the taxable income outside the U.S. may not be
able to offset the taxable loss generated in the U.S. We may have accumulated
certain net operation loss carry forwards; however, due to the changes in
ownership, the use of these net operation loss carry forward may be limited
in
accordance with the U.S. tax laws.
In
addition, any change in tax laws and regulations or the interpretation or
application thereof, either internally in one of those jurisdictions or as
between those jurisdictions, may adversely affect Diguang Development’s
profitability and tax liabilities in the future.
Cessation
of the income tax exemption for Diguang Electronics may have an adverse impact
on our net profits.
Diguang
Electronics is currently enjoying a reduced rate of income tax under the central
government and provincial government laws. Under Chinese income tax law,
Diguang Electronics, as a Foreign Investment Enterprise, or “FIE”, would
ordinarily be subject to the PRC central government and local income tax rates
of 30.0% and 3.0%, respectively. However, Chinese income tax law also
provides that any FIE engaged in manufacturing that is scheduled to operate
for
not less than 10 years shall receive an exemption from the entire central
government income tax for the two years beginning with its first profitable
year
and receive a 50.0% reduced income tax in the third through fifth years.
Normally,
the concession rate for the central government income tax for FIEs established
in special economic zones is 15.0%. The concession rate for the central
government income tax for FIEs of a production nature is 24.0% if they are
established in coastal economic open zones or in the old urban districts of
cities where the special economic zones or the economic and technological
development zones are located. However, because Diguang’s subsidiary, Diguang
Electronics, is recognized as a high-tech enterprise by the Shenzhen Science
and
Technology Bureau, it is entitled to a 50% reduction in the central government
income tax for an additional three years, i.e., in the sixth through eighth
years, subject to a minimum central government income tax rate of 10% in each
of
these years, pursuant to the Rules for the Implementation of the Income Tax
law
of the PRC for Enterprises with Foreign Investment and Foreign Enterprises.
In fact, Diguang Electronics received a 100% exemption for the first two
years, in 1999 and 2000, and a 50% exemption of the central government income
tax for the next three years, from 2001 through 2003.
Although
local tax authorities in China are responsible for collecting the applicable
central government income tax as well as provincial government income tax,
these
authorities often follow local practices in tax collection matters. Like
most high-tech enterprises in Shenzhen, Diguang Electronics paid total income
tax at a rate of 7.5% in 2005 and 2006 whereas, the applicable minimum required
central government income tax rate was 10% for 2005 and 2006, respectively.
The Shenzhen tax authority had accepted without objection Diguang
Electronics’ tax filings and payments for 2005 and 2006. Diguang
Electronics paid income tax at a rate of 15% for 2007 because of local tax
practices implemented by local tax authority. Diguang Electronics believes
the risk of application of a retroactive additional 2.5% tax and related
penalties, if any, for 2005 and 2006 to be minimal. However, there can be
no assurance that Diguang Electronics will not be required to pay the deficient
tax and any related penalty in the future.
In
order
to buffer the reform’s impact and shift to the new regime smoothly, a five-year
“grandfathering” period shall be granted for FIEs established before the
promulgation of the EIT law, which was 16 March, 2007. Practice [2007]No. 59,
issued by the Ministry of Commerce on 23 April 2007, further defines the cut-off
date as the date of approval of the set-up by the Ministry of
Commerce.
FIE
enjoying the reduced tax rate of 15 % or 24 % under the existing law will be
eligible for a five year transition period during which the tax rate will
gradually phase up to the unified tax rate of 25 %.
Manufacturing
FIE that have not yet used their five-year tax holiday will be allowed to
continue to enjoy the holiday during the grandfather period. If the five-year
tax holiday has not yet begun due to accumulated losses, the holiday will be
deemed to commence upon the effective date of the EIT law, i.e. 1 January
2008.
Furthermore,
enterprises are entitled to receive a government subsidy sourcing from the
proceeds collected as the central government income tax imposed on profits
generated by certain products that have been approved for inclusion within
the
National (and/or Provincial) Important New Products Project. Diguang
Electronics needs to apply for this kind of government subsidies for three
years
from the date a product receives this approval. Two of Diguang
Electronics’ products, its color CCFL backlight for TFT-LCD TV and its white LED
backlight have received this approval and are included in the National (and/or
Provincial) Important New Products Project. Under the local incentive program
implemented by Shenzhen Treasury Department financial fund assistance, Diguang
Electronic had applied for receiving this kind of government subsidies based
on
50% income tax imposed on the profit related to the above two products. Pursuant
to the relevant approvals, Diguang Electronics received the subsidies for the
income tax imposed on the profit generated by these two products from the local
government. Diguang Electronics has been noticed through governmental
circular that it had received the subsidy for 2006 because one product
named New Type High Efficiency CCFL/LED Backlight (TFT-LCD Backlight) was listed
on the National (and/or Provincial) Important New Products Project by the
relevant local government. Diguang Electronics intends to apply for continued
inclusion of this one product within the National (and/or Provincial) Important
New Products Project in October 2006 for the 2006 subsidy; if the application
is
approved, Diguang Electronics will be entitled to receive this kind of subsidy
until at least October 2007. However, there is no assurance that Diguang
Electronics’ application will be approved. If Diguang Electronics’
application is not successful, the subsidy income of tax refund may be reduced
and its after tax profits may be adversely affected.
Cessation
of value added tax refund for Diguang Electronics may have an adverse impact
on
our net profits.
Normally,
Diguang Electronics would be required to pay a value added tax, or the
difference between the VAT it pays and collects. Based on the fact that
two of Diguang Electronics’ products, its color CCFL backlight for TFT-LCD TV
and its white LED backlight, are included in the National (and/or Provincial)
Important New Products Project, Diguang Electronics is entitled to receive
financial support according to the Rules for the Implementation of Financial
Preferential Treatment on Shenzhen Important New Products. In accordance
with the detailed explanation provided by relevant government agencies, Diguang
Electronics applied to receive government subsidy based on a 50% of the local
portion of the VAT (which represents 25% of the total VAT) or VAT paid x 25%
x
50%, in relation to these two products approved by Shenzhen Treasury Department
financial fund assistance. This application should be effective for three
years from the date a product receives approval to be included in the National
(and/or Provincial) Important New Products Project. Pursuant to the relevant
approvals, Diguang Electronics received the subsidies for the income tax imposed
on the profit generated by these two products from the local government.
Diguang Electronics has been noticed through governmental circular that it
is entitled to receive subsidy for 2006 because one product named New Type
High Efficiency CCFL/LED Backlight (TFT-LCD Backlight) was listed on the
National (and/or Provincial) Important New Products Project by the relevant
local government. Diguang Electronics intends to apply for continued
inclusion of this one product within the National (and/or Provincial) Important
New Products Project in October 2006 for the 2006 subsidy; if the application
is
approved, Diguang Electronics will be entitled to the VAT refund until at least
October 2007. However, there is no assurance that Diguang Electronics’
application will be approved. If Diguang Electronics’ application is not
successful, the subsidy of VAT tax refund, may be reduced and its after tax
profits may be adversely affected.
Because
Chinese law will govern almost all of our material agreements after the Share
Exchange, we may not be able to enforce our legal rights within China or
elsewhere, which could result in a significant loss of business, business
opportunities, or capital.
Chinese
law will govern almost all of our material agreements after the Share Exchange.
We cannot assure you that we will be able to enforce any of our material
agreements or that remedies will be available outside of China. The system
of
laws and the enforcement of existing laws in China may not be as certain in
implementation and interpretation as in the United States. The Chinese
judiciary is relatively inexperienced in enforcing corporate and commercial
law,
leading to a higher than usual degree of uncertainty as to the outcome of any
litigation. The inability to enforce or obtain a remedy under any of our future
agreements could result in a significant loss of business, business
opportunities or capital.
Additionally,
substantially all of our assets will be located outside of the United States
and
most of our officers and directors will reside outside of the United States.
As a result, it may not be possible for United States investors to enforce
their legal rights, to effect service of process upon our directors or officers
or to enforce judgments of United States courts predicated upon civil
liabilities and criminal penalties of our directors and officers under Federal
securities laws. Moreover, we have been advised that China does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts with the United States. Further, it is unclear if extradition
treaties now in effect between the United States and China would permit
effective enforcement of criminal penalties of the Federal securities laws.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in China.
Because
most of our officers and directors reside outside of the United States, it
may
be difficult, if not impossible, to acquire jurisdiction over those persons
if a
lawsuit is initiated against us and/or our officers and directors by a
shareholder or group of shareholders in the United States. Also, because
our officers will likely be residing in China at the time such a suit is
initiated, achieving service of process against such persons would be extremely
difficult. Furthermore, because the majority of our assets are located in
China it would also be extremely difficult to access those assets to satisfy
an
award entered against us in United States court. Moreover, we have been advised
that China does not have treaties with the United States providing for the
reciprocal recognition and enforcement of judgments of courts.
We
may have difficulty establishing adequate management, legal and financial
controls in China, which could impair our planning processes and make it
difficult to provide accurate reports of our operating results.
China
historically has not followed Western style management and financial reporting
concepts and practices, and its access to modern banking, computer and other
control systems has been limited. We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in China in these
areas. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial
data
and preparing financial statements, books of account and corporate records
and
instituting business practices that meet Western standards, making it difficult
for management to forecast its needs and to present the results of our
operations accurately at all times.
Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our profitability.
We
may
experience barriers to conducting business and trade in our targeted emerging
markets in the form of delayed customs clearances, customs duties and tariffs.
In addition, we may be subject to repatriation taxes levied upon the exchange
of
income from local currency into foreign currency, substantial taxes of profits,
revenues, assets and payroll, as well as value-added tax. The markets in
which we plan to operate may impose onerous and unpredictable duties, tariffs
and taxes on our business and products, and there can be no assurance that
this
will not reduce the level of sales that we achieve in such markets, which would
reduce our revenues and profits.
There
can be no guarantee that China will comply with the membership requirements
of
the World Trade Organization, which could leave us subject to retaliatory
actions by other governments and reduce our ability to sell our products
internationally.
China
has
agreed that foreign companies will be allowed to import most products into
any
part of China. In the sensitive area of intellectual property rights,
China has agreed to implement the trade-related intellectual property agreement
of the Uruguay Round. There can be no assurances that China will implement
any
or all of the requirements of its membership in the World Trade Organization
in
a timely manner, if at all. If China does not fulfill its obligations to
the World Trade Organization, we may be subject to retaliatory actions by the
governments of the countries into which we sell our products, which could render
our products less attractive, thus reducing our revenues and
profits.
There
can be no guarantee that our management will continuously meet its obligations
under Chinese law to enable distribution of profits earned in China to entities
outside of China.
A
circular recently promulgated by the State Administration of Foreign Exchange,
or “SAFE”, has increased the ability of foreign holding companies to receive
distributions of profits earned by Chinese operating subsidiaries. We
qualify for this treatment, but remaining qualified for it will require the
Chinese principals involved, Yi Song and Hong Song to meet annual filing
obligations. While they have agreed to meet those annual requirements, it
is possible that they will fail to do so, which could limit our ability to
gain
access to the profits earned by Diguang Electronics. The result could be
the inability to pay dividends to our stockholders or to deploy capital outside
of China in a manner that would be beneficial to our business as a whole.
Risks
Related to our Securities.
The
market price of our shares is subject to significant price and volume
fluctuations.
The
markets for equity securities have been volatile. The price of our common shares
may be subject to wide fluctuations in response to variations in operating
results, news announcements, trading volume, general market trends both
domestically and internationally, currency movements and interest rate
fluctuations or sales of common shares by our officers, directors and our
principal shareholders, customers, suppliers or other publicly traded companies.
Certain events, such as the issuance of common shares upon the exercise of
our
outstanding stock options, could also materially and adversely affect the
prevailing market price of our common shares. Further, the stock markets in
general have recently experienced extreme price and volume fluctuations that
have affected the market prices of equity securities of many companies and
that
have been unrelated or disproportionate to the operating performance of such
companies. These fluctuations may materially and adversely affect the market
price of our common shares and the ability to resell shares at or above the
price paid, or at any price.
There
may not be an active, liquid trading market for our common stock.
Our
common stock is currently traded on the Over the Counter Bulletin Board, and
we
intend to file an application for listing on The NASDAQ Market as soon as
practicable. Although we intend on meeting all of the necessary requirements
as
stated by NASDAQ Marketplace Rule 4420(a), there is no guarantee that our
application will be accepted. If we do not succeed in securing a listing
on the NASDAQ Market, it could limit the ability to trade our common stock
and
result in a reduction of the price that can be obtained for shares being sold.
Compliance
with all of the provisions of the Sarbanes-Oxley Act may be a further condition
of continued listing or trading. There is no assurance that if we are granted
a
listing on the NASDAQ Market we will always be able to meet the NASDAQ Market
listing requirements, or that there will be an active, liquid trading market
for
our common stock in the future. Failure to meet the NASDAQ Market listing
requirements could result in the delisting of our common stock from the NASDAQ
Market, which may adversely affect the liquidity of our shares, the price that
can be obtained for them or both.
We
may not pay dividends.
We
may
not pay dividends in the future. Instead, we expect to apply earnings toward
the
further expansion and development of our business. The likelihood of our paying
dividends is further reduced by the fact that, in order to pay dividends, we
would need to repatriate profits earned outside of the U.S., and in doing so
those profits would become subject to U.S. taxation. Thus, the liquidity
of your investment is dependent upon your ability to sell stock at an acceptable
price, rather than receiving an income stream from it. The price of our stock
can go down as well as up, and fluctuations in market price may limit your
ability to realize any value from your investment, including recovering the
initial purchase price.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
Applicable.
ITEM
2. PROPERTY.
Neither
we, Diguang, Well Planner nor Diguang Technology own or lease any property.
Our indirect subsidiary, Diguang Electronics, was previously headquartered
in Shenzhen, China where it leased office space, 1,002.6 square meters, with
a
monthly rental of RMB15,052 plus maintenance fee of RMB 1,504, or approximately
$2,080. Diguang Electronics moved to new office space in Shenzhen in
early 2007 and the old lease was terminated and we moved out during 2007
The
new
office space, approximately 1,200 square meters, which is self-owned and located
in Futian District, Shenzhen, China has been handed over to the Company from
the
developer and the office relocation was completed in 2007.
On
December 20, 2004, Diguang Electronics entered into a lease agreement with
Dongguan Diguang Electronic Science & Technology Ltd., 92% of which is owned
by Diguang Electronics (Hong Kong) and 8% is owned by Shenzhen Diguang Engine
& Equipment Co., Ltd., to rent the plant with rental of RMB440,000 plus
maintenance fee of RMB80,000 per month for the first two years. The subsequent
rental will be subject to change in line with the market price. The lease terms
starts from January 20, 2005 and expire on January 19, 2010. On February 23,
2005, both parties agreed that the rental for three months from February to
April 2005 shall be waived as Diguang Electronic had to finish its interior
remodeling during this period. On March 30, 2005, both parties agreed that
the
rental shall be RMB380,000 per month including all maintenance fee based on
the
prevailing market price for the similar facility to be leased in Dongguan area
and that the lease terms start from February 1, 2005 to January 31, 2010. There
were no other changes under the lease agreement. Based on the above amendments,
the Company recorded the monthly rental of RMB361,000 on a straight-line
basis.
Following
the acquisition of Dongguan Diguang on December 30, 2007,
the
lease
agreement and lease commitment were deemed terminated
. T
he
lease
commitment within the group were deemed terminated.
On
October 8, 2006, The Company entered into a lease agreement with Wuhan Hannstar
Technology Ltd., or “Wuhan Hannstar”, to rent equipment with rental of
RMB235,200, approximately $30,996, per month from December 1, 2006 to December
31, 2008. But the original lease agreement was cancelled in 2007 and a new
lease
agreement was entered into between Wuhan Diguang and Wuhan Hannstar on June
6,
2007. The new lease agreement lasted only for approximately six months ended
December 31, 2007, with rental of RMB235,200, approximately $30,996, per month.
It was agreed that the lease agreement should be renewed every year. Pursuant
to
this particular clause, both partied entered into a new lease agreement for
2008
on October 29, 2007, on which the rental was RMB200,000, approximately $27,418,
per month for the year ended December 31, 2008. Also on October 8, 2006, the
Company entered into a lease agreement with Wuhan TPV Display Technology Co.,
Ltd., or “Wuhan TPV”, to rent the factory with rental of RMB37,431,
approximately $4,933, per month from December 1, 2006 to December 31, 2008.
Future
minimum payments required under the lease agreement with
Wuhan
Hannstar and Wuhan TPV
that has
an initial or a remaining lease term in excess of one year at December 31,
2007
are as follows:
Year
Ended December 31,
|
|
Amount
|
|
2008
|
|
$
|
390,586
|
|
In
October 2007, Dihao entered into a renewed lease agreement with Transcend
Optronics (Yangzhou) Co, Ltd., to rent the factory premises for the period
from
October 1, 2007 to September 30, 2009 with rental of RMB 96,747, (approximately
$12,750
),
per
month.
Future
minimum payments required under the lease agreement for the manufacturing
facilities of Dihao that has an initial or a remaining lease term in excess
of
one year at December 31, 2007 are as follows:
Years
Ended December 31,
|
|
Amount
|
|
2008
|
|
|
159,154
|
|
2009
|
|
|
119,365
|
|
Total
|
|
$
|
278,519
|
|
ITEM
3. LEGAL PROCEEDINGS.
Neither
we nor any of our direct or indirect subsidiaries is a party to, nor is any
of
our property the subject of, any legal proceedings other than ordinary routine
litigation incidental to their respective businesses. There are no
proceedings pending in which any of our officers, directors, promoters or
control persons are adverse to us or any of our subsidiaries or in which they
are taking a position or have a material interest that is adverse to us or
any
of our subsidiaries.
Neither
we nor any of our subsidiaries is a party to any administrative or judicial
proceeding arising under federal, state or local environmental laws or their
Chinese counterparts.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
(a)
MARKET PRICES OF COMMON STOCK
Our
common stock currently trades in the over-the-counter market on the OTC Bulletin
Board under the symbol “DGNG”. Since our fiscal year 2005 and until the
announcement regarding our entry into a memorandum of understanding with Diguang
Holdings and its stockholders on September 30, 2005, Online’s stock traded only
sporadically or not at all. The day prior to that announcement, the bid
price of our common stock was $1.01. Prior to the Share Exchange, Diguang’s
stock did not trade in any public markets. The following table shows for the
periods indicated the high and low bid quotations for Diguang’s common stock, as
reported by financial reporting services. These quotations are believed to
represent inter-dealer quotations without adjustment for retail mark-up,
mark-down or commissions, and may not represent actual transactions.
PERIOD
|
|
HIGH
BID
|
|
LOW
BID
|
|
FISCAL
2006
|
|
|
|
|
|
First
Quarter
|
|
$
|
18
|
|
$
|
5.083
|
|
Second
Quarter
|
|
$
|
14.50
|
|
$
|
10.50
|
|
Third
Quarter
|
|
$
|
11.60
|
|
$
|
6.25
|
|
Fourth
Quarter
|
|
$
|
7.00
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
FISCAL
2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
4.5
|
|
$
|
2.2
|
|
Second
Quarter
|
|
$
|
3
|
|
$
|
1.3
|
|
Third
Quarter
|
|
$
|
1.9
|
|
$
|
1.2
|
|
Fourth
Quarter
|
|
$
|
2.8
|
|
$
|
1.15
|
|
(b)
STOCKHOLDERS
The
Company’s common shares are issued in registered form. Signature Stock
Transfer, Inc. in Plano, Texas is the registrar and transfer agent for the
Company’s common stock. As of December 31, 2007, there were
22,340,700 shares of the Company’s common stock outstanding and the Company had
approximately 138 stockholders of record
as
of
November 27, 2007.
(c)
DIVIDENDS
The
Company has never declared or paid any cash dividends on its common stock and
it
does not anticipate paying any cash dividends in the foreseeable future.
The Company currently intends to retain future earnings, if any, to finance
operations and the expansion of its business. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and
will
be based upon the Company’s financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any financing
arrangements and any other factors that the Board of Directors deems relevant.
(d)
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
The
securities authorized for issuance under equity compensation plan are as
follows:
Plan
Category
|
|
|
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights
|
|
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
|
|
Number
of
securities
remaining
available
for
future
issuance
|
|
Equity
Compensation Plan approved by security holders
|
|
|
407,417
|
|
|
5.00
|
|
|
934,000
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
As
of
December 31, 2007, 407,417 of our common stock are subject to outstanding
options. This is because approximately 540,000 shares of our common stock were
issued under the Diguang 2006 Option Plan, and during 2007, additional 26,000
shares of our common stock were granted. None of these options has been
exercised. But 158,583 shares subject to the option were forfeited due to
resignation of staff. Pursuant to the terms of the Amended and Restated Share
Exchange Agreement, we assumed Diguang’s outstanding 2006 stock incentive plan
covering options totaling the equivalent of 1,500,000 shares of our common
stock. The exercise price for each of these options is $5.00 per share. The
commencement date for these options is March 1, 2006, with monthly vesting
at
the end of each month after March 1, 2006, for the three independent directors
and
yearly vesting for the chief financial officer and other employees of
Diguang; The options that have been issued expire ten years from their grant
date (which date is February 25, 2006 or the date the optionee commences his
or
her service relationship with us, whichever is the later date).
ITEM
6. SELECTED FINANCIAL DATA
The
following selected financial data reflects the results of operations and cash
flows. The data below should be read in conjunction with, and is qualified
by reference to, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the consolidated financial statements and notes
thereto included elsewhere in this report. The financial information
presented may not be indicative of our future performance.
|
|
Years
Ended December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
S
tatement
of Income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
6,156,408
|
|
$
|
24,483.222
|
|
$
|
35,648,118
|
|
$
|
34,242,617
|
|
$
|
45,909,256
|
|
Income
from operation
|
|
|
1,080,230
|
|
|
6,895,560
|
|
|
8,708,622
|
|
|
2,079,852
|
|
|
(2,913,922
|
)
|
Net
income
|
|
|
1,045,640
|
|
|
6,619.557
|
|
|
8,513,883
|
|
|
1,664,816
|
|
|
(2,905,337
|
)
|
Weighted
average shares outstanding
|
|
|
-
|
|
|
18,250,000
|
|
|
18,250,000
|
|
|
21,383,960
|
|
|
22,531,384
|
|
|
|
At
December 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Balance
Sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,241,033
|
|
$
|
5,352,758
|
|
$
|
10,561,516
|
|
$
|
20,550,032
|
|
$
|
16,250,727
|
|
Working
capital
|
|
|
1,418,879
|
|
|
7,966,958
|
|
|
10,546,457
|
|
|
21,095,836
|
|
|
11,784,522
|
|
Total
assets
|
|
|
7,940,920
|
|
|
14,158,413
|
|
|
30,098,458
|
|
|
46,966,828
|
|
|
56,579,792
|
|
Long-term
debt
|
|
|
483,284
|
|
|
483,296
|
|
|
-
|
|
|
-
|
|
|
1,345,730
|
|
Minority
interests
|
|
|
-
|
|
|
-
|
|
|
452,895
|
|
|
1,043,035
|
|
|
1,475,361
|
|
Stockholder
s’
equity
|
|
|
1,353,763
|
|
|
7,974,764
|
|
|
17,912,951
|
|
|
33,739,804
|
|
|
27,291,108
|
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following is management’s discussion and analysis of certain significant factors
which have affected the Company’s financial position and operating results
during the periods included in the accompanying consolidated financial
statements, as well as information relating to the plans of its current
management. This report includes forward-looking statements. These
statements relate to future events or the Company’s future financial
performance. The Company has attempted to identify forward-looking
statements by terminology including “anticipates,” “believes,” “expects,” “can,”
“continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,”
“potential,” “predict,” “should” or “will” or the negative of these terms or
other comparable terminology. Such statements are subject to certain risks
and uncertainties, including the matters set forth in this report or other
reports or documents the Company files with the Securities and Exchange
Commission from time to time, which could cause actual results or outcomes
to
differ materially from those projected. Although the Company believes that
the expectations reflected in the forward-looking statements are reasonable,
the
Company cannot guarantee future results, levels of activity, performance or
achievements. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. The Company undertakes
no obligation to update these forward-looking statements. The Company’s
expectations are as of the date this Form 10-K is filed, and the Company does
not intend to update any of the forward-looking statements after the date this
Annual Report on Form 10-K is filed to confirm these statements to actual
results, unless required by law.
The
following discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-K.
Business
Overview
We
specialize in the design, production and distribution of small to medium-sized
Light Emitting Diode, or “LED”, and Cold Cathode Fluorescent Lamp, or “CCFL”,
backlights for various Thin Film Transistor Liquid Crystal Displays, “TFT-LCD”,
and Super-Twisted Nematic Liquid Crystal Display, “STN-LCD”, Twisted Nematic
Liquid Crystal Display, “TN-LCD”, and Mono LCDs, taken together, these
applications are referred to as “LCD” applications. Those applications
include color displays for cell phones, car televisions and navigation systems,
digital cameras, televisions, computer displays, camcorders, PDAs and DVDs,
CD
and MP3/MP4 players, appliance displays and the like.
We
conduct that business principally through the operations of Diguang Electronics
and Dihao (Yangzhou) Co., Ltd., thereafter “Dihao”. As of December 31,
2007, Diguang Electronics has approximately 2,000 full-time employees, which
changes from time to time as needed, Diguang is headquartered in Shenzhen,
China, with additional offices and its backlight manufacturing operations in
Dongguan, Guangdong Province, China. As of December 31, 2007, Dihao has
approximately 330 full-time employees, which changes from time to time as
needed. Dihao is a subsidiary of North Diamond, 65% of which was acquired by
us
on January 3, 2007. Wuhan Diguang Electronics Co., Ltd was established as
in-house facilities mainly for a Taiwan-based customer with the capacity to
provide large inches of TFT-LCD and it has approximately 240 employees as of
December 31, 2007. Dongguan Diguang Electronics Science and Technology Co Ltd.,
or “Dguan Diguang S&T”, was established for the purpose to be used as the
production base of Shenzhen Diguang Electronics Co Ltd. It is the legal owner
of
the land and buildings which has been rented to Diguang Electronics since March
30, 2005. As of December 31, 2007, Dongguan Diguang S&T has approximately 10
full-time employees.
Well
Planner is involved in the import of raw materials into China and export of
finished products from China. Well Planner currently has no fixed
assets.
Diguang
Science and Technology (HK) Limited, or “Diguang S&T”, is directly involved
with the international buying of raw materials and selling of backlight products
for Diguang Electronics. Diguang S&T purchases raw materials from
international suppliers and acts as an international sales group for both
Diguang Electronics and Well Planner. Diguang S&T has no fixed
assets.
Well
Planner and Diguang S&T have only a few employees.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition presented in this section
are
based on our financial statements, which have been prepared in accordance with
the generally accepted accounting principles in the United States. During the
preparation of our financial statements we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue
and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates and judgments, including those related
to sales, returns, pricing concessions, bad debts, inventories, investments,
fixed assets, intangible assets, income taxes and other contingencies. We base
our estimates on historical experience and on various other assumptions that
we
believe are reasonable under current conditions. Actual results may differ
from
these estimates under different assumptions or conditions.
In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure about Critical Accounting Policy,” we identified the most critical
accounting principles upon which our financial status depends. We determined
that those critical accounting principles are related to the use of estimates,
inventory valuation, revenue recognition, income tax and impairment of
intangibles and other long-lived assets. We present these accounting policies
in
the relevant sections in this management’s discussion and analysis, including
the Recently Issued Accounting Pronouncements discussed below.
Revenue
Recognition
Revenue
generated from sales of backlight units to customers is recognized when
persuasive evidence of an arrangement exists, delivery of the products has
occurred, the significant risks and rewards of the ownership have been
transferred to the customer, the price is fixed or determinable and
collectibility is reasonably assured. Revenue presented on the Company’s income
statements is net of sales taxes.
Accounts
Receivable
During
the normal course of business, we extend unsecured credit to our customers.
Typical credit terms require payment to be made within 90 or 120 days of the
invoice date. We do not require collateral from our customers.
We
regularly evaluate and monitor the creditworthiness of each customer on a
case-by-case basis. We include any account balances that are determined to
be
uncollectible in the allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to management, the Company
believes that its allowance for doubtful accounts as of December 31, 2006 and
2007 was adequate, respectively. However, actual write-off might exceed the
recorded allowance.
Inventories
Inventories
are composed of raw materials and components, work in progress and finished
goods, all of which are related to backlight products. Inventories are valued
at
the lower of cost, based on weighted average method, and the market. Our
industry is characterized by rapid technological change, short-term customer
commitments and rapid changes in demand. We make provisions for estimated
excessive and obsolete inventory based on our regular reviews of inventory
quantities on hand and the latest forecasts of product demand and production
requirements from our customers. We write down inventories that are not
saleable, excessive or obsolete, whether raw materials, work-in-process or
finished goods, by charging such write-downs to cost of sales. In addition
to
write-downs based on newly introduced parts and statistics, judgments are used
for assessing provisions for the remaining inventory based on salability and
obsolescence.
Income
Taxes
We
account for income taxes in accordance with Statement of Financial Accounting
Standards No 109, “Accounting for Income Taxes”, “SFAS No. 109”. SFAS No. 109
requires an entity to recognize deferred tax liabilities and assets. Deferred
tax assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets
and
liabilities are measured using the enacted tax rate expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a
change in tax rates is recognized in income in the period that included the
enactment date.
Effective
January 1, 2007, the Company adopted the FASB’s Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition of tax benefits, classification on the balance sheet, interest
and penalties, accounting in interim periods, disclosure, and transition. In
accordance with FIN 48, the Company performed a self-assessment based on the
information available and concluded that there were no significant uncertain
tax
positions requiring recognition in its financial statements. The Company
classifies interest and/or penalties as part of income tax provision, which
was
zero during the year ended December 31, 2007.
Well
Planner is subject to corporate income tax under Hong Kong Inland Revenue
jurisdiction. However, Well Planner does not have Hong Kong sourced income.
In
accordance with Hong Kong tax regulation, Well Planner has not been taxed since
its inception.
There
is
no income tax for the companies domiciled in the BVI. Accordingly, Diguang
Holdings, Diguang Technology and North Diamond have not presented any income
tax
provision related to British Virgin Islands tax jurisdiction.
Diguang
Electronics is registered at Shenzhen and subject to a favorable income tax
rate
at 15% comparing to a statutory income tax rate of 33%, 30% for the central
government and 3% for the local government, under the current Chinese tax laws
because Shenzhen is a special zone designated by Chinese central government
to
attract foreign investments. Diguang Electronics has been deemed as a high-tech
company by Shenzhen Bureau of Science, Technology & Information. Under this
category, Diguang Electronics has been entitled to enjoy a 50% exemption from
corporate income tax at the rate of 15% for three years from January 1, 2004
to
December 31, 2006. However, in accordance with the Rules for the Implementation
of the Income Chinese Tax law for Enterprises with Foreign Investment and
Foreign Enterprises prescribed by the central government, the minimum corporate
income tax rate should be 10% within three years ended December 31, 2004, 2005,
and 2006. We recorded the income tax provision based on 10% of corporate income
tax rate for the years ended December 31, 2004, 2005 and 2006 considering that
the difference between the 7.5% rate implemented by the Chinese local tax
authority and the 10% rate in terms of the rules prescribed by the Chinese
central government should be recognized as income tax payable for conservative
consideration.
Dihao
is
registered at Yangzhou and subject to a favorable income tax rate at 24%
comparing to a statutory income tax rate of 33%, 30% for the Chinese central
government and 3% for the local government, under the current tax laws of PRC
because Yangzhou Development Zone is a special zone designated by Chinese
central government to attract foreign investments. Dihao has been a high-tech
company by Yangzhou Bureau of Science, Technology and Information. Under this
category, Dihao entitled to enjoy a 100% exemption of corporate income tax
for
the first two years from the first profit-making year and a 50% exemption of
corporate income tax for the following three years in accordance with the
preferential rules established by Yangzhou local tax authority on August 2,
1999. 2007 is the second year for Dihao to enjoy the 100% exemption in
corporation income tax. Therefore, there is no income tax for
Dihao.
Wuhan
Diguang Electronics Co., Ltd. ,or “Wuhan Diguang”, has been a foreign investment
company. Under this category, Wuhan Diguang entitled to enjoy a 100% exemption
of corporate income tax for the first two years from the first profit-making
year and a 50% exemption of corporate income tax for the following three years
in accordance with the preferential rules established by Wuhan local tax
authority. Therefore, there is no income tax for Wuhan Diguang in the year
of
2007. After the favorable income tax period, Wuhan Diguang will subject to
a
statutory income tax rate of 33%, 30% for the Chinese central government and
3%
for the local government.
Dongguan
Diguang Electronic Science and Technology Co., Ltd., or “Dongguan Diguang
S&T”, is registered at Dongguan City Development Zone, Guangdong Province,
China and subject to a favorable income tax at 27% comparing to a statutory
income tax rate of 33%,30% for the Central Government and 3% for the local
government, under the current income tax laws of PRC because Dongguan
Development Zone is a coastal economic development zone designated by Chinese
Central Government to attract foreign investments.
On
March
16, 2007, the National People’s Congress of China passed the new Enterprise
Income Tax Law, (“EIT Law”), and on December 6, 2007, the State Council of China
issued the Implementation Regulations for the EIT Law which took effect on
January 1, 2008. The EIT Law imposes a unified EIT of 25% on all
domestic-invested enterprises and foreign invested enterprises unless these
foreign investment enterprises qualify under certain grand-father rules.
The
Detailed Implementation Rules provides detailed instruction for implementation
purpose. We believe that all of our entities in China are qualified under
the
grand-father rules. The current income tax holiday we have enjoyed will be
phased out in the five years since January 1, 2008. The newly acted EIT and
its
Detailed Implementation Rules have no impact on the operating result of
2007.
Diguang
International Development Co., Ltd. was established under the laws of the State
of Nevada and is subject to U.S. federal income tax and one state income tax.
For U.S. income tax purposes no provision has been made for U.S. taxes on
undistributed earnings of overseas subsidiaries with which the Company intends
to continue to reinvest. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings if they were
remitted as dividends, or lent to the Company, or if the Company should sell
its
stock in the subsidiary. The predecessor company accumulated certain net
operation loss carry forwards; however, due to the changes in ownership, the
use
of these net operation loss carry forwards may be limited in accordance with
the
U.S. tax laws.
Impairment
of Long-Lived Assets
We
adopt
the provisions of Statement of Financial Accounting Standard No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable through the estimated undiscounted cash flows
expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount
by which the carrying value exceeds the fair value. The impairment loss for
the
years ended December 31, 2005, 2006, and 2007 was $0, $0, and $622,194,
respectively. The impairment loss was related to the investment in Huaxia
(Yangzhou) Integrated O/E System Inc., which was accounted for under the cost
method.
The
investment in Yangzhou Huaxia Integaration is our long term strategy for
upstream integration for LED development.
Share-Based
Payments
We
adopted Statement of Financial Accounting Standards No 123(R): “Share-Based
Payments” (SFAS 123R) effective January 1, 2006. SFAS 123R amends existing
accounting pronouncements for share-based payment transactions in which an
enterprise receives employee and certain non-employee services in exchange
for
(a) equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise’s equity instruments or that may be
settled by the issuance of such equity instruments. SFAS 123R generally requires
such transactions be accounted for using a fair-value-based method. As we have
never issued any stock options and warrants before January 1, 2006 and issued
certain stock options on March 1, 2006, we accounted for the stock option
granted using a fair-value-based method in accordance with SFAS No.
123R.
Retrospective
Restatement of Historical Consolidated Financial
Statements
On
January 3, 2007, the Company acquired 65% interest of North Diamond by
exercising a purchase option, which was entered into between the Company
and the Song brothers who are the holders of these 65% interest in North
Diamond
because North Diamond is conducting the same business as the Company. On
December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
with Sino Olympics Industrial Limited, “Sino Olympics” thereafter, and Shenzhen
Diguang Engine & Equipment Co., Ltd. to acquire a 100% interest in Dongguan
Diguang S&T. The closing date of the acquisition was December 30, 2007.
These two transactions were accounted for as assets exchanged between the
entities under common control in accordance with Appendix D of SFAS No. 141,
as
the owners of Dongguan Diguang S&T and the 65% interest of North Diamond
also own more than 50% interest of the Company.
In
accordance with Paragraphs D16 and D17 in Appendix D of SFAS No. 141, the
above
two transactions changed the basis of presentation regarding the Company’s
historical consolidated financial statements; therefore, all of the Company’s
historical consolidated financial statements for the years ended December
31,
2005 and 2006 have been retrospectively restated to include the financial
data
of two previously separate entities, which are under the common control,
since
January 1, 2005 for the purpose of furnishing comparative information and
the
cash disbursements for the purchase prices paid and the obligations committed
to
pay were deemed as dividends distributed and declared in 2007. Accordingly,
previously reported related party transactions associated with these two
entities were eliminated during the retrospective restatement process. The
following management discussion and analysis are based on the retrospectively
restated historical financial statements.
Results
of Operations
Comparison
of Years Ended December 31, 2007 and 2006
Revenue
Net
revenue was approximately $45.9 million for the year ended December 31, 2007,
an
increase of $11.7 million, or 34%, compared with $34.2 million for the prior
year. Of the $11.7 million increase, $4.4 million came from the sales of
both
mid-size LED and CCFL products manufactured at Yangzhou facility and $4.2
million came from the sales of CCFL products at Wuhan facilities which started
operation on July 1, 2007. The backlight products manufactured at Yangzhou
facility were delivered mainly to Taiwanese customers located in
the Eastern China region, particularly in Shanghai where certain famous
international and domestic LCD module manufacturers reside. The backlight
products manufactured at Wuhan facilities were delivered mainly to certain
top
TFT-LCD panel makers for the higher-priced 19” CCFL products. The remaining
increase of $3.1 million in revenue was attributed to Diguang Electronics.
The
increase in revenue generated by Diguang Electronics was due mainly to the
maiden sales to new customers. To meet new market demands in backlight industry,
management has changed the product mix in favor of higher-priced products
in the
categories such as CCFL for automobile TV and large size CCFL for TFT-LCD,
especially shifting from CCFL mid-size to LED mid-size products despite the
fact
that the backlight products were under pressure to cut down the unit price
due
to price erosion in the LCD monitor-end market. As a general trend, many
multinational companies have shifted their procurement chain to China seeking
low cost solution so that we are facing a great opportunity and challenge
in
terms of cost competition.
Our
total
net revenue can be divided into international sales and domestic sales as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2007
|
|
International
sales
|
|
|
31,528,000
|
|
|
38,612,000
|
|
Domestic
sales
|
|
|
2,714,000
|
|
|
7,297,000
|
|
Total
|
|
|
34,243,000
|
|
|
45,909,000
|
|
Sales
to
international customers totaled $38.6 million for the year ended December
31,
2007, an increase of $7.1 million, or 23%, compared with $31.5 million for
the
prior year. The increase in revenue was due primarily to the global demand
for
the digital display products such as automobile TV, portable DVD, MP3 and
MP4
and LCD product series, particularly resulting in the surge in demand for
the
LED backlight. Of the $7.1 million increase, approximately $3.2 million was
attributable to sales to Taiwanese customers generated at Wuhan and Yangzhou
facilities netting the $2.8 million decrease in sales to Hong Kong customers
by
Diguang Electronics. The sales to major Korean customers increased to $4.7
million for 2007, an increase of $3.9 million, or 493%, compared with $793,000
for 2006. Of the sales of $4.7 million to Korea customers, Diguang Electronics
delivered its maiden sales to a Korean-based customer in Southern China
amounting to $3.9 million during 2007. Our new Korean customers have
demonstrated to management that China is becoming a major country of
manufacturing TFT-LCD products as most of the top and secondary tier LCD
panel
makers have shifted their sources of supply to China from their existing
upstream and midstream vendor chain due to China’s low labor cost and other
competitive advantages. Accordingly, we believe that this shift would provide
a
vast opportunity for us to venture into the larger size of CCFL backlight,
which
is our core competency, and probably the related industries such as LED TV
backlight and LCD assembly. The sales to Hong Kong customers were $14.2 million
for 2007, a decrease of $2.8 million, or 16%, compared with $17 million for
2006.
Sales
to
domestic customers were $7.3 million for 2007, an increase of $4.6 million,
or
170%, compared with $2.7 million for 2006. The increase in domestic sales
was
attributable to our new customers and the increase of orders from our
existing customers even though we faced the pressure to reduce our product
unit
price due to market competition. The increase of domestic sales arose from
Diguang Electronics, in which there was an increase of $4 million generated
from
sales to existing customers and the remaining increase of $0.6 million from
new customers.
We
have
three manufacturing facilities located in the East China region (Yangzhou),
Central China region (Wuhan), and Southern China region (Dongguan). Especially,
there are various capacities in the principal manufacturing facility located
in
Dongguan to serve our customers which are LCD TV and monitor manufacturers
and
LCD assembly firms. Based on three manufacturing facilities, we believe that
we
have strategically deployed our production capacity in China for our long
term
growth.
Because our
current accounting system was unable to capture all relevant information
with
regard to the product size, volume and price changes in a systematic way,
we
were unable to discuss the financial impact of changes in volume and changes
in
product price here.
From
the
product mix aspect, our sales can be divided into two main categories: CCFL
and
LED products as follows.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2007
|
|
CCFL
|
|
|
24,212,000
|
|
|
26,188,000
|
|
LED
|
|
|
10,031,000
|
|
|
19,721,000
|
|
Total
|
|
|
34,243,000
|
|
|
45,909,000
|
|
During
the year ended December 31, 2007, CCFL products accounted for 57% of our
total
sales revenue, compared with 71% for 2006. Sales of CCFL backlights totaled
$26.2 million for the year ended December 31, 2007, an increase of $2 million,
or 8%, compared with $24.2 million for 2006. The change of the product mix
was a
result of adapting ourselves to the market pressure to reduce our product
price
and the shortage of TFT-LCD raw materials supply experienced in the first
six
months of 2007. We lost approximately $2.8 million sales to Hong Kong customers
and approximately $1.2 million sales to other customers whereas we obtained
$6
million increase in sales generated at our Wuhan and Yangzhou facilities
by
selling higher-priced products within the CCFL category in 2007. Moreover,
the
demand for CCFL products from a Korean customer started in 2007.
LED
backlight products accounted for the remainder of the total sales revenues.
Sales of LED backlight products totaled $19.7 million for 2007, an increase
of
$9.7 million, or 97%, compared with $10 million for 2006. The proportion
of LED
products, primarily small to medium sizes of backlight, accounted for 43%
for
2007, which was 14% higher than 29% in 2006. The increase was due
mainly to the rise of LED products demanded by new and existing customers
in
global market for more small inches of LCD products. Mobile phones and
electrical products require LED backlight; therefore, there is a significant
increase in LED products ranging from 4” to 10.5” delivered to our customers.
Yangzhou Dihao commenced to deliver LED products to our customers from the
second quarter ended June 30, 2007 onwards and the revenue contributed to
$2.7
million, or 14%, of the total LED revenue for 2007.
We
expect
our LED shipments will continue to grow and be more sustainable as the
transition from CCFL to LED backlights is becoming more compelling due to
its
superior performance in contrast ratio, color gamut, localized dimming and
low
power consumption.
Cost
of Sales
Since
the
basic materials for all backlight products are similar, we discuss cost of
sales
in the aggregate for all products. Cost of sales was $38.1 million for 2007,
an
increase of $15 million, or 65%, compared with $23.1 million for 2006. The
increase in cost of sales for 2007 was higher than the increase of 34% in
total
revenue for the year due mainly to the decrease in sales price and the increase
in cost of raw materials.
Raw
material cost was $30.6 million for 2007, an increase by $13.2 million, or
76%,
compared with $17.4 million for 2006. The increase in raw materials cost
for
2007 was mainly attributable to the increase of sales volume. Furthermore,
we
were unable to decrease the procurement cost in the same percentage as the
reduction in the unit price pressured by market force as a general trend
because
the supplies of certain components were limited. Regarding the increase of
raw
material cost, management noted that the increase of large size CCFL product
volume accounted for the increase of raw material cost as the material used
for
CCFL products had a much higher cost tag attached than the cost of raw materials
used on other products. As a result, a percentage of material cost to total
revenue, raw material cost accounted for 67% for 2007, compared with 51%
for
2006. Facing this kind of situation, we tried very hard to develop new customers
through tough negotiation in order for us to become one of their vendors.
In
addition, to decrease the working capital requirement in relation to purchasing
raw materials used for large size of CCFL backlight, we processed the products
for one of our key Taiwanese customers in Wuhan on an OEM basis.
Labor
cost was $4.7 million for 2007, representing an increase of $1.3 million,
or
38%, compared with $3.4 million for 2006. Compared with 65% increase in cost
of
sales, the increase of 38% in labor cost was lower. As a percentage of labor
cost to revenue, the labor cost accounted for 10% of total net revenue for
2007,
compared with 10% of total net revenue for 2006. The same percentage of labor
cost to total revenue demonstrated our efforts to control labor cost through
improving our productivity. In addition, the increase in the production of
large
inches of CCEL products did not require as much labor cost as producing the
small and medium size of CCFL products.
Production
overhead was $2.8 million for 2007, an increase of $0.6 million, or 27%,
compared with $2.2 million for 2006. As the result of an increase in production
volume, there was an increase for indirect overhead such as water and
electricity expense, depreciation charges for new addition of machineries,
repairs and maintenance expenses for new manufacturing facilities in Wuhan
and
Yangzhou. Compared with the increase of 65% in cost of sales, the increase
proportion in production overhead was lower as the production overhead was
semi-variable in nature. As a percentage of production overhead to total
revenue, it accounted for 6% of total revenue in 2007, compared with 7% of
total
revenue in 2006.
Gross
Margin
The
overall gross margin for 2007 was 17%, a 15% decrease, compared with 32%
gross
margin for 2006. During 2007, we suffered a significant price reduction pressure
on similar products compared with the unit price we got in 2006. We were
unable
to transfer the price reduction pressure to our suppliers, which meant that
we
still paid the market price to procure our raw materials. The sales volume
for
19” CCFL LCD increased dramatically in 2007, amounting to 9.3 million, which
had
an average gross margin of only 5.28%. Furthermore, in order to move into the
high-end products, the price of certain components contained in the customers’
specification was higher than the price of the same type of components used
in
the low-end products, which reduced our gross margin. Similarly, we were
unable
to pass the entire burden to our customers in order to maintain our market
share
in this industry. On the other hand, as the products made in Wuhan were on
an
OEM basis to lessen our working capital requirement whereas the low gross
margin
of the products manufactured in Wuhan has pushed our gross margin downwards.
To
the extent we were able to purchase our raw materials at lower prices consistent
with the general trend of that product market, we did everything possible
to
take the advantage of the lower prices, which mitigated the price pressure
from
our customers. At the same time, our strategy to shift to LED products with
a
gross margin of 20% in 2007 also contributed a positive impact to our gross
margin during 2007.
Management
believes that the pressure to reduce the product unit price from market will
continue in 2008. Accordingly, management intends to improve gross margin
through focusing on the following aspects: enhancing our research and
development to provide customers with alternative solutions, lowering purchasing
cost and expending customer base, and forming internal strategic business
units.
Accordingly, management plans to design and implement standard operating
procedures together with definite and full documentation in 2008 within the
entire organization for the ultimate goal to enhance our productivity and
profitability.
Regarding
international sales, our gross margin was approximately 16% for 2007, a 15%
decrease, compared with 31% for 2006 due to the price reduction pressure
from
end users who are LCD panel makers. Regarding domestic sales, our gross margin
was approximately 24%, a 21% decrease, compared with 45% for 2006.
Selling
Expenses
Selling
expenses were $2.6 million for 2007, an increase of approximate $1 million,
or
64%, compared with $1.6 million for 2006. Of the approximate $1 million of
increase, commission expense accounted for $480,000 due to the fact that
more
sales in 2007 were commission-based sales; transportation expense accounted
for
$218,000 due to the increase in sale volume; payroll expense accounted for
$223,000 due to the increase in headcounts; meal and entertainment and other
accounted for approximately $70,000 related to the extended sale effort
exercised by us; travel, show and exhibition expenses accounted for $49,000
due
to the extended effort exercised by us; telecommunication expense decreased
by
$29,000 in conjunction with the decrease in other minor items. As a percentage
of total revenue, selling expenses were approximately 5.6% for 2007 and 4.6%
for
the prior year, respectively.
Research
and Development Expenses
The
net
research and development expenses were $1,054,000 for 2007, an increase of
$268,000, or 34%, compared with $786,000 for 2006. The increase was mainly
attributable
to the increase in payroll expense of $471,000 related to our engineers
performing research and development functions. The increase was offset by
the
decrease in $180,000 mainly comprising of net mould charges and raw materials
for design and development usage netting against the reimbursement of mould
charges from customers, which demonstrated that we were able to deliver our
new
products in 2007 for the development made in 2006. Other fluctuation include:
the decrease in patent expense and training expense of $80,000 and increase
in
government fund and others of $57,000. As a percentage of total sales revenue,
research and development expenses were approximately 2.3% and 2.3% for 2007
and
2006, respectively.
General
and Administrative Expenses
General
and administrative expenses were $6.5 million for 2007, a decrease of $180,000,
or 3%, compared with $6.7 million for 2006. In terms of the components of
general and administrative expenses, share-based compensation decreased by
$928,000, or 43%, compared with $2,134,000 for 2006. The decrease was
attributable to the resignation of former CFO and two independent directors
in
2007. Professional service fees decreased by almost $389,000, or 46%, compared
to the amount of $1,236,000 for 2006. The decrease should be attributable
to
less financing and reorganization activities taking place in 2007 compared
to
the level of activities incurred in 2006. Payroll expense was increased by
$440,000 in connection with the increase in headcounts and pay scale increase.
The start-up expenses for Wuhan entity accounted for $293,000 whereas there
was
no such expense for 2006. In addition, bad debt allowance increased by $386,000
as a result of the increase of receivables with aging older than one year,
compared to $271,000 for 2006. The last $17,000 increase was related to office
expense, compared to $1.59 million for 2006. As a percentage of total sales
revenue, general and administrative expenses represented 14% and 19% for
2007
and 2006, respectively. Excluding the stock compensation expense, the remaining
general and administrative expense for 2007 and 2006 represented 11% and
13% of
total revenue, respectively.
Interest
Income
The
net
interest income was $122,000 for 2007, representing a decrease of $37,000,
or
23%, compared with $159,000 for 2006. The decrease in net interest income
was due to the fact that more cash was occupied by financing the business
expansion and the new manufacturing facility in Wuhan in 2007 whereas more
net
interest income was earned during 2006 on cash generated from operations
and
unused proceeds from the private placement that took place on March 17, 2006.
Interest income for 2007 and 2006 represented 0.27% and 0.46% of total revenue,
respectively.
Investment
Income
The
investment income was $483,000 for 2007, represented an increase of $429,000,
or
794%, compared with $54,000 for 2006. The increase was attributable to the
high
yield from the investment fund placed with the Bank in China which was redeemed
in December 2007. Compared with investment income of $54,000 for 2006, which
was
attributable to the yield from the cash proceeds from the private placement
placed as short-term deposit in Hong Kong during 2006, we did much better
in
2007. Investment income for the years ended December 31, 2007 and 2006
represented 1.05% and 0.16% of the total revenue, respectively.
Other
expenses
Other
expense was $168,000 for 2007, representing an increase of $68,000, or 68%,
compared with $100,000 for 2006. The increase was due primarily to the increase
in exchange losses incurred in working capital. Other expenses for 2007 and
2006
represented 0.37% and 0.29% of total revenue, respectively.
Income
Tax Provision
Income
tax provision for 2007 was approximately $94,000, a decrease of $359,000,
compared with $453,000 for 2006. The decrease in income tax provision was
attributable mainly to decrease of the taxable income at Diguang Electronics.
The taxable income at Diguang Electronics was $619,000 for 2007, compared
with
the taxable income of $4.5 million for 2006, considering the fact that the
applicable tax rate for Diguang Electronics was 15% for 2007 and 10% for
2006,
respectively. In addition, we did not provide any US federal income tax
provision for 2006 as there was no taxable income in the U.S. whereas we
recorded US federal income tax provision of approximately $33,000 for 2007
as a
result of subpart F income generated by Diguang S&T (HK) during 2007 in
accordance with relevant US IRS codes. As a percentage of net revenue, income
tax provision was 0.21% and 1.32% for the years ended December 31, 2007 and
2006, respectively.
Net
Loss
Net
loss
was $2,905,000 for 2007, compared with net income of $1,665,000 for 2006,
representing a decrease of approximately $4.6 million in net income, or 275%.
Minority interest portion of net income generated at North Diamond was $335,000
for 2007 and $75,000 for 2006, which represent 11% of net loss for 2007 and
4.5%
of net income for 2006. The decrease in net income was due mainly to the
decrease in gross margin, the increase in operating expenses, which was
attributable mainly to the increase in selling expenses, the increase in
research and development expense, the increase in impairment loss related
to a
long-term investment, and the increase in non-operating loss as a result
of the
weak dollar value as our international sales were mainly denominated by US
dollars. As a percentage of total revenue, net loss for 2007 accounted for
6.3%
whereas net income for 2006 accounted for 4.9%, representing a decrease of
11.2%.
Earnings
per Share
The
basic
loss per share was $0.13 for 2007, compared with basic earnings per share
of
$0.08 for 2006. Basic earning per share for 2007 were negatively impacted
by
$0.21 per share due to the significant decrease in gross margin, the increase
in
operating expenses, the incurrence of impairment loss in a long term investment,
and the increase in non-operating loss. In addition, the weighted average
common
shares outstanding were increased to 22,531,000 shares for 2007, as compared
with 21,384,000 shares for 2006.
Comparison
of Years Ended December 31, 2006 and 2005
Revenue
Net
revenue was approximately $34.2 million for the year ended December 31, 2006,
a
decrease of $1.4 million, or 4%, compared with $35.6 million for the prior
year.
The major reason of the revenue decline was the pricing pressure in the
backlight industry. CCFL products were under more pricing pressure than LED
products because CCFL backlights were mostly applied to middle size (7”-10.4”)
displays that are newer products and are, therefore, subject to more price
erosion in the earlier stage of the product life cycle. In such an environment,
our strategy was to improve our product mix in favor of higher-priced products
in the CCFL category. This strategy mitigated the impact of the pricing pressure
on our financial results.
Our
total
net revenue can be divided into international sales and domestic sales as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
International
sales
|
|
|
30,727,000
|
|
|
31,528,000
|
|
Domestic
sales
|
|
|
4,921,000
|
|
|
2,714,000
|
|
Total
|
|
|
35,648,000
|
|
|
34,243,000
|
|
Sales
to
international customers totaled $31.5 million for 2006, a decrease of $800,000,
or 2.6%, compared with $30.7 million for the prior year. Sales to Taiwanese
customers were $9.4 million for 2006, a decrease of $360,000, or 4%, compared
with $9.8 million for the prior year. The remaining decease of $440,000 was
related to other small international customers. However, sales to Hong Kong
customers were $17 million for 2006, an increase of $1.5 million, or 9.5%,
compared with $15.5 million for the prior year. This was attributable to
the
sales of CCFL backlights for 19" displays to a new Hong Kong based customer
with
the sales of $1.4 million. We were further selected as one of the major in-house
suppliers to supply higher-priced products of 19" CCFL and to start in 2007
in
Wuhan.
Sales
to
domestic customers were $2.7 million for 2006, a decrease of $2.2 million,
or
45%, compared with $4.9 million for the prior year. The decrease in domestic
sales was primarily a result of reducing product price under the market pressure
and the physical product volume did not decrease.
Due
to
the fact that our current accounting system was unable to capture all relevant
information with regard to the product size, volume and price changes in
a
systematical way, we were unable to discuss the financial impact of changes
in
volume and changes in product price at here.
From
the
product mix aspect, our sales can be divided into two main categories: CCFL
and
LED products as follows.
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
CCFL
|
|
|
24,290,000
|
|
|
24,211,000
|
|
LED
|
|
|
11,358,000
|
|
|
10,031,000
|
|
Total
|
|
|
35,648,000
|
|
|
34,242,000
|
|
During
the year ended December 31, 2006, CCFL products accounted for 71% of total
revenue, compared with 68% for the prior year. Sales of CCFL backlights totaled
$24.2 million for 2006, which is similar to the sales of $24.3 million in
2005.
Whiling facing the price reduction pressure on CCFL products from the market,
we
increased the sales of higher-priced products within the CCFL category, such
as
backlights for portable DVDs and automobile TV.
LED
backlight products accounted for the remainder of total revenues. Sales of
LED
backlight products totaled $10 million for 2006, a decrease of $1.4 million,
or
11.6%, compared with $11.4 million for the prior year. The decrease is due
to
the fact that LED technology cannot economically used to produce backlight
products for monitor larger than three inches. Therefore, the sales volume
of
LED products dropped; however the unit price for certain existing products
did
not decline as significantly as the price of CCFL products, which indicated
that
we sold higher price-to-performance products to our customers.
Cost
of Sales
Since
the
basic materials for all backlight products are similar, we discuss cost of
sales
in aggregate of all products. Cost of sales was $23.1 million for 2006, a
decrease of $78,000, or 0.3%, compared with $23 million for the prior year.
The
decrease in cost of sales for 2006 was lower than 4% decrease in total revenue
for 2006.
Raw
material cost was $17.4 million for 2006, a decrease of $1.5 million, or
8%,
compared with $18.9 million for the prior year. The 8% reduction of raw material
cost was a key contributor to our accomplishment of a higher gross margin
in a
very challenging market environment. The decrease in raw material costs was
attributed to the re-engineering of product designs that aimed at maximizing
the
luminous efficiency of products while minimizing the material input, reducing
unit cost of raw materials purchased, and enhancing the efficiency in the
production process.
Labor
cost was $3.4 million for 2006, compared with $2.5 million for the prior
year.
The 36% increase in labor cost was attributed to the significant increase
in
headcount of employees as well as increase in employee benefits. The increase
in
headcounts resulted from establishing the film cutting and LED assembling
lines
to bring these functions in-house.
Production
overhead was $2,249,000 for 2006, an increase of $580,000, or 35%, compared
with
$1,669,000 for the prior year. The 35% increase in production overhead was
attributable to the additional depreciation expense from the newly established
production lines for the 15”-19” CCFL products. The increase in production
overhear was in exchange for the improvement of our production efficiency
by
setting up all production lines in one location. The benefit will be
materialized in the long run.
Gross
Margin
The
overall gross margin for 2006 was 32.7%, a 2.7% decrease, compared with 35.4%
gross margin for the prior year. Facing the significant pressure to reduce
the
product unit price on our exiting products, we managed to maintain our gross
margins through changing product mix in favor of higher-margin products,
re-engineering product designs to reduce material consumption, and enhancing
product quality. In addition, we developed know-how to produce more types
of
components in-house at lower costs than purchasing them from outside suppliers.
Facing the unfavorable price reduction pressure on product sales, we also
took
advantage of purchasing components and raw materials at a lower price in
the
same time. The lower purchase cost significantly offset the negative impact
of
the price reduction during 2006. However, the saving in purchasing cost was
also
offset by increase in labor cost and production overhead, respectively, and
the
inventory provision recorded at the yearend of 2006.
Regarding
international sales, our gross margin was approximately 33%, a 3% decrease,
compared with 36% for the prior year due to the price reduction pressure
from
end users who are LCD panel makers. Regarding domestic sales, our gross margin
was approximately 31%, a 1% decrease, compared with 32% in 2005.
Selling
Expenses
Selling
expenses were $1,575,000 for 2006, an increase of $95,000, or 6%, compared
with
$1,480,000 for 2005. Among the components of selling expense, commission
expense
decreased by $317,000 due to the fact that more sales were generated by our
employees and less sales generated on the commission basis in 2006, compared
to
$1 million for 2005. Office expense decreased by $127,000 due to the fact
that
office function was moved into the headquarter office since March 2006. Payroll
expense was increased by $120,000 in 2006 due to the increase in headcounts.
Transportation expense increased by $155,000 due to the increase in volume
shipped in 2006, compared to $123,000 for 2005. Meal and entertainment and
other
expenses increased by $164,000 as a result of sales employees’ marketing
effort. Travel, show and exhibition, and advertising expense increased by
$45,000 in 2006. In addition, telecommunication expense was increased by
$50,000
along as marketing efforts in conjunction with minor increase in other items.
As
a percentage of total sales revenue, selling expenses were approximately
4.6%
for 2006 and 4.2% for 2005.
Research
and Development
For
the
year ended December 31, 2006, the net research and development expenses were
$786,000, an increase of $59,000, or 8%, compared with $727,000 for the prior
year. Before offset by government subsidies for research and development
in the
form of value-added tax rebate, the gross research and development expenses
were
$949,000 and $930,000 for the year ended December 31, 2006 and 2005,
respectively. The government subsidies we received were $163,000 and $203,000
for the year ended December 31, 2006 and 2005, respectively. This increase
of
merely $19,000 reflected our efforts in researching and developing new products,
such as the 15”-19” backlights for monitors and LED backlight application for
televisions. The increase was mainly incurred in the expansion of the research
and development team as well as the compensation levels of our engineers.
Moreover, the consumption of mould and the material for experiments and sample
products also experienced a meaningful increase. As a percentage of total
sales
revenue, research and development expenses were approximately 2.3% and 2.0%
for
the year ended December 31, 2006 and 2005, respectively.
General
and Administrative Expenses
General
and administrative expenses were $6.7 million for 2006, an increase of
approximate $5 million, or 294%, compared with $1.7 million for 2005. In
terms
of the components of general and administrative expense, share-based
compensation accounted for $2.1234 million resulting from granting 540,000
stock
options on March 1, 2006 whereas there was no such expense in 2005. The increase
almost accounted for 43% of total increase in 2006. Profession service fee
increased by $840,000 as a result of conducting reverse merger with a shell
company in the U.S. and private placement to raise $12 million and becoming
a
publicly traded company on OTCBB. Payroll expense increased by $910,000 due
to
the increase in headcounts and pay scale and significant increase in employee
benefit. In addition, we provided allowance for doubtful account by $272,000,
which did not incur in 2005. By centralizing office function including rental,
business travel and other miscellaneous items, office expense increased by
837,000 for 2006. As a percentage of total revenue, general and administrative
expenses represented 19% and 5% for the year ended December 31, 2006 and
2005,
respectively.
Interest
Income
The
net
interest income was $159,000 for 2006, representing an increase of $191,000,
or
597%, compared to a net interest expense of $32,000 for 2005. During the
year
ended December 31, 2005, we had a term bank loan of $494,000 outstanding
and
corresponding interest incurred during 2005. That bank loan was paid off
on
October 28, 2005. We had no interest-bearing debt outstanding during 2006.
Interest income was earned on cash proceeds from the private placement that
took
place on March 17, 2006. Interest income for 2006 represented 0.5% of total
revenue.
Income
Tax Provision
Income
tax provision for 2006 was approximately $453,000, a decrease of $80,000,
or 2%,
compared with $533,000 for the prior year. The decrease in income tax provision
was attributable mainly to the decrease in taxable income at Diguang
Electronics. The taxable income in Diguang Electronics for was $4.5 million,
compared to $5.3 million for the prior year. Diguang Electronics has been
entitled to enjoy a 50% exemption from corporate income tax at the rate of
15%
for the three years from January 1, 2004 to December 31, 2006, which means
that
the income tax rate should be 7.5% for these three years. However, in accordance
with the Rules for the Implementation of the Income Tax law of the PRC for
Enterprises with Foreign Investment and Foreign Enterprises prescribed by
the
central government, the minimum corporate income tax rate should be 10% for
the
three years ended December 31, 2004, 2005, and 2006. Therefore, the tax
provision was based at a rate of 10% for both periods, respectively. As a
percentage of net revenue, income tax provision was 1.4% and 1.5% for the
years
ended December 31, 2006 and 2005, respectively.
Net
Income
Net
income was $1.7 million for 2006, a decrease of $6.8 million, or 80%, from
$8.5
million for the prior year. Minority interest portion of net income at North
Diamond was $75,000 for 2006 and net loss of $84,000 for 2005. The decrease
in
net income was attributable to $1.4 million decrease in total revenue, the
decrease in gross margin, more than $5 million increase in operating expenses,
and the decrease in non-operating income. As a percentage of total revenue,
net
income fell to 5% for 2006 from 24% for 2005.
Earnings
per Share
The
basic
earnings per share were $0.08 for 2006, a decrease of $0.39 per share, or
83%,
compared with $0.47 for 2005. The decrease in earnings per share was due
to the
decrease in net income attributable to common shareholders. In addition,
the
weighted average common shares outstanding increased to 21.4 million shares
for
2006, compared to 18.3 million shares for 2005.
Liquidity
and Capital Resources
As
of
December 31, 2007, we had total assets of $56.6 million, of which cash amounted
to $16.3 million, accounts receivable amounted to $12.7 million and inventories
amounted to $7.5 million. Our working capital was approximately $11.8 million
and our equity was $28.8 million compared with working capital of $21.01 million
and equity of $33.74 million on December 31, 2006. Our quick ratios were
approximately 1.16:1 and 2.37:1 at December 31, 2007 and 2006, respectively.
We
believe that the current liquidity and capital resources are sufficient to
sustain operations through at least the next 12 months, primarily due to
cash
expected to be generated from continuing operations. Our ability to generate
adequate amount of cash to meet our future capital requirements will depend
primarily on operating cash flow. If sales or cash collections are reduced
from
current expectations, or if expenses and cash requirements are increased,
we may
require additional financing. We expect to obtain a line of credit from the
commercial banks in China.
Working
capital decreased by $9.3 million to $
11.8
million
at
December 31, 2007 from
$21.1
million
at
December 31, 2006. The ratio of current assets to current liabilities at
December 31, 2007 and 2006 was 1.45 and 2.73, respectively. The decrease
in
working capital is primarily due to
an
increase of accounts payable, amount due to a related party and amount due
to
stockholders, and offsetting by the increase of accounts receivable and
inventories. Accounts payable increased $10.8 million, which was attributable
to
the rise of inventory level in Dihao and Wuhan at the end of 2007 and extended
credit terms by vendors. Amount due to a related party and amount due to
stockholders increased $167,000 and $1,100,000, respectively, as a result
of
acquiring 100% interest of Dongguan Diguang S&T. Accounts receivable and
inventories increased $6,3 million and $3.1 million, respectively. The increase
in accounts receivable was a result of the increase in sales generated by
Yangzhou and Wuhan facilities and the longer credit terms granted to new
customers in 2007. The increase in inventories was primarily related to the
expectation of the increase in sales in 2008 generated in Yangzhou and Wuhan
facilities.
Comparison
of Years Ended December 31, 2007 and 2006
Cash
position decreased $4.3 million, or 21%, from $20.6 million at December 31,
2006
to $16.3 million at December 31, 2007
Net
cash
provided by operating activities was $3.9 million for 2007, compared with
the
net cash provided by the operating activities of $3.6 million for
2006.
Non-cash
items added approximately $4,261,000 back to cash outflow from operating
activities for 2007, compared with total non-cash items of $3,773,000 for
2006.
Of the non-cash items for 2007, approximately $1,206,000 was from share-based
compensation, $928,000 lower than $2,134,000 for 2006 due mainly to the
resignation of former CFO and two independent directors and other management
team members. Depreciation was $1,198,000 for 2007, with an increase of
$432,000, compared with $766,000 for 2006, due primarily to the addition
of
equipment and machinery for our new product lines, such as backlights for
computer monitors and cell phones, and new office building in Shenzhen that
was
purchased during 2006 and put into use in March of 2007. Inventory provision
was
$296,000 for 2007, $250,000 lower than $546,000 for 2006. Minority interest
was
$335,000 for 2007, compared with $75,000 for 2006 due to the increase net
income
generated by North Diamond for 2007. Before we wrote off our allowance for
doubtful accounts against accounts receivables, bad debt allowance was $604,000
for 2007, $345,000 higher than $259,000 for 2006. There was no imputed interest
and deferred tax assets impact for 2007, compared with a positive $80,000
of
imputed interest and a negative $87,000 of deferred tax assets for 2006.
In
addition, there was impairment loss of $622,000 related to a long term
investment accounting for under cost method in 2007.
The
impact of the changes in operating assets and liabilities on cash flow was
explained as follows. The accounts receivable during 2007 was increased by
approximately $6,508,000, compared with a $542,000 decrease in 2006. Inventory
level increased by $3,170,000 during 2007, compared with a $1,222,000 increase
during 2006. Other receivables increased by $249,000 during 2007, compared
with
a $152,000 increase for 2006. Deposits, prepayment and other assets decreased
by
$460,000 during 2007, compared with a $638,000 increase in deposits, prepayment
and other assets for 2006. VAT recoverable increased by $185,000 during 2007,
compared with a $220,000 increase for 2006.
Advances
from customers increased by $296,000 during 2007, compared with a $158,000
decrease in 2006. In addition, tax payable increased by $88,000 for 2007,
compared with a decrease of $228,000 for 2006. Accounts payable increased
by
approximately $10 million during 2007, compared with a $735,000 increase
during
for 2006. Accruals and other payables increased by $1,732,000, compared with
the
increase of $611,000 for 2006. The following summarized the impact of changes
in
operating assets and liabilities on cash flow between year ended December
31,
2007 and 2006:
·
|
$5,966,000
from Accounts receivable (negative impact)
|
·
|
$1,949,000
from inventory (negative impact)
|
·
|
$1,001,000
from other receivable, prepayments and other assets (positive
impact)
|
·
|
$35,000
from VAT recoverable (positive impact)
|
·
|
$9,341,000
from accounts payable (positive impact)
|
·
|
$1,121,000
from accruals and other payable (positive
impact)
|
·
|
$453,000
from advance from customers (positive
impact)
|
·
|
$316,000
from taxes payable (positive impact)
|
The
total
positive impact from above non-cash items and changes in operating assets
and
liabilities was approximately $4.4 million.
Net
cash
used in investing activities amounted to $10.2 million for 2007, an increase
of
$4.8 million, or 89%, compared with the $5.4 million cash used in investing
activities for 2006. During 2007, we invested $6.2 million in plant, property
and equipment, an increase of $3.0 million, or 94%, compared with $3.2 million
during 2006. The long-term investment during 2006 was $1.5 million whereas
there
was no cash disbursement for long term investment during 2007. During 2006,
we
redeemed $1.1 million marketable securities and paid deposit of $1.8 million
for
the new office building where we moved in 2007. During 2007, we acquired
65%
interest of North Diamond and 100% interest of Dongguang Diguang S&T by
paying cash of $1.98 million and $2.0 million, respectively.
Net
cash
used in the financing activities for 2007 was $34,000, compared with $11
million
net cash provided by financing activities for 2006. There was no private
placement in 2007 which generates cash proceeds of $12 million during 2006
accounting for the total decrease. During 2006, the owners of North Diamond
infused a total of $1.4 million of capital into Yangzhou facility whereas
there
was no such capital infusion in 2007. Compared with the cash proceeds from
private placement incurred in 2006 and capital infusion of $1.4 million in
2006,
the cash disbursement for related parties was immaterial whereas there was
a
positive cash flow from amount due to related parties during 2007. Also during
2007, we repurchased 252,000 shares of common stock with a total cost of
$429,000. Meanwhile, we had obtained the research funding of $236,000, which
was
granted by Chinese government and shared with other companies. If our research
activities fail, we would have to pay back to the Chinese government. However,
if our research activities are successful, the fund received will be deemed
as
government subsidies.
Comparison
of Years Ended December 31, 2006 and 2005
As
of
December 31, 2006, our cash position had a net increase of $10 million as
compared with cash position of $11 million at December 31, 2005.
Net
cash
generated by operating activities was $3.6 million for 2006, a decrease of
$6
million, or 63%, from the $9.6 million for 2005.
Non-cash
items added approximately $3,773,000 back to cash flow from operating activities
for 2006, compared with total non-cash items of $528,000 for 2005. Of the
non-cash items for 2006, approximately $2.1 million was the share-based
compensation whereas there was no such expense for 2005. Depreciation was
$766,000 for 2006, $267,000 higher than the $499,000 for 2005, due primarily
to
the additions of equipment and machinery for our new product lines, such
as
backlights for computer monitors, during 2006. Bad debts allowance for 2006
was
$259,000, $227,000 higher than the $32,000 for 2005. Inventory provision
was
$545,000 for 2006 whereas there was no inventory provision for 2005. The
cash
impact of deferred tax assets was a negative $87,000 for 2006 whereas there
was
no such impact from deferred tax assets for 2005. The impact of changes in
non-cash items on cash flow from operating activities between 2006 and 2005
was
approximately $3.3 million positive.
The
impact of the changes in operating assets and liabilities on cash flow was
explained for as follows. The accounts receivable during 2006 increased by
approximately $542,000 compared with the $1.3 million increase in accounts
receivable for 2005. Inventory level increased by $1.2 million during 2006,
a
decrease of $800,000 or 40% less than the $2 million increase in inventory
for
2005. Other receivables increased by $152,000 during 2006, $71,000, or 32%
less
than the $223,000 increase for 2005. VAT recoverable during 2006 increased
by
$220,000 whereas there was no such change for 2005. Deposits, prepayment
and
other assets during 2006 increased by $638,000, compared with the $25,000
decrease in the same category for 2005.
Advances
from customers decreased by $158,000 during 2006, compared with the $19,000
increase in the same category for 2005. In addition, tax payable decreased
by
$228,000 for 2006, compared with an increase of $348,000 for 2005. Accounts
payable decreased by $735,000 for 2006, compared with the $3.3 million increase
for 2005. Accruals and other payables increased by $611,000 during
2006, $193,000, or 46%, more than the $418,000 increase for 2005. The
following summarized the impact of changes in operating assets and liabilities
on cash flow between years ended December 31, 2006 and 2005:
·
|
$765,000
from accounts receivable (positive impact)
|
·
|
$824,000
from inventory(positive impact)
|
·
|
$71,000
from other receivable (positive impact)
|
·
|
$220,000
from VAT recoverable (negative impact)
|
·
|
$663,000
from deposits, prepayment and other assets (negative
impact)
|
·
|
$2,570,000
from of accounts payable (negative
impact)
|
·
|
$193,000
from accruals and other payable (positive
impact)
|
·
|
$177,000
from advance from customers (negative
impact)
|
·
|
$576,000
from taxes payable (negative impact)
|
The
total
impact from above non-cash items and the changes in operating assets and
liabilities was approximately $2.4 million.
Net
cash
used in investing activities amounted to $5.5 million for 2006, a decrease
of
$263,000, or 5%, compared with the $5.7 million cash used in investing
activities for 2005. During 2006, we invested $3.2 million into plant, property
and equipment as a result we added new production lines in Dongguan facility
whereas we relocated our production lines to Dongguan facility during 2005.
During 2005, we incurred investment of approximately $4.1 million into plant,
property and equipment for future business expansion. The majority of the
$4.1
million investment in fixed assets during 2005 was spent on adding equipment
and
machinery to Dongguan facility. During 2006, we disposed of marketable
securities with proceeds of approximately $1.1 million, compared with the
purchase of marketable securities by $765,000 during 2005. During 2006, we
made
cash payment of $1.8 million for a new office space which was not put into
use
as of December 31, 2006, compared with the deposit of $722,000 made during
2005.
During 2006, we made a $1.5 million investment in Huaxia (Yangzhou) Integrated
O/E System Inc. for 15% of its equity interest whereas we did not have such
investment activity in 2005. During 2006, due from related parties was decreased
by $22,000 whereas we incurred cash disbursement of 97,000 to related
parties.
Net
cash
generated by financing activities for 2006 was approximately $11 million.
The
primary source of cash flow for 2006 was from a private placement incurred
in
March 2006 through which we received cash proceeds of $12 million in connection
with effecting a reverse merger with Online Processing, Inc. Offering expenses
paid in 2006 amounted to approximately $1.74 million in addition to $26,000
paid
in 2005. The net funds raised will be used to financing our next phase of
expansion resulting from our new product offerings. The increase in cash
used in
financing activities for 2006 was due to the repayment to related parties,
which
was a negative cash flow of $470,000, a decrease of $605,000 compared with
a
positive cash flow of $135,000 for 2005. We paid dividends of approximately
$111,000 during 2006, which was the remaining balance at December 31, 2005
whereas there were no dividends paid for 2005.
Our
primary source of funds for 2006 was from operating cash flows and the remaining
cash proceeds from private placements incurred in March 2006.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required for smaller reporting companies.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)
Financial Statements
The
following financial statements are set forth at the end hereof.
1. Report
of Independent
Registered
Public Accounting Firm
2. Consolidated
Balance Sheets as of December 31, 2007 and 2006
3.
Consolidated
Statements of
Income
and
Comprehensive Income (Loss) for the years ended December 31, 2007,
2006 and 2005
4. Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2007,
2006 and 2005
5. Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
2005
6. Notes
to Consolidated Financial Statements.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Due
to a
recent reorganization by BDO International, the Company's auditors, BDO Reanda,
were no longer part of the BDO International network. In order to assure the
continuity of audit services rendered by BDO International, the Company decided,
effective October 22, 2007, to select BDO Shenzhen as its independent auditor,
beginning with the review for the third quarter ending September 30, 2007.
The
Audit
Committee approved the resignation of BDO Reanda and the appointment of BDO
Shenzhen
Dahua
Tiancheng CPAs
effective October 22, 2007.
The
change in auditors was not the result of any disagreement with BDO Reanda,
and
the Company's management team would like to take this opportunity to express
our
cordial thanks to BDO Reanda for their valuable professional services to the
Company.
This
information was previously reported in our Current Report on Form 8-K filed
on
October 26, 2007.
ITEM
9A. CONTROLS AND PROCEDURES
(a)
|
Evaluation
of disclosure controls and
procedures:
|
The
Company maintains disclosure controls and procedures designed to ensure
that
information required to be disclosed in the reports the Company files or
submits
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's (“SEC”) rules and forms, and that
such information is accumulated and communicated to the Company's management,
including its chief executive officer (“CEO”) and chief financial officer
(“CFO”), as appropriate, to allow timely decisions regarding required financial
disclosure.
In
connection with the preparation of this annual report on Form 10-K (“Form
10-K”), the Company carried out an evaluation as of December 31, 2007, under
the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as such term is defined in
Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation,
the
CEO and CFO concluded that as of December 31, 2007 the Company's disclosure
controls and procedures were not effective because of the material weaknesses
described below under “Management's Annual Report on Internal Control over
Financial Reporting.”
To
address these material weaknesses, the Company performed additional analyses
and
other procedures (described below under the subheading “Interim Measures”) to
ensure that the Company’'s consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United
States
(“GAAP”). Accordingly, Company management believes that the consolidated
financial statements included in this Form 10-K fairly present in all material
respects the Company’s financial condition, results of operations and cash flows
for the periods presented and that this Form 10-K does not contain any
untrue
statement of a material fact or omit to state a material fact necessary
to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the periods covered by this report.
(b)
|
Management’s
report on internal control over financial
reporting.
|
Management
is responsible for establishing and maintaining adequate internal control
over
financial reporting for the Company, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with GAAP.
Management
has conducted an assessment, including testing, of the effectiveness of the
Company's internal control over financial reporting as of December 31,
2007. In making its assessment, management used the criteria in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").
1.
|
Entity
level material weaknesses-control
environment
|
We
did
not have an appropriate level of control consciousness as it relates to the
establishment and maintenance of policies and procedures with respect to
key
internal controls. Effective controls were not designed and in place over
the
process related to identifying and accumulating all required information
to
ensure the completeness and accuracy of consolidated financial statements
and
disclosures as required by Rule 3-10 of Regulation S-X.
2.
|
Insufficient
resources for US GAAP compliance
|
The
Company currently lacks finance and accounting personnel who possess sufficient
skills and experience to ensure that all transactions are accounted for
in
accordance with US GAAP. In addition, we do not have sufficient internal
financial policies and procedures to ensure that the existing personnel
are
capable of fulfilling the requirements of US GAAP reporting. Amongst
those deficiencies, revenue and cost recognition were affected most as
evidenced
by their significant adjustments as compared to our preliminary consolidated
financial statements.
3.
|
Ineffective
information technology general control
|
The
Company currently does not have a formal documentation on the information
technology general controls, including program development, program changes,
computer operations, access to programs and data.
Remediation
Measures of Material Weaknesses
To
remediate the material weaknesses described above in “Management’s Report over
Financial Reporting”, we have implemented or plan to implement the following
measures, and will continue to evaluate and may in the future implement
additional measures.
1.
|
We
planned remediation measures of hiring and training of personnel
who will
address these material weaknesses generally as we will have sufficient
personnel with knowledge, experience and training in the application
of
U.S. GAAP commensurate with our financial reporting
requirements;
|
2.
|
Audit
Committee and management will prioritize improvement of our internal
control over financial reporting.
We
have a comprehensive training program in financial reporting on
U.S.G.A.A.P internally and our staff have enrolled in professional
accounting seminars.
|
3.
|
We
continue to retain the services of outside U.S. counselor to advise
on SEC
disclosure requirements
and
at the same time, we have the staff training plan on the disclosure
requirement either internally or enrolment in professional
courses.
|
4.
|
The
Company is in the progress of implementing an ERP system which
we
considered would enable the Company to enhance its management
capability
on monitoring the Company's business operations. Besides, we
are in the
process of establishing a comprehensive IT short term development
plan and
long term strategic plan that are appropriately aligned with
business
objectives and include the following:
|
|
·
|
IT
short term development plan: Business departments will initialize
the
information technology requests in accordance with their business
workflow, and senior management will develop implementation plans
and
procedures;
|
|
·
|
IT
long term strategic plan: IT long term strategic plan development
is based
on corporate strategic requirement, including the IT goal and mission,
guidance, objectives and the Company’s actions. The IT mission and
guidance drive how IT should implement and align with the Company’s
strategic goals;
|
|
·
|
Senior
management of the Company will review and approve the IT strategic
plan.
|
We
also
planned to develop an appropriate IT Organization and Relationships program
to
regulate IT organizational structure that adequately supports critical systems
and segregation of duties, including the following:
|
·
|
IT
managers to have adequate knowledge and experience to fulfill their
responsibilities to deliver high quality IT services;
|
|
·
|
Significant
IT processes, controls and activities documented;
|
|
·
|
Job
roles and responsibilities within the IT organization clearly defined
and
documented;
|
|
·
|
IT
personnel to understand and accept their responsibilities regarding
internal controls; and
|
|
·
|
IT
management to implement a division of roles and responsibilities,
segregation of duties, that reasonably prevents a single individual
from
subverting a critical process.
|
We
expect
that the overall ERP implementation, together with the above mentioned policies
and procedures, will be completed before September 2008.
We
believe that we are taking the steps necessary for remediation of the material
weaknesses identified above, and we will continue to monitor the effectiveness
of these steps and to make any changes that our management deems
appropriate.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide
only
management’s report in this annual report.
(c)
Changes in internal controls over financial reporting:
For
the
fourth quarter ended December 31, 2007, there has been no change in the
Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.
(d)
Inherent Limitations on Effectiveness of Controls
The
Company’s management, including the CEO and CFO, does not expect that our
disclosure controls or our internal control over financial reporting will
prevent or detect all error and all fraud. A control system, no matter how
well
designed and operated, can provide only reasonable, not absolute, assurance
that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will
not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by
the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls
is
based in part on certain assumptions about the likelihood of future events,
and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation
of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND BOARD
INDEPENDENCE
The
following table and text set forth the names and ages of all directors and
executive officers of the Company as of December 31, 2007 The Board of
Directors is comprised of only one class. All of the directors will serve
until the next annual meeting of stockholders and until their successors are
elected and qualified, or until their earlier death, retirement, resignation
or
removal. Also provided herein are brief descriptions of the business experience
of each director and executive officer during the past five years and an
indication of directorships held by each director in other companies subject
to
the reporting requirements under the federal securities laws.
Name
|
|
|
Age
|
|
|
Position
|
|
Yi
Song
|
|
|
50
|
|
Board
Chairman and CEO
|
|
Hong
Song
|
|
|
44
|
|
Director
and COO
|
Keith
Hor
|
|
|
43
|
|
Chief
Financial Officer (appointed as of March 7, 2007)
|
|
Fong
Heung Sang
|
|
|
48
|
|
Independent
Director (appointed as of August 8, 2007)
|
Hoi
S. Kwok
|
|
|
56
|
|
Independent
Director (appointed as of August 8, 2007)
|
|
Tuen-Ping
Yang
|
|
|
61
|
|
Independent
Director
|
|
Yi
Song, Board Chairman, President and Chief Executive
Officer
,
established Diguang Electronics in 1996 and has been its chairman since
inception. Mr. Song started his career in 1976 when he joined Hubei Wei Te
Engine Factory as a technician. He was subsequently promoted to the position
of
engineer and thereafter, director of technology. From 1978 to 1979, he conducted
research in the detecting fuse tube system of mathematical control together
with
a team of researchers from Wuhan Wireless Research Institute. From 1990 to
1996,
he worked in the field of the marketing and sales operation in Shenzhen Nanji
Electromechanical Company Ltd. under Aidi (Group) Corporation of China. Mr.
Song
is one of the members of SID, or Society for Information Display, the Deputy
Director (Commissioner) of Working Committee of Shenzhen Electronics
Communication Experts, one of the members of China Flat Plate Display
Association, and Deputy Director of Shenzhen Optoelectronic Industry
Association. In 2003, he was awarded Excellent Entrepreneur by Shenzhen
Government and in 2006 he was again awarded the same title. Mr. Song cooperated
with Wuhan University to research and develop the computer detecting project
of
Motor Automation Control Engineering. Mr. Song has completed a CEO course from
Tsinghua University that focused on International Enterprise Management and
is
now working towards receiving his MBA for the University of Southern Queensland.
Mr. Song is Hong Song's older brother and Tuen-Ping Yang's nephew.
Hong
Song, Chief Operating Officer
,
joined
Diguang Electronics in January 2001 and became Chief Operating Officer in 2006.
Prior to joining Diguang Electronics, Mr. Song was an engineer involved in
the
design of mining engineering equipment at Beijing Engineering Design &
Research Institute for Nonferrous Metals Industry (ENFI) from 1983 to 1990,
where he was later promoted to project chief designer. Mr. Song has also held
management positions at China National Non-Ferrous Metals Industry Corporation
(CNNC) from 1990 to 1998. He obtained a degree in Mechanical Engineering from
Xi’an Construction Technology University in 1983 and participated in
post-graduate studies in Project Economic Analysis at Paris Mineral Industries
University in Paris, France from 1998 to 1999. Mr. Song received his MBA from
Peking University in 2001. Mr. Song is Yi Song’s younger brother and Tuen-Ping
Yang’s nephew.
Keith
Hor
,
Chief
Financial Officer,
was
our
financial controller from October 2006 to March 2007, overseeing the corporate
strategic planning, financial and accounting functions and he was appointed
chief financial officer on March 7, 2007 followed the resgination of former
chief financial officer on teh same date. Mr. Hor has extensive experience
in
corporate finance, treasury, accounting, auditing and financial planning
experience in multi-national corporations. From April 2004 to September 2006,
he
was the group financial controller of and company secretary for Asia Tiger
Group
Ltd, a company listed in the Mainboard of Singapore Stock Exchange Ltd. and
principally engaged in the trading and manufacturing of office equipment
products and digital cameras with manufacturing facilities in Shenzhen, China.
Prior to that, Mr. Hor had been the Vice President-Finance and
Administration (Hong Kong & China) for five years in Jardine Logistics (HK)
Ltd., a company principally engaged in air and sea forwarding services,
warehouse, supply chain, inventory management and third party logistics
services. He was a certified practicing accountant in Price Waterhouse from
1988 to 1993. Mr. Hor obtained his Master of Finance from the Bernard M.
Baruch College, the City University of New York and his Professional Diploma
of
Accountancy from the Hong Kong Polytechnic University. He is a fellow member
of
the Chartered Association of Accountants, UK and an associate member of Hong
Kong Society of Accountants.
Fong
Heung Sang, Independent Director,
appointed
as of August 8, 2007, is a US Certified Public Accountant, and since December
2006 has served as the Executive Vice President for Corporate Development of
Fuqi International, Inc.(Nasdaq: FUQI) From January 2004 to November 2006,
Mr.
Fong served as the managing partner of Iceberg Financial Consultants, a
financial advisory firm based in China that advises Chinese clients on raising
capital in the United States. From March 2002 to March 2004, Mr. Fong served
as
Chief Financial Officer of Pacific Systems Control Technology, Inc. (NASDAQ:
PFSY), a Chinese company listed on NASDAQ and later on OTCBB. From December
2001
to December 2003, Mr. Fong was the Chief Executive Officer of Holley
Communications, a Chinese company that engaged in CDMA chip and cell phone
design. Mr. Fong currently serves as an independent director and audit committee
member of Universal Technology Holdings Limited (HK Stock Code 8091), a Hong
Kong public company, and as an independent director and chairman of the audit
committee of Kandi Technologies, Inc., a U.S. public company (Nasdaq: KNDI).
Mr.
Fong graduated from the Baptist University with a diploma in history in 1982.
He
has a MBA from the University of Nevada at Reno and a Masters in Accounting
from
the University of Illinois at Urbana-Champagne, and is a member of the American
Institute of Certified Public Accountants (AICPA)
appointed
as of August 8, 2007, is a Certified Public Accountant, and since December
2006
has served as the Executive Vice President for Corporate Development of Fuqi
International, Inc. From January 2004 to November 2006, Mr. Fong served as
the
managing partner of Iceberg Financial Consultants, a financial advisory firm
based in China that advises Chinese clients on raising capital in the United
States. From March 2002 to March 2004, Mr. Fong served as Chief Financial
Officer of Pacific Systems Control Technology, Inc. (NASDAQ: PFSY), a Chinese
company listed on NASDAQ and later on OTCBB. From December 2001 to December
2003, Mr. Fong was the Chief Executive Officer of Holley Communications, a
Chinese company that engaged in CDMA chip and cell phone design. Mr. Fong
currently serves as an independent director and audit committee member of
Universal Technology Holdings Limited (HK Stock Code 8091), a Hong Kong public
company, and as an independent director and chairman of the audit committee
of
Stone Mountain Resources, Inc., a U.S. public company (OTCBB: SMOU). Mr. Fong
graduated from the Baptist University with a diploma in history in 1982. He
has
a MBA from the University of Nevada at Reno and a Masters in Accounting from
the
University of Illinois at Urbana-Champagne.
Hoi
S. Kwok, Independent Director,
appointed as of August 8, 2007, is the Dr. William Mong Endowed Chair Professor
of Nanotechnology at the Hong Kong University of Science and Technology. He
has
served as a consultant to numerous companies, and currently for Bona Fide
Instruments, Ltd (Hong Kong), Integrated Micro-displays Limited (Hong Kong),
and
Himax Displays (Taiwan). He has founded four companies, and most recently eLite
Displays (Hong Kong) in 2004. He received his B.S. in Electrical Engineering
from Northwestern University in 1973, and received his B.S. and Ph.D. in Applied
Physics from Harvard University in 1974 and 1978, respectively
Tuen-Ping
Yang, Independent Director,
has been
the President of Cinema Systems, Inc. located in California since 1992.
Previously, from 1984 to 1986, Mr. Yang served as the President of World
Television Network and a Director of the Los Angeles National Bank. He has
also
been an Assistant Professor at Chinese Culture University, and a Manager of
CMPC
Taipei, Taiwan. He received his first Golden House Award (Taiwan’s Oscar Award)
as the Best Film Director in 1972, and has received that award an additional
three times since that date. He received his bachelor's degree from the National
Taiwan University of Arts in 1967 and his master’s degree of Fine Arts from the
University of California, Los Angeles, U.S. in 1976. Mr. Yang is Yi Song’s and
Hong Song’s uncle.
Significant
Employees
The
following are employees of Diguang Electronics who are not executive officers,
but who are expected to make significant contributions to our business:
Gangyi
Luo, General Manager of Large Sized LED Backlight SBU, Diguang
Electronics,
joined
Diguang Electronics in 2000 as a Sales Engineer, the departmental manager and
later Superintendent of Sales & Marketing. He was a lecturer from 1996
to 2000 at Kunming Railway Equipment School before joining Diguang Electronics
in the Sales and Marketing Department as a Sales Engineer. Based on his
performance, Luo Gangyi was promoted to the position of Departmental Manager,
then Superintendent of Sales and Marketing. Luo Gangyi studied from 1992
to 1996 in Southwest Jiaotong University and obtained an Engineering
degree.
Huade
Zuo, General Manager of Small Sized Backlight SBU, Diguang
Electronics,
joined
Diguang Electronics in 1999 as an engineer, manager, deputy chief engineer
and
later as Technology Superintendent. He is responsible for our technology,
especially for the new technology and products. From 1981 to 1999, he
worked with Hubei Wei Te Engine Factory, where he was involved in product
development. He has extensive experience in the design and production of moulds.
Mr. Zou Huade graduated from Wuhan Wireless Industries College in 1981,
specializing in the design and production of moulds.
Maoshan
Ding, General Manager of Conventional Backlight SBU, Diguang
Electronics,
joined
Diguang Electronics in 2001 as R&D Engineer, R&D manager and later R
& D Superintendent. He was also a director of Diguang Electronics at the
beginning of 2005. He was engaged in working at Hu Bei Wei Te Engine
Factory, as Technology Section Chief and Engineer from 1980 to 1988. He
was engaged in working on R&D fields for engine products, Honghu Mechanical
Electronic Research Institute from 1988 to 2001. He graduated from Hubei
Electronic Industrial School with a major in Semi-conductors.
Chen
Rongguo, Director of Management Center, Diguang
Electronics
,
joined
Diguang Electronics in 2003 as deputy chief economist and production manager
and
later as budget & control superintendent. From 1980 to 1989, he worked
with Hubei Wei Te Engine Factory where he held various positions in production,
finance and corporate management functions. In 1989, he joined Wan Ma
Company as an assistant to the general manager where he was involved in the
day-to-day operations of the Company. In 1995, he was transferred to the
holding company, Ji Li Group Company, as logistics control manager. Mr.
Chen studied economic management by remote learning in Beijing Institute of
Economic Management from 1983 to 1986.
Chao
Guo, General Manager of Medium Sized Backlight SBU, Diguang
Electronics
,
jointed
Diguang Electronics in January 2003. From January 2003 up to now he
worked as manager in Diguang Electronics for overseas sales in charge of
Korea and Europe market development and because of his good achievements he
was promoted as General Manager of Medium Sized backlight SBU on September
1,
2007. From July 2002 to December 2002 he worked for Dongguan Tailian Manufacture
Co, LTD as PMC dept Assistant. Mr.Guo studied in Xi An
Europe Asia Foreign Language University, China in July 2002 with
Major as International Trade.
Audit
Committee Financial Expert
The
Company has a separately-designated a standing Audit Committee of the Board
of
Directors established in accordance with Section 3(a)(58)(A) of the Exchange
Act, as amended. The Audit Committee consists of the following individuals,
all
of whom the Company considers to be independent, as defined under the SEC’s
rules and regulations and the Nasdaq’s definition of independence: Fong Heung
Sang,
Hoi
S.
Kwok
and Tuen-Ping Yang. Mr.
Fong
Heung Sang
is the Chairman of the Audit Committee. The Board has
determined that Mr. Fong Heung Sang is the Audit Committee financial expert,
as
defined in Item 407(d0(5)of Regulation S-K, serving on the Company’s audit
committee.
Compensation
Committee
The
Company has a separately-designated standing Compensation Committee of the
Board
of Directors. The Compensation Committee is responsible for determining
compensation for the Company’s executive officers. The Company’s three
independent directors, as defined under the SEC’s rules and regulations and the
Nasdaq’s definition of independence, Fong Heung Sang,
Hoi
S.
Kwok
and Tuen-Ping Yang serve on the Compensation Committee. Mr
Hoi
S.
Kwok
is the Chairman of the Compensation Committee.
Nominating
Committee
The
Company has a separately-designated standing Nominating Committee of the Board
of Directors. Director candidates are nominated by the Nominating
Committee. The Nominating Committee will consider candidates based upon
their business and financial experience, personal characteristics, expertise
that is complementary to the background and experience of other Board members,
willingness to devote the required amount of time to carrying out the duties
and
responsibilities of Board membership, willingness to objectively appraise
management performance, and any such other qualifications the Nominating
Committee deems necessary to ascertain the candidates ability to serve on the
Board. In general, in order to provide sufficient time to enable the
Nominating Committee to evaluate candidates recommended by stockholders, the
Corporate Secretary must receive the stockholder's recommendation no later
than
thirty (30) days after the end of the Company's fiscal year. The Company’s
independent directors, as defined under the SEC’s rules and regulations and the
Nasdaq’s definition of independence, Fong Heung Sang,
Hoi
S.
Kwok
and Tuen-Ping Yang serve on the Nominating Committee. Mr. Tuen
Ping Yang is the Chairman of the Nominating Committee.
Stockholders
Communication
Stockholders
interested in communicating directly with the Board of Directors, or specified
individual directors, may email the Company’s independent directors and they
will review all such correspondence and will regularly forward to the Board
copies of all such correspondence that deals with the functions of the Board
or
committees thereof or that he otherwise determines requires their
attention. Directors may at any time review all of the correspondence
received that is addressed to members of the Board of Directors and request
copies of such correspondence. Concerns relating to accounting, internal
controls or auditing matters will immediately be brought to the attention of
the
Audit Committee and handled in accordance with procedures established by the
Audit Committee with respect to such matters.
Code
of Ethics and Conduct
The
Board
of Directors has adopted a Code of Ethics and Conduct which is applicable to
all
officers directors and employees. The Code of Ethics and Conduct filed
herewith is incorporated by reference from the Code of Ethics filed as an
exhibit to the Registration Statement on Amendment No. 1 to Form S-1 filed
with
the Commission on October 30, 2006.
Section
16(a) Beneficial Ownership Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers and directors and persons who own more than 10% of a
registered class of the Company’s equity securities to file with the Securities
and Exchange Commission initial statements of beneficial ownership, reports
of
changes in ownership and annual reports concerning their ownership of common
stock and other of the Company’s equity securities, on Forms 3, 4 and 5
respectively. Executive officers, directors and greater than 10% stockholders
are required by Commission regulations to furnish the Company with copies of
all
Section 16(a) reports they file. To the best of the Company’s knowledge
(based solely upon a review of the Form 3, 4 and 5 filed), no officer, director
or 10% beneficial shareholder failed to file on a timely basis any reports
required by Section 16(a) of the Securities Exchange Act of 1934, as
amended.
ITEM
11. EXECUTIVE COMPENSATION
The
Company’s Compensation Committee is empowered to review and approve the annual
compensation and compensation procedures for the executive officers of the
Company.
The
primary goals of the Compensation Committee of our board of directors with
respect to executive compensation are to attract and retain the most talented
and dedicated executives possible and to align executives’ incentives with
stockholder value creation. The Compensation Committee evaluates individual
executive performance with a goal of setting compensation at levels the
committee believes are comparable with executives in other companies of similar
size and stage of development operating in similar industry while taking into
account our relative performance and our own strategic goals.
We
have
not retained a compensation consultant to review our policies and procedures
with respect to executive compensation. We conduct an annual review of the
aggregate level of our executive compensation, as well as the mix of elements
used to compensate our executive officers. Based on the compensations committee
general industry knowledge of various companies in the electronics industry,
we
believe the salaries and bonuses of the key officers and employees of Diguang
are fair and reasonable.
Elements
of Compensation
Executive
compensation consists of following elements:
Base
Salary.
Base
salaries for our executives are established based on the scope of their
responsibilities, taking into account competitive market compensation paid
by
other companies for similar positions. Generally, we believe that executive
base
salaries should be targeted near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and adjusted from time to time to realign salaries with market levels
after taking into account individual responsibilities, performance and
experience. The last meeting of the Compensation Committee was held on March
20,
2007.
Discretionary
Annual Bonus.
The
Compensation Committee has the authority to award discretionary annual bonuses
to our executive officers under the Compensation Committee Charter. So far,
no
discretionary bonus has been awarded. Bonuses, if they are awarded, are intended
to compensate officers for achieving financial and operational goals and for
achieving individual annual performance objectives. These objectives vary
depending on the individual executive, but relate generally to strategic factors
such as the financial performance, results of operation and per share
performance of our common stock.
Our
chief
executive officer and chief operating officer are eligible for a discretionary
annual bonus, the specific amount of which will be determined by the
Compensation Committee. The actual amount of discretionary bonus is determined
following a review of each executive’s individual performance and contribution
to our strategic goals conducted during the first quarter of each fiscal year.
The Compensation Committee has not fixed a maximum payout for any officers’
annual discretionary bonus.
Long-Term
Incentive Program.
We
believe that long-term performance is achieved through an ownership culture
that
encourages such performance by our key employees through the use of stock
options. Our stock compensation plan has been established to provide certain
of
our employees with incentives to help align those employees’ interests with the
interests of stockholders. The Compensation Committee believes that the use
of
stock options offers the best approach to achieving our compensation goals.
We
have not adopted stock ownership guidelines, and our stock compensation plan
has
provided the principal method for our key employees to acquire equity interests
in our company. We believe that the annual aggregate value of these awards
should be set near competitive median levels for comparable
companies.
Options.
Our
2006 Stock Incentive Plan authorizes us to grant options to purchase shares
of
common stock to our employees, directors and consultants. Our Compensation
Committee was the administrator of the stock option plan until the authority
was
delegated by the Board to our chief operating officer, Song Hong in 2007. Stock
option grants were made on February 25, 2006 or at the commencement of
employment. The board of directors reviewed and approved the stock option to
our
key employees, including our chief financial officer, and our independent
directors on February 25, 2006 and the granting of stock options subsequent
to
that was administered and approved by the Compensation Committee, based upon
a
review of the competitive compensation of the key officers and the key
employees, its assessment of individual performance, a review of each
executive’s existing long-term incentives, and retention considerations. In
2006, our former chief financial officer, the only named executive officer,
was
awarded stock options in the amounts indicated in the section entitled “Grants
of Plan Based Awards”. These grants were made to encourage an ownership culture
among our employees. Neither the chief executive officer nor the chief operating
officer has been granted any stock options. Stock options granted by us have
an
exercise price of $5.00 per share
,
expire
ten years after the date of grant and
with
monthly vesting at the end of each month after March 1, 2006 for the three
independent directors and yearly vesting for the chief financial officer and
other employees; the options issued to the independent
directors
and the chief financial officer
and our other employees vest at a rate of
1/36th per month, and 1/4th per year, respectively. During 2007, the former
chief financial officer and two former independent directors resigned and all
option awards had been expired as of December 31, 2007, e
xcept
20,000 shares have vested with the former chief financial officer at the time
of
her resignation on March 8, 2007
. In 2007, our current chief financial
officer, the only named executive officer, was award stock options in the
amounts indicated in the section entitled “Grants of Plan Based
Awards”.
2006
Stock Incentive Plan.
Our
2006 Stock Incentive Plan authorizes us to grant incentive stock option,
nonstatutory stock option, stock options, cash awards and stock awards to our
employees, directors and consultants. Mr. Song Hong, our chief operating
officer, is the administrator of the plan. If and when stock option awards
are
granted, they will be made on March 1 annually and, occasionally, to meet other
special retention or performance objectives. Mr. Song Hong will provide the
stock option award plans to the Compensation Committee on the executive officers
and other key employees, etc. based upon the competitive compensation of the
key
officers and the key employees, its assessment of individual performance, a
review of each executive’s existing long-term incentives, and retention
considerations. Periodic stock option award plan to eligible employees, etc.
will be regularly prepared by Mr. Song Hong for the approval of the Compensation
Committee.
Stock
Appreciation Rights.
We
currently do not have any Stock Appreciation Rights Plan that authorizes us
to
grant stock appreciation rights.
Other
Compensation.
Our
chief executive officer and chief operating officer who were parties to
employment agreements prior to the filing of this annual report will continue
to
be parties to such employment agreements in their current form until such time
as the Compensation Committee determines in its discretion that revisions to
such employment agreements are advisable. There has been no employment agreement
with our previous chief financial officer. Other than the annual salary
stipulated in the employment agreements of our chief executive officer and
chief
operating officer and the bonus that may be awarded to them at the discretion
of
the Compensation Committee, and other than the annual salary and the stock
options granted to our chief financial officer, we do not have any other
benefits and perquisites for our executive officers; however, the Compensation
Committee in its discretion may provide benefits and perquisites to these
executive officers if it deems it advisable. We currently have no plans to
change the employment agreements (except as required by law or as required
to
clarify the benefits to which our executive officers are entitled as set forth
herein) or to extend benefits and perquisites.
SUMMARY
COMPENSATION TABLE
Name
and principal position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
Bonus
($)
(d)
|
|
Stock
awards
($)
(e)
|
|
Option
awards
1
($)
(f)
|
|
Non-equity
incentive plan compensation
($)
(g)
|
|
Change
in pension value and non-qualified deferred compensation
earnings
($)
(h)
|
|
All
other compensation
($)
2
(i)
|
|
Total
($)
(j)
|
|
Yi
Song
Chief
Executive Officer and Chairman of the Board
|
|
|
2007
2006
2005
|
|
|
218,660
250,000
16,890
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
218,660
250,000
16,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith
Hor
Chief
Financial Officer
(appointed
on March 8, 2007)
|
|
|
2007
2006
2005
|
|
|
117,283
-
-
|
|
|
|
|
|
|
|
|
16,795
|
|
|
|
|
|
|
|
|
|
|
|
134,078
-
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jackie
You Kazmerzak
Chief
Financial Officer
(resigned
on March 8, 2007)
|
|
|
2007
2006
2005
|
|
|
27,599
100,000
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
36,991
184,954
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
64,590
284,954
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong
Song
Chief
Operating Officer
|
|
|
2007
2006
2005
|
|
|
174,554
200,000
13,122
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
174,554
200,000
13,122
|
|
Jackie
You Kazmareck resigned as CFO on March 8,2007 and 60,000 shares were forfeited
and 20,000 shares were vested at the time of termination under the Stock
Option
Plan . The fair value of the vested 20,000 shares was $221,945 and its
remaining
balance of $36,991 was amortized in 2007.
Mr
Yi
Song entered into an employment letter agreement with us as of April 19, 2006,
to serve as our Chief Executive Officer from March 17, 2006 through March 17,
2009, the “Initial Term”, and shall continue after that for an unspecified term.
During the Initial Term, the employment relationship may be terminated by:
(i)
Yi Song for any reason upon 30 days notice, or (ii) us without cause, as defined
in the employment agreement, upon 30 days notice or (iii) us for cause, as
defined in the employment agreement, with immediate effect. Following the
Initial Term, the employment relationship may be terminated by Yi Song or us
according to our policies at the time of termination. Yi Song shall receive
a
monthly base salary of US$20,833.33, which is the RMB equivalent of $250,000
on
an annualized basis, which may be increased during the Initial Term on each
anniversary of March 17, 2006.
Mr
Hong
Song entered into an employment letter agreement with us as of April 19, 2006,
to serve as our Chief Operating Officer from March 17, 2006 through March 17,
2009, the “Initial Term”, and shall continue after that for an unspecified term.
During the Initial Term, the employment relationship may be terminated by:
(i)
Hong Song for any reason upon at least 30 days written notice, or (ii) us
without cause, as defined in the employment agreement, upon 30 days written
notice, or (iii) us for cause, as defined in the employment agreement, with
immediate effect. Following the Initial Term, the employment relationship may
be
terminated by Hong Song or us according to our policies at the time of
termination. Hong Song shall receive a monthly base salary of US$16,666.67,
which is the RMB equivalent of US$200,000 on an annualized basis, which may
be
increased during the Initial Term on each anniversary of March 17,
2006.
Mr.Keith
Hor entered into an employment agreement, (the "Employment Agreement"), on
March
7, 2007, to serve as our Chief Financial Officer with effect from March 8,
2007.
Pursuant to the Employment Agreement, Mr. Hor shall receive a salary of
US$10,000 per month, payable pursuant to our normal payroll practices. In
addition, Mr. Hor was granted options to purchase the equivalent of 20,000
of
our shares under our 2006 Stock Incentive Plan. The vesting schedule of his
options is as follows: 25% of the shares subject to the stock options shall
vest
on each of the first four anniversary of March 1, 2008.
We
shall
also pay Messrs. Yi Song , Hong Song and Keith Hor such bonuses as may
be determined from time to time by our Compensation Committee. The amount of
annual bonus payable to them may vary at the discretion of the Compensation
Committee. In determining the annual bonus to be paid to them, the Compensation
Committee may, consider all factors they deem to be relevant and
appropriate.
Grants
of
Plan-Based Awards
|
|
|
|
|
|
Estimated
future payouts under non-equity incentive plan awards
|
|
|
Estimated
future payouts under equity incentive plan awards
|
|
|
All
other stock awards; number of shares of
|
|
|
All
other option awards; number of securities
|
|
|
Exercise
or base price of
|
|
|
Grant
date fair value of stock
|
|
Name
|
|
|
Grant
date
|
|
|
Threshold
($)
|
|
|
Target
($)
|
|
|
Maxi-mum
($)
|
|
|
Threshold
(#)
|
|
|
Target
(#)
|
|
|
Maxi-mum
(#)
|
|
|
stock
or
units
(#)
|
|
|
underlying
options
(#)
|
|
|
option
awards
($/Sh)
|
|
|
and
option awards
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
(k)
|
|
|
(l)
|
|
Song
Yi
Chief
Executive Officer and Chairman of the Board
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Keith
Hor
Chief
Financial Officer
|
|
|
March
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
$
|
5
|
|
$
|
5
|
|
Jackie
You Kazmerzak
Chief
Financial Officer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Song
Hong
Chief
Operating Officer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
Equity Awards at Fiscal
Year-End
|
|
|
Option
awards
|
|
|
Stock
awards
|
|
|
|
|
Number
of securities underlying
|
|
|
Number
of securities underlying
|
|
|
Equity
incentive plan awards: number of
securities
|
|
|
|
|
|
|
|
|
Number
of shares or units of stock
|
|
|
Market
value of shares or units of stock
|
|
|
Equity
incentive plan awards: number of unearned
shares units or other
|
|
|
Equity
incentive plan awards: market or payout
value of unearned shares, units or other rights
|
|
Name
2
|
|
|
unexercised
options exercisable
(#)
|
|
|
unexercised
options
unexercisable
(#)
|
|
|
underlying
unexercised unearned options
(#)
|
|
|
Option
exercise price
($)
|
|
|
Option
expiration
date
|
|
|
that
have not vested
(#)
|
|
|
that
have not vested
($)
|
|
|
rights
that have not vested
(#)
|
|
|
that
have not vested
($)
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
Song
Yi
Chief
Executive Officer and Chairman of the Board
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Keith
Hor
Chief
Financial Officer
|
|
|
5,000
|
|
|
-
|
|
|
15,000
|
|
|
5
|
|
|
February
28, 2017
|
|
|
|
|
|
|
|
|
15,000
|
|
|
32,700
|
|
Jackie
You Kazmerzak
Chief
Financial Officer
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
5
|
|
|
February
25, 2016
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Song
Hong
Chief
Operating Officer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Pursuant
to the terms of the Amended and Restated Share Exchange Agreement, we assumed
Diguang’s outstanding 2006 stock incentive plan covering options totaling the
equivalent of 1,500,000 shares of our common stock. Options equivalent to
approximately 566,000 shares of our common stock were issued under the Diguang
2006 Option Plan before the Share Exchange closed as follows: the equivalent
of
20,000 and 80,000 shares were granted to Diguang’s current and former chief
financial officer in 2007 Agreement, as of March 7, 2007, the date the former
chief financial officer resigned, 20,000 of her options have been vested and
are
exercisable but none of them has been exercised as of March 7, 2007. Under
the
Stock Option Agreement, the remaining of the 60,000 shares subject to the option
that were unvested and hence unexercisable shall terminate and expire effective
immediately on March 7, 2007, the date of her resignation. Under the Stock
Option Agreement, 16,795 of his options have been vested and are exercisable
but
none of them has been exercised as March 1, 2008 . Neither the Chief Executive
Officer nor the Chief Operating Officer was or is granted any
options.
Name
3
|
|
|
Fees
earned or paid in cash
($)
|
|
|
Stock
awards
($)
|
|
|
Option
awards
1
($)
|
|
|
Non-equity
incentive plan compensation
7
($)
|
|
|
Change
in pension value and nonqualified deferred compensation
earnings
8
|
|
|
All
other compensation
2
($)
|
|
|
Total
($)
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
Remo
Richli
|
|
|
18,300
|
|
|
30,824
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
49,124
|
|
Gerald
Beemiller
|
|
|
12,467
|
|
|
30,824
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
43,291
|
|
Tuen-Ping
Yang
|
|
|
24,000
|
|
|
50,962
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
74,962
|
|
Fong
Heung Sang
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
Hoi
S. Kwok
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
As
used
in this section, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as
consisting of sole or shared voting power, including the power to vote or direct
the vote, and/or sole or shared investment power, including the power to dispose
of or direct the disposition of, with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable.
As
of
December 31, 2006, we had a total of 22,593,000 shares of common stock
outstanding, which are our only issued and outstanding voting equity securities.
As of December 2007, we had repurchased a total of 252,300 shares and we
had a total of 22,340,700 shares of common stock outstanding.
The
following table sets forth, as of
Februrary
28, 2008
: (a) the names and addresses of each beneficial owner of more
than five percent (5%) of our common stock known to us, the number of shares
of
common stock beneficially owned by each such person, and the percent of our
common stock so owned; and (b) the names and addresses of each director and
executive officer, the number of shares our common stock beneficially owned,
and
the percentage of our common stock so owned, by each such person, and by all
of
our directors and executive officers as a group. Each person has sole voting
and
investment power with respect to the shares of our common stock, except as
otherwise indicated. Beneficial ownership consists of a direct interest in
the
shares of common stock, except as otherwise indicated.
Name
of Beneficial Owner
|
|
Amount
of Beneficial Ownership
|
|
Percentage
Ownership
(1)
|
|
Sino
Olympics Industrial Limited
|
|
|
15,590,000
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
Yi
Song (2)
|
|
|
15,590,000
|
|
|
69
|
%
|
|
|
|
|
|
|
|
|
Hong
Song
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Tuen-Ping
Yang
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Fong
Heung Sang (appointed on August 8, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hoi
S. Kwok (appointed on August 8, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remo
Richli (resigned on June 20, 2007)
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Gerald
Beemiller (resigned on June 22, 2007)
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Jackie
You Kazmerzak (resigned on March 8, 2007)
|
|
|
*
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Keith
Hor (appointed on March 8, 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Officers & Directors as a Group
|
|
|
15,590,000
|
|
|
69
|
%
|
(1)
All percentages have been rounded up to the nearest one hundredth
of one
percent.
(2)
Mr. Yi Song is the majority stockholder of Sino Olympics, as such
he may
be viewed as having beneficial ownership over all 15,590,000 shares
owned
by Sino Olympics.
|
*
Individual owns less than 1% of our securities.
Pursuant
to the terms of the Share Exchange, and as described above, we assumed Diguang’s
2006 Option Plan, which includes a total of 1,500,000 shares. Employees,
as well as officers and directors, will be eligible to receive shares under
Diguang’s 2006 Option Plan.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transaction
with management and others
Prior
to
the Share Exchange, Diguang Holdings paid a dividend in the amount $0.1624
per
share of common stock, an aggregate of $2,078,744. On December 12, 2005, the
Board of Diguang Technology resolved to distribute dividend of $2.1 million
from
its retained earnings to Sino Olympics. According to the board resolution,
Sino
Olympics will receive the payment of approximately $111,140, after netting
the
amount due from and to related parties, at the end of February 2006 to holders
of its common stock. The record date for the dividend was December 12,
2005. As of that date, Diguang’s officers and directors beneficially owned
all of its stock.
As
part
of the Share Exchange, Sino Olympics received 17,000,000 shares of our common
stock in exchange for its shares of Diguang Holdings’ common stock. Yi
Song and Hong Song, two of our officers and directors as of the close
of the Share Exchange, own Sino Olympics.
We
are
continually looking for opportunities to expand our business through either
internal growth or by merger and acquisition. During the process of
understanding Diguang Holdings’ business operation, we noted that Sino Olympics
owns currently owns a 32.5% interest in North Diamond, Ltd., a British Virgin
Islands corporation, which owns a wholly foreign owned enterprise. Sino Olympics
also has an option to acquire an additional 32.5% interest in North Diamond
common stock from another stockholder for a total purchase price of $487,500.
The wholly foreign owned enterprise will produce backlight products which are
different from those we currently produce, but which we would like to produce
in
the near future. Thus, we entered into a Purchase Option Agreement, the “Option
Agreement”, with Sino Olympics, Diguang Electronics, and Yi Song and Hong Song,
the “Songs”, giving us the right to acquire the interests held in North Diamond
from Sino Olympics. Under the Option Agreement, we have the right to purchase
from Sino Olympics its entire equity interest in North Diamond, including the
option to acquire the additional 32.5% ownership, for a period of one year
from
the date of the Option Agreement. The consideration to be paid for the exercise
of the option is the amount that Sino Olympics paid for its interest, plus
interest at the rate of 6% per annum, plus the assumption of any remaining
obligation of Sino Olympics to contribute registered capital to North Diamond.
In consideration for the Sino Olympics' entry into the Option Agreement, we
and
Shenzhen Diguang Electronics Co., Ltd. have agreed to allow Yi Song and
Hong Song to devote such time and attention to the business of North Diamond
as
they deem appropriate, subject to the oversight of the independent members
of
our board of directors. In view of the possibility that we are going to own
a
significant interest in this joint venture, we believe that it is in our best
interest to have Yi Song and Hong Song devote a portion of their business time
and efforts to the joint venture.
On
May
12, 2006, we entered into an Amended and Restated Purchase Option Agreement,
the
“Amended Agreement”, which superceded the Option Agreement. The parties to, and
the terms and conditions of, the Amended Agreement are wholly identical to
the
Option Agreement except in the following respects. First, Sino Olympics’s
current ownership of a 32.5% equity interest, “the Equity Interest”, in North
Diamond is in exchange for a total contribution of $487,500 in registered
capital, and not as was stated in the Option Agreement, in exchange for a total
contribution of $20,000,000 in authorized capital. Second, Sino Olympics granted
us the option to purchase, on or before May 12, 2007, all of the Equity
Interest, including the option to acquire the additional 32.5% ownership in
North Diamond, and not as was stated in the Option Agreement, on or before
April
21, 2007. Third, the interest at the rate of 6% per annum which forms part
of
the consideration applies to both the Equity Interest and the additional 32.5%
interest in North Diamond. Furthermore, the Amended Agreement elaborated that
the interest at the rate of 6% per annum shall commence on the date of payment
made by Sino Olympics towards its registered capital of North Diamond and shall
end on the date we exercise the option. Finally, the Amended Agreement shall
terminate if we fail to exercise the option prior to May 12, 2007, and not
as
stated in the Option Agreement, prior to April 21, 2007.
As
of
March 31, 2006, Sino Olympics infused only $487,500 into North Diamond,
accounting for 32.5% interest whereas the other investor infused $1.0125
million, accounting for 67.5% interest based on the actually infused capital.
On
June 27, 2006, Sino Olympics injected an additional $1 million in North Diamond.
So far Sino Olympics has made a total of $1,487,500 investment, accounting
for
59.5% ownership out of $2.5 million of infused capital in North Diamond. As
of
September 30, 2006, Sino Olympics has injected another $392,857 and so
reached its targeted 65% current equity ownership of North Diamond before the
exercise of the purchase option.
On
May
15, 2006, our board of directors, which included all the independent directors,
passed resolutions to approve our acquisition of the Equity Interest and Sino
Olympics’s additional 32.5% ownership in North Diamond.
On
January 3, 2007, we exercised the option and the purchase price determined
in
accordance with the Amended and Restated Purchase Option Agreement was
$1,977,864.
On
July
18, 2006, Yi Song entered into a license agreement with us to grant us the
right
to use his patents free of charge pending the transfer of the patents to
us.
During
the normal course of business, transactions involving the movement of funds
among certain related parties have occurred from time to time. The details
of
amounts due from and due to related parties are summarized as follows:
Related
Party Relationships
Name
of Related Parties
|
|
Relationship
with the Company
|
|
|
|
Mr.
Yi Song
|
|
One
of the shareholders of the Company
|
Mr.
Hong Song
|
|
One
of the shareholders of the Company
|
Shenzhen
Diguang Engine & Equipment Co., Ltd., a China based
entity
|
|
80%
owned by Mr. Yi Song and 20% owned by Mr. Hong Song
|
Sino
Olympics Industrial Limited
|
|
The
representative of Song’s
brothers
|
The
roll
forward details of amount due to related parties were summarized as
follows:
Amount
due to
|
|
Diguang
Engine
|
|
Stockholders
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance
at January 1 , 2006
|
|
$
|
1,706,165
|
|
$
|
-
|
|
$
|
1,706,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
1,358,261
|
|
|
-
|
|
|
1,358,261
|
|
Accrued
interest
|
|
|
13,738
|
|
|
-
|
|
|
13,738
|
|
Payments
made
|
|
|
(1,779,705
|
)
|
|
-
|
|
|
(1,779,705
|
)
|
Translation
adjustment
|
|
|
16
|
|
|
-
|
|
|
16
|
|
Balance
at December 31, 2006
|
|
$
|
1,298,475
|
|
$
|
-
|
|
$
|
1,298,475
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest
|
|
|
77,113
|
|
|
-
|
|
|
77,113
|
|
Purchase
price for acquisition of 65% interest
in
North diamond
|
|
|
-
|
|
|
1,977,864
|
|
|
1,977,864
|
|
Purchase
price for acquisition of 100% interest in Dongguan Diguang
S&T
|
|
|
-
|
|
|
4,200,000
|
|
|
4,200,000
|
|
Purchase
price paid
|
|
|
-
|
|
|
(3,977,864
|
)
|
|
(3,977,864
|
)
|
Translation
adjustment
|
|
|
90,202
|
|
|
-
|
|
|
90,202
|
|
Balance
at December 31, 2007
|
|
$
|
1,465,790
|
|
$
|
2,200,000
|
|
$
|
3,665,790
|
|
On
December 29, 2007, Diguang International Holdings Ltd., or “Diguang
International Holdings”, our wholly-owned subsidiary, entered into a sale and
purchase agreement, or the “Agreement”, with Sino Olympics Industrial Limited,
or “Sino Olympics”, and Shenzhen Diguang Engine & Equipment Co., Ltd., or
“Shenzhen Diguang”, to acquire a 100% interest in Dongguan Diguang Electronics
Science and Technology Co. Ltd., or “Dongguan S&T”. The closing date of the
acquisition was December 30, 2007, which was deemed to be the date for the
purpose of financial consolidation. Pursuant to local law, the acquisition
is
not effective until the registration of change of shareholders is approved
by
the Industrial and Commercial Bureau in Donggu
an,
Administration of Foreign investment in enterprises in Dongguan and State
Administration in Foreign Exchange. Such approval is expected to be obtained
within six months.
The
above
acquisition was approved by the independent directors of the Registrant at
the
board of directors’ meeting held on November 28, 2007.
According
to the Agreement dated December 29, 2007, the consideration for the sale
and
purchase is US$4,200,000 and the initial payment is US$2,000,000, followed
by 4
equal installments of US$550,000 payable on or before June 30,
2009.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The
following table sets forth the aggregate fees for professional audit services
rendered by BDO Shenzhen Dahua Tiancheng, BDO Reanda for the audit of the
Company’s annual financial statements for the fiscal years 2007 and 2006
respectively, and fees billed for other services provided by BDO Shenzhen
Dahua
Tiancheng and Chiu & Wang, Inc., BDO Reanda and Chiu & Wang, Inc. for
fiscal years 2007 and 2006 respectively, and other fees also include the
404
consulting fee provided by E&Y in 2007. The Audit Committee has approved all
of the following fees.
|
|
Fiscal
Year Ended
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
275,090
|
|
$
|
207,700
|
|
Audit
related Fees
|
|
|
40,000
|
(1)
|
|
176,000
|
|
Tax
Fees
|
|
|
36,600
|
(2)
|
|
5,000
|
|
404
consulting Fees
|
|
|
95,500
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
Fees
|
|
$
|
447,250
|
|
$
|
388,700
|
|
(1)
|
Includes
accounting and reporting consultations related to
acquisition.
|
(2)
|
Includes
fees for service related to tax compliance services, preparation
and
filing of tax returns and tax consulting
services.
|
Audit
Committee’s Pre-Approval Policy
During
fiscal year ended December 31, 2007, the Audit Committee of the Board of
Directors adopted policies and procedures for the pre-approval of all audit
and
non-audit services to be provided by the Company’s independent auditor and for
the prohibition of certain services from being provided by the independent
auditor. The Company may not engage the Company’s independent auditor to
render any audit or non-audit service unless the service is approved in advance
by the Audit Committee or the engagement to render the service is entered into
pursuant to the Audit Committee’s pre-approval policies and procedures. On
an annual basis, the Audit Committee may pre-approve services that are expected
to be provided to the Company by the independent auditor during the fiscal
year. At the time such pre-approval is granted, the Audit Committee
specifies the pre-approved services and establishes a monetary limit with
respect to each particular pre-approved service, which limit may not be exceeded
without obtaining further pre-approval under the policy. For any
pre-approval, the Audit Committee considers whether such services are consistent
with the rules of the Securities and Exchange Commission on auditor
independence. There was no audit committee for the fiscal year ended
2005.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES.
(a)
List
of Financial Statements/Schedules
Consolidated
Financial Statements
Consolidated
Balance
Sheets
Consolidated
Statements
of Income and Comprehensive Income
Consolidated
Statements
of Stockholders’ Equity
Consolidated
Statements
of Cash Flows
Notes
to
Consolidated Financial Statements
(b)
Exhibits
The
following is a list of exhibits filed as part of this Annual Report on Form
10-K. Where so indicated by footnote, exhibits that were previously filed are
incorporated by reference.
Exhibit
No.
|
|
Description
|
2.1
|
|
Amended
and Restated Share Exchange Agreement with Online, Diguang, Terri
Wonderly, Sino Olympics, JLF Partners I, LP, JLF Partners II, LP,
JLF
Offshore Fund, Ltd., Craig Samuels and Hilltop Holdings Company,
LP, dated
March 17, 2006 (incorporated by reference from Form 8-K filed on
March 21,
2006)
|
|
|
|
3.1(i)
|
|
Amended
and Restated Articles of Incorporation (incorporated by reference
from
Form S-1/A filed on October 30, 2006)
|
|
|
|
3.1(ii)
|
|
Amended
and Restated By-laws (incorporated by reference from Form S-1/A filed
on
October 30, 2006)
|
|
|
|
4.1
|
|
Amended
and Restated Share Exchange Agreement with Online, Diguang International
Holdings Limited, Terri Wonderly, Sino Olympics, JLF Partners I,
LP, JLF
Partners II, LP, JLF Offshore Fund, Ltd., Craig Samuels and Hilltop
Holdings Company, LP dated March 17, 2006 (Exhibit 2.1)
|
4.2
|
|
Placement
Agent Agreement with Online, Chardan Capital Markets, LLC and Maxim
Group,
LLC dated September 27, 2005 (incorporated by reference from Form
S-1
filed on June 16, 2006)
|
|
|
|
4.3
|
|
Amended
and Restated Form of Registration Rights Agreement dated January
16, 2006
(incorporated by reference from Form S-1 filed on June 16, 2006)
|
|
|
|
10.1
|
|
Production
Building Lease Contract with Dongguan Diguang Electronics Science
&
Technology Co., Ltd. and Shenzhen Diguang Electronics Co. dated March
30,
2005 (incorporated by reference from Form S-1 filed on June 16, 2006)
|
|
|
|
10.2
|
|
Employment
Agreement of Yi Song (incorporated by reference from Form 8-K filed
on
April 21, 2006)
|
|
|
|
10.3
|
|
Employment
Agreement of Hong Song (incorporated by reference from Form 8-K filed
on
April 21, 2006)
|
|
|
|
10.4
|
|
Amended
and Restated Purchase Option Agreement dated May 12, 2006 (incorporated
by
reference from Form 10-QSB filed on May 15, 2006)
|
|
|
|
10.5
|
|
Lease
Agreement between Wuhan Diguang Electronics Co. Ltd. and TPV
Technology (Wuhan) Co. Ltd dated November 18, 2006
|
|
|
|
10.6
|
|
Employment
Agreement of Keith Hor dated March 7 2007 (incorporated by reference
from
Form 8-K filed on March 13, 2007)
|
|
|
|
10.7
|
|
Lease
Agreement between Dihao Electronics (Yangzhou) Co. Ltd and
Transcend
Optronics (Yangzhou) Co., Ltd dated October 1,
2007
|
|
|
|
10.8
|
|
Lease
Agreement between Wuhan Diguang Electronics Co. Ltd and Wuhan Hannstar
Technology Co. Ltd dated October 29, 2007
|
|
|
|
10.9
|
|
Sale
and Purchase Agreement relating to 100% interest in Dongguan Diguang
Science & Technology Limited dated December 29, 2007 (incorporated by
reference from Form 8-K filed on January 4, 2008
|
|
|
|
14.1
|
|
Code
of Ethics (incorporated by reference from Form S-1/A filed on October
30,
2006)
|
|
|
|
21.1
|
|
Subsidiaries
of the registrant (incorporated by reference from Form S-1 filed
on June
16, 2006)
|
|
|
|
31.1
|
|
Rule
13a-14(a) Certification*
|
|
|
|
31.2
|
|
Rule
13a-14(a) Certification*
|
|
|
|
32.1
|
|
Section
1350 Certification*
|
|
|
|
32.2
|
|
Section
1350 Certification*
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
Diguang
International Development Co., Ltd.
(Registrant)
|
|
|
|
|
|
/s/ Keith
Hor
|
|
By:
Keith Hor
|
|
Title:
Chief Financial Officer
(Principal
Financial Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, this report has been signed
by the following persons in the capacities and on the dates
indicated.
Dated:
April
14
,
2008
|
|
/s/
Yi Song
|
|
|
Yi
Song
|
|
|
Chairman
of the Board and Chief Executive Officer
(Director
and Principal Executive Officer)
|
|
|
|
|
|
|
Dated:
April 14, 2008
|
|
/s/
Hong Song
|
|
|
Hong
Song
|
|
|
Director
|
|
|
|
|
|
|
Dated:
April 14, 2008
|
|
/s/
Fong
Heung Sang
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
April 14, 2008
|
|
/s/
Hoi
S. Kwok
|
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
April 14, 2008
|
|
/s/
Tuen-Ping Yang
|
|
|
Tuen-Ping
Yang
|
|
|
Director
|
FINANCIAL
STATEMENTS
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONTENTS
Reports
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance
Sheets
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements
of Income and Comprehensive Income
|
|
|
F-6
|
|
|
|
|
|
|
Consolidated
Statements
of Stockholders’ Equity
|
|
|
F-7
|
|
|
|
|
|
|
Consolidated
Statements
of Cash Flows
|
|
|
F-8
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-9
|
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Diguang
International Development Co., Ltd
We
have
audited the accompanying consolidated balance sheets of Diguang International
Development Co., Ltd (the “Company”) as of December 31, 2007, and the related
statements of income and comprehensive income, stockholders’ equity and cash
flows for the year ended December 31, 2007. These financial statements are
the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is
not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Diguang International Development
Co., Ltd, as of December 31, 2007, the results of its operations and its
cash
flows for the year ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
/s/
BDO Shenzhen Dahua Tiancheng CPAs
BDO
Shenzhen Dahua Tiancheng CPAs
Shenzhen,
PRC
April12,
2008
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Diguang
International Development Co., Ltd
We
have
audited the accompanying consolidated balance sheets of Diguang International
Development Co., Ltd (the “Company”) as of December 31, 2006, and the related
statements of income and comprehensive income, stockholders’ equity and cash
flows for each of the years in the two-year period ended December 31, 2006.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements
based
on our audits. We did not audit the financial statements of Dongguan Diguang
Electronic Science and Technology Co., Ltd., a wholly-owned subsidiary, those
statements include assets which represent 16% of the consolidated assets
as of
December 31, 2006, and revenues which represent 0% and 0% of the consolidated
revenues for each of the years in the two-year period ended December 31,
2006.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for
Dongguan Diguang Electronic Science and Technology Co., Ltd., is based solely
on
the report of the other auditors.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is
not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits and
the
report of the other auditors provide a reasonable basis for our
opinion.
In
our
opinion, based on our audits and the report of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Diguang International Development Co., Ltd, as of December
31, 2006, the results of its operations and its cash flows for each of the
years
in the two-year period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
BDO Reanda
BDO
Reanda
Beijing,
PRC
March
23,
2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
Diguang
International Development Co., Ltd
We
have
audited the accompanying balance sheets of Dongguan Diguang Electronic Science
and Technology Co., Ltd (“Dongguan Diguang S&T”) as of December 31, 2005 and
2006, and the related statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for each of the years in the two-year period
ended December 31, 2006. These financial statements are the responsibility
of Dongguan Diguang S&T’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Dongguan Diguang S&T is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of Dongguan Diguang S&T’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Dongguan Diguang Electronics
Science and Technology Co., Ltd, as of December 31, 2005 and 2006, the results
of its operations and its cash flows for each of the years in the two-year
period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
/s/
BDO Shenzhen Dahua Tiancheng CPAs
BDO
Shenzhen Dahua Tiancheng CPAs
Shenzhen,
PRC
December
28, 2007
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
BALANCE SHEETS
(In
US Dollars)
|
|
December
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
20,550,032
|
|
$
|
16,250,727
|
|
Accounts
receivable, net of allowance for doubtful account $751,145 and
$680,784
|
|
|
6,384,253
|
|
|
12,713,705
|
|
Inventories,
net of provision $545,446 and $841,518
|
|
|
4,396,247
|
|
|
7,499,768
|
|
Other
receivables, net of provision $0 and $102,574
|
|
|
243,334
|
|
|
389,764
|
|
VAT
recoverable
|
|
|
220,793
|
|
|
407,376
|
|
Advance
to suppliers
|
|
|
1,398,594
|
|
|
904,203
|
|
Deferred
tax asset
|
|
|
86,572
|
|
|
86,572
|
|
Total
current assets
|
|
|
33,279,825
|
|
|
38,252,115
|
|
|
|
|
|
|
|
|
|
Investment,
net of impairment $0 and $622,194
|
|
|
1,500,000
|
|
|
877,806
|
|
Property
and equipment, net
|
|
|
8,321,004
|
|
|
17,449,871
|
|
Construction
in progress
|
|
|
1,896,537
|
|
|
-
|
|
Prepayment
for purchasing office space
|
|
|
1,969,462
|
|
|
-
|
|
Total
assets
|
|
$
|
46,966,828
|
|
$
|
56,579,792
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
8,033,367
|
|
$
|
18,855,416
|
|
Advance
from customers
|
|
|
177,184
|
|
|
464,281
|
|
Accruals
and other payables
|
|
|
1,991,603
|
|
|
3,358,199
|
|
Accrued
payroll and related expense
|
|
|
347,688
|
|
|
795,690
|
|
Income
tax payable
|
|
|
335,672
|
|
|
428,217
|
|
Amount
due to related parties
|
|
|
1,298,475
|
|
|
1,465,790
|
|
Amount
due to stockholders - current
|
|
|
-
|
|
|
1,100,000
|
|
Total
current liabilities
|
|
|
12,183,989
|
|
|
26,467,593
|
|
|
|
|
|
|
|
|
|
Research
funding advanced
|
|
|
-
|
|
|
245,730
|
|
Amount
due to stockholders
|
|
|
-
|
|
|
1,100,000
|
|
Total
non-current liabilities
|
|
|
-
|
|
|
1,345,730
|
|
Total
liabilities
|
|
|
12,183,989
|
|
|
27,813,323
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,043,035
|
|
|
1,475,361
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share, 50 million shares authorized,
22,593,000 shares and 22,593,000 issued, 22,593,000 shares and
22,340,700
outstanding
|
|
|
22,593
|
|
|
22,593
|
|
Additional
paid-in capital
|
|
|
18,468,478
|
|
|
20,028,955
|
|
Treasury
stock at cost
|
|
|
-
|
|
|
(429,295
|
)
|
Appropriated
earnings
|
|
|
1,294,578
|
|
|
1,949,839
|
|
Retained
earnings
|
|
|
12,865,572
|
|
|
3,127,110
|
|
Translation
adjustment
|
|
|
1,088,583
|
|
|
2,591,906
|
|
Total
stockholders’ equity
|
|
|
33,739,804
|
|
|
27,291,108
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
46,966,828
|
|
$
|
56,579,792
|
|
See
accompanying notes to financial statements
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(In
US Dollars)
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
35,648,118
|
|
$
|
34,242,617
|
|
$
|
45,909,256
|
|
Cost
of sales
|
|
|
23,066,958
|
|
|
23,145,450
|
|
|
38,087,919
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
12,581,160
|
|
|
11,097,167
|
|
|
7,821,337
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expense
|
|
|
1,480,229
|
|
|
1,574,524
|
|
|
2,582,456
|
|
Research
and development
|
|
|
727,302
|
|
|
786,322
|
|
|
1,054,367
|
|
General
and administrative
|
|
|
1,664,094
|
|
|
6,656,469
|
|
|
6,476,242
|
|
Loss
on disposing assets
|
|
|
913
|
|
|
-
|
|
|
-
|
|
Impairment
loss
|
|
|
-
|
|
|
-
|
|
|
622,194
|
|
Income
(loss) from operations
|
|
|
8,708,622
|
|
|
2,079,852
|
|
|
(2,913,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
|
|
(32,075
|
)
|
|
158,699
|
|
|
122,251
|
|
Investment
income (loss)
|
|
|
(7,405
|
)
|
|
53,676
|
|
|
483,311
|
|
Other
income (loss)
|
|
|
293,341
|
|
|
(99,908
|
)
|
|
(168,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
8,962,483
|
|
|
2,192,319
|
|
|
(2,476,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
532,927
|
|
|
452,562
|
|
|
94,343
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) before minority interests
|
|
|
8,429,556
|
|
|
1,739,757
|
|
|
(2,570,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
(84,327
|
)
|
|
74,941
|
|
|
334,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8,513,883
|
|
$
|
1,664,816
|
|
$
|
(2,905,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
18,250,000
|
|
|
21,383,960
|
|
|
22,531,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share - basic
|
|
|
0.47
|
|
|
0.08
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
|
18,250,000
|
|
|
21,383,960
|
|
|
22,531,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
(loss) per shares - diluted
|
|
|
0.47
|
|
|
0.08
|
|
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income :
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,513,883
|
|
$
|
1,664,816
|
|
$
|
(2,905,337
|
)
|
Translation
adjustments
|
|
|
234,630
|
|
|
851,488
|
|
|
1,857,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
8,748,513
|
|
$
|
2,516,304
|
|
$
|
(1,047,628
|
)
|
See
accompanying notes to financial statements.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(In
US Dollars)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Treasury
Stock
|
|
Additional
Paid-in Capital
|
|
Appropriated
Earnings
|
|
Retained
Income Loss)
|
|
Accumulated
Comprehensive Income (Loss)
|
|
Total
|
|
Balance
at January 1, 2005
|
|
|
18,250,000
|
|
$
|
18,250
|
|
$
|
-
|
|
$
|
3,846,144
|
|
$
|
133,507
|
|
$
|
7,184,389
|
|
$
|
2,465
|
|
$
|
11,184,755
|
|
Retained
earnings converted to capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,236,445
|
|
|
-
|
|
|
(1,236,445
|
)
|
|
-
|
|
|
-
|
|
Appropriation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
368,326
|
|
|
(368,326
|
)
|
|
-
|
|
|
-
|
|
Dividends
declared
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,100,000
|
)
|
|
-
|
|
|
(2,100,000
|
)
|
Imputed
interest on stockholder loans
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,683
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,683
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,513,883
|
|
|
-
|
|
|
8,513,883
|
|
Translation
adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
234,630
|
|
|
234,630
|
|
Balance
at December 31, 2005
|
|
|
18,250,000
|
|
|
18,250
|
|
|
-
|
|
|
5,162,272
|
|
|
501,833
|
|
|
11,993,501
|
|
|
237,095
|
|
|
17,912,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
and recapitalization
|
|
|
1,943,000
|
|
|
1,943
|
|
|
-
|
|
|
(44,425
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(42,482
|
)
|
Common
shares issued
|
|
|
2,400,000
|
|
|
2,400
|
|
|
-
|
|
|
10,256,976
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,259,376
|
|
Offsetting
offering expenses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25,718
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25,718
|
)
|
Fair
value of stock options granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,134,342
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,134,342
|
|
Capital
infused in two previously separate entities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
905,357
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
905,357
|
|
Imputed
interest on stockholder loans
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,674
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
79,674
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,664,816
|
|
|
-
|
|
|
1,664,816
|
|
Appropriation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
792,745
|
|
|
(792,745
|
)
|
|
-
|
|
|
-
|
|
Translation
adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
851,488
|
|
|
851,488
|
|
Balance
at December 31, 2006
|
|
|
22,593,000
|
|
|
22,593
|
|
|
-
|
|
|
18,468,478
|
|
|
1,294,578
|
|
|
12,865,572
|
|
|
1,088,583
|
|
|
33,739,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of stock options granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
1,206,091
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,206,091
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,905,337
|
)
|
|
-
|
|
|
(2,905,337
|
)
|
Appropriation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
655,261
|
|
|
(655,261
|
)
|
|
-
|
|
|
-
|
|
Treasury
stock
|
|
|
-
|
|
|
-
|
|
|
(429,295
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(429,295
|
)
|
Translation
adjustment converted into capital
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
354,386
|
|
|
-
|
|
|
-
|
|
|
(354,386
|
)
|
|
-
|
|
Deemed
dividend distribution
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,177,864
|
)
|
|
-
|
|
|
(6,177,864
|
)
|
Translation
adjustments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,857,709
|
|
|
1,857,709
|
|
Balance
at December 31, 2007
|
|
|
22,593,000
|
|
$
|
22,593
|
|
$
|
(429,295
|
)
|
$
|
20,028,955
|
|
$
|
1,949,839
|
|
$
|
3,127,110
|
|
$
|
2,591,906
|
|
$
|
27,291,108
|
|
See
accompanying notes to financial statements
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(
The
Increase or Decrease in Cash and Cash Equivalents
)
(In
US Dollars)
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income(loss)
|
|
$
|
8,513,883
|
|
$
|
1,664,816
|
|
$
|
(2,905,337
|
)
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
(84,327
|
)
|
|
74,941
|
|
|
334,617
|
|
Depreciation
|
|
|
499,203
|
|
|
766,141
|
|
|
1,197,819
|
|
Imputed
interest
|
|
|
79,683
|
|
|
79,674
|
|
|
-
|
|
Bad
debts allowance
|
|
|
32,061
|
|
|
259,237
|
|
|
604,258
|
|
Inventory
provision
|
|
|
-
|
|
|
545,446
|
|
|
296,072
|
|
Impairment
of long-term investment
|
|
|
-
|
|
|
-
|
|
|
622,194
|
|
Loss
on disposing assets
|
|
|
913
|
|
|
-
|
|
|
-
|
|
Stock
compensation
|
|
|
-
|
|
|
2,134,342
|
|
|
1,206,091
|
|
Deferred
tax asset
|
|
|
-
|
|
|
(86,572
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,306,417
|
)
|
|
(541,888
|
)
|
|
(6,507,856
|
)
|
Inventory
|
|
|
(2,046,095
|
)
|
|
(1,221,802
|
)
|
|
(3,170,378
|
)
|
Other
receivables
|
|
|
(222,967
|
)
|
|
(152,056
|
)
|
|
(248,711
|
)
|
VAT
recoverable
|
|
|
-
|
|
|
(219,860
|
)
|
|
(184,913
|
)
|
Prepayments
and other assets
|
|
|
25,421
|
|
|
(638,015
|
)
|
|
459,832
|
|
Accounts
payable
|
|
|
3,303,643
|
|
|
734,551
|
|
|
10,075,059
|
|
Accruals
and other payable
|
|
|
417,810
|
|
|
610,856
|
|
|
1,732,009
|
|
Advance
from customers
|
|
|
19,196
|
|
|
(157,525
|
)
|
|
295,936
|
|
Taxes
payable
|
|
|
347,510
|
|
|
(228,046
|
)
|
|
88,034
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
9,579,517
|
|
|
3,624,240
|
|
|
3,894,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(4,124,520
|
)
|
|
(3,214,600
|
)
|
|
(6,172,666
|
)
|
Cash
paid for acquisition of two entities
|
|
|
-
|
|
|
-
|
|
|
(3,977,864
|
)
|
Long
term investment
|
|
|
-
|
|
|
(1,500,000
|
)
|
|
-
|
|
Disposal
(purchase) of marketable securities
|
|
|
(765,370
|
)
|
|
1,056,122
|
|
|
-
|
|
Deposit
for office building
|
|
|
(721,928
|
)
|
|
(1,808,773
|
)
|
|
-
|
|
Due
from related parties
|
|
|
(96,659
|
)
|
|
21,538
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(5,708,477
|
)
|
|
(5,445,713
|
)
|
|
(10,150,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Common
share issued
|
|
|
-
|
|
|
12,000,000
|
|
|
-
|
|
Stock
repurchase
|
|
|
-
|
|
|
-
|
|
|
(429,295
|
)
|
Offering
expenses
|
|
|
(25,718
|
)
|
|
(1,740,624
|
)
|
|
-
|
|
Due
to related parties
|
|
|
135,319
|
|
|
(469,590
|
)
|
|
158,876
|
|
Capital
infused by owners of North Diamond
|
|
|
-
|
|
|
1,392,857
|
|
|
-
|
|
Research
funding advanced
|
|
|
-
|
|
|
-
|
|
|
236,225
|
|
Payments
for a long-term bank loan
|
|
|
(470,941
|
)
|
|
-
|
|
|
-
|
|
Dividend
paid
|
|
|
-
|
|
|
(111,140
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(361,340
|
)
|
|
11,071,503
|
|
|
(34,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of changes in foreign exchange rates
|
|
|
183,415
|
|
|
738,486
|
|
|
1,990,693
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
3,693,115
|
|
|
9,988,516
|
|
|
(4,299,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
6,868,401
|
|
|
10,561,516
|
|
|
20,550,032
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the year
|
|
$
|
10,561,516
|
|
$
|
20,550,032
|
|
$
|
16,250,727
|
|
See
accompanying notes to financial statements
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 ─ REORGANIZATION AND RECAPITALIZATION
On
January 10, 2006, Online Processing, Inc. (“Online” thereafter) entered into a
stock exchange agreement with Diguang International Holdings Limited (“Diguang
Holdings” thereafter). Pursuant to the stock exchange agreement, without raising
$12 million, the reverse acquisition will not be effective, vice versa, without
reverse acquisition being effective, the private placement will be not
closed.
On
March
17, 2006, Online issued 2.4 million shares of its common stock in exchange
for
the gross proceeds of $12 million and issued another 18,250,000 shares of
its
common stock in exchange for 100% equity interest in Diguang Holdings, making
Diguang Holdings a wholly owned subsidiary of the Online. Consummating the
above
two transactions simultaneously, Online and Diguang Holdings successfully
fulfilled its contractual obligations, respectively, under the Stock Exchange
Agreement on March 17, 2006.
Online
Processing Inc. was organized under the laws of the State of Nevada in 2000.
Its initial business was to provide Internet-based mortgage processing for
mortgage brokers. It had never been able to achieve profitability in that
business so it began searching for operating companies to acquire in order
to
increase shareholders’ value.
In
February 2003, through a share exchange, it acquired 100% of the issued and
outstanding stock of Communication Field Services, Inc. (“CFS”), a Nevada
corporation engaged in the business of providing installation, maintenance
and
servicing of communication technologies. Online’s plan was to secure
additional financing to expand the CFS’ business, but it was unable to do so. In
March 2003, Online decided to cease commercial operations in CFS. Since
then, there were no real meaningful operating activities by Online. Thereafter,
it began the process of reviewing new business opportunities with the intention
to maximize shareholders’ interest, looking at possible business acquisitions in
North America and internationally. In accordance with the Stock Exchange
Agreement, Online implemented a reverse split of 3-for-5 making the total
outstanding shares from 11,518,233 at December 31, 2005 into 6,910,940 shares.
Then its CEO, Terri Wonderly, agreed to cancel 4,697,940 shares of common
stock
that she owned. Consequently, Online ended up with having 1,943,000 shares
issued and outstanding right before the effectiveness of the aforementioned
stock exchange transaction and fund raising transaction. Of the 1,943,000
shares
issued and outstanding, 900,000 shares are owned by the existing shareholders
of
Online, 800,000 shares are owned by Chardan Capital, the financial consultant,
and the remaining 243,000 shares are owned by the placement agents.
Diguang
Holdings was established under the law of the British Virgin Islands on July
27,
2004 by Sino Olympics (which is controlled by the song brothers) for the
purpose
of holding 100% of the equity interest in the following entities:
·
|
Well
Planner Limited (a Hong Kong based entity);
and
|
·
|
Diguang
Science and Technology (HK) Limited (a British Virgin Islands based
entity).
|
·
|
Shenzhen
Diguang Electronics Co., Ltd. (a China based
entity);
|
Well
Planner Limited (“Well Planner” thereafter), was established under the laws of
Hong Kong Special Administrative Region on April 20, 2001 and has been doing
business in custom forwarding related to export and import activities conducted
by Diguang Electronics for a service fee based on a service agreement, pursuant
to which service fees should not be less than 2% of the goods Well Planner
has
sold. However, Well Planner makes sales only to Diguang Science and Technology
(HK) Limited. In essence, Well Planner is a pass-through entity among all
three
entities.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 ─ REORGANIZATION AND RECAPITALIZATION (Continued)
Diguang
Science and Technology (HK) Limited (“Diguang Technology” thereafter) was
established under the laws of the British Virgin Islands on August 28, 2003
and
has handled all sales to international customers and procurements of electronic
components and materials for Diguang Electronics.
Both
Well
Planner and Diguang Technology do not have any office space leased in Hong
Kong
and British Virgin Islands.
Shenzhen
Diguang Electronics Co. Ltd.( “Diguang Electronics” thereafter), was established
as an equity joint venture in Shenzhen under the laws of the People’s Republic
of China (the “PRC”) on January 9,1996 with the registered capital of RMB85
million (equivalent $10,573,615) as of December 31, 2006 and an operating
life
of 20 years starting on that date. Diguang Electronics designs, develops
and
manufactures LED and CCFL backlight units. These backlight units are essential
components used in illuminating display panels such as TFT-LCD and color
STN-LCD
panels. These display panels are used in products such as mobile phones,
PDAs,
digital cameras, liquid crystal computer or television displays and other
household and industrial electronic devices. Diguang Electronics’ customers are
located in both China and overseas.
The
above
stock exchange transaction enabled those shareholders of Diguang Holdings
to
obtain a majority voting interest in Online. Generally accepted accounting
principles in the United States of America require that the company whose
shareholders retain the majority interest in a combined business be treated
as
the acquirer for accounting purposes. Based on the fact that the above two
transactions were consummated simultaneously, the two transactions have been
accounted for as a reverse acquisition with a shell company with cash as
Diguang
Holdings has acquired controlling equity interest in Online as of March 17,
2006. The reverse acquisition process utilizes the capital structure of Online
and the assets and liabilities of Diguang Holdings are recorded at historical
cost.
Diguang
Holdings is the continuing operating entity for financial reporting purposes
and
the financial statements prior to March 17, 2006 represent Diguang Holdings’
financial position and results of operations. As of March 17, 2006, Online
had
no assets, $42,482 of liabilities, and the corresponding negative shareholders’
equity with 1,943,000 shares of common stock issued and outstanding, all
of
which were included in the consolidated financial statements of Diguang Holdings
as of December 31, 2006. Please see the stockholders’ equity statement for the
period from January 1, 2006 to December 31, 2006. And note that this
reorganization transaction was deemed a non-cash transaction for cash flow
statement purposes. Although Diguang Holdings is deemed to be the acquiring
corporation for financial accounting and reporting purposes, the legal status
of
Online as the surviving company did not change.
On
November 18, 2006, Diguang Electronics and Diguang Holdings entered into
a
Sino-Foreign Equity Joint Venture Agreement, for the establishment of Wuhan
Diguang Electronics Co., Ltd., (“Wuhan Diguang” thereafter). Pursuant to the
Joint Venture Agreement, Diguang Electronics and Diguang Holdings set up
Wuhan
Diguang in Wuhan, Hubei Province, China, with a registered capital of $1
million, of which 70% was infused by Diguang Electronics and the remaining
30%
by Diguang Holdings. Wuhan Diguang was then established on March 13, 2007
and
its business license issued by Wuhan Municipal Administrative Bureau for
Industry and Commerce is valid for 20 years expiring on March 12, 2027. Wuhan
Diguang manufactures and sells LED and CCFL backlight units in Middle of
China
region. Wuhan Diguang started operation on July 1, 2007, and its operating
results have been included in the consolidation financial statements of the
Company for the year ended December 31, 2007.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 ─ BASE OF PRESENTATION
Acquiring
65% Interest of North Diamond Limited
On
January 3, 2007, the Company acquired 65% interest of North Diamond by
exercising a purchase option, which was entered between the Company and Song’s
brothers who are the holders of these 65% interest in North Diamond because
North Diamond is conducting the same business as the Company. The purchase
price
determined
in accordance with the Amended and Restated Purchase Option Agreement
was
$1,977,864. North Diamond is a holding company of
Dihao
(Yangzhou) Co., Ltd. (“Dihao” thereafter)
,
an
operating entity, which is
registered in the Yangzhou City Development Zone, Jiangsu Province, China.
Dihao
conducts business activities developing, manufacturing and marketing backlight
products for large size electronic display devices and provides relevant
technical services in China. Of the $
1,977,864
the
purchase price was $1,880,357 and the balance $97,507 was the interest paid
at a
rate of 6% per annum in line with the amount of capital infused and the time
length in which the capital was infused. This transaction was accounted for
as
assets exchanged between the entities under common control in accordance
with
Appendix D of SFAS No. 141, as the owners of the 65% interest of North Diamond
also own greater than 50% interest of the Company.
Acquiring
100% Interest of Dongguan Diguang Electronic Science and Technology Co.,
Ltd.
On
December 29, 2007, Diguang Holdings entered into a sale and purchase agreement
with Sino
Olympics
Industrial Limited (“Sino Olympics” thereafter) and Shenzhen Diguang Engine
& Equipment Co., Ltd (“Diguang Engine” thereafter) to acquire a 100%
interest in Dongguan Diguang Electronics Science and Technology Co. Ltd.
(“Dongguan Diguang S&T” thereafter). The closing date of the acquisition is
December 30, 2007.
Pursuant
to local law, the acquisition is not effective until the registration of
change
of shareholders is approved by the Industrial and Commercial Bureau in Dongguan,
Administration of Foreign Investment Enterprises in Dongguan, and State
Administration Bureau of Foreign Exchange Control. Such approval is expected
to
be obtained within
six
months since December 30, 2007. The consideration for the purchase transaction
was $4.2 million and the initial payment was $2 million, which was paid by
the
end of 2007,
followed
by four equal installments of $550,000 payable on June 30, 2008,
December
31,
2008,
March 31, 2009 and June 30, 2009, respectively. The outstanding interest
shall
be paid together with each principal installment in aggregate sum, whereas
the
interest shall be calculated on the outstanding balance at the prevailing
market
rate quoted by the People’s Bank of China.
Dongguan
Diguang S&T was established under the laws of the People’s Republic of China
on February 16, 2004 and
has been used by Diguang Electronics as the production base ever since.
This
transaction was accounted for as assets exchanged between the entities under
common control in accordance with Appendix D of SFAS No. 141, as the owners
of
Dongguan Diguang S&T also own greater than 50% interest of the
Company.
Retrospective
Restatement of Historical Consolidated Financial
Statements
In
accordance with Paragraph D16 and D17 in Appendix D of SFAS No. 141, the
above
two transactions changed the basis of presentation regarding the Company’s
historical consolidated financial statements; therefore, all of the Company’s
historical consolidated financial statements for the years ended December
31,
2005 and 2006 have been retrospectively restated to include the financial
data
of two previously separate entities, which are under the common control,
since
January 1, 2005 for the purpose of furnishing comparative information and
the
cash disbursements for the purchase prices paid and the obligations committed
to
pay were deemed as dividends distributed and declared in 2007. Accordingly,
previously reported related party transactions associated with these two
entities were eliminated during the retrospective restatement
process.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES
Principles
of Consolidation
The
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant inter-company accounts and transactions have
been
eliminated. All of the consolidated financial statements have been prepared
based on generally accepted accounting principles in the United
States.
Foreign
Currency Translations and Transactions
The
Renminbi (“RMB”), the national currency of PRC, is the primary currency of the
economic environment in which the operations of four subsidiaries, Diguang
Electronics, Dihao, Wuhan Diguang, and Dongguan Diguang S&T, are conducted.
Hong Kong dollar is the primary currency of the economic environment in which
the operations of one of subsidiaries, Well Planner, are conducted. U.S dollar
is the functional currency in which Diguang Technology, one subsidiary
established under the laws of the British Virgin Islands, recorded all its
activities. The Company uses the United States dollars (“U.S. dollars”) for
financial reporting purposes.
The
Company translates the above five subsidiaries’ assets and liabilities into U.S.
dollars using the rate of exchange prevailing at the balance sheet date,
and the
statement of income is translated at average rate during the reporting period.
Adjustments resulting from the translation of subsidiaries’ financial statements
from the functional currency into U.S. dollars are recorded in shareholders'
equity as part of accumulated comprehensive income (loss) - translation
adjustments. Gains or losses resulting from transactions in currencies other
than the functional currency are reflected in the statements of income for
the
reporting periods.
Revenue
Recognition
Revenue
generated from sales of backlight units to customers is recognized when
persuasive evidence of an arrangement exists, delivery of the products has
occurred, the significant risks and rewards of the ownership have been
transferred to the customer, the price is fixed or determinable and
collectibility is reasonably assured. Revenue presented on the Company’s income
statements is net of sales taxes.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturity of three months
or
less to be cash equivalents.
Short
Term Deposits
Short
term deposits consist of certificates of deposit having maturity of three
to
twelve months. These short term deposits are renewable when they mature and
interest rates are subject to change in line with the market interest rates
available when they are renewed.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Accounts
Receivable and Concentration of Credit Risk
During
the normal course of business, the Company extends unsecured credit to its
customers. Typically credit terms require payment to be made within 90 days
of
the invoice date. The Company does not require collateral from its customers.
The Company maintains its cash accounts at credit worthy financial institutions
and closely monitors the movements of its cash positions.
The
Company regularly evaluates and monitors the creditworthiness of each customer
on a case-by-case basis. The Company includes any accounts balances that
are
determined to be uncollectible in the allowance for doubtful accounts. After
all
attempts to collect a receivable have failed, the receivable is written off
against the allowance. Based on the information available to management,
the
Company believes that its allowance for doubtful accounts as of December
31,
2005, 2006 and 2007 were adequate, respectively. However, actual write-off
might
exceed the recorded allowance.
The
following table presents allowance activities in accounts
receivable.
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
491,908
|
|
$
|
491,908
|
|
$
|
751,145
|
|
Additions
charged to expense
|
|
|
-
|
|
|
259,237
|
|
|
501,684
|
|
Recovery
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Write-off
|
|
|
-
|
|
|
-
|
|
|
(572,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
491,908
|
|
$
|
751,145
|
|
$
|
680,784
|
|
Inventories
Inventories
are composed of raw materials and components, work in progress, and finished
goods, all of which are related to backlight products. Inventories are valued
at
the lower of cost (based on weighted average method) and the
market.
Property
and Equipment
Properties
and equipment are recorded at historical cost, net of accumulated depreciation.
The Amount of depreciation is determined using the straight-line method over
the
shorter of the estimated useful lives and the remaining contractual life
related
to leasehold improvements, as follows:
Land
usage right
|
|
|
48.5-50
years
|
|
Machinery
and equipment
|
|
|
5-10
years
|
|
Furniture
and office equipment
|
|
|
5
years
|
|
Accounting
Software
|
|
|
2
years
|
|
Vehicles
|
|
|
5-10
years
|
|
Software
|
|
|
2-5
years
|
|
Leasehold
improvement
|
|
|
5
years
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Property
and Equipment (Continued)
Maintenance
and repairs are charged directly to expense as incurred, whereas betterment
and
renewals are generally capitalized in their respective property accounts.
When
an item is retired or otherwise disposed of, the cost and applicable accumulated
depreciation are removed and the resulting gain or loss is recognized and
reflected as an item before operating income (loss).
Impairment
of Long-Lived Assets
The
Company adopts the provisions of Statement of Financial Accounting Standard
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable through the estimated undiscounted cash flows
expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the
amount
by which the carrying value exceeds the fair value. The impairment loss for
the
years ended December 31, 2005, 2006, and 2007 was $0, $0, and $622,194,
respectively. In accordance with APB 18, an impairment loss of $622,194 in
2007
was related to an investment, which was accounted for under the cost method.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No 109, “Accounting for Income Taxes” (“SFAS No. 109”).
SFAS No. 109 requires an entity to recognize deferred tax liabilities and
assets. Deferred tax assets and liabilities are recognized for the future
tax
consequence attributable to the difference between the tax bases of assets
and
liabilities and their reported amounts in the financial statements. Deferred
tax
assets and liabilities are measured using the enacted tax rate expected to
apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of
a change in tax rates is recognized in income in the period that included
the
enactment date.
Diguang
Electronics is registered at Shenzhen and subject to a favorable income tax
rate
at 15% comparing to a statutory income tax rate of 33% (30% for the central
government and 3% for the local government) under the current tax laws of
PRC
because Shenzhen is a special zone designated by the Chinese central government
to attract foreign investments. Diguang Electronics has been deemed as a
high-tech company by Shenzhen Bureau of Science, Technology & Information.
Under this category, Diguang Electronics has been entitled to enjoy a 50%
exemption from corporate income tax at the rate of 15% for the three years
from
January 1, 2004 to December 31, 2006. However, in accordance with the Rules
for
the Implementation of the Income Tax law of the PRC for Enterprises with
Foreign
Investment and Foreign Enterprises prescribed by the central government,
the
minimum corporate income tax rate should be 10% within the three years ended
December 31, 2004, 2005, and 2006. The Company recorded the income tax provision
based on 10% of corporate income tax rate for the years ended December 31,
2004,
2005 and 2006 considering that the difference between the 7.5% rate implemented
by the local tax authority and the 10% rate in terms of the rules prescribed
by
the central government should be recognized as income tax payable for
conservative consideration.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Income
Taxes (Continued)
Well
Planner is subject to a favorable income tax rate at 17.5% under Hong Kong
Inland Revenue jurisdiction. However, Well Planner does not have Hong Kong
sourced income. In accordance with Hong Kong tax regulation, Well Planner
has
not been taxed since its inception. There is no income tax for the companies
domiciled in the BVI. Accordingly, the Company’s financial statements do not
present any income tax provision related to the British Virgin Islands tax
jurisdiction.
Dihao
is
registered at Yangzhou and subject to a favorable income tax rate at 24%
comparing to a statutory income tax rate of 33%, 30% for the Chinese central
government and 3% for the local government, under the current tax laws of
PRC
because Yangzhou Development Zone is a special zone designated by Chinese
central government to attract foreign investments. Dihao has been
deemed
as
a high-tech company by Yangzhou Bureau of Science, Technology and Information.
Under this category, Dihao entitled to enjoy a 100% exemption of corporate
income tax for the two years from January 1, 2006 to December 31, 2007 and
a 50%
exemption of corporate income tax for the following three years from January
1,
2008 to December 31, 2010 in accordance with the preferential rules established
by Yangzhou local tax authority on August 2, 1999. Therefore, there is no
income tax for Dihao for the year ended 31 December 31, 2007.
Wuhan
Diguang is a foreign investment company. Under this category, Wuhan Diguang
entitled to enjoy a 100% exemption of corporate income tax for the first
two
years from the first profit-making year and a 50% exemption of corporate
income
tax for the following three years in accordance with the preferential rules
established by Wuhan local tax authority. Wuhan Diguang has suffered a loss
for
the year ended December 31, 2007 since its operation started from July 1,
2007.
After the favorable income tax period, Wuhan Diguang will subject to a statutory
income tax rate of 25%, the unified income tax rate under the newly enacted
corporate tax law.
Dongguan
Diguang S&T is registered at Dongguan City Development Zone, Guangdong
Province, China and subject to a favorable income tax at 27% comparing to
a
statutory income tax rate of 33% (30% for the Central Government and 3% for
the
local government) under the current income tax laws of PRC because Dongguan
Development Zone is a coastal economic development zone designated by Chinese
Central Government to attract foreign investments.
Diguang
International Development Co., Ltd. was established under the laws of the
State
of Nevada and is subject to U.S. federal income tax and one state income
tax.
For U.S. income tax purposes no provision has been made for U.S. taxes on
undistributed earnings of overseas subsidiaries with which the Company intends
to continue to reinvest. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings if they were
remitted as dividends, or lent to the Company, or if the Company should sell
its
stock in the subsidiary. The predecessor company accumulated certain net
operation loss carry forwards; however, due to the changes in ownership,
the use
of these net operation loss carry forwards may be limited in accordance with
the
U.S. tax laws.
Because
the consolidated financial statements were based on the respective entities’
historical financial statements, the respective effective income tax rate
for
the periods reported represents the effect of actual income tax provisions
incurred to Diguang Electronics, Dihao, Wuhan Diguang and Diguang International
Development Co., Ltd.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Adoption
of FIN 48
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109," (thereafter FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. A company must determine
whether it is "more-likely-than-not" that a tax position will be sustained
upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. Once it is determined
that a position meets the more-likely-than-not recognition threshold, the
position is measured to determine the amount of benefit to recognize in the
financial statements. The Company did not report any impact of adopting FIN
48
for the year ended December 31, 2007.
Retained
Earnings
It
is the
intention of the Company to reinvest earnings generated from the operations
of
its foreign subsidiaries and retained in those foreign subsidiaries.
Accordingly, no provision has been made for U.S. income and foreign withholding
taxes that would result if such earnings were repatriated. These taxes are
undeterminable at this time. The amount of earnings retained in foreign
subsidiaries was $15,832,985 and $15,638,576 at December 31, 2006 and 2007,
respectively.
Fair
Value of Financial Instruments
The
carrying amount of cash, accounts receivable, other receivables, advance
to
vendor, accounts payable and accrued liabilities are reasonable estimates
of
their fair value because of the short maturity of these items. The fair value
of
amounts due from/to related parties and stockholders are reasonable estimate
of
their fair value as the amounts will be collected and paid off in a period
less
than one year.
Value
Added Tax
Diguang
Electronics, Dihao and Wuhan Diguang are subject to value added tax (VAT)
imposed by the PRC government on its domestic product sales. VAT rate for
the
Company is 17%. The input VAT can be offset against the output VAT. VAT payable
or receivable balance presented on the Company’s balance sheets represents
either the input VAT less than or larger than the output VAT. The debit balance
represents a credit against future collection of output VAT instead of a
receivable.
Research
and Development
Research
and development costs are expensed as incurred. The actual research and
development expense incurred for the years ended December 31, 2005, 2006
and
2007 was $869,792, $1,286,527 and $1,214,684, respectively. After offsetting
against the government subsidies and other revenue, which were specified
as
supporting research and development efforts via the proceeds collected from
value added tax, the net research and development expenses for the years
ended
December 31, 2005 ,2006, and 2007 was $727,302, $786,322 and $1,054,367,
respectively.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from
those
estimates.
Comprehensive
Income (Loss)
The
Company adopted Statement of Financial Accounting Standard No. 130, “Reporting
Comprehensive Income” (“SFAS No. 130”), issued by the Financial Accounting
Standards Board (“FASB”). SFAS No. 130 establishes standards for reporting and
presentation
of comprehensive income (loss) and its components in a full set of
general-purpose financial statements. The Company has chosen to report
comprehensive income (loss) in the statements of income and comprehensive
income. Comprehensive income (loss) is comprised of net income and all changes
to stockholders’ equity except those due to investments by owners and
distributions to owners.
Earnings
(Loss) Per Share
The
Company presents earnings per share in accordance with the Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”).
SFAS No. 128 replaces the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average number
of
common shares outstanding during the period. Diluted earnings (loss) per
share
reflects the potential dilution of securities that could share in the earnings
of an entity, similar to fully diluted earnings (loss) per share. The Company
granted stock options to purchase 540,000 shares of its common stock on March
1,
2006. The outstanding shares subject to the options at December 31, 2006
and
2007 were 506,000 and
407,417
shares
respectively. The stock options granted during 2006 and 2007 did not have
impact
on determination of the diluted EPS for the year ended December 31, 2006
and
2007 as they were anti-diluted. As of December 31, 2007, t
he
Company had repurchased 242,300 shares of stock at average price of $1.77
per
share, resulting in 22,350,700 shares of common stock outstanding, which
was
used as the basis of computation of earnings per share.
Share-Based
Payments
The
Company adopted Statement of Financial Accounting Standards No 123(R):
“Share-Based Payments” (SFAS 123R) effective January 1, 2006. SFAS 123R amends
existing accounting pronouncements for share-based payment transactions in
which
an enterprise receives employee and certain non-employee services in exchange
for (a) equity instruments of the enterprise or (b) liabilities that are
based
on the fair value of the enterprise’s equity instruments or that may be settled
by the issuance of such equity instruments. SFAS 123R generally requires
such
transactions be accounted for using a fair-value-based method. As the Company
did not grant any stock options and warrants before January 1, 2006 and granted
stock options to purchase 540,000 shares of its common stock on March 1,
2006,
the Company accounted for the stock option granted using a fair-value-based
method in accordance with SFAS No. 123R.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 ─ SUMMARY OF ACCOUNTING POLICIES (Continued)
Appropriations
to Statutory Reserve
Under
the
corporate law and relevant regulations in China, the subsidiary of the Company
located in the mainland China (Diguang Electronics) is required to appropriate
a
portion of its retained earnings to statutory reserve. It is required to
appropriate 10%(the proportion is 15% before 2006) of its annual after-tax
income each year to statutory reserve until the statutory reserve balance
reaches 50% of the registered capital. In general, the statutory reserve
shall
not be used for dividend distribution purpose.
Recently
Issued Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
“
Fair
Value Measurements
”
(SFAS
No.
157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements.
The
Company is required to adopt SFAS No. 157 effective at the beginning of
2008. The Company is evaluating the impact that the adoption of this statement
may have on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159,
“
The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115
”
(SFAS
No.159). SFAS No. 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets
and
liabilities. The provisions of SFAS No. 159 become effective as of the
beginning of 2008. The Company is evaluating the impact that the adoption
of
this statement may have on its consolidated financial statements.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “
Business
Combinations
”
(“SFAS No. 141(R)”). SFAS 141(R) changes accounting for acquisitions
that close beginning in 2009. SFAS No. 141R broadens the guidance of SFAS
No.
141, extending its applicability to all transactions and other events in
which
one entity obtains control over one or more other businesses. It broadens
the
fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations. SFAS No.
141R
expands on required disclosures to improve the statement users’ abilities to
evaluate the nature and financial effects of business combinations.
SFAS No. 141R is effective for fiscal years beginning on or after
December 15, 2008 (fiscal year beginning July 1, 2009 for the Company). The
Company is currently assessing the impact that the adoption of SFAS No.
141R may have on its financial position, results of operations, and cash
flows.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “
Noncontrolling
Interests in Consolidated Financial Statements, An Amendment of ARB
No. 51
”
(“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest in a
subsidiary be reported as equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be identified in
the
consolidated financial statements. It also calls for consistency in the manner
of reporting changes in the parent’s ownership interest and requires fair value
measurement of any noncontrolling equity investment retained in a
deconsolidation. SFAS No. 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests.
The
Company is currently assessing the impact that the adoption of SFAS No. 160
may have on its financial position, results of operations, and cash flows.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 ─ INVENTORIES
The
inventories are as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,097,996
|
|
$
|
3,631,197
|
|
Work
in progress
|
|
|
972,008
|
|
|
1,603,662
|
|
Finished
goods
|
|
|
1,367,489
|
|
|
1,802,523
|
|
Consignment
goods
|
|
|
522,571
|
|
|
1,303,904
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,960,064
|
|
$
|
8,341,286
|
|
Provision
|
|
|
(563,817
|
)
|
|
(841,518
|
)
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
4,396,247
|
|
$
|
7,499,768
|
|
NOTE
5 ─ PROPERTY, PLANT AND EQUIPMENT
A
summary
of property, plant and equipment at cost is as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Land
usage rights
|
|
$
|
584,455
|
|
$
|
2,993,885
|
|
Plant
and office buildings
|
|
|
4,532,021
|
|
|
10,505,835
|
|
Machinery
|
|
|
2,837,082
|
|
|
4,090,772
|
|
Office
equipment
|
|
|
593,330
|
|
|
937,505
|
|
Vehicles
|
|
|
186,108
|
|
|
277,925
|
|
Software
|
|
|
13,698
|
|
|
111,260
|
|
Leasehold
improvement
|
|
|
1,090,071
|
|
|
1,322,537
|
|
|
|
|
|
|
|
|
|
|
|
|
9,836,765
|
|
|
20,239,719
|
|
Accumulated
depreciation
|
|
|
(1,515,761
|
)
|
|
(2,789,848
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
8,321,004
|
|
$
|
17,449,871
|
|
The
depreciation and amortization for the years ended December 31, 2005, 2006
and
2007, were $499,203, $766,141 and $1,197,819, respectively.
The
office space of 1,220 square meters acquired by Diguagn Electronics at a
cost of
RMB15,369,877 (equivalent of $2,107,021) was put in use in May 2007 as the
office building of Diguang International Development Co., Ltd. and Diguang
Electronics.
Pursuant
to the Board resolution of Diguang Electronics dated June 28, 2007, it was
resolved that Diguang Electronics would acquire an land usage right of a
34,930
square meters land in Shenzhen at a total cost of RMB17,278,052 (equivalent
of
$2,368,609). On June 29, 2007, an acquisition agreement was entered into
between
Diguang Electronic and Shenzhen Municipal Bureau of Land Resources and Housing
Management. Diguang Electronics had made full payment of RMB17,278,052 and
the
land had not been put in use as of December 31, 2007.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 ─ RELATED PARTY TRANSACTIONS
Related
Party Relationships
Name
of Related Parties
|
|
|
Relationship
with the Company
|
|
|
|
|
Mr.
Yi Song
|
|
|
One
of the shareholders of the Company
|
Mr.
Hong Song
|
|
|
One
of the shareholders of the Company
|
Shenzhen
Diguang Engine & Equipment Co., Ltd. (a China based
entity)
|
|
|
80%
owned by Mr. Yi Song and 20% owned by Mr. Hong Song
|
Sino
Olympics Industrial Limited
|
|
|
The
representative of Song’s brothers
|
The
break-down details of due to related parties were summarized as
follows:
Amount
due to
|
|
Diguang
Engine
|
|
Stockholders
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance
at January 1 , 2006
|
|
$
|
1,706,165
|
|
$
|
-
|
|
$
|
1,706,165
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
1,358,261
|
|
|
-
|
|
|
1,358,261
|
|
Accrued
interest
|
|
|
13,738
|
|
|
-
|
|
|
13,738
|
|
Payments
made
|
|
|
(1,779,705
|
)
|
|
-
|
|
|
(1,779,705
|
)
|
Translation
adjustment
|
|
|
16
|
|
|
-
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
1,298,475
|
|
$
|
-
|
|
$
|
1,298,475
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest
|
|
|
77,113
|
|
|
-
|
|
|
77,113
|
|
Purchase
price for acquisition of 65% interest
in
North diamond
|
|
|
-
|
|
|
1,977,864
|
|
|
1,977,864
|
|
Purchase
price for acquisition of 100% interest in Dongguan Diguang
S&T
|
|
|
-
|
|
|
4,200,000
|
|
|
4,200,000
|
|
Purchase
price paid
|
|
|
-
|
|
|
(3,977,864
|
)
|
|
(3,977,864
|
)
|
Translation
adjustment
|
|
|
90,202
|
|
|
-
|
|
|
90,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
1,465,790
|
|
$
|
2,200,000
|
|
$
|
3,665,790
|
|
Shenzhen
Diguang Engine & Equipment Co., Ltd
As
of
December 31, 2005, Shenzhen Diguang Electronics owed $2,339 to Shenzhen Diguang
Engine and Equipment, which was paid off by the Company during the year of
2006.
Dongguan
Diguang S&T entered into a loan agreement with Shenzhen Diguang Engine and
Equipment on October 20, 2006. Pursuant to the loan agreement, Shenzhen Diguang
Engine and Equipment committed to make a loan of RMB10 million to Dongguan
Diguang S&T through a bank at the current market rate for this type of loan.
On October 20, 2006, Diguang Engine and Equipment advanced RMB10 million
being
the principal with a 5.5% interest rate to Dongguan S&T through China
Merchants Bank, Shenzhen Nanyou Branch. And on December 31, 2007, the cumulative
interest for the aforementioned loan was RMB692,352. The accrued interest
will
be paid together with the repayment of principal when the loan matures. The
loan
will be matured on November 30, 2008.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 ─ RELATED PARTY TRANSACTIONS (Continued)
Stockholders
During
the process of acquiring 100% interest of Dongguan Diguang Science and
Technology (Dongguan Diguang S&T), Sino Olympics Industrial Limited (Sino
Olympics) owns 92% of interest and Shenzhen Diguang Engine & Equipment owns
the remaining 8% of interest at Dongguan Diguang S&T. Accordingly, the
entire consideration of $4.2 million was allocated $3,864,000 to Sino Olympics
and $336,000 to Shenzhen Diguang Engine & Equipment. Based on the fact that
Mr. Song brothers are the owners of both Sino Olympics and Shenzhen Diguang
Engine & Equipment, the entire consideration of the $4.2 million was treated
as amount due to Mr. Song Brothers. Of the $4.2 million acquisition price,
$2
million was paid in cash before the end of 2007 and the remaining balance
of
$2.2 million was recorded as a portion of liabilities of the Company. 50%
of
$2.2 million was classified as a portion of current liabilities and the
remaining 50% of $2.2 million was classified as a portion of long term
liabilities on the Company’s balance sheet as of December 31, 2007.
The
purchase price $1,977,864
for
acquiring 65% interest in North Diamond was paid out before December 31,
2007.
NOTE
7 ─ LONG-TERM INVESTMENT
The
investment in the following limited liability companies was accounted for
under
the cost method. Regarding investment in Huaxia (Yangzhou) Integrated O/E
System
Inc. (“Huaxia (Yangzhou)” thereafter), whose main product is the chips used to
make backlight units, the Company committed to invest up to 15% interest
by
contributing cash of $3 million. At July 6, 2006, the Company contributed
investment of $1.5 million to Huaxia (Yangzhou), and planed to inject additional
capital of $1.5 million in two years after Huaxia (Yangzhou) changes the
Business Registration Certificate. On June 6, 2007, the Company decided to
transfer out $0.54 million of its capital commitment of $3 million to other
investors. After the transference, the Company’s remaining capital commitment to
Huaxia (Yangzhou) is $2.46 million, accounting for 12.3% of the total registered
capital of the company. On November 30, 2007, Huaxia (Yangzhou) increased
its
paid-in capital to $15.6 million by investment from the other investors.
The
Company did not increase its investment accordingly; consequently, the Company
held only 9.62% of total paid-in capital in Huaxia (Yangzhou).
Since
Huaxia (Yangzhou) suffered net loss for two consecutive years ended December
31,
2006 and 2007, the Company carried out an impairment review of the long-term
investment based on the estimation that the carrying value of the net assets
of
Huaxia (Yangzhou) is deemed to be the net realizable value of the investment.
The carrying amount of $1.5 million of the long-term investment is higher
than
the Company’s share of the estimated net realizable value; consequently, an
impairment loss of $622,194 was recognized as of December 31, 2007 in accordance
with APB 18.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 ─ INCOME TAXES
The
income before income taxes in 2005, 2006 and 2007, respectively, was as
following:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) in China entities
|
|
$
|
4,909,765
|
|
$
|
4,592,817
|
|
$
|
249,932
|
|
Income
(Loss) in non-China and non-US entities
|
|
|
4,338,675
|
|
|
329,004
|
|
|
(714,511
|
)
|
Income
(Loss) in U.S
entity
|
|
|
-
|
|
|
(2,632,239
|
)
|
|
(2,246,205
|
)
|
Elimination
during consolidation process
|
|
|
(285,957
|
)
|
|
(97,263
|
)
|
|
234,407
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before income taxes
|
|
$
|
8,962,483
|
|
$
|
2,192,319
|
|
$
|
(2,476,377
|
)
|
The
income tax provision was as follows:
|
|
Years
Ended December 31,
|
|
Current:
|
|
2005
|
|
2006
|
|
2007
|
|
China
|
|
$
|
532,927
|
|
$
|
538,334
|
|
$
|
60,829
|
|
Federal
|
|
|
-
|
|
|
-
|
|
|
32,714
|
|
State
|
|
|
-
|
|
|
800
|
|
|
800
|
|
|
|
|
532,927
|
|
|
539,134
|
|
|
94,343
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
-
|
|
|
(86,572
|
)
|
|
-
|
|
The
U.S.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
532,927
|
|
$
|
452,562
|
|
$
|
94,343
|
|
Deferred
tax assets and liabilities reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
that give rise to deferred tax assets as of December 31, 2006 and 2007 were
as
follows:
|
|
December
31,
|
|
Current:
|
|
2006
|
|
2007
|
|
Bad
debt allowance
|
|
$
|
32,027
|
|
$
|
66,782
|
|
Inventory
provision
|
|
|
54,545
|
|
|
126,228
|
|
Accrued
salary
|
|
|
-
|
|
|
30,643
|
|
|
|
|
86,572
|
|
|
223,653
|
|
Non-current:
|
|
|
|
|
|
|
|
Net
operating loss carry-forwards
|
|
|
4,255
|
|
|
-
|
|
State
tax impact
|
|
|
157
|
|
|
-
|
|
|
|
|
4,411
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
90,983
|
|
|
223,653
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(4,411
|
)
|
|
(137,081
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax assets:
|
|
$
|
86,572
|
|
$
|
86,572
|
|
The
difference between the effective income tax rate and the expected federal
statutory rate was as follows:
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 ─ INCOME TAXES (Continued)
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Statutory
rate
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
(34.0
|
)%
|
Income
tax rate reduction
|
|
|
(24.0
|
)
|
|
(58.0
|
)
|
|
(41.3
|
)
|
Permanent
differences
|
|
|
(0.0
|
)
|
|
47.1
|
|
|
71.6
|
|
Valuation
allowance
|
|
|
-
|
|
|
0.2
|
|
|
5.4
|
|
Other
|
|
|
(4.1
|
)
|
|
(2.7
|
)
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
5.9
|
%
|
|
20.6
|
%
|
|
3.8
|
%
|
NOTE
9
─
EQUITY TRANSACTIONS
Under
China laws and regulations, Diguang Electronics is required to appropriate
a
portion of its retained earning to a general reserve, which cannot be used
for
dividend distribution purpose. In the years ended December 31, 2005, 2006
and
2007, the appropriation was $368,326, $792,745 and $655,261, respectively,
which
was deemed a non-cash transaction for cash flow statement purpose.
On
October 8, 2005, Diguang Electronics converted its retained earnings of RMB10
million (equivalent $1,236,445) into the registered capital resulting in
a total
registered capital amounting RMB15 million (equivalent $1,840,845), which
was
approved by relevant government agency and verified by a CPA firm and was
deemed
as a non-cash transaction for cash flow reporting purpose.
On
December 12, 2005, the Board of Diguang Technology resolved to declare dividend
of $2.1 million from its retained earnings to Sino Olympics Industrial Limited.
According to the board resolution, Sino Olympics Industrial Limited will
receive
the only cash payment of approximately $111,140 at the end of February 2006,
after netting of amount of $1,988,860 of due from stockholders, which was
deemed
as a non-cash transaction for cash flow statement purpose.
As
of
March 17, 2006 right before the reverse merger and private placement took
place,
Online had 11,518,233 shares of common stock outstanding. The board of directors
and majority shareholders of Online resolved to implement a 3-for-5 reverse
split. Consequently, the total outstanding share number after the reverse
split
was 6,910,940. Terry Wonderly, the majority shareholder, agreed to cancel
4,967,940 shares of common stock she owned. After this cancellation, Online
had
1,943,000 shares of common stock outstanding right before reverse merger
and
private placement. Of the 1,943,000 shares of common stock issued and
outstanding, Chardan Capital LLC (the consultant of Online for the reverse
merger and private placement) accounted for 800,000 shares and Chardan Capital
Markets and Maxim (two placement agents) accounted for 243,000
shares.
On
March
17, 2006, in connection with the reverse acquisition between Diguang
International Holdings and Online, the Company issued 2.4 million shares
of its
common stock to 91 accredited investors at $5.00 per share to raise cash
of $12
million. After deducting the offering expenses of $1,647,124 paid by cash
and
the accrued offering expense of $93,500, the Company recorded the net proceeds
of $10,259,376. The Company also deducted from additional paid-in capital
the
offering expenses of $25,718 incurred in 2005 and presented as a deferred
expense on the balance sheet as of December 31, 2005. This deduction was
deemed
as a non-cash transaction for cash flow statement purpose.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 ─ EQUITY TRANSACTIONS (Continued)
In
accordance with the signed Share Exchange Agreement, the shareholders of
Diguang
International Holdings Limited will be granted certain incentive shares if
the
Company (post reverse merger) meets certain financial performance criteria.
The
incentive shares and financial performance criteria are as follows:
|
|
Total
Incentive
Shares
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Sino
Olympics Industries Limited
|
|
|
6,000,000
|
|
|
500,000
|
|
|
1,500,000
|
|
|
2,000,000
|
|
|
2,000,000
|
|
After-tax
Profit Target (in million) (1)
|
|
|
|
|
$
|
15.7
|
|
$
|
22.8
|
|
$
|
31.9
|
|
$
|
43.1
|
|
(1)
After-tax profit targets shall be the income from operations, less taxes
paid or
payable with regard to such income, excluding the effect on income from
operations, if any, resulting from issuance of Incentive Shares in any year.
By
way of example, if the Incentive Shares for 2006 are earned and issued in
2007
with an aggregate value of $7 million, and as a result the income from
operations for 2007 is reduced by $7 million, the determination of whether
the
after-tax profit targets are hit for 2007 will be made without deducting
the $7
million from income from operations. That is, if income from operations was
$20
million after the charge for issuance of the Incentive Shares, for purposes
of
issuance of Incentive Shares for 2007, income from operations will be deemed
to
be $27 million, and whether the target is hit will be determined by deducting
from $27 million the amount of taxes that would have been paid or payable
had
income from operations actually been $27 million.
The
Company accounts for the transactions of issuing these incentive shares based
on
the fair value on the grant date. Under SFAS 123R, the Company assesses whether
it is probable at the grant date the awards would be earned and if it is
probably the expense would be recorded over the period (which in this case
is
specified as the shareholders of
Diguang
International Development Co., Ltd.
can earn
any of the amounts each year). The after-tax profit target for the year ended
December 31, 2006 and 2007, respectively, had not been met and the Company
did
not record any share-based compensation for Song Brothers during this reporting
period.
In
accordance with the board resolution of the Company dated February 21, 2007,
the
Company appointed Chardan Capital Markets, LLC, (“Chardan”), as the agent to
purchase back up to $5 million of the Company’s common shares on behalf of the
Company pursuant to Rule 10b-18 and 10b-5. As of December 31, 2007,
the
Company had repurchased 252,300 shares of stock at average price of $1.77
per
share, resulting in 22,340,700 shares of common stock outstanding as of December
31, 2007. The repurchased shares at cost were presented in line of treasury
stock in the stockholders’ equity section on the balance sheet as of December
31, 2007.
Due
to
the acquisition of two previously separate entities, at the respective effective
date, the Company reclassified $74,258, which was 65% accumulated translation
adjustment in North Diamond at December 31, 2006 and $280,128, which was
100%
translation adjustment at Dongguan Diguang S&T at December 30, 2007 as
additional paid-in capital as result of the fact that the Company paid cash
to
acquire 65% interest in North Diamond and 100% interest of Dongguan Diguang
S&T so that the accumulated translation adjustment in the respective entity
became part of the Company’s operating assets, which will be included in the
process of determining net income in accordance with SFAS No. 52.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 ─ STOCK OPTIONS
Effective
on January 1, 2006, the Company adopted the fair value recognition provisions
of
Statement of Financial Accounting Standards (SFAS) No. 123 (R),
“Share-Based
Payments.”
The
Company recognized the share-based compensation cost based on the grant-date
fair value estimated in accordance with the new provisions of SFAS No. 123
(R).
There were no stock options issued before January 1, 2006.
For
the
years ended December 31, 2006 and 2007, the Company issued stock options
to
purchase 540,000 shares at $5 per share and 26,000 shares at $5 per share,
respectively. The Company applied the
Black-Scholes option pricing model to determine the fair value of stock options
on each of the grant dates. The fair value was $5,592,509 for 540,000 stock
options granted in 2006 at $11.10 per share and $56,680 at $2.18 per share
for
26,000 stock options granted in 2007.
The
share-based compensation recognized for stock options granted was $2,134,342
and
$1,206,091 for the years ended December 31, 2006 and 2007,
respectively. No tax benefit was recognized for the share-based
compensation due to the stock options granted.
Assumptions
The
disclosure of the above fair value for these awards was estimated using the
Black-Scholes option pricing model with the assumptions listed
below:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
48.04
|
%
|
|
105.04
|
%
|
Weighted
average volatility
|
|
|
N/A
|
|
|
N/A
|
|
Expected
life
|
|
|
7
years
|
|
|
7
years
|
|
Risk
free interest rate
|
|
|
4.60
|
%
|
|
4.51
|
%
|
The
expected volatilities are essentially based on the historical volatility
of the
Company’s stock. The observation was made on a daily basis. The periods of
observation covered were from January 1, 2005 through March 1, 2006 for options
granted on March 1, 2006 and from January 1, 2005 through March 1, 2007 for
options granted on March 1, 2007. The expected terms of stock options are
based
on the average vesting period and the contractual life of stock options granted.
The 400,000 shares of stock options granted to employees vest on each of
the
first four anniversaries of the granting date. The 60,000 shares of stock
options granted to directors vest at the end of each month starting from
the
grant date for 36 months in order to match the term of directorship. The
80,000
shares of stock options granted to the former Chief Financial Officer vest
at
the end of each month starting from the grant date for 48 months. The 26,000
shares of stock options granted in 2007 vest on each of the first four
anniversaries of the granting date. The risk-free rates are consistent with
the
expected terms of stock option and based on the U.S. Treasury yield curve
i
n
effect
at the time of grant. The Company estimated the forfeiture rate of its stock
options was 6.13%.
Stock
Option Plan
The
Company’s 2006 Stock Incentive Plan (the “2006 Plan”), which is
shareholder-approved, permits the grant of stock options to its employees
up to
1,500,000 shares of common stock. The Company believes that such awards better
align the interests of its employees with those of its shareholders. Option
awards are generally granted with an exercise price per share equal to the
market price of the grant date. These options have up to ten-year contractual
life term.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 ─ STOCK OPTIONS (Continued)
Awards
generally vest over four years in equal installments on the next four succeeding
anniversaries of the grant date. The share-based compensation will be recognized
based on graded vesting method over the four years or over the three years
regarding the options granted to directors in order to match their directorship
terms. A summary of option activities under the 2006 Plan during the years
ended
December 31, 2006 and 2007 is presented as follows:
Stock
Options
|
|
Shares
|
|
Weighted-
Average Exercise Price
|
|
Weighted
- Average Remaining Contractual Term
|
|
Outstanding
at Janaury1, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
Granted
|
|
|
540,000
|
|
|
5.00
|
|
|
9.17
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
or expired
|
|
|
(34,000
|
)
|
|
-
|
|
|
-
|
|
Outstanding
at December 31, 2006
|
|
|
506,000
|
|
|
5.00
|
|
|
9.17
|
|
Exercisable
at December 31, 2006
|
|
|
33,333
|
|
$
|
5.00
|
|
|
9.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
26,000
|
|
|
5.00
|
|
|
9.17
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
or expired
|
|
|
(124,583
|
)
|
|
-
|
|
|
-
|
|
Outstanding
at December 31, 2007
|
|
|
407,417
|
|
|
5.00
|
|
|
8.22
|
|
Exercisable
at December 31, 2007
|
|
|
145,389
|
|
$
|
5.00
|
|
|
8.20
|
|
The
trading price of the Company stock at December 31, 2006 and 2007 was $4.50
and
$2.50 per share, respectively. Consequently, no intrinsic value was reported.
A
summary of the Company’s non-vested stock options during the years ended
December 31, 2006 and 2007 is presented below:
Non-vested
Options
|
|
Shares
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Non-vested
at January 1, 2006
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
|
540,000
|
|
|
11.10
|
|
Vested
|
|
|
(33,333
|
)
|
|
11.10
|
|
Forfeited
|
|
|
(34,000
|
)
|
|
11.10
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2006
|
|
|
472,667
|
|
$
|
11.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
26,000
|
|
|
2.18
|
|
Vested
|
|
|
(112,056
|
)
|
|
11.10
|
|
Forfeited
|
|
|
(124,583
|
)
|
|
10.67
|
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2007
|
|
|
262,028
|
|
$
|
10.66
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 ─ COMMITMENTS AND CONTINGENCIES
Operating
Leases
On
October 8, 2006, The Company entered into a lease agreement with Wuhan Hanstarr
Technology Ltd. (“Wuhan Hanstarr” thereafter), to rent equipment with rental of
RMB235,200 (approximately $30,996) per month from December 1, 2006 to December
31, 2008. But the original lease agreement was cancelled in 2007 and a new
lease
agreement was entered into between Wuhan Diguang and Wuhan Hanstarr on June
6,
2007. The new lease agreement lasted only for approximately six months ended
December 31, 2007, with rental of RMB235,200 (approximately $30,996) per
month.
It was agreed that the lease agreement should be renewed every year. Pursuant
to
this particular clause, both partied entered into a new lease agreement for
2008
on October 29, 2007, on which the rental was RMB200,000 (approximately $27,418)
per month for the year ended December 31, 2008. Also on October 8, 2006,
the
Company entered into a lease agreement with Wuhan TPV Display Technology
Co.,
Ltd. (“Wuhan TPV” thereafter) to rent the factory with rental of
RMB37,431(approximately $4,933) per month from December 1, 2006 to December
31,
2008.
Future
minimum payments required under the lease agreement with
Wuhan
Hanstarr and Wuhan TPV
that has
an initial or a remaining lease term in excess of one year at December 31,
2007
are as follows:
Year
Ended December 31,
|
|
Amount
|
|
|
|
|
|
|
2008
|
|
$
|
390,586
|
|
On
October 31, 2005 and August 4, 2006, Dihao entered into two lease agreements
with Transcend Optronics (Yangzhou) Co, Ltd. to rent the factory premises
for
the period from October 1, 2005 to September 30, 2007. In October 2007, Dihao
and Transcend Optronics (Yangzhou) Co, Ltd. renewed the lease agreement to
rent
the factory premises for the period from October 1, 2007 to September 30,
2009
with rental of RMB 96,747(approximately $12,750) per month.
Future
minimum payments required under the lease agreement for the manufacturing
facilities of Dihao that has an initial or a remaining lease term in excess
of
one year at December 31, 2007 are as follows:
Years
Ended December 31,
|
|
Amount
|
|
|
|
|
|
|
2008
|
|
$
|
159,154
|
|
2009
|
|
|
119,365
|
|
|
|
|
|
|
Total
|
|
$
|
278,519
|
|
Long-term
Investment Commitment
The
Company has committed to invest additional $0.96 million of cash to Huaxia
(Yangzhou). Please refer to Note 7 for details.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 ─ EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted net earnings
per
share for the periods as indicated:
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
8,513,883
|
|
$
|
1,664,816
|
|
$
|
(2,905,337
|
)
|
Net
income (loss) used in computing diluted earnings per share
|
|
$
|
8,513,883
|
|
$
|
1,664,816
|
|
$
|
(2,905,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
18,250,000
|
|
|
21,383,960
|
|
|
22,531,384
|
|
Potential
diluted shares from stock options granted
|
|
|
-
|
|
|
-
|
|
|
|
|
Weighted
average common share outstanding - diluted
|
|
|
18,250,000
|
|
|
21,383,960
|
|
|
22,531,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.47
|
|
$
|
0.08
|
|
$
|
(0.13
|
)
|
Diluted
earnings per share
|
|
$
|
0.47
|
|
$
|
0.08
|
|
$
|
(0.13
|
)
|
NOTE
13 ─ GOVERNMENT SUBSIDIES
The
local
government in Shenzhen provided government subsidies sourcing from the proceeds
of value added tax and corporate income tax collected to encourage Diguang
Electronics’ research and development efforts.
All
subsidies were accounted for based on the hard evidence that Diguang Electronics
should be entitled to receive these subsidies or that cash has been received.
Government
subsidies received with specification to support the research and development
efforts were first offset against Diguang Electronics’ research and development
expense and the remaining balance, if any, together with proceeds from other
subsidy programs, were recognized as other income in accordance with
internationally prevailing practice. The government subsidies for the years
ended December 31, 2005, 2006, and 2007 were $203,012, $163,121 and $160,317,
respectively.
NOTE
14 ─ RESEARCH FUNDING ADVANCED
On
April
23, 2007, Diguang Electronics entered a fund sharing agreement with Skyworth
LCD
Technology Co., Ltd. (“Skyworth LCD” thereafter) to share aggregate funding of
RMB3 million (approximately $411,263) granted by the Department of Science
and
Technology of Guangdong Province to support the research of large size TFT
back
light technology. According to the sharing agreement, Diguang Electronics
will
receive 42.4% or RMB1,275,000 (approximately $174,787) of the total fund
available in two installment payments. On May 23, 2007 Diguang Electronics
received the first installment of RMB892, 500 (approximately $122,350). In
accordance with the government grant, if the final product resulting from
the
research and development project conducted by Diguang Electronics failed
to meet
the standards established by the designated government authorities at the
appropriate level in this particular filed, the amount of fund received by
the
Company shall be returned in full.
On
June
22, 2007 Diguang Electronics entered a fund sharing agreement with Hisense
Electric Co., Ltd. (“Hisense” thereafter) to share aggregate funding of RMB3.77
million (approximately $516,821) granted by the Ministry of Science and
Technology of the People’s Republic of China for supporting technology research
of LED back light products. According to the sharing agreement, Diguang
Electronics will receive 40% or RMB1,508,000 (approximately $206,728) of
the
total amount available in three installment payments. On May 23, 2007 Diguang
Electronics received the first installment payment of RMB900, 000 (approximately
$123,370). In accordance with the government grant, if the final product
resulting from the research and development project conducted by Diguang
Electronics failed to meet the standards established by the designated
government authorities at the appropriate level in this particular filed,
any
amount of fund received by the Company shall be returned in full.
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 ─ RESEARCH FUNDING ADVANCED (Continued)
As
of
December 31, 2007, these two research projects were still in progress and
no
revenue had been generated and cost incurred was expensed. In accordance
with
EITF 07-01, “Accounting for Collaborative Arrangements,” the Company believes
that it does not have any significant business and financial risk associated
with the participation in the above two collaborative arrangements other
than
the fact that it may have the obligation to pay back the entire amount of
fund
received if the result of research projects conducted by the Company would
not
satisfy the standards established by the designated government authority
at the
appropriated level in this particular field. Therefore, the amount of fund
received was presented as part of liabilities until the ultimate results
would
pass the test successfully.
NOTE
15 ─ CONCENTRATION OF CUSTOMERS AND VENDORS
Customers
and vendors who accounts for 10% or more of revenues, accounts receivable,
purchases, and accounts payable are presented as follows:
|
|
|
|
Accounts
|
|
|
|
Accounts
|
|
|
|
Revenue
|
|
Receivable
|
|
Purchases
|
|
Payable
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
31
|
%
|
|
6
|
%
|
|
-
|
|
|
-
|
|
Customer
B
|
|
|
6
|
%
|
|
16
|
%
|
|
-
|
|
|
-
|
|
Customer
C
|
|
|
25
|
%
|
|
12
|
%
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
D
|
|
|
-
|
|
|
-
|
|
|
7
|
%
|
|
11
|
%
|
Vendor
E
|
|
|
-
|
|
|
-
|
|
|
23
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
F
|
|
|
4
|
%
|
|
14
|
%
|
|
|
|
|
|
|
Customer
C
|
|
|
10
|
%
|
|
0
|
%
|
|
|
|
|
|
|
Customer
A
|
|
|
28
|
%
|
|
3
|
%
|
|
|
|
|
|
|
Customer
H
|
|
|
10
|
%
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
G
|
|
|
|
|
|
|
|
|
10
|
%
|
|
0
|
%
|
Vendor
E
|
|
|
|
|
|
|
|
|
8
|
%
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
C
|
|
|
11
|
%
|
|
7
|
%
|
|
|
|
|
|
|
Customer
A
|
|
|
12
|
%
|
|
3
|
%
|
|
|
|
|
|
|
Customer
H
|
|
|
16
|
%
|
|
11
|
%
|
|
|
|
|
|
|
Customer
I
|
|
|
9
|
%
|
|
18
|
%
|
|
|
|
|
|
|
Customer
J
|
|
|
8
|
%
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor
E
|
|
|
|
|
|
|
|
|
11
|
%
|
|
11
|
%
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
16 ─ SEGMENT REPORTING
The
Company currently operates only in one business segment. As the Company’s major
production base is in China while export revenue and net income in overseas
entities is accounted for a significant portion of total consolidated revenue
and net income, management believes that the following tables present useful
information to chief operation decision makers for measuring business
performance, financing needs, and preparing corporate budget, etc.
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to China domestic customers
|
|
$
|
4,921,563
|
|
$
|
2,714,184
|
|
$
|
7,297,447
|
|
Sales
to international customers
|
|
|
30,726,555
|
|
|
31,528,433
|
|
|
38,611,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,648,118
|
|
$
|
34,242,617
|
|
$
|
45,909,256
|
|
|
|
Domestic
|
|
International
|
|
|
|
|
|
Customers
|
|
Customers
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,921,563
|
|
$
|
30,726,555
|
|
$
|
35,648,118
|
|
Gross
margin
|
|
|
32
|
%
|
|
36
|
%
|
|
35
|
%
|
Receivable
|
|
|
2,006,595
|
|
|
4,074,832
|
|
|
6,081,427
|
|
Inventory
|
|
|
3,722,087
|
|
|
-
|
|
|
3,722,087
|
|
Property
and equipment
|
|
|
7,694,541
|
|
|
-
|
|
|
7,694,541
|
|
Expenditures
for long-lived assets
|
|
|
4,846,448
|
|
|
-
|
|
|
4,846,448
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,714,184
|
|
$
|
31,528,433
|
|
$
|
34,242,617
|
|
Gross
margin
|
|
|
45
|
%
|
|
31
|
%
|
|
32
|
%
|
Receivable
|
|
|
1,039,279
|
|
|
5,074,974
|
|
|
6,384,253
|
|
Inventory
|
|
|
4,396,247
|
|
|
-
|
|
|
4,396,247
|
|
Property
and equipment
|
|
|
8,321,004
|
|
|
-
|
|
|
8,321,004
|
|
Expenditures
for long-lived assets
|
|
|
6,523,373
|
|
|
-
|
|
|
6,523,373
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,297,447
|
|
$
|
38,611,809
|
|
$
|
45,909,256
|
|
Gross
margin
|
|
|
21
|
%
|
|
16
|
%
|
|
17
|
%
|
Receivable
|
|
|
1,948,355
|
|
|
10,765,350
|
|
|
12,713,705
|
|
Inventory
|
|
|
7,499,768
|
|
|
-
|
|
|
7,499,768
|
|
Property
and equipment
|
|
|
17,449,871
|
|
|
-
|
|
|
17,449,871
|
|
Expenditures
for long-lived assets
|
|
|
6,172,666
|
|
|
|
|
|
6,172,666
|
|
DIGUANG
INTERNATIONAL DEVELOPMENT CO., LTD.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
17 ─ SUPPLEMENTARY INFORMATION ABOUT CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Cash
Paid
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
29,982
|
|
$
|
-
|
|
$
|
-
|
|
Income
Tax
|
|
|
185,417
|
|
|
689,049
|
|
|
(5,598
|
)
|
Non-Cash
Transactions
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Dividend
payable
|
|
$
|
111,140
|
|
$
|
-
|
|
$
|
-
|
|
Amount
due to stockholders
|
|
|
-
|
|
|
-
|
|
|
2,200,000
|
|
Common
stock
|
|
|
-
|
|
|
1,943
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
1,236,445
|
|
|
(27,661
|
)
|
|
354,386
|
|
Appropriation
|
|
|
368,326
|
|
|
792,745
|
|
|
655,261
|
|
Retain
Earnings
|
|
|
(1,715,911
|
)
|
|
(792,745
|
)
|
|
(2,855,261
|
)
|
Deferred
offering expense
|
|
|
-
|
|
|
25,718
|
|
|
-
|
|
Translation
adjustments
|
|
|
-
|
|
|
-
|
|
|
(354,386
|
)
|
NOTE
18 ─
Quarterly
Financial Data (Unaudited)
Summarized
quarterly financial data for 2006 and 2007 is as follows:
|
|
Quarterly
Financial Data
|
|
2007
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Net
sales
|
|
$
|
6,762,087
|
|
$
|
8,896,421
|
|
$
|
15,719,648
|
|
$
|
14,531,100
|
|
Gross
profit
|
|
|
1,381,167
|
|
|
1,211,739
|
|
|
3,013,322
|
|
|
2,215,109
|
|
Net
income (loss)
|
|
|
(1,080,391
|
)
|
|
(654,926
|
)
|
|
774,115
|
|
|
(1,944,135
|
)
|
Basic
earnings per share
|
|
$
|
(0.05
|
)
|
$
|
(0.03
|
)
|
$
|
0.03
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Net
sales
|
|
$
|
9,366,290
|
|
$
|
9,603,108
|
|
$
|
8,867,131
|
|
$
|
6,482,159
|
|
Gross
profit
|
|
|
3,256,332
|
|
|
3,443,770
|
|
|
3,233,901
|
|
|
1,257,215
|
|
Net
income (loss)
|
|
|
1,948,927
|
|
|
832,933
|
|
|
668,845
|
|
|
(1,785,889
|
)
|
Basic
earnings per share
|
|
$
|
0.10
|
|
$
|
0.04
|
|
$
|
0.03
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grafico Azioni Diguang International De... (PK) (USOTC:DGNG)
Storico
Da Giu 2024 a Lug 2024
Grafico Azioni Diguang International De... (PK) (USOTC:DGNG)
Storico
Da Lug 2023 a Lug 2024