United States Securities and Exchange Commission Edgar Filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934 (Amendment No. 2)

Filed by the Registrant þ

Filed by a Party other than the Registrant ¨

Check the appropriate box:

þ

Preliminary Proxy Statement

¨

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

¨

Definitive Proxy Statement

¨

Definitive Additional Materials

¨

Soliciting Material Pursuant to §240.14a-12

 

 

Zoom Technologies, Inc.

 

(Name of Registrant as Specified In Its Charter)

 

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

 

 

 

 

Payment of Filing Fee (Check the appropriate box):

 

¨

No fee required.

 

þ

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

(1)

Title of each class of securities to which transaction applies:

Ownership of 100% of Gold Lion Holding Limited; and up to an additional 28.97% interest in Tianjin Tong Guang Group Digital Communication Co., Ltd. (Gold Lion Holding Limited is the indirect owner of 51.03% of Tianjin Tong Guang Group Digital Communication Co., Ltd.)

 

 

(2)

Aggregate number of securities to which transaction applies:

Ownership of 100% of Gold Lion Holding Limited; and up to an additional 28.97% interest in Tianjin Tong Guang Group Digital Communication Co., Ltd. (Gold Lion Holding Limited is the indirect owner of 51.03% of Tianjin Tong Guang Group Digital Communication Co., Ltd.)

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

A maximum being paid for the ownership of 100% of Gold Lion Holding Limited and up to an additional 28.97% interest in Tianjin Tong Guang Group Digital Communication Co., Ltd. is $13,462,270.42. The transaction value is based on the average of the high and low price of the registrant’s common stock reported on the NASDAQ Capital Market on May 8, 2009.

 

 

(4)

Proposed maximum aggregate value of transaction:
$13,462,270.42

 

 

(5)

Total fee paid:
$751.20

 

þ

Fee paid previously with preliminary materials.

 

¨

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

 

(1)

Amount Previously Paid:

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

(3)

Filing Party:

 

 

(4)

Date Filed:

 

 

 

Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.




ZOOM TECHNOLOGIES, INC.

207 South Street

Boston, Massachusetts 02111

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD SEPTEMBER 8, 2009

TO THE STOCKHOLDERS OF ZOOM TECHNOLOGIES, INC.:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Zoom Technologies, Inc., or Zoom, a Delaware corporation, relating to the proposed acquisition of Gold Lion Holding Limited, or Gold Lion, a company organized and existing under the laws of the British Virgin Islands, will be held at 9:30 a.m. Eastern daylight time on September 8, 2009, at Zoom’s offices located at 207 South Street, Boston, Massachusetts 02111, to consider and vote upon the proposals described below.

Proposal 1 – The Acquisition Proposal. A proposal to approve: (a) the acquisition by Zoom by the issuance of 4,225,219 shares of Zoom common stock (aggregate value based on per share price as of June 17, 2009: $5,957,558.79) for 100% of Gold Lion, which is a holding company that owns (i) 100% of Jiangsu Leimone Electronics Co., Ltd., or Jiangsu Leimone, a foreign investment enterprise organized under the laws of the People’s Republic of China, or PRC, which owns 51.03% of Tianjin Tong Guang Group Digital Communication Co., Ltd., or TCB Digital, a company organized under the laws of the PRC, and (ii) 100% of Profit Harvest Corporation Ltd., or Profit Harvest, a company organized under the laws of Hong Kong, and (b) the future acquisition by Zoom by the issuance of an additional 2,402,576 shares of Zoom common stock of additional shares of TCB Digital such that Zoom would own up to 80% of the outstanding shares of TCB Digital; subject to an upward adjustment that could provide for a maximum of 9,126,963 shares of Zoom common stock being issued for the acquisition of both Gold Lion and the additional 28.97% interest in TCB Digital. The acquisition is made pursuant to the Share Exchange Agreement, dated January 28, 2009, as amended on May 12, 2009, between Zoom, Gold Lion, TCB Digital, Zoom Telephonics, Inc., a wholly owned subsidiary of Zoom, and the Gold Lion shareholders. The completion of the proposed acquisition will result in the change of control of Zoom under the NASDAQ Stock Market Rules. If approved by the stockholders of Zoom, the closing of the acquisition will take place within 30 days of such stockholder approval.

Proposal 2 – The Name Change Proposal. To approve the amendment to Zoom’s certificate of incorporation to change Zoom’s name from and after the closing of the acquisition to Leimone United, Inc.

Proposal 3 – The Adjournment Proposal. To approve any adjournment of the special meeting for the purpose of soliciting additional proxies.

The Zoom board of directors has fixed the record date as the close of business on August 6, 2009, as the date for determining stockholders entitled to receive notice of and to vote at the special meeting and any adjournment thereof.

A quorum will be present at the Zoom special meeting if one-third of the outstanding shares of common stock entitled to vote at the special meeting are represented in person or by proxy. Abstentions and broker non-votes, if any, will count as present for the purposes of establishing a quorum. Each of the Acquisition Proposal and the Adjournment Proposal will be approved if holders of a majority of all shares of common stock that are present or represented at the special meeting and entitled to vote on such proposal vote in favor of the proposal. The Name Change Proposal will be approved if holders of a majority of all shares of common stock outstanding on the record date vote in favor of the proposal.

Your vote is important. Please sign, date and return your proxy card as soon as possible to make sure that your shares are represented at the special meeting. You may also vote by telephone or the internet, as described on the proxy card. If you are a stockholder of record, you may also cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct your broker or bank how to vote your shares, or you may cast your vote in person at the special meeting by obtaining a proxy from your brokerage firm or bank.






After careful consideration of all relevant factors, Zoom’s board of directors has determined that the above proposals are fair to and in the best interests of Zoom and its stockholders and has recommended that you vote or give instruction to vote “FOR” adoption of each of them. The board of directors of Zoom did not obtain a fairness opinion on which to base its assessment of the Acquisition Proposal.

Dated: August 12, 2009

By Order of the Board of Directors,


Frank B. Manning

Chairman of the Board

YOUR VOTE IS IMPORTANT. WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON OR NOT, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED, OR SUBMIT A PROXY BY TELEPHONE OR THE INTERNET (AS DESCRIBED ON THE PROXY CARD) AS SOON AS POSSIBLE.

SEE “RISK FACTORS” IN THE ACCOMPANYING PROXY FOR A DISCUSSION OF VARIOUS FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE ACQUISITION OF GOLD LION SINCE, UPON ZOOM’S ACQUISITION OF GOLD LION, THE OPERATIONS AND ASSETS OF ZOOM WILL LARGELY BE THOSE OF GOLD LION.

THIS PROXY STATEMENT IS DATED AUGUST 12, 2009, AND IS FIRST BEING MAILED TO ZOOM’S STOCKHOLDERS ON OR ABOUT AUGUST 12, 2009.






TABLE OF CONTENTS


 

SUMMARY OF MATERIAL TERMS OF THE TRANSACTION

4

QUESTIONS AND ANSWERS ABOUT THE ACQUISITION AND THE ZOOM SPECIAL MEETING

6

SUMMARY

10

The Parties

10

The Acquisition; Acquisition Consideration

10

Management of Zoom

11

Date, Time and Place of Special Meeting of Zoom’s Stockholders

11

Voting Power; Record Date

11

Approval of the Gold Lion Shareholders

11

The Name Change Proposal

12

Quorum and Vote Required to Approve the Proposals by the Zoom Stockholders

12

Proxies

12

Option Modifications

12

Interests of Zoom Officers and Directors in the Acquisition

12

Zoom’s Recommendations to Stockholders

12

Conditions to the Closing of the Share Exchange Agreement

13

Exclusivity; No Other Negotiation

13

Quotation

13

Material Federal Income Tax Consequences of the Acquisition

13

Anticipated Accounting Treatment

14

Risk Factors

14

Board Solicitation

14

RISK FACTORS

15

Risks Related to Gold Lion’s Business

15

Risks Relating to the Acquisition and Spin-Off

21

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

24

HISTORICAL FINANCIAL INFORMATION

25

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF ZOOM

51

THE ZOOM SPECIAL MEETING

82

THE ACQUISITION PROPOSAL

84

General Description of the Acquisition

84

Background of the Acquisition

84

Interests of Zoom Officers and Directors in the Acquisition

86



1




Zoom’s Reasons for the Acquisition and Recommendation of the Zoom Board

86

Fees and Expenses

88

Material Federal Income Tax Consequences of the Acquisition

88

Anticipated Accounting Treatment

89

Regulatory Matters

89

THE SHARE EXCHANGE AGREEMENT

90

Basic Deal Terms

90

Representations and Warranties

91

Conditions to Closing

93

Covenants of the Parties

94

Additional Agreements and Covenants

95

Exclusivity; No Other Negotiation

95

Termination

95

Effect of Termination; No Termination Fee

96

Indemnification

96

Conclusion of Zoom’s Board of Directors

96

CERTAIN AGREEMENTS RELATING TO THE ACQUISITION

97

Lock-Up and Voting Agreements

97

Founder Lock-Up Agreement

97

NAME CHANGE PROPOSAL

98

ADJOURNMENT PROPOSAL

99

INFORMATION ABOUT GOLD LION

100

Overview

100

Competitive Strengths

100

Strategy

101

Products and Technology

101

Sale and Marketing

104

Competition

105

Employees

105

Industry

105

Properties

107

GOLD LION’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

108

Overview

108

Plan of Operation

109

Critical Accounting Policies and Estimates

109



2




Revenue Recognition

109

Liquidity and Capital Resources

111

DIRECTORS AND EXECUTIVE OFFICERS

116

Independence of Directors

117

Board Committees

117

EXECUTIVE COMPENSATION

118

Summary Compensation Table

119

Bonuses and Deferred Compensation

119

Stock Option and Stock Appreciation Rights

119

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

120

BENEFICIAL OWNERSHIP OF SECURITIES

121

Security Ownership of Zoom

121

Security Ownership of Gold Lion

122

Security Ownership of Zoom after the Acquisition

122

DESCRIPTION OF ZOOM’S COMMON STOCK

123

Anti-Takeover Effects of Provisions of Delaware Law

123

Anti-Takeover Effects of Provisions of Zoom’s Charter Documents

123

Listing

123

Zoom’s common stock is listed on the NASDAQ Capital Market under the symbol “ZOOM.”.

123

Transfer Agent

123

STOCKHOLDER PROPOSALS

124

WHERE YOU CAN FIND MORE INFORMATION

124

 

ANNEXES

A – Share Exchange Agreement

A-1 – Amendment to Share Exchange Agreement

B – Form of Separation Agreement

C – Form of Lock-Up and Voting Agreement

D – Form of Founder Lock-Up Agreement

E – Form of License Agreement





3





SUMMARY OF MATERIAL TERMS OF THE TRANSACTION

This section summarizes information related to the proposals to be voted on at the special meeting. These items are described in greater detail elsewhere in this proxy statement. You should carefully read this entire proxy statement and the other documents to which you are referred.

·

The parties to the share exchange agreement are:

·

Zoom Technologies, Inc., or Zoom;

·

Tianjin Tong Guang Group Digital Communication Co., Ltd., or TCB Digital, a company organized under the laws of the People’s Republic of China, or PRC;

·

Zoom Telephonics, Inc., or Zoom Telephonics, a wholly owned subsidiary of Zoom;

·

Gold Lion Holding Limited, or Gold Lion, a company organized and existing under the laws of the British Virgin Islands. Gold Lion owns 100% of the outstanding capital stock of Jiangsu Leimone Electronics Co., Ltd., or Jiangsu Leimone, a foreign investment enterprise organized under the laws of the PRC, that engages in the manufacturing, research and development, and sales of electronic components for 3rd generation mobile phones, wireless communication circuitry, GPS equipment, and related software products. Jiangsu Leimone owns the initial 51.03% of the outstanding capital stock of TCB Digital that Zoom is proposing to initially acquire. Gold Lion also owns 100% of Profit Harvest Corporation Ltd, or Profit Harvest, which is a marketing and sales company organized and existing under the laws of Hong Kong.; and

·

Lei (Leo) Gu, a citizen of the PRC. Mr. Gu owns 70.6% of the outstanding capital stock of Gold Lion and holds an option indirectly to acquire an additional 28.97% of the outstanding capital stock of TCB Digital.

·

Songtao Du, a citizen of the PRC. Mr. Du owns 29.4% of the outstanding capital stock of Gold Lion, which was pledged to Mr. Cao Wei.

·

TCB Digital is a high technology company engaged in electronic and telecommunication product design, development, and manufacturing. TCB Digital started its business in 1999 and was originally established as an Electronic Manufacturing Service (EMS) factory for mobile phone vendors. TCB Digital was Motorola’s first independent outsource manufacturing vendor responsible for producing Motorola mobile phones in China. Moreover, TCB Digital was the first EMS factory in China receiving Motorola’s International Quality Product and Qualification certificate. Since 2004, TCB Digital developed and produced GSM and CDMA mobile phones, wireless data modules and GPS equipment. TCB Digital is headquartered in Tianjin, China. TCB Digital’s two main business operations are EMS for Original Equipment Manufacturer (OEM) customers and the design and production of mobile phone products.

TCB Digital offers high quality and comprehensive EMS to both domestic and global customers, including, Samsung, Tianyu, CCT, Danahar and Spreadtrum. TCB Digital’s primary products include mobile phones, wireless telecommunication modules, digital cameras, cable TV set-top boxes and GPS equipment. In addition, TCB Digital has developed various state-of-the-art mobile phones and Smartphones based on both of the main network technologies: Global System for Mobile Communications, or GSM, and Code Division Multiple Access, or CDMA. Presently, TCB Digital markets its mobile phone products through distributors in China and also supplies GSM and CDMA mobile phones to major customers, including China Mobile Communications Corporation, or CMCC, China UNICOM and China Telecom. See “Information about TCB Digital” for more information.

·

Pursuant to the share exchange agreement, within 30 days of obtaining the approval of the stockholders of Zoom, Zoom will acquire from the Gold Lion shareholders 100% of Gold Lion in exchange for 4,225,219 shares of Zoom common stock (aggregate value based on per share price as of June 17, 2009: $5,957,558.79). As discussed above, Mr. Gu holds an option to acquire an additional 28.97% of the outstanding capital stock of TCB Digital. Pursuant to the share exchange agreement, Zoom has agreed to provide Mr. Gu the option to exchange the additional 28.97% interest in TCB Digital for the issuance by Zoom of an additional 2,402,576 shares of Zoom common stock.



4





Assuming the exercise by Mr. Gu of the foregoing option, Zoom would issue an aggregate of 6,627,795 shares of Zoom common stock. The number of shares issuable for the acquisition of Gold Lion would increase to 5,818,439 shares of Zoom common stock, and the number of shares issuable for the additional 28.97% interest in TCB Digital would increase to 3,308,524 shares of Zoom common, if either: (a) as of the date the Zoom stockholders approve the acquisition, Zoom’s common stock is not listed on the NASDAQ Capital Market or (b) the NASDAQ Capital Market has not approved Zoom’s listing application for the post-transaction entity within 30 days after the closing of the share exchange agreement. Upon the execution of the share exchange agreement, Gold Lion was entitled to and Zoom issued 90,000 shares of common stock as consideration for the execution of the share exchange agreement. See “The Acquisition Proposal.”

·

After the acquisition and assuming Zoom acquires Gold Lion and the additional 28.97% interest in TCB Digital and the upward adjustment discussed in the preceding bullet point does not occur, the existing Zoom stockholders are expected to beneficially own approximately 22% of the outstanding shares of Zoom, excluding shares that may be acquired upon the exercise of outstanding options following the completion of the acquisition. If the upward adjustment discussed in the preceding bullet point does occur, the existing Zoom stockholders are expected to beneficially own approximately 17% of the outstanding shares of Zoom, excluding shares that may be acquired upon the exercise of outstanding options following the completion of the acquisition.

·

Aside from obtaining the requisite stockholder approval, the closing of the acquisition is subject to the satisfaction by each party of various conditions prior to closing. See “The Share Exchange Agreement — Conditions to Closing.”

·

Upon the closing of the acquisition, the officers of Zoom will be: Leo Gu – Chief Executive Officer and Anthony K. Chan – Chief Financial Officer.

·

Upon the closing of the acquisition, Zoom intends to issue a dividend consisting of 100% of the issued and outstanding capital stock of Zoom Telephonics to its stockholders of record immediately prior to the closing. We refer to this as the “spin-off.” In connection with the spin-off, Zoom would contribute, distribute or otherwise transfer all of its current and future assets and liabilities related to the business of Zoom to Zoom Telephonics, subject to certain licensing rights discussed below. Zoom’s stockholders immediately prior to the closing would retain their existing shares in Zoom and would also receive an equal number of new shares in Zoom Telephonics.

·

In connection with the completion of the acquisition, Zoom Telephonics has agreed to enter into a license agreement with TCB Digital granting TCB Digital licensing rights for “Zoom” and “Hayes” trademarks for certain products and geographic regions.

·

In connection with the execution of the share exchange agreement, Zoom entered into lock-up and voting agreements with each of its executive officers and directors, pursuant to which each person agreed until the closing not to sell, transfer, assign, pledge or hypothecate any shares of Zoom’s common stock and to vote their shares in favor of the Acquisition Proposal.

·

At the closing of the acquisition, Frank Manning and Peter Kramer will enter into founder lock-up agreements pursuant to which they will agree that during the one-year period commencing on the date of closing that each will not sell, transfer, assign, pledge or hypothecate, in any calendar month, greater than 3% of the shares of Zoom’s common stock sold in the previous four calendar weeks.

·

Upon the closing of the acquisition, if the Name Change Proposal is approved, Zoom will change its name to Leimone United, Inc.



5





QUESTIONS AND ANSWERS ABOUT THE ACQUISITION AND THE ZOOM SPECIAL MEETING

These Questions and Answers below are only summaries of matters described in this proxy statement. They do not contain all of the information that may be important to you. You should read carefully the entire document, including the annexes to this proxy statement.

Q. What is being voted on? 

 

A. You are being asked to vote on three proposals:

·

A proposal to approve: (a) the acquisition by Zoom by the issuance of 4,225,219 shares of Zoom common stock for 100% of Gold Lion, and (b) the future acquisition by Zoom of an additional 28.97% interest in TCB Digital by the issuance of an additional 2,402,576 shares of Zoom common stock; subject to an upward adjustment that could provide for a maximum of 9,126,963 shares of Zoom common stock (aggregate value based on per share price as of June 17, 2009: $5,957,558.79) being issued for the acquisition of both Gold Lion and the additional 28.97% interest in TCB Digital. This proposal is called the “Acquisition Proposal.”

·

A proposal to approve the amendment to Zoom’s certificate of incorporation to change Zoom’s name from and after the closing of the acquisition to Leimone United, Inc. This proposal is called the “Name Change Proposal.”

·

A proposal for the approval of any adjournment of the special meeting for the purpose of soliciting additional proxies. This proposal is called the “Adjournment Proposal.”

 

 

 

Q. What vote is required to approve the Acquisition Proposal and Adjournment Proposal?

 

A. Approval of the Acquisition Proposal and Adjournment Proposal will require the affirmative vote of the majority of our shares of common stock voted at the special meeting, provided that there is a quorum at such meeting.

 

 

 

Q. What vote is required to approve the Name Change Proposal?

 

A. Approval of the Name Change Proposal will require the affirmative vote of the majority of our outstanding shares of common stock as of the record date.

 

 

 

Q. Why is Zoom proposing to approve any adjournment of the special meeting?

 

A. We are proposing to approve any adjournment of the special meeting so that we may delay the meeting in the event that it appears that the other proposals to be presented at the meeting will not be approved. This will provide our management with more time to solicit stockholders to vote or change their votes.

 

 

 

Q. Who is entitled to vote at the special meeting?

 

A. The “record date” for the special meeting is August 6, 2009. Record holders of our common stock at the close of business on the record date are entitled to vote or have their votes cast at the special meeting. Each share of common stock is entitled to one vote per proposal at the special meeting.

 

 

 

Q. What constitutes a quorum?

 

A. A quorum will be present at the special meeting if one-third of Zoom’s outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes, if any, will count as present for the purposes of establishing a quorum.

 

 

 

Q. Does the Zoom board of directors recommend voting in favor of the Acquisition Proposal, Name Change Proposal and Adjournment Proposal?

 

A. After careful consideration of the acquisition and the terms and conditions of the share exchange agreement, the board of directors of Zoom has determined that the Acquisition Proposal, Name Change Proposal and Adjournment Proposal are in the best interests of the Zoom stockholders. The Zoom board of directors recommends that the stockholders entitled to vote approve each of the proposals described above. See “Summary—Interests of Zoom Officers and Directors in the Acquisition” for a discussion of how the interests of our officers and directors are different from those of yours as a stockholder.




6








Q. How do the Zoom’s executive officers and directors intend to vote their shares?

     

A. All of our executive officers and directors have agreed to vote the shares held by them in favor of the Acquisition Proposal.

 

 

 

Q. How much of Zoom will existing Zoom stockholders own after the acquisition?

 

A. Pursuant to the share exchange agreement, the number of shares issuable pursuant to the Acquisition Proposal will increase if either: (a) as of the date the Zoom stockholders approve the acquisition, Zoom’s common stock is not listed on the NASDAQ Capital Market or (b) the NASDAQ Capital Market has not approved Zoom’s listing application for the post-transaction entity within 30 days after the closing of the share exchange agreement. We refer to the requirement to issue the additional shares as the “NASDAQ Additional Consideration Shares.”

Pursuant to the share exchange agreement, Zoom will acquire Gold Lion for 4,225,219 shares of Zoom common stock (aggregate value based on per share price as of June 17, 2009: $5,957,558.79), and if Zoom acquires the additional 28.97% interest in TCB Digital the aggregate shares that will be issued will be 6,627,795 shares of Zoom common stock. If Zoom is required to issue the NASDAQ Additional Consideration Shares, Zoom will issue 5,818,439 shares of Zoom common stock for Gold Lion, and a maximum of 9,126,963 shares of Zoom common stock if it acquires the additional 28.97% interest in TCB Digital.

·

If Zoom acquires Gold Lion (and not the additional 28.97% interest in TCB Digital) and does not issue the NASDAQ Additional Consideration Shares, the existing Zoom stockholders are expected to beneficially own approximately 30.7% of the outstanding shares of Zoom.

·

If Zoom acquires Gold Lion and the additional 28.97% interest in TCB Digital, and does not issue the NASDAQ Additional Consideration Shares, the existing Zoom stockholders are expected to beneficially own approximately 22.0% of the outstanding shares of Zoom.

·

If Zoom acquires Gold Lion (and not the additional 28.97% interest in TCB Digital) and issues the NASDAQ Additional Consideration Shares, the existing Zoom stockholders are expected to beneficially own approximately 24.3% of the outstanding shares of Zoom.

·

If Zoom acquires Gold Lion and the additional 28.97% interest in TCB Digital, and issues the NASDAQ Additional Consideration Shares, the existing Zoom stockholders are expected to beneficially own approximately 17.0% of the outstanding shares of Zoom.

The above percentages exclude shares that may be acquired upon the exercise of outstanding options following the completion of the acquisition.

 

 

 

Q. Do Zoom stockholders have appraisal rights under Delaware law?

 

A. No. Zoom stockholders do not have appraisal rights under Delaware corporate law.


Q. How will the spin-off work and what will I get in the spin-off?

     

A. In the spin-off, on the closing date, Zoom will distribute to its stockholders all of the outstanding shares of Zoom Telephonics common stock on a pro rata basis.

Zoom will distribute one share of Zoom Telephonics’ common stock for every share of Zoom common stock you own of record as of the close of business on the record date for the spin-off, and do not sell in the “regular way” market prior to the ex-dividend date.

 

 

 



7








Q. What will Zoom’s relationship with Zoom Telephonics be after the spin-off?

 

A. Zoom and Zoom Telephonics each will be independent, publicly traded companies. However, TCB Digital and Zoom Telephonics will enter into a license agreement granting TCB Digital licensing rights for “Zoom” and “Hayes” trademarks for certain products and geographic regions. Zoom and Zoom Telephonics have also entered into a separation and distribution agreement that allocates responsibility for obligations arising before and after the spin-off, including, among others, obligations relating to taxes.

 

 

 

Q. Why is Zoom affecting the spin-off?

 

A. Zoom’s believes that upon the completion of the Gold Lion acquisition, both post-acquisition Zoom and Zoom Telephonics would be better served by becoming separate entities. Among other considerations, Zoom’s board of directors believed that making Zoom and Zoom Telephonics separate entities would:

·

allow Zoom Telephonics’ management, which is based in the United States, to focus solely on the current United States and European business;

·

allow Zoom Telephonics to provide its employees stock-based incentives linked solely to the operations of Zoom Telephonics, as opposed to the overall post-acquisition Zoom operations;

·

allow Zoom Telephonics to pursue financing arrangements based solely on the merits of its business, as opposed to the overall post-acquisition Zoom operations; and

·

make it more likely that post-acquisition Zoom would meet the initial listing requirements of the Nasdaq Stock Market, which would prevent Zoom for being required to issue the NASDAQ Additional Consideration Shares.

 

 

 

Q. Where will Zoom Telephonics’ common stock be traded after the spin-off?

 

A. After the spin-off, we expect Zoom Telephonics’ common stock to be traded on the OTC Bulletin Board.

 

 

 

Q. Will the Zoom stockholders be taxed as a result of the acquisition?

 

A. It is anticipated that the acquisition will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and no gain or loss will be recognized by Zoom, Zoom stockholders, Gold Lion, or Gold Lion stockholders as a result of the acquisition.

 

 

 

Q. Will the Zoom stockholders be taxed as a result of the spin-off?

 

A. We expect that a U.S. holder receiving Zoom Telephonics shares in the distribution will be treated as receiving a taxable distribution to the extent of the fair market value of shares received (including any fractional shares sold on behalf of the stockholder) on the distribution date. That distribution would be treated as taxable dividend income to the extent of such holder’s share of Zoom’s current and accumulated earnings and profits (as determined for federal income tax purposes), if any. Based on certain assumptions, however, Zoom does not believe that it will have any current or accumulated earnings and profits. To the extent the amount of the distribution exceeds such holder’s share of Zoom’s current and accumulated earnings and profits, if any, the distribution would be treated first as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its shares of Zoom common stock (thus reducing such adjusted tax basis) with any remaining amounts being treated as capital gain from the sale of Zoom shares.




8






Q. If I am not going to
attend the special meeting in person, should I return my proxy card instead?

     

A. Yes. After carefully reading and considering the information in this proxy statement, please fill out and sign your proxy card. Then return it in the return envelope as soon as possible, so that your shares may be represented at the special meeting. You may also submit a proxy by telephone or on the internet, as explained on the proxy card. A properly executed proxy will be counted for the purpose of determining the existence of a quorum.

 

 

 

Q. How do I change my vote?

 

A. You must send a later-dated, signed proxy card to Zoom’s secretary prior to the date of the special meeting or, if you are a stockholder of record, you may attend the special meeting in person and vote.

 

 

 

Q. If my shares are held in “street name,” will my broker automatically vote them for me?

 

A. No. Your broker can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your shares. Your broker can tell you how to provide these instructions.

 

 

 

Q. What will happen if the requisite number of Zoom’s shareholders do not vote to approve of the acquisition proposal described in this proxy statement?

 

A. If the proposed acquisition is not approved and the share exchange agreement is terminated, each party will bear its own costs and expenses and there shall be no penalty associated with the break-up.  Moreover, the parties would decide collectively whether to re-solicit proxies at a later date.

 

 

 

Q. Who can help answer
my questions?

 

A. If you have questions, you may write or call Zoom at 207 South Street, Boston, Massachusetts 02111; Telephone: 617-753-0897; Attention: Investor Relations ..




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SUMMARY

This summary highlights selected information from this proxy statement and does not contain all of the information that is important to you. To better understand the acquisition, as well as the other proposals, you should read carefully this entire document and the other documents to which this proxy statement refers you, including the share exchange agreement attached as Annex A to this proxy statement, as amended in Annex A-1. The share exchange agreement, as amended, is the legal document that governs the acquisition. The share exchange agreement is also described in detail elsewhere in this proxy statement.

The Parties

Zoom and Zoom Telephonics

Zoom is the parent company of Zoom Telephonics, which is an operating company that designs, produces, markets, sells, and supports broadband and dial-up modems, Voice over Internet Protocol or "VoIP" products and services, Bluetooth® wireless products, and other communication-related products. Unless otherwise noted, when we refer to Zoom’s business, we are referring to the current business of Zoom and Zoom Telephonics.

TCB Digital

TCB Digital is a high technology company engaged in electronic and telecommunication product design, development, and manufacturing. TCB Digital started its business in 2004 and was originally established as an Electronic Manufacturing Service (EMS) factory for mobile phone vendors. TCB Digital was Motorola’s first independent outsource manufacturing vendor responsible for producing Motorola mobile phones in China. Moreover, TCB Digital was the first EMS factory in China receiving Motorola’s International Quality Product and Qualification certificate. Since 2004, TCB Digital developed and produced GSM and CDMA mobile phones, wireless data modules and GPS equipment. TCB Digital is headquartered in Tianjin, China. TCB Digital’s two main business operations are Electronic Manufacturing Service for OEM (Original Equipment Manufacturer) customers and the design and production of mobile phone products.

Gold Lion; Gold Lion Shareholders

Gold Lion is a company organized and existing under the laws of the British Virgin Islands. Gold Lion owns 100% of the outstanding capital stock of Jiangsu Leimone, a foreign investment enterprise organized under the laws of the PRC that engages in the manufacturing, research and development, and sales of electronic components for 3rd generation mobile phones, wireless communication circuitry, GPS equipment, and related software products. Jiangsu Leimone owns the initial 51.03% of the outstanding capital stock of TCB Digital that Zoom is proposing to acquire. Profit Harvest is a marketing and sales company 100% owned by Gold Lion, and is organized and existing under the laws of Hong Kong.

Leo Gu is a citizen of the PRC. Mr. Gu owns 70.6% of the outstanding capital stock of Gold Lion and holds an option indirectly to acquire an additional 28.97% of the outstanding capital stock of TCB Digital. Songtao Du is a citizen of the PRC. Mr. Du owns 29.4% of the outstanding capital stock of Gold Lion, which was pledged to Mr. Cao Wei.

The Acquisition; Acquisition Consideration

The share exchange agreement provides for an acquisition transaction in which Zoom would acquire 100% of Gold Lion in exchange for 4,225,219 shares of Zoom common stock (aggregate value based on per share price as of June 17, 2009: $5,957,558.79). Gold Lion owns 100% of Profit Harvest and also 100% of Jiangsu Leimone. Jiangsu Leimone owns 51.03% of the outstanding shares of TCB Digital. Further, Zoom has agreed with Mr. Gu, the holder of an option to acquire an additional 28.97% of the outstanding capital stock of TCB Digital, to provide him with the option to exchange the additional 28.97% TCB Digital interest for the issuance by Zoom of an additional 2,402,576 shares of Zoom common stock.

The number of shares issuable to the Gold Lion shareholders for their shares of Gold Lion would increase to 5,818,439 shares of Zoom common stock, and the number of shares issuable for the additional 28.97% interest in TCB Digital would increase to 3,308,524 shares of Zoom common stock, if either: (a) as of the date the Zoom stockholders approve the acquisition, Zoom’s common stock is not listed on the NASDAQ Capital Market or (b) the NASDAQ Capital Market has not approved Zoom’s listing application for the post-transaction entity within 30 days



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after the closing of the share exchange agreement. Upon the execution of the share exchange agreement, Gold Lion was entitled to and Zoom issued 90,000 shares of common stock as consideration for the execution of the share exchange agreement.

The parties plan to complete the acquisition within 30 days after the Zoom special meeting, provided that:

·

our stockholders have approved the Acquisition Proposal; and

·

the other conditions specified in the share exchange agreement have been satisfied or waived.

The share exchange agreement also provides Zoom with purchase options to acquire from Mr. Gu five other companies that are wholly owned or majority owned by Gu, or the Leimone Companies, with the option price of each company based on the higher of a minimum price or a multiple of that company’s net income.

Management of Zoom

Upon the consummation of the acquisition, the Zoom board of directors will consist of five directors, as set forth below. At least three of the four directors designated by Gold Lion shall be “independent directors” as defined by the rules of the Securities and Exchange Commission and the NASDAQ Capital Market. Such independent directors will serve as members of our audit committee.

Upon the consummation of the acquisition, our executive officers and directors are expected to be:

·

Leo Gu – Chairman of the Board, Director, and Chief Executive Officer

·

Anthony K. Chan – Chief Financial Officer

·

Frank B. Manning – Director

·

Augustine Lo – Independent Director, Chairperson of the Audit and Compensation Committees

·

Kit H. Choy – Independent Director

·

Chang Shan – Independent Director

See the section entitled “Directors and Executive Officers” for biographical information about our directors and executive officers after the consummation of the acquisition.

Date, Time and Place of Special Meeting of Zoom’s Stockholders

The special meeting of the stockholders of Zoom will be held at 9:30 a.m. Eastern daylight time on September 8, 2009 at Zoom’s offices located at 207 South Street, Boston, Massachusetts 02111, to consider and vote upon each of the proposals.

Voting Power; Record Date

You will be entitled to vote or direct votes to be cast at the special meeting if you owned shares of our common stock at the close of business on August 6, 2009, the record date for the special meeting. You will have one vote for each share of common stock you owned at the close of business on the record date. On the record date, there were 1,959,378 shares of common stock outstanding.

Approval of the Gold Lion Shareholders

All of Gold Lion shareholders are parties to the share exchange agreement. Accordingly, no further action by the Gold Lion shareholders is needed to approve the acquisition.

The Name Change Proposal

Zoom is seeking stockholder approval to amend its amended and restated certificate of incorporation to change its name from and after the closing of the acquisition to Leimone United, Inc.



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Quorum and Vote Required to Approve the Proposals by the Zoom Stockholders

A quorum of Zoom’s stockholders is necessary to hold a valid meeting. A quorum will be present at the special meeting if one-third of the outstanding shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes, if any, will count as present for the purposes of establishing a quorum.

·

The approval of the Acquisition Proposal and Adjournment Proposal will require the affirmative vote of holders of a majority of the shares of Zoom’s common stock present in person or represented by proxy and cast at the special meeting.

·

The approval of the Name Change Proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Zoom’s common stock on the record date.

A broker non-vote will have no effect on the Acquisition Proposal or the Adjournment Proposal vote, but an abstention will have the effect of a vote against the Acquisition Proposal and the Adjournment Proposal. With respect to the Name Change Proposal, an abstention or a broker non-vote will have the same effect as a vote against the proposal.

Proxies

Proxies may be solicited by mail, telephone or in person. If you grant a proxy, you may revoke your proxy before it is exercised at the special meeting by sending a notice of revocation to the secretary of Zoom, submitting a later-dated proxy statement or, if you are a stockholder of record, voting in person at the special meeting.

Option Modifications

Upon the consummation of the acquisition, Zoom will modify each of its outstanding options such that any vesting provision provided in such options that requires the continued service of the holder to Zoom or its subsidiaries to vest shall thereafter continue to vest in accordance with the vesting schedule included in the option without the need for the holder to continue to provide service to Zoom or its subsidiaries.

Interests of Zoom Officers and Directors in the Acquisition

When you consider the unanimous recommendation of Zoom’s board of directors in favor of adoption of the Acquisition Proposal, you should keep in mind that its executive officers and members of its board of directors have interests in the transaction that are different from, or in addition to, your interests as a stockholder. These interests include, among other things:

·

As discussed in the “Summary – Option Modifications,” all of Zoom’s options, including those held by its executive officers and directors, will be modified such that the vesting provisions provided in such options that requires the continued service of the holder to Zoom or its subsidiaries to vest shall thereafter continue to vest in accordance with the vesting schedule included in the option without the need for the holder to continue to provide service to Zoom or its subsidiaries. This means that Zoom’s officers and directors will retain the rights associated with their options, even though they will no longer be required to provide services to Zoom.

·

Upon completion of the spin-off, Zoom anticipates that each of its current executive officers and directors will hold similar positions in Zoom Telephonics. Further, it is likely that Zoom Telephonics will issue its employees and directors new options to purchase Zoom Telephonics’ common stock upon completion of the spin-off.

·

Upon completion of the acquisition, Peter Kramer, Bernard Furman, Ronald Woods and Joseph Donovan will resign as directors of Zoom.  After the acquisition, Messrs. Kramer, Furman, Woods and Donovan have agreed to cooperate with the combined company’s management in its transition, including the provision of any historical information about Zoom that the combined company may need in connection with future capital raising transactions.  These individuals will not receive any cash compensation for their services to the combined company, but will each receive an option to acquire 7,500 shares of the combined company at an exercise price equal to the closing price of Zoom’s common stock on the closing date of the acquisition.



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Zoom’s Recommendations to Stockholders

After careful consideration of the terms and conditions of the share exchange agreement, Zoom’s board of directors has unanimously determined that the acquisition and the transactions contemplated thereby, including the spin-off, are fair to and in the best interests of Zoom and its stockholders. Zoom’s board of directors has also unanimously determined that the Name Change Proposal and the Adjournment Proposal are also in the best interests of Zoom and its stockholders. The board of directors did not obtain a fairness opinion on which to base its assessment. Zoom’s board of directors recommends that Zoom stockholders vote:

·

FOR the Acquisition Proposal;

·

FOR the Name Change Proposal; and

·

FOR the Adjournment Proposal.

Conditions to the Closing of the Share Exchange Agreement

The consummation of the transactions contemplated by the share exchange agreement is conditioned upon a number of other conditions to the obligations of each of the parties to complete the acquisition, including the accuracy of each of the parties’ representations and warranties, the compliance by each party with its covenants and obligations, the delivery of certain ancillary agreements and the absence of a material adverse effect with respect to each of the parties. See “The Share Exchange Agreement – Conditions to Closing.”

Exclusivity; No Other Negotiation

The share exchange agreement contains detailed provisions prohibiting each of Zoom, Gold Lion, TCB Digital, and the Gold Lion shareholders party to the share exchange agreement from seeking an alternative transaction. These covenants generally prohibit Zoom, TCB Digital and the Gold Lion shareholders party to the share exchange agreement, as well as their officers, directors, subsidiaries, employees, agents and representatives, from taking any action to solicit an alternative acquisition proposal.

Quotation

Our outstanding common stock is quoted on the NASDAQ Capital Market under the symbol ZOOM. We intend to apply to NASDAQ to retain our listing upon completion of the acquisition. NASDAQ’s approval will require that the post-acquisition entity meet NASDAQ’s initial listing requirements.  There is no assurance that the post-acquisition entity will meet NASDAQ’s initial listing requirements.  If the post-acquisition entity does meet NASDAQ’s initial listing requirements, we expect Zoom’s common stock to be traded on the OTC Bulletin Board.

After the spin-off, we expect Zoom Telephonics’ common stock to be traded on the OTC Bulletin Board.

Material Federal Income Tax Consequences of the Acquisition

The following section is a summary regarding material United States federal income tax consequences of the acquisition to holders of Zoom common stock. This discussion addresses only those Zoom security holders that hold their securities as a capital asset within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code, and does not address all the United States federal income tax consequences that may be relevant to particular holders in light of their individual circumstances or to holders that are subject to special rules, such as:

·

financial institutions;

·

investors in pass-through entities;

·

tax-exempt organizations;

·

dealers in securities or currencies;

·

traders in securities that elect to use a mark to market method of accounting;

·

persons that hold Zoom common stock as part of a straddle, hedge, constructive sale or conversion transaction; and

·

persons who are not citizens or residents of the United States



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This summary of material federal income tax consequences is based upon the Code, applicable treasury regulations thereunder, published rulings and court decisions, all as currently in effect as of the date hereof, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or federal laws other than those pertaining to the income tax, are not addressed.

Neither Zoom nor Gold Lion intends to request any ruling from the Internal Revenue Service as to the United States federal income tax consequences of the acquisition.

It is anticipated that the acquisition will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and no gain or loss will be recognized by Zoom, Gold Lion, or their respective shareholders as a result of the acquisition.

This discussion is intended to provide all material United States federal income tax consequences of the acquisition to Zoom and its stockholders who hold their stock as a capital asset. This discussion is not a complete analysis or description of all potential United States federal tax consequences of the acquisition to other holders who are subject to special rules. It does not address any non-income tax or any foreign, state or local tax consequences of the acquisition. Accordingly, you are strongly urged to consult with your tax advisor to determine the particular United States federal, state, local or foreign income or other tax consequences to you of the acquisition.

Anticipated Accounting Treatment

The Gold Lion acquisition will be accounted for as a reverse merger, whereby Gold Lion will be the continuing entity for financial reporting purposes and will be deemed to be the acquirer of Zoom. The acquisition is being accounted for as a reverse merger because after the acquisition the former shareholders of Gold Lion will hold the majority of the outstanding shares of Zoom and will have the ability to initially appoint the majority of the members of the board of directors of Zoom.

In accordance with the applicable guidance for accounting for the acquisition as a reverse merger, first Gold Lion will be deemed to have undergone a recapitalization, whereby its outstanding ordinary shares were converted into shares of Zoom common stock. Immediately thereafter Gold Lion, which is the continuing accounting entity, will have been deemed to have acquired the assets and assumed the liabilities of Zoom in exchange for the issuance of the Zoom shares. However, because of the spin-out of essentially all the assets and liabilities of Zoom to the Zoom shareholders, the proposed transaction will have no impact on the historical assets and liabilities of Gold Lion.

Risk Factors

In evaluating the proposals to be voted on at the special meeting, you should carefully read this proxy statement and especially consider the factors discussed in the section entitled “Risk Factors.”

Board Solicitation

Your proxy is being solicited by the board of directors of Zoom on each of the proposals being presented to the stockholders at the special meeting.



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RISK FACTORS

You should carefully consider the following risk factors, together with all of the other information included in this proxy statement, before you decide whether to vote or direct your vote to be cast to approve the acquisition or the other proposals.

If Zoom completes the Gold Lion acquisition pursuant to the share exchange agreement, the resulting company will be subject to a number of risks. You should carefully consider the risks described below and the other information included in this proxy statement before you decide how you want to vote on the proposals. Following the closing of the share exchange agreement, the market price of Zoom’s securities could decline due to any of these risks, in which case you could lose all or part of your investment.

In assessing these risks, you should also refer to the other information included in this proxy statement, including the consolidated financial statements and the accompanying notes. You should note that Zoom would become a holding company with substantial operations in the PRC. As a result, Zoom would be subject to legal and regulatory environments that differ in many respects from those of the United States. Zoom’s business, financial condition or results of operations could be affected materially and adversely by any of the risks discussed below.

Risks Related to Gold Lion’s Business

Gold Lion’s ownership of businesses, inclusive of TCB Digital, Jiangsu Leimone and Profit Harvest (collectively “Gold Lion Group”) including sales, results of operations, and reputation could be materially adversely affected if it fails to efficiently manage its manufacturing operations without interruption, or fails to ensure that its products meet the expectations of its distributors and end-user customers.

Operation of Gold Lion Group requires successful execution of complex manufacturing processes. The disruption of any of these could interrupt its revenue generation and have a material and adverse effect on Gold Lion Group’s relationships with distributors and end-user customers, TCB Digital and Jiangsu Leimone’s brand names, and its financial performance. TCB Digital and Jiangsu Leimone’s manufacturing operations involve raw material and component sourcing from third parties, internal assembly processes, and distribution processes. These operations are modified on a regular basis in an effort to improve manufacturing and distribution efficiency and flexibility. Gold Lion Group may experience difficulties in coordinating its supplies of components and raw materials to meet the demand for its products, increasing or decreasing production at its facilities in response to demand, adopting new manufacturing processes, finding a timely way to develop the best technical solutions for new products, or achieving manufacturing efficiency and flexibility. Gold Lion Group may experience delays in adjusting or upgrading production at its facilities when it introduces new models, delays in expanding manufacturing capacity, failure in its manufacturing processes, or failure by its business partners to adequately perform the services it has outsourced to them, which in turn may have a material adverse effect on Gold Lion Group’s sales and results of operations. In addition, a failure or an interruption could occur at any stage of Gold Lion Group’s product development, manufacturing and delivery processes, resulting in products not meeting the expectations of its distributors and end customers, which could have a material adverse effect on Gold Lion Group’s sales, results of operations, and reputation.

Gold Lion Group’s results of operations, particularly its profitability, may be materially adversely affected if it does not successfully manage price erosion and is not able to manage costs related to its products and operations.

Selling price erosion is a characteristic of the mobile handset and electronics industries, and the products offered by Gold Lion Group are subject to natural price erosion over time. If Gold Lion Group is not able to lower its costs at the same rate or faster than this selling price erosion, and to introduce new cost-efficient products with higher prices in a timely manner, as well as manage costs related to its products and operations generally, this will have a material adverse effect on its business and results of operations, particularly its profitability.

Gold Lion Group relies primarily on its distributors for marketing and sale of its products at the provincial and local levels and for after-sales support of its products. Because Gold Lion Group has limited influence over its distributors, it cannot be certain that their marketing and after-sale support of its products will be adequate to meet Gold Lion Group’s sales requirements and to protect Gold Lion Group’s brand and reputation.



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Gold Lion Group now has distributors and after-sales service centers at the national level, provincial level and municipal level in 31 provinces in China. Gold Lion Group grants its distributors the right to use its brand name and logo when they market Gold Lion Group’s products within their respective sales territories or channels and when they provide after-sales support to Gold Lion Group’s end-user customers. However, Gold Lion Group’s contractual arrangements with its distributors do not provide Gold Lion Group with control over their everyday business activities, and one or more of its distributors may engage in activities that are prohibited under Gold Lion Group’s contractual arrangements with them, that violate Peoples’ Republic of China (“PRC”) laws and regulations governing the mobile handset industry or other PRC laws and regulations generally, or that are otherwise harmful to Gold Lion Group’s business or reputation in the industry.

Gold Lion Group maintains inventories of raw materials, components and handsets, and its inventories may decline in value or become obsolete.

The rapid technological change in Gold Lion Group’s industry, the short product life cycle of its handsets, its limited forecasting experience and processes, and the competitive nature of its target markets make forecasting Gold Lion Group’s future sales and operating results difficult. Gold Lion Group’s expense levels are based, in part, on its expectations regarding future sales. In addition, to enable Gold Lion Group to promptly fill orders, it maintains inventories of raw materials, components and handsets. As a result, Gold Lion Group has to commit to considerable costs in advance of anticipated sales. Any significant shortfall of sales may result in Gold Lion Group maintaining higher levels of inventories of raw materials, components, and finished goods than it requires, thereby increasing its risk of inventory obsolescence and corresponding inventory write-downs and write-offs. Gold Lion Group cannot guarantee that such write-downs will be adequate to cover all losses resulting from inventory obsolescence.

Gold Lion Group plans to market its products to countries outside of China, which may subject it to various economic, political, regulatory, legal and foreign exchange risks.

Gold Lion Group currently sells substantially all of its products in China. Gold Lion Group also plans to selectively enter into markets outside China where it identifies an opportunity to sell differentiated products and where it believes it will be able to realize a reasonable return on investment. The marketing, distribution and sale of its mobile handsets overseas exposes Gold Lion Group to a number of risks, including:

·

fluctuations in currency exchange rates of the U.S. dollar and other foreign currencies against the Renminbi;

·

difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, overseas markets;

·

difficulty in designing products that are compatible with communications and product standards in foreign countries, and in attaining the required certifications for those products;

·

longer accounts receivable collection periods and greater difficulty in accounts receivable collection;

·

increased costs associated with maintaining marketing and sales activities in various countries;

·

difficulty and costs relating to compliance with unexpected changes in regulatory requirements and different commercial and legal requirements in the jurisdictions in which Gold Lion Group offers its products;

·

inability to obtain, maintain or enforce intellectual property rights; and

·

changes to import and export regulations, including quotas, tariffs and other trade barriers, delays or difficulties in obtaining export and import licenses, potential foreign exchange controls and repatriation controls on foreign earnings, exchange rate fluctuations, and currency conversion restrictions.

If Gold Lion Group is unable to effectively manage these risks, its ability to conduct or expand its business abroad would be impaired; and this may in turn have a material adverse effect on Gold Lion Group’s business, financial condition, results of operations, and prospects.

Gold Lion Group’s operating results are difficult to predict and may fluctuate significantly from period to period in the future.



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Gold Lion Group’s operating results are difficult to predict and may fluctuate significantly from period to period based on a number of factors such as the launch of new products in a given period, the seasonality of its mobile handset sales, the short life-cycle of any given handset model due to rapid technological advances, a possible deterioration of economic conditions in China, and potential changes to the regulation of the mobile handset industry in China. As a result, you may not be able to rely on period-to-period comparisons of Gold Lion Group’s operating results as an indication of its future performance. If its revenues for a particular period are lower than Gold Lion Group expects, its may be unable to reduce its fixed costs and operating expenses for that period by a corresponding amount, which would negatively impact its operating results for that period relative to its operating results for other periods.

Gold Lion Group has not applied for patents or registered copyrights for most of its intellectual property; and its failure to adequately protect its intellectual property rights may undermine its competitive position. In addition, litigation to protect Gold Lion Group’s intellectual property rights may be costly.

Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Gold Lion Group relies primarily on trade secrets and other contractual restrictions to protect its intellectual property. Gold Lion Group has not applied for patents or registered copyrights in China for most of its inventions, original works of authorship, developments, and improvements relating to the mobile handsets it produces. The actions Gold Lion Group has taken to protect its intellectual property rights may not be adequate to provide it with meaningful protection or commercial advantage. As a result, third parties may use the technologies that it has developed and compete with Gold Lion Group, which could have a material adverse effect on its business, financial condition and operating results.

In addition, policing unauthorized use of proprietary technology can be difficult and expensive. Litigation may be necessary to enforce Gold Lion Group’s intellectual property rights and the outcome of any such litigation may not be in Gold Lion Group’s favor. Given the relative unpredictability of China’s legal system and potential difficulties in enforcing a court judgment in China, there is no guarantee that Gold Lion Group would be able to halt the unauthorized use of its intellectual property through litigation in a timely manner.

Furthermore, any such litigation may be costly and may divert management attention away from Gold Lion Group’s business and cause it to expend significant resources. An adverse determination in any such litigation will impair Gold Lion Group’s intellectual property rights and may harm its business, prospects and reputation. In addition, Gold Lion Group has no insurance coverage against litigation costs and would have to bear all costs arising from such litigation to the extent it is unable to recover them from other parties. The occurrence of any of the foregoing could have a material adverse impact on Gold Lion Group’s business, financial condition and results of operations.

Gold Lion Group may be exposed to infringement or misappropriation claims by third parties which, if determined adversely against it, could disrupt its business and subject it to significant liability to third parties, as well as have a material adverse effect on its financial condition and results of operations.

Gold Lion Group’s success depends, in large part, on its ability to use and develop its technology, know-how and product designs without infringing upon the intellectual property rights of third parties.

Gold Lion Group’s products include increasingly complex technology and, as the amount of such technologies and the number of parties claiming rights continue to increase; the possibility of alleged infringement and related intellectual property claims against it continues to rise. The holders of patents and other intellectual property rights potentially relevant to Gold Lion Group’s product offerings may be unknown to Gold Lion Group, or may otherwise make it difficult for Gold Lion Group to acquire a license on commercially acceptable terms. There may also be technologies licensed to and relied on by Gold Lion Group that are subject to infringement or other corresponding allegations or claims by others which could damage its ability to rely on such technologies. In addition, although Gold Lion Group endeavors to ensure that companies that work with it possess appropriate intellectual property rights or licenses, Gold Lion Group cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in its products or by companies with which it works in cooperative research and development activities. Since technology standards, including those used and relied on by Gold Lion Group, typically involve intellectual property rights, Gold Lion Group cannot fully avoid risks of a claim for infringement of such rights due to its reliance on such standards. Gold Lion Group believes that the number of



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third parties declaring their intellectual property to be relevant to these standards - for example, those standards related to 3G mobile communication technologies as well as other advanced mobile communications standards - is increasing, which may increase the likelihood that Gold Lion Group will be subject to such claims in the future. While Gold Lion Group believes that any such intellectual property rights declared and found to be essential to a given standard carry with them an obligation to be licensed on fair, reasonable and non-discriminatory terms, not all intellectual property owners agree on the meaning of that obligation and, thus, costly and time-consuming litigation over such issues may result in the future.

As Gold Lion Group continues to market and sell its products throughout China, and as litigation becomes more common in China, Gold Lion Group faces a higher risk of becoming subject to claims for intellectual property infringement. While Gold Lion Group has not, to date, become subject to these types of claims, it is possible that it may, in the future, become subject to such intellectual property infringement claims. Regardless of whether such claims have merit or are decided in its favor, any such litigation could have a negative impact on Gold Lion Group brand, reputation and ability to conduct its business and sell some or all of its products.

Gold Lion Group’s sales and profitability depend on the continued growth of the mobile telecommunications industry, especially in China, and if the mobile telecommunications industry does not grow as Gold Lion Group expects or grows at a slower speed than Gold Lion Group expects, its sales and profitability may be materially adversely affected.

Gold Lion Group derives substantially all of its revenues from sales of mobile handsets in China. The continued development of its business depends, in large part, on continued growth in the mobile telecommunications industry, especially in China, in terms of the number of existing mobile subscribers who upgrade or replace their existing mobile handsets, the number of new subscribers, and increased usage. Although China’s wireless telecommunication industry has grown rapidly in the past, and although China government has granted 3G licenses to operators, the wireless telecommunication industry may not continue to grow at the same growth rate in the future or to grow at all.

Furthermore, Gold Lion Group’s sales and profitability are also affected by the extent to which there is increasing demand for, and development of, value-added services, leading to opportunities for it to successfully market mobile handsets that feature those services. To a certain extent, Gold Lion Group is dependent on third-party mobile telecommunication operators to successfully introduce these value-added services that encourage end users to upgrade or replace their mobile handsets. For instance, mobile telecommunication operators in China are upgrading their networks to offer 3G wireless telecommunication services, which will lead to increased demand for enhanced wireless value-added services and, therefore, increased demand for mobile handsets with more advanced technologies in China. Therefore, if mobile telecommunication operators are not successful in their attempts to introduce new services, increase the number of subscribers, stimulate increased usage and drive replacement sales, its business and results of operations could be materially adversely affected.

These developments in its industry are, to a large extent, outside of Gold Lion Group’s control; and any reduced demand for wireless voice and data services, any other downturn, or other adverse changes in China’s wireless telecommunication industry could severely harm its business.

Changes in the regulatory environment for telecommunications systems and services, especially in China, could negatively impact Gold Lion Group’s business.

The telecommunications industry in China is heavily regulated, and regulatory changes may affect both Gold Lion Group and its customers. For example, changes in regulations that impose more stringent standards for the production of mobile handsets could adversely affect Gold Lion Group business. Similarly, tariff regulations that affect the pricing of new services offered by mobile telecommunication operators could also affect their ability to invest in network infrastructure, which in turn could affect the sales of Gold Lion Group’s mobile handsets. License fees, environmental, health and safety, privacy and other regulatory changes may increase costs and restrict operations of mobile telecommunication network operators and service providers. The indirect impact of such changes could affect Gold Lion Group’s business adversely even though the specific regulations may not directly apply to it or its products.

China Ministry of Industry and Information Technology (“MIIT”) has broad discretion and authority to regulate all aspects of the telecommunications and information technology industries in China, including managing spectrum, setting mobile handset specifications and standards, approving the adoption of new technologies such as



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3G, and drafting laws and regulations. MIIT also determines the forms and types of services that may be offered by telecommunication companies to the public, the rates that are charged to subscribers for those services, and the content of material available in China over wireless services, including Internet content. In addition, China’s telecommunication regulatory framework is still at a relatively early stage of development, and prone to directional shifts and major structural changes. The PRC government is in the process of drafting a national telecommunication law, which may include new legislation governing the mobile handset industry. If MIIT sets standards with which Gold Lion Group is unable to comply or which would render Gold Lion Group’s products uncompetitive, its ability to sell products could be severely limited, resulting in substantial harm to Gold Lion Group’s operations.

Gold Lion Group depends on its key personnel, and its business and growth may be severely disrupted if it loses their services. Gold Lion Group may also have difficulty attracting and retaining qualified management and research and development personnel.

Gold Lion Group’s future success depends substantially on the continued services of its key personnel. Gold Lion Group relies on key personnel’s experience in the mobile handset manufacturing industry, in similar business operations, in sales and marketing, and on their relationships with Gold Lion Group’s shareholders, customers, and suppliers. If Gold Lion Group loses the services of one or more of these key personnel, it may not be able to replace them readily, if at all, with suitable or qualified candidates, and may incur additional expenses to recruit and retain new officers, which could severely disrupt its business and growth.

In addition, if any of these key personnel joins a competitor or forms a competing company, Gold Lion Group may lose some of its customers. Gold Lion Group has entered into employment agreements with each of these key personnel, which contain confidentiality and non-competition provisions. However, if any disputes arise between these key personnel and Gold Lion Group, it is not clear what the court decisions will be and the extent to which these court decisions could be enforced in China, where all of these key personnel reside and hold some of their assets. Furthermore, as Gold Lion Group expects to continue to expand its operations and develop new products, Gold Lion Group will need to continue attracting and retaining experienced management and key research and development personnel.

Competition for management and research and development personnel in the mobile handset market in China is intense, and the availability of suitable and qualified candidates is limited. In particular, Gold Lion Group competes to attract and retain qualified research and development personnel with other mobile handset manufacturers, universities and research institutions. Competition for these individuals could cause Gold Lion Group to offer higher compensation and other benefits in order to attract and retain them, which could have a material adverse effect on Gold Lion Group’s financial condition and results of operations. Gold Lion Group may also be unable to attract or retain the personnel necessary to achieve its business objectives, and any failure in this regard could severely disrupt its business and growth.

Fluctuations in exchange rates could adversely affect Gold Lion Group’s business.

Because substantially all of its earnings are denominated in Renminbi, any appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect Gold Lion Group’s balance sheet position and financial results reported in U.S. dollar terms without giving effect to any underlying change in its business or results of operations. In addition, fluctuations in the exchange rate between the U.S. dollar and the Renminbi would affect the relative purchasing power of Gold Lion Group’s U.S. dollar denominated cash assets and the Renminbi value of Gold Lion Group’s U.S. dollar denominated bank borrowings. Fluctuations in the exchange rate will also affect the relative value of any dividend Gold Lion Group may issue that will be exchanged into U.S. dollars, and will affect the earnings from and value of any U.S. dollar-denominated investments it makes in the future.

Gold Lion Group’s competitive position could decline if it is unable to obtain additional financing to acquire businesses or technologies that are strategic for its success, or otherwise execute its business strategy.

Gold Lion Group believes that its current cash will be sufficient to fund its working capital and capital expenditure requirements for at least the next twelve months. However, Gold Lion Group may need to raise additional funds to support more rapid expansion, respond to competitive pressures, acquire complementary businesses or technologies or respond to unanticipated requirements. Gold Lion Group cannot assure you that additional funding will be available to it in amounts or on terms acceptable to Gold Lion Group. If sufficient funds are not available or are not available on acceptable terms, Gold Lion Group’s ability to fund its expansion, take advantage of acquisition opportunities, develop or enhance its services or products, or otherwise respond to



19





competitive pressures would be significantly limited. If appropriate opportunities arise, Gold Lion Group intends to acquire businesses; technologies, services or products that it believes are strategic.

Risks Related to Gold Lion’s Industry

If Gold Lion Group cannot keep pace with market changes and produce mobile phones with new technologies and features in a timely and cost-efficient manner to meet its customers’ requirements and preferences, the growth and success of its business will be materially adversely affected.

The mobile handset market in China is characterized by changing consumer preferences with respect to style and functionality, increasing demand for new and advanced technologies and features, rapid product obsolescence and price erosion, evolving industry standards, intense competition and wide fluctuations in product supply and demand. If Gold Lion Group cannot keep pace with market changes and produce new mobile handsets in a timely and cost-efficient manner to meet its customers’ requirements and preferences, the growth and success of its business will be materially adversely affected.

Gold Lion Group experiences intensive competition from its Electronics Manufacturing Service (“EMS”) competitors; Gold Lion Group’s failure to maintain its relationship with clients may have material adverse impact on its business and profitability.

In recent years, more and more EMS providers have invested heavily in the northern part of China and particularly in the Bo Hai area where Tianjin city is located. Gold Lion Group’s OEM customers are also giving more orders to other EMS providers to balance their need and reduce their risk. Gold Lion Group will attempt to provide better services and higher quality products to attract more customers and reduce its risk from fierce competition.

Competition in mobile phone manufacture and sales is intense. Gold Lion Group’s failure to maintain or improve its market position and respond successfully to changes in the competitive landscape may have a material adverse impact on its business and results of operations.

The mobile handset manufacturing industry in China is intensely competitive. Industry participants compete with each other mainly on the basis of the breadth and depth of their product portfolios, price, operational and manufacturing efficiency, technical performance, product features, quality, customer support and brand recognition. Gold Lion Group faces significant competition from a number of competitors, including domestic mobile handset producers such as Bird Ningbo Co., Ltd, Haier Telecom Co. Ltd., , Konka Group Co., Ltd, Lenovo Group Limited, and TCL Communication Technology Holdings Limited,. and a number of large multinational mobile handset producers, such as LG Electronics Ltd., Motorola Inc., Nokia Corporation, Samsung Electronics Co., Ltd., and Sony Ericsson Mobile Communications (China) Co., Ltd.. Many of Gold Lion Group’s competitors have longer operating histories, greater name recognition, significantly larger market shares, access to larger customer bases and significantly greater economies of scale and financial, sales and marketing, manufacturing, distribution, technical and other resources than Gold Lion Group does. Some of these competitors have used, and will probably continue to use, more aggressive pricing strategies, greater amounts of sales incentives and subsidies for distributors, retailers and customers, more successful design approaches, and more advanced technologies. In addition, some competitors have chosen to focus on building products based on commercially available components, which may enable them to introduce these products faster and with lower levels of research and development spending than Gold Lion Group. Furthermore, consolidation among the industry participants in China may potentially result in stronger competitors that are better able to compete as end-to-end suppliers as well as competitors who are more specialized in particular areas and geographic markets. This could have a material adverse effect on Gold Lion Group’s business, financial condition, results of operations and prospects.

Gold Lion Group may be unable to manage rapid growth and a changing operating environment, which could adversely affect its ability to serve its customers and could harm its business.

Gold Lion Group has experienced rapid growth over the last few years. Gold Lion Group has limited operational, administrative and financial resources, which may be inadequate to sustain its current growth rate. If Gold Lion Group is unable to manage its growth effectively, the quality of its solutions could deteriorate and its business may suffer. As its customer base increases and it enters new end-markets, Gold Lion Group will need to:

·

increase its investments in personnel, research and development capabilities, facilities and other operational areas;



20





·

continue training, motivating and retaining its existing employees, and attract and integrate new qualified employees;

·

develop and improve its operational, financial, accounting and other internal systems and controls; and

·

take enhanced measures to protect any proprietary technology or technological capability it develops.

Any failure to manage Gold Lion Group’s growth successfully could distract management’s attention and result in its failure to serve its customers and harm its business.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for Gold Lion Group’s products and materially adversely affect its competitive position.

Gold Lion Group conducts substantially all of its operations and generates most of its revenues in China. Accordingly, its business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

·

the higher level of government involvement;

·

the early stage of development of the market-oriented sector of the economy;

·

the rapid growth rate;

·

the higher level of control over foreign exchange; and

·

the allocation of resources.

While the PRC economy has grown significantly since the late 1970s, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on Gold Lion Group. For example, Gold Lion Group’s financial condition and results of operations may be adversely affected by government control over the telecommunications industry, capital investments or changes in tax regulations that are applicable to it.

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and imposing policies that impact particular industries or companies in different ways. For example, efforts by the PRC government to slow the pace of growth of the PRC economy could result in decreased capital expenditure by mobile telecommunication network operators, which in turn could reduce demand for its products.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of mobile communications investments and expenditures in China, which in turn could lead to a reduction in demand for Gold Lion Group’s products and consequently have a material adverse effect on its business and prospects. In particular, any adverse change in the PRC government’s policies towards the mobile communications industry may have a material adverse effect on Gold Lion Group’s business.

Risks Relating to the Acquisition and Spin-Off

Upon completion of the acquisition, voting control by the Gold Lion shareholders may limit your ability to influence the outcome of director elections and other matters requiring shareholder approval.

Upon consummation of the acquisition, the shareholders of Gold Lion will own between 60.3% and 83% of the common stock of Zoom depending on whether Zoom only acquires Gold Lion or if it also acquires the additional 28.97% interest in TCB Digital and depending on whether Zoom is required to issue the NASDAQ Additional



21





Consideration Shares. These Gold Lion shareholders will be able to control substantially all matters requiring approval by Zoom’s stockholders, including the election of a majority of Zoom’s directors and the approval of other business transactions. This concentration of ownership could have the effect of delaying or preventing a future change in control of Zoom or discouraging a potential acquirer from attempting to obtain control of Zoom, which in turn could have a material adverse effect on the market price of Zoom’s common stock or prevent Zoom’s stockholders from realizing a premium over the market price for their common stock.

If Zoom is required to issue the NASDAQ Additional Consideration Shares, the Gold Lion shareholders will be entitled to receive additional shares as contingent consideration for the acquisition, which would result in dilution and might have an adverse effect on the market price of Zoom’s common stock.

Under the share exchange agreement, the Gold Lion shareholders are entitled to receive up to an additional 2,499,168 in NASDAQ Additional Consideration Shares if either: (a) as of the date the Zoom stockholders approve the acquisition, Zoom’s common stock is not listed on the NASDAQ Capital Market or (b) the NASDAQ Capital Market has not approved Zoom’s listing application for the post-transaction entity within 30 days after the closing of the share exchange agreement. If the NASDAQ Additional Consideration Shares are issued, the number of shares outstanding will significantly increase. The issuance of the additional shares will have a dilutive effect on the common stock already outstanding and may cause a reduction in the trading price of Zoom’s common stock in the public market.

Because Zoom does not intend to pay dividends, stockholders will benefit from an investment in Zoom’s common stock only if those shares appreciate in value.

Zoom has never declared or paid any cash dividends on the shares of Zoom common stock. Upon completion of the acquisition, Zoom currently intends to retain all future earnings, if any, for use in the operations and expansion of the business. As a result, Zoom does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the declaration and payment of cash dividends will be at the discretion of Zoom’s board of directors and will depend on factors its board of directors deems relevant, including among others, Zoom’s results of operations, financial condition and cash requirements, business prospects, and the terms of Zoom’s credit facilities, if any, and any other financing arrangements. Accordingly, realization of a gain on stockholders’ investments will depend on the appreciation of the price of Zoom’s common stock, and there is no guarantee that Zoom’s common stock will appreciate in value.

Zoom’s board of directors approved the acquisition without obtaining a fairness opinion.

Zoom did not obtain a fairness opinion with respect to the Gold Lion acquisition. If Zoom’s board of directors erred in concluding that the share exchange agreement is in the best interest of Zoom’s stockholders, then its stockholders could suffer adverse consequences such as a decline in the value of their shares following the consummation of the transaction. In addition, at a minimum, any litigation over the board’s exercise of its fiduciary duties would divert management’s time and attention from completing the transactions described herein and would likely also involve the expenditure of substantial amounts for legal fees.

Gold Lion may have difficulty establishing adequate management, legal and financial controls in the PRC.

Most PRC companies historically have been less focused on establishing Western style management and financial reporting concepts and practices, as well as modern banking, computer and other internal control systems, than companies in the U.S. and certain other Western countries. Gold Lion may have difficulty in hiring and retaining a sufficient number of qualified internal control employees to work in the PRC. As a result of these factors, Gold Lion may experience difficulty in establishing management, legal and financial controls, collecting financial data, preparing financial statements, books of account and corporate records, and instituting business practices that meet Western standards.

Section 404 of the Sarbanes-Oxley Act of 2002 will require Zoom to document and test its internal controls over financial reporting in future periods. Any delays or difficulty in satisfying these requirements could adversely effect its future results of operations and Zoom’s stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 will require Zoom to document and test the effectiveness of Gold Lion’s internal control over financial reporting in accordance with an established internal control framework and to report on its conclusion as to the effectiveness of such internal controls. It may cost Zoom more than it expects to comply with these control and procedure-related requirements.



22





Zoom may discover in the future areas of its internal control that need improvement, particularly with respect to Gold Lion Group or other businesses that it may acquire. Zoom cannot be certain that any remedial measures it takes will provide it with adequate internal control over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm Zoom’s operating results or cause it to fail to meet its reporting obligations. If Zoom is unable to conclude that it has effective internal control over financial reporting, or if its independent auditors are unable to provide it with an unqualified report regarding the effectiveness of its internal control over financial reporting in future periods as required by Section 404, investors could lose confidence in the reliability of its financial statements, which could result in a decrease in the value of Zoom’s common stock. In addition, failure to comply with Section 404 could potentially subject Zoom to sanctions or investigations by the SEC or other regulatory authorities.

The distribution of Zoom Telephonics stock to Zoom shareholders may be treated as a taxable dividend.

Zoom may discover that as of the date of the distribution of Zoom Telephonics stock to Zoom shareholders that it has sufficient current earnings and profits to cause all or a portion of the distribution to be treated as a taxable dividend. If this were to occur, an amount equal to the fair market value of the Zoom Telephonics common stock received by Zoom shareholders (including any fractional shares deemed to be received) on the distribution date will be treated as a taxable dividend to the extent of a shareholder’s ratable share of 2009 earnings and profits of Zoom with the excess treated as a non-taxable return of capital to the extent of a shareholder’s tax basis in Zoom common stock, and any remaining excess treated as capital gain.

The distribution of Zoom Telephonics stock to Zoom shareholders may result in a taxable gain to Zoom.

The distribution of Zoom Telephonics stock to Zoom shareholders is not intended to be a tax-free distribution governed by Section 355 of the Code. A taxable distribution will generally result in taxable gain to the distributing corporation. Zoom believes in this case that it will not recognize gain as a result of the distribution because its tax basis in Zoom Telephonics stock will exceed the fair market value of that stock as of the date of distribution. In addition, even if Zoom’s tax basis in the Zoom Telephonics stock were less than the fair market value of that stock as of the date of distribution, Zoom believes that it would nonetheless have sufficient net operating loss carryforwards to offset any taxable gain recognized.

To the extent that either of these assumptions are incorrect, Zoom has fully indemnified TCB Digital under the Share Exchange Agreement for any pre-closing income taxes incurred, including any income tax resulting from the distribution of Zoom Telephonics.



23





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this proxy statement regarding Zoom’s and Gold Lion’s strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The parties may not actually achieve the plans, intentions or expectations disclosed in the forward-looking statements, and you should not place undue reliance on the forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements made by the parties. The parties to this proxy statement have included important factors in the cautionary statements included in this proxy statement, particularly in the “Risk Factors” section, that the parties believe could cause actual results or events to differ materially from the forward-looking statements made by the parties, including, among others:

·

legislation or regulatory environments, requirements or changes adversely affecting the business in which Gold Lion is engaged;

·

continued compliance with government regulations;

·

fluctuations in customer demand;

·

management of rapid growth;

·

the time to develop and market new products;

·

general economic conditions;

·

geopolitical events; and

·

changes in accounting principles generally accepted in the United States.

Further, the forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations, dividends or investments made by Zoom or Gold Lion.

You should read this proxy statement, including all annexes to this proxy statement with the understanding that actual future results may be materially different from what the parties expect. Neither Zoom nor Gold Lion assumes any obligation to update any forward-looking statements.





24





HISTORICAL FINANCIAL INFORMATION

OF GOLD LION HOLDING LTD.


Index


Report of Independent Registered Public Accounting Firm

page 26

Consolidated Balance Sheets at December 31, 2008 and 2007

page 27

For the years ended December 31, 2008 and 2007:

 

Consolidated Statements of Operations and Other Comprehensive Income

page 28

Consolidated Statements of Cash Flows

page 29

Consolidated Statements of Stockholders’ Equity

page 30

Notes to Consolidated Financial Statements

page 31

 

 

 

 

Unaudited Consolidated Balance Sheets at March 31, 2009 and 2008

page 51

For the years ended March 31, 2009 and 2008:

 

Unaudited Consolidated Statements of Operations and Other Comprehensive Income

page 52

Unaudited Consolidated Statements of Cash Flows

page 53

Unaudited Notes to Consolidated Financial Statements

page 54

 

 

 

 

 

 

 

 





25





Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders of

Gold Lion Holding, Ltd.


We have audited the accompanying consolidated balance sheets of Gold Lion Holding, Ltd. Affiliates and Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of income and other comprehensive income, stockholders' equity, and cash flows for the years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gold Lion Holding, Ltd., Affiliates and Subsidiaries as of December 31, 2008 and 2007 and the combined consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.


The accompanying financial statements referred to above were combined and consolidated as described in Note 1 to the financial statements.


/s/  Goldman Parks Kurland Mohidin LLP


Goldman Parks Kurland Mohidin LLP

Encino, California

March 27 2009






26





GOLD LION HOLDING LTD.

CONSOLIDATED BALANCE SHEETS

 

 

December 31,
2008

 

December 31,
2007

 

ASSETS

   

 

 

   

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

812,769

 

$

3,980,584

 

Restricted cash

 

 

8,753,757

 

 

5,452,203

 

Notes receivable

 

 

 

 

452,742

 

Accounts receivable, net

 

 

12,366,814

 

 

12,669,242

 

Other receivables, net of allowance for doubtful accounts

 

 

1,119,881

 

 

2,598,614

 

Advance to suppliers

 

 

24,275,313

 

 

12,309,764

 

Inventories, net

 

 

3,742,046

 

 

7,216,945

 

Due from related parties

 

 

6,069,842

 

 

18,148,353

 

Total current assets

 

 

57,140,422

 

 

62,828,447

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

7,054,892

 

 

5,002,685

 

Long-term investments

 

 

65,653

 

 

229,391

 

Due from related parties-long term

 

 

247,294

 

 

 

Deferred tax assets

 

 

612,835

 

 

438,938

 

Goodwill

 

 

103,057

 

 

10,273

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

65,224,153

 

$

68,509,734

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Short-term loans

 

$

18,893,525

 

$

19,240,918

 

Notes payable

 

 

17,507,514

 

 

9,553,870

 

Accounts payable

 

 

3,580,720

 

 

4,857,342

 

Advance from customers

 

 

3,785,462

 

 

2,721,406

 

Dividends payable

 

 

578,142

 

 

541,789

 

Taxes payable

 

 

775,315

 

 

645,925

 

Accrued expenses and other payables

 

 

2,832,599

 

 

2,845,673

 

Due to related parties

 

 

5,161,169

 

 

16,207,276

 

Deferred tax liabilities

 

 

11,879

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

53,126,325

 

 

56,614,199

 

 

 

 

 

 

 

 

 

Long-term loans

 

 

1,167,168

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

54,293,493

 

 

56,614,199

 

 

 

 

 

 

 

 

 

MINORITY INTERESTS

 

 

6,489,032

 

 

5,776,086

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Common shares, issued and outstanding; 1,000 shares,
par value $0.001 per share

 

 

1

 

 

4,630,213

 

Additional paid-in capital

 

 

3,553,292

 

 

1

 

Statutory surplus reserve

 

 

569,193

 

 

257,078

 

Accumulated other comprehensive income

 

 

243,625

 

 

234,917

 

Accumulated retained earning

 

 

75,517

 

 

997,240

 

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

4,441,628

 

 

6,119,449

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

65,224,153

 

$

68,509,734

 




The accompanying notes are an integral part of these consolidated financial statements


27





GOLD LION HOLDING LTD.

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME

 

 

Years Ended December 31

 

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Net revenue

   

$

80,611,981

   

$

42,496,458

 

Cost of sales

 

 

(72,410,992

)

 

(37,789,130

)

 

 

 

 

 

 

 

 

Gross profit

 

 

8,200,989

 

 

4,707,328

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

267,076

 

 

159,576

 

General and administrative expenses

 

 

1,685,885

 

 

557,215

 

Research and development expenses

 

 

871,238

 

 

1,957,194

 

 

 

 

2,824,199

 

 

2,673,985

 

 

 

 

 

 

 

 

 

Income from operations

 

 

5,376,790

 

 

2,033,343

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

Equity in earnings in investee

 

 

3,191

 

 

 

Interest income

 

 

176,102

 

 

9,860

 

Government grant income

 

 

176,747

 

 

79,933

 

Other income

 

 

4,121

 

 

63,879

 

Interest expense

 

 

(1,599,139

)

 

(449,873

)

Exchange loss

 

 

(91,071

)

 

(449,873

)

Other expenses

 

 

(37,506

)

 

(17,983

)

 

 

 

(1,367,555

)

 

(316,416

)

 

 

 

 

 

 

 

 

Income before income taxes and minority interests

 

 

4,009,235

 

 

1,716,927

 

Income tax expense

 

 

(611,586

)

 

(120,949

)

 

 

 

 

 

 

 

 

Income before minority interest

 

 

3,397,649

 

 

1,595,978

 

Minority interest

 

 

(330,721

)

 

(626,576

)

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

3,066,928

 

 

969,402

 

Loss from discontinued operation

 

 

(246,654

)

 

(214,117

)

 

 

 

 

 

 

 

 

Net Income

 

 

2,820,274

 

 

755,285

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

8,708

 

 

234,917

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

2,828,982

 

$

990,202

 




The accompanying notes are an integral part of these consolidated financial statements


28





GOLD LION HOLDING LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2008 AND 2007

 

 

2008

 

2007

 

Cash flows from operating activities:

   

 

 

   

 

 

 

Net income

 

$

2,820,274

 

$

755,285

 

Adjustments to reconcile net income to cash used by operating activities:

 

 

 

 

 

 

 

Minority interest

 

 

330,721

 

 

626,576

 

Depreciation and amortization

 

 

1,231,707

 

 

437,188

 

Provision for inventory obsolescense

 

 

(173,528

)

 

416,931

 

Provision for doubtful receivables

 

 

(86,390

)

 

55,505

 

Loss on disposal of fixed assets

 

 

497

 

 

––

 

Investment income

 

 

(3,191

)

 

––

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Deferred tax assets

 

 

(130,508

)

 

(427,702

)

Accounts receivable

 

 

266,411

 

 

(6,290,050

)

Inventories

 

 

3,292,582

 

 

(4,486,960

)

Advances to suppliers

 

 

(16,037,819

)

 

(9,462,401

)

Prepaid expenses and other assets

 

 

1,541,259

 

 

(2,537,207

)

Accounts payable  

 

 

(1,543,164

)

 

2,320,802

 

Advance from customers

 

 

867,776

 

 

 

Related parties

 

 

(721,332

)

 

(1,190,725

)

Accrued expenses and other current liabilities

 

 

(110,174

)

 

340,278

 

Net cash used by operating activities

 

 

(8,454,880

)

 

(19,442,480

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Restricted cash

 

 

(2,890,163

)

 

(5,312,627

)

Cash paid for long- term investment

 

 

 

 

(10,273

)

Purchase of property & equipment and other long-term assets

 

 

(2,895,299

)

 

(1,919,288

)

Cash proceeds from disposal of fixed assets

 

 

9,623

 

 

445

 

Cash proceeds from disposal of discontinued operations

 

 

1,749,258

 

 

––

 

Cash proceeds from notes receivable

 

 

475,622

 

 

360,779

 

Cash increase due to acquisition of subsidiaries

 

 

 

 

5,151,367

 

Net cash used for investing activities

 

 

(3,550,959

)

 

(1,729,597

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from short-term loans

 

 

18,600,309

 

 

17,416,130

 

Proceeds from long-term loan

 

 

1,149,054

 

 

 

Advance to related parties

 

 

(5,649,111

)

 

(17,810,945

)

Repayment on borrowing from related parties

 

 

(37,884,458

)

 

18,039,538

 

Proceeds from notes payable

 

 

7,199,115

 

 

9,309,291

 

Dividend distribution

 

 

––

 

 

(519,566

)

Collection on advance to related parties

 

 

18,484,740

 

 

1,395,920

 

Receipt on related parties

 

 

26,885,911

 

 

(546,402

)

Repayments on short-term loan

 

 

(20,213,293

)

 

(2,531,221

)

Net cash provided by financing activities

 

 

8,572,267

 

 

24,752,745

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

265,756

 

 

181,332

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,167,815

)

 

3,762,000

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning balance

 

 

3,980,584

 

 

218,584

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, ending balance

 

$

812,769

 

$

3,980,584

 

 

 

 

 

 

 

 

 

SUPPLEMENTARY DISCLOSURE:

 

 

 

 

 

 

 

Interest paid

 

$

1,489,630

 

$

416,580

 

Income tax paid

 

$

931,854

 

$

189,735

 



The accompanying notes are an integral part of these consolidated financial statements


29





GOLD LION HOLDING LTD.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2008 AND 2007


 

 

Shares

 

Common stock

 

Additional paid-in capital

 

Statutory surplus reserve

 

Other compre-hensive income (loss)

 

Accumulated surplus/
(deficit)

 

Total

 

Balance December 31, 2006

     

 

1,000

     

$

1

     

$

     

$

     

$

     

$

1,770

     

$

1,769

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

     

 

 

 

 

 

 

 

 

 

 

 

 

 

234,917

     

 

     

 

234,917

 

Net income

     

 

 

 

 

 

 

 

 

 

 

 

 

 

     

 

755,285

     

 

755,285

 

Appropriated statutory surplus reserve

     

 

 

 

 

 

 

 

 

 

65,293

     

 

 

 

 

(65,293

)

 

 

Contribution of equity in affiliates

     

 

 

 

 

4,630,213

     

 

     

 

191,785

 

 

 

 

 

309,018

     

 

5,131,016

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Balance December 31, 2007

     

 

1,000

     

$

4,630,214

     

$

     

$

257,078

     

$

234,917

     

$

997,240

     

$

6,119,449

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes due to consolidation

     

 

 

 

 

(4,630,213

)

 

3,553,292

     

 

(257,078

)

 

 

 

 

(3,172,804

)

 

(4,506,803

)

Foreign currency translation

     

 

 

     

 

 

 

 

 

 

 

 

 

8,708

     

 

     

 

8,708

 

Net income

     

 

 

     

 

 

 

 

 

 

 

 

 

     

 

2,820,274

     

 

2,820,274

 

Appropriated statutory surplus reserve

     

 

 

 

 

 

 

 

 

 

 

569,193

     

 

     

 

(569,193

)

 

 

 

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2008

     

 

1,000

     

$

1

     

$

3,553,292

     

$

569,193

     

$

243,625

     

$

75,517

     

$

4,441,628

 





The accompanying notes are an integral part of these consolidated financial statements


30





GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2008 AND 2007

NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS

Gold Lion Holding Ltd ("Gold Lion" or “the Company”) was founded by Mr. Gu Lei (“Gu”) in September 2002 in the British Virgin Islands. Pursuant to an agreement dated June 30, 2007, Mr. Cao Wei (“Cao”), purchased from Gu 29.4% shares in the Company. Through a resolution of the Company on November 26, 2008, the Company issued 705 shares to Gu and 294 shares to Mr. Du Songtao (“Du”), resulting in a total of 1,000 issued and outstanding shares of Common Stock. Pursuant to a pledge agreement dated November 26, 2008, Du pledged his 294 shares to Cao, including all rights to such shares. As such, Gu and Cao jointly control 100% of Gold Lion.

On August 2, 2007, Gu founded Profit Harvest Corporation Ltd. (“Profit Harvest”) in Hong Kong, and in December 2008, 100% ownership of Profit Harvest was transferred to Gold Lion.

Pursuant to the capital injection agreement (“the Agreement”) by and among Tianjin Communication and Broadcasting Group Co., Ltd. (“TCBGCL”), TCBGCL Labour Union, Hebei Leimone Science and Technology Co., Ltd. (“Hebei Leimone”), Tianjin 712 Communication and Broadcasting Co., Ltd. (“712”), Beijing Depu Investment Co., Ltd. (“Beijing Depu”) and other natural person shareholders on May 8, 2007 and a resolution of the shareholder’s meeting on June 30, 2007, Hebei Leimone, a company controlled by Gu, acquired 25.13% of Tianjin Tong Guang Group Digital Communication Co., Ltd. (“TCB Digital”) from TCBGCL Labour Union and various natural person shareholders for cash of RMB9,000,000, approximately $1,286,000. Pursuant to this Agreement, Hebei Leimone and Beijing Depu, the companies controlled by Gu and Cao respectively, were to invest additional RMB15,928,700 and RMB10,377,600 respectively to TCB Digital, bringing the total investment from Hebei Leimone and Beijing Depu to $4,679,111 (RMB35,306,300). After this additional investment was made as of June 30, 2007, Hebei Leimone and Beijing Depu held 36.03% and 15% equity interests respectively of TCB Digital, amounting to 51.03% ownership in TCB Digital. Pursuant to an agreement dated June 30, 2007, Cao irrevocably pledged his 15% equity interest in TCB Digital through his ownership in Beijing Depu to Gu in exchange for a 29.4% stake in Gold Lion.

On November 30, 2007, Gold Lion and GD Industrial Company signed a share transfer agreement, pursuant to which, GD Industrial Company transferred 60% equity of Nantong Zong Yi Kechuang Digital Camera Technology Co., Ltd. (“Nantong Zong Yi”) for cash of $10,273 to the Company. In July 2008, Nantong Zong Yi changed its name to Jiangsu Leimone Electronic Co., Ltd. (“JS Leimone”). Before the acquisition date, JS Leimone did not have any operating activities. In January 2008, the Company invested $5,074,226 (HK$38,800,000) to JS Leimone to increase the Company’s ownership in JS Leimone to 80%. Pursuant to the share transfer agreement by and between Gold Lion and Nantong Zong Yi Investment Co., Ltd. dated November 26, 2008, the Company acquired the remaining 20% equity interest of JS Leimone from Nantong Zong Yi Investment Co., Ltd. for cash of $103,214 (HK$800,000). After this transaction, the Company owned 100% of JS Leimone.

Pursuant to the share transfer agreement by and among Hebei Leimone, Beijing Depu Investment Co., Ltd and JS Leimone dated December 15, 2008, Hebei Leimone and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity interest of TCB Digital to JS Leimone on December 30, 2008.

Per the fact that TCB Digital and Profit Harvest are under common control with the Company since July 2007 and August 2007, respectively, we combined their financials at historical cost into the Company from the date the Company acquires control. Acquisition method is used when the Company has actual equity investment in TCB Digital and Profit Harvest.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Gold Lion Holding Ltd, its 100%-owned subsidiary Profit Harvest, its 100%-owned subsidiary JS Leimone and its 51.03%-owned joint venture TCB Digital as of and for the year ended December 31, 2008. As the Company acquired 60% of JS Leimone on November 30, 2007, the operating results from December 1, 2007 through December 31, 2007 and the balance sheet of JS Leimone were included in the combination for the year ended December 31, 2007. As of June 30, 2007, Gu and Cao jointly acquired 51.03% equity of TCB Digital through Hebei Leimone and Beijing Depu, entities they controlled, and Gu controlled 100% of Profit Harvest in 2007. The consolidated financial statements for 2007



31



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Principles of Consolidation (continued)

included the combination of 100% operation results of TCB Digital from July1, 2007 through December 31, 2007 and 100% of the operating results of Profit Harvest for 2007. As Gu and Cao transferred their 51.03% equity interest of TCB Digital into JS Leimone on December 30, 2008, and 100% equity interest of Profit Harvest was transferred to Gold Lion on December 22, 2008, the consolidated financial statements as of December 31, 2008 include the consolidation of balance sheets of TCB Digital and Profit Harvest and combination of 100% operating results of TCB Digital and 100% operating results of Profit Harvest of 2008. The difference of shareholder’s equity between 2007 and 2008 resulted from the change of consolidation method is presented as changes due to consolidation on the face of consolidated statements of shareholder’s equity. The common stock from contribution of equity in affiliates by the shareholders in 2007 was the 51.03% paid-in capital of TCB Digital, which was $4,630,212, and 100% paid-in capital of Profit Harvest, which was $1. The accumulated surplus from recapitalization on reverse acquisition in 2007 was the 51.03% retained earning of TCB Digital and 100% retained earning of Profit Harvest amounting to $309,018 and nil respectively. The common stock from changes due to consolidation was the reclassificationin 2008 of 51.03% paid-in capital of TCB Digital, which was $4,630,212, and 100% paid-in capital of Profit Harvest, which was $1. The additional paid-in capital from changes due to consolidation amounted to $3,553,292 in 2008 was the excess of the net assets over the purchase price for the acquisition of 51.03% of TCB Digital and 100% of Profit Harvest from related parties amounting to $1,610,957 and $1,942,335 respectively. The statutory surplus reserve from changes due to consolidation amounted to $(257,078) in 2008 was the net figure of statutory surplus reserve amounting to $257,078. The accumulated deficit from changes due to consolidation amounted to $(3,172,804) in 2008 was the 51.03% of accumulated retained earning of TCB Digital as of Dec.31, 2008 which amounted to $1,230,469 and the 100% of accumulated retained earning of Profit Harvest as of December 31, 2008 which amounted to $1,942,335.

Basis of Presentation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The Company’s functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars ($).

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount of property and equipment and intangible assets; the allocation of the purchase price for the Company’s acquisitions; the collectability of accounts receivable; the fair value of share-based compensation; the useful lives and salvage values of property and equipment; the realizability of inventories; and amounts recorded for contingencies. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results may differ from those estimates.

Foreign Currency Translation

The Company’s financial records are maintained in its local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.


32



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Foreign Currency Translation

The reporting currency of the Company is the US dollar. Transactions denominated in currencies other than US dollars are translated into US dollars at the average rate for the period. Monetary assets and liabilities denominated in currencies other than US dollars are translated into US dollars at the rates of exchange at the balance sheet date. The resulting exchange differences are recorded in other expenses in the statement of income and comprehensive income.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, including cash and cash equivalents, restricted cash, marketable securities, trade, bills and other receivables, deposits, trade, bills and other payables approximate their fair values due to the short-term maturity of such instruments. The carrying amounts of bank borrowings approximate their fair values because the applicable interest rates approximate current market rates.

It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

The Company is exposed to foreign currency risk arising from import purchase transactions and trade payables as they affect the future operating results of the Company. The Company did not have any hedging transactions during 2008 or 2007.

Risks and Uncertainties

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

Cash and Cash Equivalents

Cash consists of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash deposits that are restricted as to withdrawal or pledged as security, are disclosed separately on the consolidated balance sheet, and not included in cash for the purpose of the consolidated statements of cash flows.

Accounts Receivable

Allowances for doubtful accounts are maintained against accounts receivable for estimated losses resulting from the inability of customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. Accounts are written off against the allowance when it becomes evident collection will not occur.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements; or decrease due to market conditions and product life cycle changes. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.


33



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Inventories (continued)

In addition, the Company estimates net realizable value based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions. Historically, the actual net realizable value has been close to management’s estimate.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over estimated useful lives of 30 years for buildings and improvements, 10 years for machinery and equipment, 4-5 years for electronic equipment, 5 years for workshop reconstruction and assembling line reconstruction, and 5 years for transportation equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and betterments are charged to the property accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed to the current period. 

Capitalized Interest

Interest associated with major development and construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially complete or development activity is suspended for more than a brief period.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying values of long-lived assets, including property, plant and equipment and other intangible assets, whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal. For 2008, the Company performed an annual impairment review of long-lived assets and concluded that there was no impairment loss.

Goodwill

The Company recognizes goodwill for the excess of the purchase price over the fair value of the identifiable net assets of the business acquired. As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” an impairment test for goodwill is undertaken by the Company at the reporting unit level annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As of December 31, 2008, the Company did not incur any impairment loss for goodwill.

Revenue Recognition

The Company recognizes sales in accordance with the United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” and SAB No. 104, “Revenue Recognition.” The Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services were rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Revenue is not recognized until title and risk of loss is transferred to the customer, which occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions were met. Provisions for discounts and returns are provided for at the time the sale is recorded, and are recorded as a reduction of sales. The Company bases its


34



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Revenue Recognition (continued)

estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of specific transaction in each arrangement. Revenues represent the invoiced value of goods, net of value added

The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Deposits or advance payments from customers prior to delivery of goods and passage of title of goods are recorded as advanced from customers.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Under this method, deferred income taxes are recognized for the estimated tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts and each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion; it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.

Operating Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company that do not meet the capitalization criteria of SFAS 13, are accounted for as operating leases. Rental payables under operating leases are recognized as expenses on the straight-line basis over the lease term.

Comprehensive Income

The Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.

SFAS No.130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income (loss) includes foreign currency translation adjustments.

Long-Term Investments

The Company accounted for its 9% investment in Tianjin Tong Guang Microelectronics Co., Ltd using the cost method.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation requires we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of 2007. The adoption of FIN 48 had no material effect on our financial statements.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application was encouraged, provided the


35



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Recent Accounting Pronouncements (continued)

reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The adoption of SFAS 157 had no material effect on our 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 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 were effective for 2008. The adoption of SFAS 159 had no material effect on our financial statements.

In June 2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for use in Future Research and Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable advance payments for goods or services that used or rendered for research and development activities should be expensed when the advance payment is made or when the research and development activity has been performed. The adoption of FASB Staff Position No. EITF 07-3 had no material effect on our financial statements.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance became effective for the fiscal year beginning after December 15, 2008. Our management is in the process of evaluating the impact that SFAS 160 will have on the Company’s financial statements upon adoption.

In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance became effective for the fiscal year beginning after December 15, 2008. Our management is in the process of evaluating the impact that SFAS 141 (Revised) will have on the Company’s financial statements upon adoption.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with US GAAP (the GAAP hierarchy). SFAS 162 will not have an offset on the Company’s financial statements.


36



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Recent Accounting Pronouncements (continued)

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 will not have an impact on the Company’s financial statements.

NOTE 2 MERGER AND ACQUISITION

The Company acquired 60% of equity of JS Leimone on November 30, 2007. As of November 30, 2007, the net assets of JS Leimone were Nil. The agreed purchase consideration was $10,273 which was higher than 60% of total net assets of JS Leimone and resulted in goodwill of $10,273. On January 1, 2008, the Company invested $4,971,056 (HK$38,800,000) into JS Leimone. After this investment, the net assets of JS Leimone were $4,976,051 and the Company owned 80% of JS Leimone. The fair value of the 80% of equity interest of JS Leimone Electronic Co., Ltd on January 1, 2008 was $3,981,085. The agreed purchase consideration was $4,971,012 (HK$38,800,000) which was higher than 80% of total net assets of JS Leimone and resulted in goodwill of $989,927. The Company acquired the remaining 20% of equity of JS Leimone on November 30, 2008. As of November 30, 2008, the net assets of JS Leimone were $5,001,783 and therefore 20% of total assets of JS Leimone was $1,000,357. The agreed purchase consideration was $103,214 which was lower than 20% of total net assets of JS Leimone and resulted in negative goodwill of $897,143. Therefore, the total goodwill resulted from the acquisition of JS Leimone was $103,057. As of December 31, 2008 and 2007, goodwill was $103,057 and $10,273 respectively. There was no impairment of goodwill for 2008.

The following table summarizes goodwill resulting from the acquisition of JS Leimone:

November 30, 2007

$

10,273

 

January 1, 2008

 

989,927

 

November 30, 2008

 

(897,143

)

 

 

 

 

Total goodwill

$

103,057

 



37



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 2 MERGER AND ACQUISITION (continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed from JS Leimone as of the date of acquisition.

 

 

November 30,
2007

 

January 1,
2008

 

November 30,
2008

 

 

 

 

 

 

 

 

 

 

 

 

Cash

     

$

39,231

     

$

5,010,704

     

$

79,411

 

Accounts receivable

 

 

 

 

 

 

18,475

 

Other receivables

 

 

 

 

 

 

(4,750

)

Advance to suppliers

 

 

 

 

 

 

4,665,134

 

Inventories

 

 

 

 

 

 

246,854

 

Due from related parties

 

 

 

 

 

 

45,431

 

Other assets

 

 

 

 

 

 

217,569

 

Fixed assets

 

 

 

 

 

 

 

 

1,708,102

 

Accounts payable

 

 

 

 

 

 

 

 

(388,235

)

Advance from customers

 

 

 

 

 

 

 

 

(115,716

)

Salary payable

 

 

 

 

 

(21,401

)

 

(52,961

)

Taxes payable

 

 

 

 

 

 

 

 

(5,138

)

Other Payable

 

 

 

 

 

 

 

 

(1,111,614

)

Due to related parties

 

 

(39,231)

 

 

(39,648

)

 

 

 

Affect from foreign currency translation

 

 

 

 

200

 

 

(258,357

)

Purchase price

 

 

 

 

4,949,855

 

 

5,001,783

 

NOTE 3 RESTRICTED CASH

Restricted cash as of December 31, 2008 and 2007, was $8,753,757 and $5,452,203 respectively. Restricted cash was deposits in banks representing collateral for the banks to issue banker’s acceptances. Restricted cash may not be recovered when the secured notes payable cannot be paid.

NOTE 4 NOTES RECEIVABLE

All Company’s notes receivable are non-interest bearing bank acceptances issued by Beijing Beny Wave Science and Technology Co., Ltd. and honored by local banks, which were Nil and $452,742, at December 31, 2008 and 2007, respectively. As of December 31, 2007, the balance of notes receivable were due from January 2008 through February 2008.

NOTE 5 ACCOUNTS RECEIVABLE

As of December 31, 2008 and 2007, the Company’s accounts receivable consisted of the following:

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Accounts receivable

     

$

12,383,724

     

$

13,015,913

 

Less: Allowance for doubtful accounts

 

 

(16,910

)

 

(346,671

)

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

12,366,814

 

$

12,669,242

 




38



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 6 INVENTORIES

Inventories, by major categories, as of December 31, 2008 and 2007 are as follows:

 

     

2008

     

2007

 

 

 

 

 

 

 

 

 

Raw materials

     

$

3,704.758

     

$

6,531,972

 

Work in progress

 

 

17,672

 

 

111,744

 

Low value consumables

 

 

5,591

 

 

 

Finished goods

 

 

382,488

 

 

1,001,114

 

 

 

 

4,096,227

 

 

7,644,830

 

Less: Allowance for obsolete inventories

 

 

(368,463

)

 

(427,885

)

 

 

 

 

 

 

Inventories, net

 

$

3,742,046

 

$

7,216,945

 

NOTE 7 ADVANCE TO SUPPLIERS

As of December 31, 2008 and 2007, the Company’s advance to suppliers consisted of the following:

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Suzhou Moben Communication Technology Ltd.

     

$

200,039

     

 

 

 

 

 

 

 

 

 

 

Shenzhen Yingqiongxing Trading Company

 

 

455,852

 

 

 

 

 

 

 

 

 

 

 

Beijing Xingwang Time Commercial Trading Co., Ltd.

 

 

7,737,737

 

$

6,856,638

 

 

 

 

 

 

 

 

 

China Electronic Appliance Corporation

 

 

 

 

2,531,549

 

 

 

 

 

 

 

 

 

Spreadtrum Communications (shanghai) Co., Ltd.

 

 

 

 

127,808

 

 

 

 

 

 

 

 

 

Shenzhen HANTEL Communication Co., Ltd.

 

 

 

 

600,211

 

 

 

 

 

 

 

 

 

WINCOS

 

 

 

 

1,409,488

 

 

 

 

 

 

 

 

 

CEC CoreCast Corporation Limited

 

 

7,305,206

 

 

 

 

 

 

 

 

 

 

 

Beijing Orsus Xelent Technologies Inc.

 

 

6,000,625

 

 

 

 

 

 

 

 

 

 

 

 

HK HYWIN TECHNOLOGY Co., Ltd.

 

 

 

 

154,725

 

 

 

 

 

 

 

 

 

Derong

 

 

1,312,336

 

 

 

 

 

 

 

 

 

 

 

ECE Telecom Technology Limited

 

 

377,085

 

 

 

 

 

 

 

 

 

 

 

Tianjin Liantuo Electronic Technology Co., Ltd.

 

 

382,247

 

 

 

 

 

 

 

 

 

 

 

T.L.Y. (Hong Kong) Limited

 

 

104,840

 

 

 

 

 

 

 

 

 

 

 

Others

 

 

399,346

 

 

629,345

 

 

 

 

 

 

 

 

 

Total other receivables, net

 

$

24,275,313

 

$

12,309,764

 




39



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 8 OTHER RECEIVABLES

As of December 31, 2008 and 2007, the Company’s other receivables and prepaid expenses consist of the following:

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Advance to employees

     

$

177,068

     

$

276,616

 

 

 

 

 

 

 

 

 

Loan to third parties

 

 

476,963

 

 

832,529

 

 

 

 

 

 

 

 

 

Deposit for rental of equipment lease

 

 

43,769

 

 

115,065

 

 

 

 

 

 

 

 

 

Payment on behalf of other companies

 

 

 

 

836,517

 

 

 

 

 

 

 

 

 

Receivable for disposal of long-term assets

 

 

297,628

 

 

278,913

 

 

 

 

 

 

 

 

 

Others

 

 

83,605

 

 

243,251

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

40,848

 

 

15,723

 

 

 

 

 

 

 

 

 

Total other receivables, net

 

$

1,119,881

 

$

2,598,614

 

The loan to third parties bear no interest.

The deposit for rental of equipment lease will be recovered in one year.

NOTE 9 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of December 31, 2008 and 2007 consisted of the following:

 

 

2008

 

2007

 

 

 

 

 

 

 

 

 

Cost:

     

 

 

     

 

 

 

 

 

 

 

 

 

 

 

Machinery and Equipment

 

$

8,479,599

 

$

5,467,660

 

 

 

 

 

 

 

 

 

Electronic Equipment

 

 

1,581,014

 

 

1,336,720

 

 

 

 

 

 

 

 

 

Transportation Equipment

 

 

169,235

 

 

115,305

 

 

 

 

 

 

 

 

 

Workshop reconstruction

 

 

58,606

 

 

54,921

 

 

 

 

 

 

 

 

 

Assembling line reconstruction

 

 

119,173

 

 

 

 

 

 

 

 

 

 

 

Total at cost

 

 

10,407,627

 

 

6,974,606

 

 

 

 

 

 

 

 

 

Less: Accumulated depreciation

 

 

(3,352,735

)

 

(1,971,921

)

 

 

 

 

 

 

 

 

Total property, plant and equipment, net

 

$

7,054,892

 

$

5,002,685

 

Depreciation for 2008 and 2007 was $1,231,707 and $437,188 respectively.



40



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 10 LONG-TERM INVESTMENTS

As of December 31, 2008 and 2007, the Company’s long-term investment consisted of the following:

 

 

 

 

 

2008

 

 

 

 

2007

 

 

 

 

                   

 

 

                   

 

 

                   

 

 

                   

 

Tianjin Jiaotong Group Guang Tong Information
Tech Construction Co., Ltd. (“TJGGTIT”)

     

 

     

$

     

 

25%

     

$

167,865

 

Tianjin Tong Guang Microelectronics Co., Ltd.

 

 

9%

 

 

65,653

 

 

  9%

 

 

61,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

$

65,653

 

 

 

 

$

229,391

 

TJGGTIT was established on April 27, 2006 with total registered capital of $622,836 (RMB5,000,000). The Company sold the investment in TJGGTIT for $178,620 in 2008.

Tianjin Tong Guang Microelectronics Co., Ltd. was established on April 19, 2006 with total registered capital of $622,549 (RMB5,000,000). Tianjin Tong Guang Microelectronics Co., Ltd.’s principal activities are development, manufacturing and sale of electronic information products and related technical consulting services.

NOTE 11 SHORT-TERM LOANS

Short-term loans represent amounts due to various financial institutions which are normally due within one year. As of December 31, 2008 and 2007, the Company’s short term loans consisted of the followings:

 

 

2008

 

2007

 

 

     

 

 

     

 

 

 

Loan from Shanghai Pudong Development Bank Tianjin Pucheng Branch, due from May 30, 2007 to May 29, 2008, with interest at 6.8985%, guaranteed by Huamiao Industrial Co., Ltd.

 

$

 

$

1,367,222

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Shenyi Street Branch, due from August 3, 2007 to April 25, 2008, with interest at 6.84%, guaranteed by TCBGCL

 

 

 

 

4,101,667

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Shenyi Street Branch, due from August 16, 2007 to July 15, 2008, with interest at 6.84%, guaranteed by TCBGCL

 

 

 

 

8,203,333

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Shenyi Street Branch, due from September 17, 2007 to September 16, 2008, with interest at 8.019%, secured by the Company’s fixed assets

 

 

 

 

2,597,722

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Shenyi Street Branch, due from November 15, 2007 to November 14, 2008, with interest at 8.019%, secured by the Company’s fixed assets

 

 

 

 

1,162,139

 

 

 

 

 

 

 

 

 

Loan from China Merchants Bank Tianjin Branch, due from November 12, 2007 to February 5, 2008, with interest at 5.832%, pledged by Company’s notes receivable

 

 

 

 

441,613

 

 

 

 

 

 

 

 

 

Loan from Northern International Trust & Investment Co., LTD, due from December 17, 2007 to December 16, 2008, with interest at 8.019%, guaranteed by Hebei Leimone

 

 

 

 

1,367,222

 

 

 

 

 

 

 

 

 



41



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 11 SHORT-TERM LOANS (continued)

 

 

2008

 

2007

 

Loan from Bank of Communications Tianjin Branch, due from April 25, 2008 to March 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid March 25, 2009

     

$

4,376,878

     

 

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from May 26, 2008 to April 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on April 27, 2009 (Unaudited)

 

 

2,917,919

 

 

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from June 25, 2008 to June 13, 2009 with interest at 8.217%, guaranteed by TCBGCL

 

 

2,917,919

 

 

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from July 15, 2008 to May 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital

 

 

2,917,919

 

 

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from September 17, 2008 to September 16, 2009 with interest at 7.92%, secured by the Company’s fixed assets

 

 

2,772,023

 

 

 

 

 

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from November 17, 2008 to November 16, 2009 with interest at 7.326%, secured by the Company’s fixed assets

 

 

1,240,116

 

 

 

 

 

 

 

 

 

 

 

 

Loan from Northern International Trust & Investment Co., LTD, due from December 23, 2008 to October 23, 2009 with interest at 8.7000%, guaranteed by small and medium enterprises credit guaranty center.

 

 

1,750,751

 

 

 

 

 

 

 

 

 

 

 

 

Total short-term loans

 

$

18,893,525

 

$

19,240,918

 

NOTE 12 NOTES PAYABLE

These notes were payable in 3 or 6 months and bear no interest. The balance of notes payable as of December 31, 2008 and 2007 consisted of the following which all were banker’s acceptances:

 

 

2008

 

2007

 

 

     

 

 

     

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 14, 2007 to June 14, 2008, secured by $1,367,222 of cash in bank

 

$

 

$

2,734,444

 

 

 

 

 

 

 

 

 

Notes payable to China Electronic Appliance Co., Ltd, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 20, 2007 to June 20, 2008, secured by $1,367,222 of cash in bank

 

 

 

 

2,734,444

 

 

 

 

 

 

 

 

 

Notes payable to China Electronic Appliance Co., Ltd, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 21, 2007 to June 21, 2008, secured by $1,367,222 of cash in bank

 

 

 

 

2,734,445

 

 

 

 

 

 

 

 

 

Note payable to Techfaith Intelligent Handset Technology(Beijing) Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 21, 2007 to March 31, 2008, secured by $1,350,537 of cash in bank

 

 

 

 

  1,350,537

 

 

 

 

 

 

 

 

 




42



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 12 NOTES PAYABLE (continued)

 

 

2008

 

2007

 

 

     

 

 

     

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 11, 2008 to March 11, 2009, secured by $729,480 of cash in bank, paid on March 11, 2009

 

$

1,458,960

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 10, 2008 to March 10, 2009, secured by $2,188,439 of cash in bank, paid on March 10, 2009

 

 

4,376,878

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 16, 2008 to March 16, 2009, secured by $2,188,439 of cash in bank, paid on March 16, 2009

 

 

4,376,878

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 17, 2008 to March 17, 2009, secured by $583,584 of cash in bank, paid on March 17, 2009

 

 

1,167,168

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 22, 2008 to March 22, 2009, secured by $875,376 of cash in bank, paid on March 22, 2009

 

 

1,750,751

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 09, 2008 to March 09, 2009, secured by $1,458,959 of cash in bank, paid on March 9, 2009

 

 

2,917,919

 

 

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from October 17, 2008 to April 17, 2009, secured by $291,792 of cash in bank, paid on April 17, 2009 (Unaudited)

 

 

583,584

 

 

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 18, 2008 to June 18, 2009, secured by $437,688 of cash in bank

 

 

875,376

 

 

 

              

 

 

 

 

 

 

 

Total notes payable

 

$

17,507,514

 

$

  9,553,870

 




43



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 13 ACCRUED EXPENSES AND OTHER PAYABLES

As of December 31, 2008 and 2007, the accrued expenses and other liabilities of the Company are summarized as follows:

 

 

2008

 

2007

 

 

     

 

 

     

 

 

 

Accrued machinery rent

 

$

1,158,189

 

$

1,842,312

 

Accrued plant rent

 

 

807,404

 

 

428,142

 

Accrued utility

 

 

608,480

 

 

174,790

 

Accrued others

 

 

46,451

 

 

22,887

 

Warranty deposit

 

 

 

 

205,083

 

Welfare & salary payable

 

 

53,702

 

 

21,401

 

Others

 

 

158,373

 

 

151,058

 

 

 

 

 

 

 

 

 

Total accrued expenses and other payables                            

 

$

2,832,599

 

$

2,845,673

 

NOTE 14 LONG-TERM LOANS

As of December 31, 2008, the Company’s long-term loans consisted of the followings:

Loan from Nantong Zong Yi Investment Co., Ltd., due from January 29, 2008 to January 28, 2010, with interest at same period secured bank lending rate of 7.56% plus 0.756%, secured by the Company’s fixed assets

 

$

729,480

 

 

 

 

 

 

Loan from Nantong Zong Yi Investment Co., Ltd., due from March 5, 2008 to March 4, 2010, with interest at same period secured bank lending rate of 7.56% plus 0.756%, secured by the Company’s fixed assets

 

 

437,688

 

 

 

 

 

 

Total long-term loans

 

$

1,167,168

 

NOTE 15 DIVIDEND PAYABLE

In June 2007, before the Company acquired 51.03% of TCB Digital, TCB Digital decided to distribute cash dividends to its original shareholders of $1,074,068 (RMB7,862,700). The Company paid dividends of $495,926 (RMB3,900,000) in July 2007 to its original shareholders. The balance of dividends payable was $578,142 and $541,789 as of December 31, 2008 and 2007 respectively, representing the dividend payable to TCBGCL amounting to RMB3,962,700. The Company has no plan to pay this amount in the first two quarters of 2009. The specific due date of the dividend will be negotiated between the current shareholders and original shareholders of the Company. The fluctuation of the balance of dividend payable represents the fluctuation of currency exchange rate.



44



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 16 RELATED PARTY BALANCES AND TRANSACTIONS

Due from related parties

As of December 31, 2008 and 2007, due from related parties were:

 

 

2008

 

2007

 

 

     

 

                    

     

 

                    

 

Due from related parties-short term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

 

$

673,380

 

$

1,001,571

 

Hebei Leimone

 

 

745,943

 

 

416,530

 

Shanghai Spreadbridge Information Technology Co., Ltd.

 

 

2,111,460

 

 

771,113

 

Beijing Leimone Shengtong Wireless Technology Co., Ltd.

 

 

561,699

 

 

830,353

 

Gu Lei

 

 

575,710

 

 

478,528

 

Leimone (Tianjin) Industrial Co., Ltd.

 

 

582,096

 

 

14,649,850

 

Beijing Leimone Shengtong Cultural Development Co., Ltd.

 

 

14,590

 

 

 

 

TCBGCL

 

 

74,484

 

 

 

712

 

 

51,990

 

 

 

Zhejiang Leimone Electronics Co., Ltd.

 

 

678,489

 

 

 

Other

 

 

 

 

 

406

 

 

 

 

 

 

 

 

 

Total due from related parties-short term

 

 

6,069,842

 

 

18,148,353

 

 

 

 

 

 

 

 

 

Due from related parties – long term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beijing Leimone Shengtong Wireless Technology Co., Ltd.

 

 

247,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total due from related parties

 

$

6,317,136

 

$

18,148,353

 

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd. (“Electronics Science & Tech”), an entity related to the Company through a common shareholder of TCB Digital, purchased products from the Company. For 2008 and 2007, the Company recorded net revenues of $11,839,003 and $2,307,822 from sales to Electronics Science & Tech respectively.

Hebei Leimone is controlled by Gu, the majority shareholder of the Company.

a.

Hebei Leimone sells certain handsets to the Company. For 2008 and 2007, the Company recorded total purchases from Hebei Leimone of nil and $1,290,829 respectively. The balances due from Hebei Leimone represented advances to Hebei Leimone which were $68,206 and $63,918 respectively;

b.

The Company sells certain products and provides some technical services to Hebei Leimone. For 2008 and 2007, the Company recorded net revenues of $407,116 and $537,086 respectively from sales to Hebei Leimone; and as of December 31, 2008 and 2007, the balances of due from Hebei Leimone regarding such sales were $437,009 and $352,612 respectively;

c.

Additionally, Hebei Leimone borrowed money from the Company. The borrowings bear no interest and had a maturity of 12 months. As of December 31, 2008, the balance of such loans was $240,728, among which $43,768 is due on October 20, 2009 and $196,960 is due on December 25, 2009.



45



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 16 RELATED PARTY BALANCE AND TRANSACTIONS (continued)

Shanghai Spreadbridge Information Technology Co., Ltd. (“Shanghai Spreadbridge”) is controlled by Gu, the majority shareholder of the Company.

a.

Shanghai Spreadbridge borrows money from the Company. The borrowings bear no interest and had a maturity of 14 months. As of December 31, 2008 and 2007, the balances of loans were $393,919 and $546,889 respectively, of which $393,919 was due on December 31, 2008 and $14,590 was subsequently received on February 19, 2009;

b.

The Company sells certain products to Shanghai Spreadbridge. For 2008 and 2007, the Company recorded net revenues of $4,112,767 and $184,019 from sales to Shanghai Spreadbridge respectively. As of December 31, 2008 and 2007, the balances of due from Shanghai Spreadbridge related to such sales was $1,263,007 and $224,224 respectively;

c.

Additionally, Shanghai Spreadbridge sells raw materials to the Company. For 2008 and 2007, the Company recorded total purchases from Shanghai Spreadbridge of $1,515,113 and nil respectively. The amount due from Shanghai Spreadbridge represented advances made and the amount was $454,534 as of December 31, 2008.

Beijing Leimone Shengtong Wireless Technology Co., Ltd. (“Beijing Leimone”) was founded by Gu, the majority shareholder of the Company.

a.

Beijing Leimone borrows money from the Company. The borrowings bear no interest and had a maturity of 12 months or more. As of December 31, 2007, the balance of such loans was $830,353 which was subsequently repaid in April 2008. As of December 31, 2008, the balance of such loans was $247,294 and is due on March 30, 2010.

b.

TCB Digital transferred a project to Beijing Leimone on June 25, 2008 and as of December 31, 2008, the balance related to this business was $561,699, which was received on March 11, 2009.

The majority shareholder of the Company Gu borrowed money from the Company, these borrowings bear no interest and had a two-year repayment term. As of December 31, 2008 and 2007, the balances of such loans were $510,634 and $478,528 respectively; and the amount outstanding as of December 31, 2008 is due on August 5, 2009.

The amount due from Leimone (Tianjin) Industrial Co., Ltd. (“Tianjin Leimone”) represented short term loans granted by the Company. Tianjin Leimone is controlled by Gu. The borrowing bears no interest and had a one-year repayment term. As of December 31, 2008, the balance of loans was $551,458 among with bulk due on May 12, 2009 and $30,638 due on December 25, 2009. Additionally, the Company made an advance payment to Tianjin Leimone on December 18, 2007; and as of December 31, 2008 and 2007, the balances of advance payments amounted to nil and $14,649,850 respectively.

The amount due from Beijing Leimone Shengtong Cultural Development Co., Ltd. (“Beijing Leimone Cultural”) represented a short term loan granted by the Company. Beijing Leimone Cultural was controlled by Gu. The borrowing bears no interest and no maturity date.

The amount due from TCBGCL represented an advance payment. TCBGCL is a shareholder of TCB Digital.

712 is a minority shareholder of TCB Digital. 712 purchases raw materials from the Company. For 2008 and 2007, the Company recorded total revenues from such sales to 712 of $906,178 and nil respectively.



46



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 16 RELATED PARTY BALANCE AND TRANSACTIONS (continued)

Zhejiang Leimone Electronics Co., Ltd. (“Zhejiang Leimone”) was controlled by Gu. Zhejiang Leimone acquired Personal Phone System Electronic Manufacturing Service from the Company in 2008. The acquisition cost was $627,353 and had not been paid as at December 31, 2008. Additionally, the Company purchases raw materials from Zhejiang Leimone. For 2008, the Company recorded total purchases of nil. The amount due from Zhejiang Leimone represented the advance payment of $51,136 as of December 31, 2008.

Due to related parties

As of December 31, 2008 and 2007, due to related parties were:

 

 

2008

 

 

2007

 

 

     

 

 

 

     

 

 

 

TCBGCL

 

 

 

 

$

1,599,422

 

Hebei Leimone

 

$

233,434

 

 

 

39,648

 

Zhejiang Leimone

 

 

37,002

 

 

 

 

 

Gu

 

 

4,879,889

 

 

 

14,565,884

 

Others

 

 

10,844

 

 

 

2,322

 

 

 

 

 

 

 

 

 

 

 Total due to related parties                                                  

 

$

    5,161,169

 

 

$

  16,207,276

 

The balance of due to related parties under TCBGCL which is a shareholder of TCB Digital represented rentals payable for the lease of machinery properties and plants. The balances of due to TCBGCL related to such lease amounted to nil and $1,599,422 at December 31 2008 and 2007, respectively.

The Company borrowed money from Hebei Leimone. The borrowing bears no interest and had a two-year repayment term. As of December 31, 2008 and 2007, the balances of such loans amounted to $233,434 and $39,648 respectively; and the outstanding amount as of December 31, 2008 is due on November 21, 2009.

Zhejiang Leimone transferred some fixed assets to the Company which amounted to $37,002 which the Company has not yet paid as at December 31, 2008.

Gu provides fund to the Company with no interest and repayment term. As of December 31, 2008 and 2007, the balances of funds provided by Gu was $4,879,889 and $14,565,884 respectively.

NOTE 17 DISCONTINUED OPERATION

On May 6, 2008, the Company entered into a project transfer agreement and transferred the digital project department to 712. Such agreement was implemented before June 30, 2008. For the period before June 30, 2008, the statements of operations of the Company reported the results of operations of the digital project department as discontinued operations. The digital project department was sold at its net book value, of $1,669,674.

NOTE 18 GOVERNMENT GRANT INCOME

In 2007, TCB Digital received a $79,933 subsidy from Tianjin Municipal Bureau of Finance for the development of ERP. In 2008, TCB Digital received a $43,089 subsidy from Tianjin Municipal Bureau of Finance for research and development and a $133,658 subsidy from Tianjin Municipal Hebei District Science and Technology Commission for research and development.

NOTE 19 MINORITY INTERESTS

Minority interests on the consolidated statement of income and comprehensive income of $330,721 and $626,576 for 2008 and 2007 respectively represents the minority shareholders’ proportionate share of the net income/(loss) of the Company.



47



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 20 INCOME TAX

TCB Digital and JS Leimone are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% (33% before year 2008) on income reported in the statutory financial statements after appropriated tax adjustments.

JS Leimone is exempt from income tax in PRC for two years starting from the first profitable year or the year 2008, whichever is earlier, and is subject to a 50% discount on normal income tax rate for the following three years. 

TCB Digital had operating profit of approximately $654,000 and $1,813,000 for 2008 and 2007, respectively, while JS Leimone had operating profit of approximately $486,000 and operating loss of approximately $299,000 for 2008 and 2007, respectively, while Profit Harvest had operating profit of approximately $1,942,000 and Nil for 2008 and 2007, respectively. A 100% valuation allowance was established due to the uncertainty of its realization. The additional deducted expenses in 2007 was the additional 50% of R&D expenses deducted before income tax.

The following table summarizes the temporary differences which result in deferred tax assets and liabilities:

 

 

2008

 

2007

 

Deferred tax assets:

 

 

 

 

 

 

 

Inventory impairment

 

 

92,116

 

 

106,971

 

Buy-back reverse

 

 

290,550

 

 

331,967

 

Expenses deductible in next year

 

 

171,490

 

 

 

Understated cost and expenses

 

 

58,679

 

 

 

Total deferred tax assets

 

 

612,835

 

 

438,938

 

Deferred tax liabilities

 

 

 

 

 

 

 

Understated sales

 

 

(11,879)

 

 

 

Net deferred tax assets

 

 

600,956

 

 

438,938

 

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for 2008 and 2007:

 

 

2008

 

2007

US statutory rates

 

(34%)

 

(34%)

Tax rate difference

 

14.6%

 

3.7%

Effect of tax holiday

 

3.1%

 

(0.5%)

Additional deducted expenses                                                 

 

0.0%

 

22.7%

Other

 

1.0%

 

1.0%

Tax per financial statements

 

(15.3%)

 

(7.1%)

NOTE 21 STATUTORY RESERVES 

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriations to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve equals 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at least 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. As of June 30, 2007, TCB Digital accumulatively appropriated the statutory surplus reserve amounted to $375,827. We appropriated $127,951 to the statutory surplus reserve in the second half year of 2007. After this appropriation, TCB Digital’s statutory surplus reserve amounted to $503,778 and the Company’s statutory surplus reserve amounted to $257,078 as of December 31, 2007. In 2008, we appropriated 10% of 2008’s net income of TCB Digital, which amounted to $65,415 to the statutory reserve accordingly. As of December 31, 2008, the Company’s statutory surplus reserve amounted to $569,193.



48



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 22 CONCENTRATION DISCLOSURE

The following table set forth the Company’s major customers whose purchases from the Company represent over 10% of the Company’s sales for the year ended December 31, 2008 and 2007:

2008

 

2007

Customers

 

Sales
revenue

 

% of total  revenue

   

Customers

   

Sales

Revenue

   

% of total revenue

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

  

$11,850,174

  

15%

 

Beijing Orsus Xelent Technology & Trading Co., Limited.

 

$  8,101,324

 

19%

Beijing Xingwang Shidai Tech & Trading Co., Ltd.

 

  11,524,309

 

14%

 

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

 

    6,107,810

 

14%

 

 

 

 

 

 

Beijing Xingwang Shidai Tech & Trading Co., Ltd.

 

    5,529,669

 

13%

 

 

 

 

 

 

Beijing Beny Wave Science and Technology Co., Ltd.

 

    5,300,006

 

12%

Total

 

$23,374,483

 

29%

 

Total

 

$25,038,809

 

58%

The following table set forth the Company’s major suppliers whose sales to the Company represent over 10% of the Company’s purchases for 2008 and 2007:

2008

 

2007

Suppliers

 

Purchase

 

% of total purchase

   

Suppliers

   

Purchase

   

% of total purchase

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

  

$11,850,174

  

15%

 

Beijing Orsus Xelent Technology & Trading Co., Limited.

 

$  8,101,324

 

19%

Beijing Xingwang Shidai Tech & Trading Co., Ltd.

 

  11,524,309

 

14%

 

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

 

    6,107,810

 

14%

 

 

 

 

 

 

Beijing Xingwang Shidai Tech & Trading Co., Ltd.

 

    5,529,669

 

13%

 

 

 

 

 

 

Beijing Beny Wave Science and Technology Co., Ltd.

 

    5,300,006

 

12%

Total

 

$23,374,483

 

29%

 

Total

 

$25,038,809

 

58%




49



GOLD LION HOLDING LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 AND 2007


NOTE 23 OPERATING RISK

Industry risk

The industry in which we compete is a rapidly evolving, highly competitive and fragmented market driven by consumer preferences and quickly evolving technology. Increased competition may result in price reductions, reduced gross margin and loss of market share. Failure to compete successfully against current or future competitors could have a material adverse effect on the Company’s business, operating results and financial condition.

Product risk of obsolescence

From the second half of year 2007, the Company began to involve in the agent business of some famous high-end smart phones. Because of the restructure of China Unicom, one type of smart phones could not be sold as expected and inventory impairment loss arose. Such uncertain and unpredictable events could take significant effect on the profits that the Company will make in the future.

Exchange risk

The Company can not guarantee the current exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and because of a fluctuating exchange rate actually post higher or lower profit depending on exchange rate of Renminbi and US dollars on that date. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

Political risk

Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally PRC currently allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations relating to ownership of a Chinese corporation are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected.

Interest risk

The Company is exposed to interest rate risk arising from short-term variable rate borrowings from time to time. The Company’s future interest expense will fluctuate in line with any change in borrowing rates. The Company does not have any derivative financial instruments as of December 31, 2008 and 2007 and believes its exposure to interest rate risk is not material.

NOTE 24 COMMITMENT

Operating lease commitment

The Company has operating leases and the lessor of the premises for TCB Digital is TCBGCL, a common shareholder of TCB Digital. Pursuant to these leases which rates of rent are all at Rmb 8 per square meter per month for both production facilities and dormitory space, the commitment of the Company is as follows:

Year Ended December 31

 

 

 

2009

$

249,867

 

2010

 

201,369

 

2011

 

200,678

 

2012

 

111,128

 

 

 

 

 

Total minimum lease payments

$

763,042

 



50





GOLD LION HOLDING LTD.

UNAUDITED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2009 & DECEMBER 31, 2008

 

March 31,
2009

     

December 31,
2008

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

$

 3,273,094

 

$

812,769

 

Restricted cash

 

11,978,497

 

 

8,753,757

 

Accounts receivable, net of allowance for doubtful accounts

 

5,388,503

 

 

12,366,814

 

Other receivables, net of allowance for doubtful accounts

 

674,527

 

 

1,119,881

 

Advance to suppliers

 

35,849,103

 

 

24,275,313

 

Inventories, net

 

3,346,461

 

 

3,742,046

 

Due from related parties

 

9,100,489

 

 

6,069,842

 

Total current assets

 

69,610,674

 

 

57,140,422

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

6,692,107

 

 

7,054,892

 

Long-term investments

 

65,736

 

 

65,653

 

Due from related parties-long term

 

247,604

 

 

247,294

 

Deferred tax assets

 

658,625

 

 

600,956

 

Goodwill

 

103,057

 

 

103,057

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

  77,377,803

 

$

  65,212,274

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Short-term loans

$

  18,917,261

 

$

  18,893,525

 

Notes payable

 

23,956,994

 

 

17,507,514

 

Accounts payable

 

3,107,685

 

 

3,580,720

 

Advance from customers

 

9,029,205

 

 

3,785,462

 

Dividends payable

 

578,868

 

 

578,142

 

Taxes payable

 

746,835

 

 

775,315

 

Accrued expenses and other payables

 

2,757,193

 

 

2,832,599

 

Due to related parties

 

5,264,344

 

 

5,161,169

 

Total current liabilities

 

64,358,384

 

 

53,114,446

 

 

 

 

 

 

 

 

Long-term loans

 

1,168,634

 

 

1,167,168

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

65,527,018

 

 

54,281,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Common shares, issued and outstanding; 1,000 shares, par value
$0.001 per share

 

1

 

 

1

 

Additional paid-in capital

 

3,553,292

 

 

   3,553,292

 

Statutory surplus reserve

 

569,193

 

 

569,193

 

Accumulated other comprehensive income

 

260,293

 

 

243,625

 

Retained earnings

 

995,888

 

 

75,517

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

 

5,378,667

 

 

4,441,628

 

Noncontrolling Interest

 

6,472,118

 

 

6,489,032

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

  77,377,803

 

$

  65,212,274

 




The accompanying notes are an integral part of these consolidated financial statements.


51





GOLD LION HOLDING LTD.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
AND OTHER COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008

 

 

March 31,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net revenue

     

$

28,816,557

     

$

11,283,503

 

Cost of sales

 

 

(26,131,951

)

 

(9,159,640

)

 

 

 

 

 

 

 

 

Gross profit

 

 

2,684,606

 

 

2,123,863

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

(1,048,323

)

 

(154,106

)

General and administrative expenses

 

 

(787,482

)

 

(751,727

)

Research and development expenses

 

 

 

 

(683,661

)

 

 

 

(1,835,805

)

 

(1,589,494

)

 

 

 

 

 

 

 

 

Income from operations

 

 

848,801

 

 

534,369

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

Equity in earnings in investee

 

 

 

 

3,096

 

Interest income

 

 

154,170

 

 

15,200

 

Other income

 

 

425,038

 

 

 

Interest expense

 

 

(320,907

)

 

(355,720

)

Exchange loss

 

 

(24,903

)

 

(65,523

)

Other expenses

 

 

(31,560

)

 

(9,175

)

 

 

 

201,838

 

 

(412,122

)

 

 

 

 

 

 

 

 

Income before income taxes and noncontrolling interests

 

 

1,050,639

 

 

122,247

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(147,181

)

 

(7,257

)

 

 

 

 

 

 

 

 

Income before noncontrolling interests

 

 

903,458

 

 

114,990

 

 

 

 

 

 

 

 

 

Less: Net income attributable to Noncontrolling Interest

 

 

16,914

 

 

(4,737

)

 

 

 

 

 

 

 

 

Income from operations

 

 

920,372

 

 

110,253

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

16,668

 

 

609,515

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

937,040

 

$

719,768

 




The accompanying notes are an integral part of these consolidated financial statements.


52





GOLD LION HOLDING LTD.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008

 

 

March 31,

 

 

 

 

2009

 

 

2008

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

     

 

 

     

 

 

 

Net income including noncontrolling interest

 

$

903,458

 

$

114,990

 

Adjustments to reconcile net income to cash used by
operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

394,928

 

 

242,781

 

Provision for inventory obsolescence

 

 

308,350

 

 

321,183

 

Provision for doubtful receivables

 

 

36,637

 

 

 

Investment income

 

 

 

 

(3,096

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Deferred tax assets

 

 

(56,906

)

 

(152,828

)

Accounts receivable

 

 

6,950,079

 

 

(669,384

)

Inventories

 

 

77,581

 

 

(193,979

)

Advances to suppliers

 

 

(11,541,642

)

 

(12,103,151

)

Prepaid expenses and other assets

 

 

446,697

 

 

(267,313

)

Accounts payable  

 

 

(477,465

)

 

8,089,361

 

Advance from customers

 

 

5,238,238

 

 

848,891

 

Related parties-net

 

 

(3,627,940

)

 

(2,310,606

)

Accrued expenses and other current liabilities

 

 

(107,897

)

 

(1,419,739

)

Net cash used in operating activities

 

 

(1,455,882

)

 

(7,502,890

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Restricted cash

 

 

(3,213,283

)

 

(1,257,308

)

Cash paid for long- term investment

 

 

 

 

(9,031,486

)

Purchase of property and equipment and

 

 

 

 

 

 

 

other long-term assets

 

 

(23,333

)

 

(385,347

)

Net cash used in investing activities

 

 

(3,236,616

)

 

(10,674,141

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from short-term loans

 

 

4,819,925

 

 

348,399

 

Proceeds from long-term loan

 

 

 

 

1,114,877

 

Advance to related parties

 

 

(7,351,115

)

 

(1,741,995

)

Repayment on borrowing from related parties

 

 

 

 

(1,434,642)

 

Proceeds from notes payable

 

 

6,426,566

 

 

1,104,013

 

Collection on advance to related parties

 

 

7,954,414

 

 

459,886

 

Receipt on related parties

 

 

108,119

 

 

15,828,177

 

Repayments on short-term loan

 

 

(4,819,925

)

 

(450,132

)

Net cash provided by financing activities

 

 

7,137,984

 

 

15,228,583

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

14,839

 

 

240,883

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

2,460,325

 

 

(2,707,565

)

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning balance

 

 

812,769

 

 

3,980,584

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, ending balance

 

$

3,273,094

 

$

1,273,019

 

 

 

 

 

 

 

 

 

SUPPLEMENTARY DISCLOSURE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

297,134

 

$

327,481

 

 

 

 

 

 

 

 

 

Income tax paid

 

$

 

$

488,346

 



The accompanying notes are an integral part of these consolidated financial statements.


53



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS

Gold Lion Holding Ltd ("Gold Lion" or “the Company”) was founded by Mr. Gu Lei (“Gu”) in September 2002 in the British Virgin Islands. Pursuant to an agreement dated June 30, 2007, Mr. Cao Wei (“Cao”), purchased from Gu 29.4% shares in the Company. Through a resolution of the Company on November 26, 2008, the Company issued 705 shares to Gu and 294 shares to Mr. Du Songtao (“Du”), resulting in a total of 1,000 issued and outstanding shares of Common Stock. Pursuant to a pledge agreement dated November 26, 2008, Du pledged his 294 shares to Cao, including all rights to such shares. As such, Gu and Cao jointly control 100% of Gold Lion.

On August 2, 2007, Gu founded Profit Harvest Corporation Ltd. (“Profit Harvest”) in Hong Kong, and in December 2008, 100% ownership of Profit Harvest was transferred to Gold Lion.

Pursuant to the capital injection agreement (“the Agreement”) by and among Tianjin Communication and Broadcasting Group Co., Ltd. (“TCBGCL”), TCBGCL Labour Union, Hebei Leimone Science and Technology Co., Ltd. (“Hebei Leimone”), Tianjin 712 Communication and Broadcasting Co., Ltd. (“712”), Beijing Depu Investment Co., Ltd. (“Beijing Depu”) and other natural person shareholders on May 8, 2007 and a resolution of the shareholder’s meeting on June 30, 2007, Hebei Leimone, a company controlled by Gu, acquired 25.13% of Tianjin Tong Guang Group Digital Communication Co., Ltd. (“TCB Digital”) from TCBGCL Labour Union and various natural person shareholders for cash of RMB9,000,000, approximately $1,286,000. Pursuant to this Agreement, Hebei Leimone and Beijing Depu, the companies controlled by Gu and Cao respectively, were to invest additional RMB15,928,700 and RMB10,377,600 respectively to TCB Digital, bringing the total investment from Hebei Leimone and Beijing Depu to $4,679,111 (RMB35,306,300). After this additional investment was made as of June 30, 2007, Hebei Leimone and Beijing Depu held 36.03% and 15% equity interests respectively of TCB Digital, amounting to 51.03% ownership in TCB Digital. Pursuant to an agreement dated June 30, 2007, Cao irrevocably pledged his 15% equity interest in TCB Digital through his ownership in Beijing Depu to Gu in exchange for a 29.4% stake in Gold Lion.

On November 30, 2007, Gold Lion and GD Industrial Company signed a share transfer agreement, pursuant to which, GD Industrial Company transferred 60% equity of Nantong Zong Yi Kechuang Digital Camera Technology Co., Ltd. (“Nantong Zong Yi”) for cash of $10,273 to the Company. In July 2008, Nantong Zong Yi changed its name to Jiangsu Leimone Electronic Co., Ltd. (“JS Leimone”). Before the acquisition date, JS Leimone did not have any operating activities. In January 2008, the Company invested $5,074,226 (HK$38,800,000) to JS Leimone to increase the Company’s ownership in JS Leimone to 80%. Pursuant to the share transfer agreement by and between Gold Lion and Nantong Zong Yi Investment Co., Ltd. dated November 26, 2008, the Company acquired the remaining 20% equity interest of JS Leimone from Nantong Zong Yi Investment Co., Ltd. for cash of $103,214 (HK$800,000). After this transaction, the Company owned 100% of JS Leimone.

Pursuant to the share transfer agreement by and among Hebei Leimone, Beijing Depu Investment Co., Ltd and JS Leimone dated December 15, 2008, Hebei Leimone and Beijing Depu Investment Co., Ltd. transferred their 51.03% equity interest of TCB Digital to JS Leimone on December 30, 2008.

Per the fact that TCB Digital and Profit Harvest are in common control with the Company since July 2007 and August 2007, respectively, we combine their financials at historical cost into the Company from the date the Company acquires control. Acquisition method is used when the Company has actual equity investment in TCB Digital and Profit Harvest.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Gold Lion Holding Ltd, its 100%-owned subsidiary Profit Harvest, its 100%-owned subsidiary JS Leimone and its 51.03%-owned joint venture TCB Digital as of and for the three months ended March 31, 2009. As of June 30, 2007, Gu and Cao jointly acquired 51.03% equity of TCB Digital through Hebei Leimone and Beijing Depu, entities under they controlled, and Gu controlled 100% of Profit Harvest in 2007. The consolidated financial statements for the three months ended March 31, 2008 included the combination of 51.03% operation results of TCB Digital from January 1, 2008 through March 31, 2008 and 100% of the operating results of Profit Harvest for three months ended March 31, 2008. As Gu



54



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Principles of Consolidation (continued)

and Cao transferred their 51.03% equity interest of TCB Digital into JS Leimone on December 30, 2008, and 100% equity interest of Profit Harvest was transferred to Gold Lion on December 22, 2008, the consolidated financial statements as of March 31, 2009 include the consolidation of balance sheets and operating results for the three months ended March 31, 2009 of TCB Digital and Profit Harvest.

Basis of Presentation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The Company’s functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars ($).

Use of Estimates

The preparation of the consolidated financial statements in conformity with US GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the recoverability of the carrying amount of property and equipment and intangible assets; the allocation of the purchase price for the Company’s acquisitions; the collectability of accounts receivable; the fair value of share-based compensation; the useful lives and salvage values of property and equipment; the realizability of inventories; and amounts recorded for contingencies. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results may differ from those estimates.

Foreign Currency Translation

The Company’s financial records are maintained in its local currency, the Renminbi (“RMB”), which is the functional currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

The reporting currency of the Company is the US dollar. Transactions denominated in currencies other than US dollars are translated into US dollars at the average rate for the period. Monetary assets and liabilities denominated in currencies other than US dollars are translated into US dollars at the rates of exchange at the balance sheet date. The resulting exchange differences are recorded in other expenses in the statement of income and comprehensive income.

Foreign Currency Transaction

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand.

Fair Value of Financial Instruments

The carrying values of the Company’s financial instruments, including cash and cash equivalents, restricted cash, marketable securities, trade, bills and other receivables, deposits, trade, bills and other payables approximate their fair values due to the short-term maturity of such instruments. The carrying amounts of bank borrowings approximate their fair values because the applicable interest rates approximate current market rates.



55



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Fair Value of Financial Instruments (continued)

It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.

The Company is exposed to foreign currency risk arising from import purchase transactions and trade payables as they affect the future operating results of the Company. The Company did not have any hedging transactions during the three months ended March 31, 2009 or 2008.

Risks and Uncertainties

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

Cash and Cash Equivalents

Cash consists of cash on hand, cash in bank accounts and interest-bearing savings accounts. Cash deposits that are restricted as to withdrawal or pledged as security, are disclosed separately on the consolidated balance sheet, and not included in cash for the purpose of the consolidated statements of cash flows.

Accounts Receivable

Allowances for doubtful accounts are maintained against accounts receivable for estimated losses resulting from the inability of customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. Accounts are written off against the allowance when it becomes evident collection will not occur.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements; or decrease due to market conditions and product life cycle changes. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.

In addition, the Company estimates net realizable value based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions. Historically, the actual net realizable value has been close to management’s estimate.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over estimated useful lives of 30 years for buildings and improvements, 10 years for machinery and equipment, 4-5 years for electronic equipment, 5 years for workshop reconstruction and assembling line reconstruction, and 5 years for transportation equipment. Expenditures for maintenance and repairs are charged to expense as incurred. Major renewals and betterments are charged to the property accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed to the current period. 



56



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Capitalized Interest

Interest associated with major development and construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially complete or development activity is suspended for more than a brief period.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the carrying values of long-lived assets, including property, plant and equipment and other intangible assets, whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal. For 2008, the Company performed an annual impairment review of long-lived assets and concluded that there was no impairment loss.

Goodwill

The Company recognizes goodwill for the excess of the purchase price over the fair value of the identifiable net assets of the business acquired. As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” an impairment test for goodwill is undertaken by the Company at the reporting unit level annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As of December 31, 2008, the Company did not incur any impairment loss for goodwill.

Revenue Recognition

The Company recognizes sales in accordance with the United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” and SAB No. 104, “Revenue Recognition.” The Company recognizes revenue when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services were rendered, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured. Revenue is not recognized until title and risk of loss is transferred to the customer, which occurs upon delivery of goods, and objective evidence exists that customer acceptance provisions were met. Provisions for discounts and returns are provided for at the time the sale is recorded, and are recorded as a reduction of sales. The Company bases its estimates on historical experience taking into consideration the type of products sold, the type of customer, and the type of specific transaction in each arrangement. Revenues represent the invoiced value of goods, net of value added tax (“VAT”).

The Company does not offer promotional payments, customer coupons, rebates or other cash redemption offers to its customers. Deposits or advance payments from customers prior to delivery of goods and passage of title of goods are recorded as advanced from customers.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Under this method, deferred income taxes are recognized for the estimated tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts and each year-end based on enacted tax laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized when, in management’s opinion; it is more likely than not that some portion of the deferred tax assets will not be realized. The provision for income taxes represents current taxes payable net of the change during the period in deferred tax assets and liabilities.



57



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Operating Leases

Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company that do not meet the capitalization criteria of SFAS 13, are accounted for as operating leases. Rental payables under operating leases are recognized as expenses on the straight-line basis over the lease term.

Comprehensive Income

The Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is comprised of net income and all changes to the statements of stockholders' equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders.

SFAS No.130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income (loss) includes foreign currency translation adjustments.

Long-Term Investments

The Company accounted for its 9% investment in Tianjin Tong Guang Microelectronics Co., Ltd using the cost method.



58



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company adopted SFAS 160 from January 1, 2009.

Certain amounts presented for prior periods that were previously designated as minority interest have been reclassified to conform to the current year presentation. Effective January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” which established new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability (as was previously the case); that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, the Company retroactively reclassified the “Minority interest” balance previously included in the “Other liabilities” section of the consolidated balance sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statement of income and other comprehensive income, largely identifying net income including NCI and net income attributable to China Tractor Holdings, Inc.

In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company adopted SFAS 141 (Revised) on January 1, 2009. The adoption of SFAS 141 (Revised) did not have any impact on the Company’s financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. 

The Company adopted SFAS 161 on January 1, 2009. The adoption of SFAS 161 did not have any impact on the Company’s financial statements.





59



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Recent Accounting Pronouncements (continued)

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). SFAS 162 did not have an impact on the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). SFAS 163 also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 163 was adopted on January 1, 2009 and did l not have an impact on the Company’s financial statements.

In January 2009, the FASB issued FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20, and EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“FSP EITF 99-20-1”). FSP EITF 99-20-1 changes the impairment model included within EITF 99-20 to be more consistent with the impairment model of SFAS No. 115. FSP EITF 99-20-1 achieves this by amending the impairment model in EITF 99-20 to remove its exclusive reliance on “market participant” estimates of future cash flows used in determining fair value. Changing the cash flows used to analyze other-than-temporary impairment from the “market participant” view to a holder’s estimate of whether there has been a “probable” adverse change in estimated cash flows allows companies to apply reasonable judgment in assessing whether an other-than-temporary impairment has occurred. The adoption of FSP EITF 99-20-1 did not have a material impact on the consolidated financial statements because all of the investments in debt securities are classified as trading securities.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This FSP shall be applied prospectively with retrospective application not permitted. This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting this FSP must also early adopt FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). Additionally, if an entity elects to early adopt either FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1) or FSP FAS 115-2 and FAS 124-2, it must also elect to early adopt this FSP. The Company is currently evaluating this new FSP but does not believe that it will have a significant impact on the determination or reporting of the financial results.



60



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 1 ORGANIZATION AND PROPOSED BUSINESS OPERATIONS (continued)

Recent Accounting Pronouncements (continued)

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2. This FSP amends SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP will replace the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security, and it is more likely than not it will not have to sell the security before recovery of its cost basis. This FSP provides increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold and also requires increased and more frequent disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. Although this FSP does not result in a change in the carrying amount of debt securities, it does require that the portion of an other-than-temporary impairment not related to a credit loss for a held-to-maturity security be recognized in a new category of other comprehensive income and be amortized over the remaining life of the debt security as an increase in the carrying value of the security. This FSP shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4. Also, if an entity elects to early adopt either FSP FAS 157-4 or FSP FAS 107-1 and APB 28-1, the entity also is required to early adopt this FSP. We are currently evaluating this new FSP but do not believe that it will have a significant impact on the determination or reporting of our financial results.


61



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 2 MERGER AND ACQUISITION

The Company acquired 60% equity in JS Leimone on November 30, 2007. As of November 30, 2007, the net assets of JS Leimone were Nil. The agreed purchase consideration was $10,273 which was higher than 60% of total net assets of JS Leimone and resulted in goodwill of $10,273. On January 1, 2008, the Company invested $4,971,056 (HK$38,800,000) into JS Leimone. After this investment, the net assets of JS Leimone were $4,976,051 and the Company owned 80% of JS Leimone. The fair value of the 80% of equity interest of JS Leimone Electronic Co., Ltd on January 1, 2008 was $3,981,085. The agreed purchase consideration was $4,971,012 (HK$38,800,000) which was higher than 80% of total net assets of JS Leimone and resulted in goodwill of $989,927. The Company acquired the remaining 20% of equity of JS Leimone on November 30, 2008. As of November 30, 2008, the net assets of JS Leimone were $5,001,783 and therefore 20% of total assets of JS Leimone were $1,000,357. The agreed purchase consideration was $103,214 which was lower than 20% of total net assets of JS Leimone and resulted in negative goodwill of $897,143. Therefore, the total goodwill resulted from the acquisition of JS Leimone was $103,057. As of March 31, 2009 and December 31, 2008, goodwill amounted to $103,057 and $103,057 respectively. There was no impairment of goodwill for 2008.

The following table summarizes goodwill resulting from the acquisition of JS Leimone:


November 30, 2007

 

$

10,273

 

January 1, 2008

 

989,927

 

November 30, 2008

 

(897,143)

 

 

 

 

 

 

Total goodwill

 

$

103,057

 



62



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 2 MERGER AND ACQUISITION (continued)

The following table summarizes the fair values of the assets acquired and liabilities assumed from JS Leimone as of the dates of acquisition. The total consideration for the acquisition exceeded the fair value of the net assets acquired by $103,057.

 

 

November 30,
2007

 

January 1,
2008

 

November 30,
2008

 

 

 

 

 

 

 

 

 

Cash

     

$

39,231

     

$

5,010,704

     

$

79,411

 

Accounts receivable

 

 

 

18,475

 

Other receivables

 

 

 

(4,750

)

Advance to suppliers

 

 

 

4,665,134

 

Inventories

 

 

 

246,854

 

Due from related parties

 

 

 

45,431

 

Other assets

 

 

 

217,569

 

Fixed assets

 

 

 

 

 

1,708,102

 

Accounts payable

 

 

 

 

 

(388,235

)

Advance from customers

 

 

 

 

 

(115,716

)

Salary payable

 

 

 

(21,401

)

(52,961

)

Taxes payable

 

 

 

 

 

(5,138

)

Other Payable

 

 

 

 

 

(1,111,614

)

Due to related parties

 

(39,231

)

(39,648

)

 

 

Affect from foreign currency translation

 

 

200

 

(258,357

)

Purchase price

 

 

4,949,855

 

5,001,783

 


NOTE 3 RESTRICTED CASH

Restricted cash as of March 31, 2009 and December 31, 2008, was $11,978,497 and $8,753,757 respectively. Restricted cash was deposits in banks representing collateral for the banks to issue banker’s acceptances. Restricted cash may not be recovered when the secured notes payable cannot be paid.

NOTE 4 ACCOUNTS RECEIVABLE

As of March 31, 2009 and December 31, 2008, the Company’s accounts receivable consisted of the following:


 

 

2009

 

2008

 

 

 

 

 

 

 

Accounts receivable

 

$

5,445,321

 

$

12,383,724

 

Less: Allowance for doubtful accounts

 

 

(56,818

)

 

(16,910

)

 

 

 

 

 

 

 

 

Accountants receivable, net

 

$

5,388,503

 

$

12,366,814

 




63



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 5 INVENTORIES

Inventories, by major categories, as of March 31, 2009 and December 31, 2008 were as follows:

 

 

2009

 

2008

 

 

 

 

 

 

 

Raw materials

     

$

2,506,531

     

$

3,669,226

 

Work in progress

 

14,094

 

17,672

 

Low value consumables

 

3,891

 

5,591

 

Consigned goods

 

1,175,882

 

 

 

Finished goods

 

323,383

 

418,020

 

 

 

 

4,023,781

 

 

4,096,227

 

Less: Allowance for obsolete inventories                               

 

 

(677,320

)

 

(368,463

)

 

 

 

 

 

 

 

 

Inventories, net

 

$

3,346,461

 

$

3,742,046

 


NOTE 6 ADVANCE TO SUPPLIERS

As of March 31, 2009 and December 31, 2008, the Company’s advance to suppliers consisted of the following:

 

 

2009

 

2008

 

 

 

 

 

 

 

Suzhou Moben Communication Technology Ltd.

     

$

206,373

     

$

200,039

 

Shenzhen Yingqiongxing Trading Company

 

456,425

 

455,852

 

Beijing Xingwang Time Commercial Trading Co., Ltd.       

 

3,877,801

 

7,737,737

 

CEC CoreCast Corporation Limited

 

17,885,025

 

7,305,206

 

Beijing Orsus Xelent Technologies Inc.

 

4,261,736

 

6,000,625

 

Derong

 

1,313,984

 

1,312,336

 

CEC Telecom Co., Ltd.

 

 

297,709

 

 

377,085

 

Tianjin Liantuo Electronic Technology Co., Ltd.

 

 

382,728

 

 

382,247

 

T.L.Y. (Hong Kong) Limited

 

 

 

 

104,840

 

Beijing HYT Technology & Trade Co., Ltd.,

 

 

6,776,616

 

 

 

Others

 

 

390,706

 

 

399,346

 

 

 

 

                      

 

 

                     

 

Total advance to suppliers, net

 

$

35,849,103

 

$

24,275,313

 


NOTE 7 OTHER RECEIVABLES

As of March 31, 2009 and December 31, 2008, the Company’s other receivables and prepaid expenses consisted of the following:

 

 

2009

 

2008

 

 

 

 

 

 

 

Advance to employees

     

$

107,660

     

$

177,068

 

Loan to third parties

 

360,699

 

476,963

 

Deposit for rental of equipment lease

 

73,040

 

43,769

 

Receivable for disposal of long-term assets                             

 

 

297,628

 

Others

 

116,698

 

83,605

 

Prepaid expenses

 

 

16,430

 

 

40,848

 

 

 

 

                      

 

 

                      

 

Total other receivables, net

 

$

674,527

 

$

1,119,881

 

The loan to third parties bears no interest.

The deposit for rental of equipment lease will be recovered in one year.



64



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 8 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment as of March 31, 2009 and December 31, 2008 consisted of the following:

 

 

2009

 

2008

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

Machinery and Equipment

     

$

8,496,912

     

$

8,479,599

 

Electronic Equipment

 

1,599,677

 

1,581,014

 

Transportation Equipment

 

 

169,447

 

 

169,235

 

Workshop reconstruction

 

 

58,680

 

 

58,606

 

Assembling line reconstruction

 

 

119,323

 

 

119,173

 

Total at cost

 

 

10,444,039

 

 

10,407,627

 

Less: Accumulated depreciation

 

 

(3,751,932

)

 

(3,352,735

)

 

 

 

                      

 

 

                      

 

Total property, plant and equipment, net                          

 

$

6,692,107

 

$

7,054,892

 


Depreciation for the three months ended March 31, 2009 and 2008 was $394,928 and $242,781 respectively.

NOTE 9 Long-term investmentS

As of March 31, 2009 and December 31, 2008, the Company’s long-term investments consisted of the following:

 

 

2009

 

2008

 

 

 

 

 

 

 

Tianjin Tong Guang Microelectronics Co., Ltd.

 

 

9%

65,736

 

 

9%

    65,653

 


Tianjin Tong Guang Microelectronics Co., Ltd. was established on April 19, 2006 with total registered capital of $622,549 (RMB 5,000,000). Tianjin Tong Guang Microelectronics Co., Ltd.’s principal activities are development, manufacturing and sale of electronic information products and related technical consulting services.



65



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 10 SHORT-TERM LOANS

Short-term loans represent amounts due to various financial institutions which are normally due within one year. As of March 31, 2009 and December 31, 2008, the Company’s short term loans consisted of the followings:

 

 

2009

 

2008

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from April 25, 2008 to March 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on March 25, 2009

     

$

     

$

4,376,878

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from May 26, 2008 to April 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on April 25, 2009

 

 

2,921,585

 

 

2,917,919

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from June 25, 2008 to June 13, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on June 13, 2009

 

 

2,921,585

 

 

2,917,919

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from July 15, 2008 to May 25, 2009 with interest at 8.217%, guaranteed by TCBGCL, the common shareholder of TCB Digital, paid on May 25, 2009

 

 

2,921,585

 

 

2,917,919

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from September 17, 2008 to September 16, 2009 with interest at 7.92%, secured by the Company’s fixed assets

 

 

2,775,505

 

 

2,772,023

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from November 17, 2008 to November 16, 2009 with interest at 7.326%, secured by the Company’s fixed assets

 

 

1,241,673

 

 

1,240,116

 

 

 

 

 

 

 

Loan from Northern International Trust & Investment Co., LTD, due from December 23, 2008 to October 23, 2009 with interest at 8.7000%, guaranteed by small and medium enterprises credit guaranty center.

 

 

1,752,951

 

 

1,750,751

 

 

 

 

 

 

 

Loan from Bank of Communications Tianjin Branch, due from March 3, 2009 to March 2, 2010 with interest at 5.841%, guaranteed by TCBGCL, the common shareholder of TCB Digital

 

 

4,382,377

 

 

 

 

 

                      

 

 

                      

Total short-term loans

 

$

18,917,261

 

$

18,893,525



66



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 11 NOTES PAYABLE

These notes were payable in 3 or 6 months and bear no interest. The balance of notes payable as of March 31, 2009 and December 31, 2008 consisted of the following which all were banker’s acceptances:

 

     

2009

     

2008

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 11, 2008 to March 11, 2009, secured by $729,480 of cash in bank, paid on March 11, 2009

     

$

     

$

1,458,960

 

 

 

 

                      

 

 

                      

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 10, 2008 to March 10, 2009, secured by $2,188,439 of cash in bank, paid on March 10, 2009

 

 

 

 

4,376,878

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 16, 2008 to March 16, 2009, secured by $2,188,439 of cash in bank, paid on March 16, 2009

 

 

 

 

4,376,878

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 17, 2008 to March 17, 2009, secured by $583,584 of cash in bank, paid on March 17, 2009

 

 

 

 

1,167,168

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 22, 2008 to March 22, 2009, secured by $875,376 of cash in bank, paid on March 22, 2009

 

 

 

 

1,750,751

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from September 09, 2008 to March 09, 2009, secured by $1,458,959 of cash in bank, paid on March 9, 2009

 

 

 

 

2,917,919

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from October 17, 2008 to April 17, 2009, secured by $292,159 of cash in bank, paid on April 17, 2009(Unaudited)

 

 

584,317

 

 

583,584

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from December 18, 2008 to June 18, 2009, secured by $438,238 of cash in bank

 

 

876,475

 

 

875,376

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 13, 2009 to September 13, 2009, secured by $584,317 of cash in bank

 

 

1,168,634

 

 

 

 

 

 

 

 

 

 

 

Notes payable to Beijing Orsus Xelent Technology & Trading Company Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 18, 2009 to September 18, 2009, secured by $146,079 of cash in bank

 

 

292,158

 

 

 


67



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 11 NOTES PAYABLE (continued)

 

     

2009

     

2008

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from January 15, 2009 to July 15, 2009, secured by $2,191,189 of cash in bank

     

 

4,382,377

     

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from February 12, 2009 to August 12, 2009, secured by $2,191,189 of cash in bank

 

 

4,382,377

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 10, 2009 to September 10, 2009, secured by $1,460,793 of cash in bank

 

 

2,921,585

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 16, 2009 to September 16, 2009, secured by $3,213,743 of cash in bank

 

 

6,427,486

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 17, 2009 to March 17, 2009, secured by $584,317 of cash in bank

 

 

1,168,634

 

 

 

 

 

 

 

 

 

 

 

Notes payable to CEC CoreCast Corporation Limited, honored by the Bank of Communications Tianjin Shenyi Street Branch, from March 23, 2009 to September 23, 2009, secured by $876,478 of cash in bank

 

 

1,752,951

 

 

 

              

 

 

                      

 

 

                      

 

Total notes payable

 

$

23,956,994

 

$

17,507,514

 


NOTE 12 ACCRUED EXPENSES AND OTHER PAYABLES

As of March 31, 2009 and December 31, 2008, the accrued expenses and other liabilities of the Company were summarized as follows:

 

 

2009

 

2008

 

 

 

 

 

 

 

Accrued machinery rent

      

$

1,159,644

      

$

1,158,189

 

Accrued plant rent

 

763,410

 

807,404

 

Accrued utility

 

658,975

 

608,480

 

Accrued others

 

 

46,451

 

Welfare & salary payable

 

52,272

 

53,702

 

Others

 

122,892

 

158,373

 

 

 

                      

 

                      

 

Total accrued expenses and other payables                                        

 

$

2,757,193

 

$

2,832,599

 




68



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 13 LONG-TERM LOANS

As of March 31, 2009 and December 31, 2008, the Company’s long-term loans consisted of the followings:

 

     

2009

     

2008

 

 

 

 

 

 

 

 

 

Loan from Nantong Zong Yi Investment Co., Ltd., due from January 29, 2008 to January 28, 2010. with interest at same period secured bank lending rate (7.56%) plus 0.756%, secured by the Company’s fixed assets

     

$

730,396

     

$

729,480

 

 

 

 

 

 

 

 

 

Loan from Nantong Zong Yi Investment Co., Ltd., due from March 5, 2008 to March 4, 2010. with interest at same period secured bank lending rate (7.56%) plus 0.756%, secured by the Company’s fixed assets

 

 

438,238

 

 

437,688

 

              

 

 

                      

 

 

                      

 

Total notes payable

 

$

1,168,634

 

$

1,167,168

 

NOTE 14 DIVIDENDS PAYABLE

In June 2007, before the Company acquired 51.03% of TCB Digital, TCB Digital decided to distribute cash dividends to its original shareholders of $1,074,068 (RMB7,862,700). The Company paid dividends of $495,926 (RMB3,900,000) in July 2007 to its original shareholders. The balance of dividends payable was $578,868 and $578,142 as of March 31, 2009 and December 31, 2008 respectively, representing the dividend payable to TCBGCL amounting to RMB3,962,700. The Company has no plan to pay this amount in the first two quarters of 2009. The specific due date of the dividend will be negotiated between the current shareholders and original shareholders of the Company. The fluctuation of the balance of dividend payable represents the fluctuation of currency exchange rate.

NOTE 15 RELATED PARTY BALANCES AND TRANSCATIONS

Due from related parties

As of March 31, 2009 and December 31, 2008, due from related parties were:

 

 

2009

 

2008

 

 

 

 

 

 

 

Due from related parties - short term

     

 

 

     

 

 

 

 

 

 

 

 

 

 

 

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

 

$

1,155,996

 

$

673,380

 

Hebei Leimone

 

746,880

 

745,943

 

Shanghai Spreadbridge Information Technology Co., Ltd.

 

2,026,465

 

2,111,460

 

Beijing Leimone Shengtong Wireless Technology Co., Ltd.             

 

 

 

 

561,699

 

Gu Lei

 

 

511,277

 

 

575,710

 

Leimone (Tianjin) Industrial Co., Ltd.

 

 

616,425

 

 

582,096

 

Beijing Leimone Shengtong Cultural Development Co., Ltd.

 

 

29,216

 

 

14,590

 

TCBGCL

 

 

-

 

 

74,484

 

Tianjin Tong Guang Group Wanjie Import & Export Trading Co., Ltd.

 

 

3,235,801

 

 

 

 

712

 

 

92,058

 

 

51,990

 

Zhejiang Leimone Electronics Co., Ltd.

 

 

686,371

 

 

678,489

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total due from related parties-short term

 

 

9,100,489

 

 

6,069,842

 

 

 

 

 

 

 

 

 

Due from related parties – long term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beijing Leimone Shengtong Wireless Technology Co., Ltd.

 

 

247,604

 

 

247,294

 

 

 

 

 

 

 

 

 

Total due from related parties    

 

$

9,348,093

 

$

6,317,136

 




69



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 15 RELATED PARTY BALANCES AND TRANSCATIONS (continued)

Due from related parties (continued)

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd. (“Electronics Science & Tech”), an entity related to the Company through a common shareholder of TCB Digital, purchased products from the Company. For the three months ended March 31 2009 and 2008, the Company recorded net revenues of $481,700 and $277,188 from sales to Electronics Science & Tech respectively.

Hebei Leimone is controlled by Gu, the majority shareholder of the Company.

a.

Hebei Leimone sells certain handsets to the Company. For the three months ended March 31 2009 and 2008, the Company recorded total purchases from Hebei Leimone of nil and nil respectively. The balances due from Hebei Leimone represented advances to Hebei Leimone which were $68,292 and $68,206 respectively as of March 31, 2009 and December 31, 2008;

b.

The Company sells certain products and provides some technical services to Hebei Leimone. For the three months ended March 31 2009 and 2008, the Company recorded net revenues of $219,088 and $406,414 respectively from sales to Hebei Leimone; and as of March 31, 2009 and December 31, 2008, the balances of due from Hebei Leimone regarding such sales were $437,558 and $437,009 respectively;

c.

Additionally, Hebei Leimone borrowed money from the Company. The borrowings bear no interest and had a maturity of 12 months. As of March 31, 2009 and December 31, 2008, the balance of such loans was $241,030 and $240,728, among which $43,823 is due on October 20, 2009 and $197,207 is due on December 25, 2009.

Shanghai Spreadbridge Information Technology Co., Ltd. (“Shanghai Spreadbridge”) is controlled by Gu, the majority shareholder of the Company.

b.

Shanghai Spreadbridge borrows money from the Company. The borrowings bear no interest and had a maturity of 14 months. As of March 31, 2009 and December 31, 2008, the balances of loans were $379,806 and $393,919 respectively, of which $393,919 was due on December 31, 2008 and $14,590 was subsequently received on February 19, 2009;

c.

The Company sells certain products to Shanghai Spreadbridge. For the three months ended March 31 2009 and 2008, the Company recorded net revenues of nil and $2,653,574 from sales to Shanghai Spreadbridge respectively. As of March 31, 2009 and December 31, 2008, the balances of due from Shanghai Spreadbridge related to such sales was $1,249,986 and $1,263,007 respectively;

d.

Additionally, Shanghai Spreadbridge sells raw materials to the Company. For the three months ended March 31 2009 and 2008, the Company recorded total purchases from Shanghai Spreadbridge of nil and nil respectively. The amount due from Shanghai Spreadbridge represented advances made and the amount was $396,673 and $454,534 as of March 31, 2009 and December 31, 2008 respectively.

Beijing Leimone Shengtong Wireless Technology Co., Ltd. (“Beijing Leimone”) was founded by Gu, the majority shareholder of the Company.

a.

Beijing Leimone borrows money from the Company. The borrowings bear no interest and had a maturity of 12 months or more. As of March 31, 2009 and December 31, 2008, the balance of such loans was $247,604 and $247,294 and is due on March 30, 2010.

b.

TCB Digital transferred a project to Beijing Leimone on June 25, 2008 and as of December 31, 2008, the balance related to this business was $561,699, which was received on March 11, 2009.



70



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 15 RELATED PARTY BALANCES AND TRANSCATIONS (continued)

Due from related parties (continued)

The majority shareholder of the Company Gu borrowed money from the Company, these borrowings bear no interest and had a two-year repayment term. As of March 31, 2009 and December 31, 2008, the balances of such loans were $511,277 and $575,710 respectively; and the amount outstanding as of March 31, 2009 is due on August 5, 2009.

The amount due from Leimone (Tianjin) Industrial Co., Ltd. (“Tianjin Leimone”) represented short term loans granted by the Company. Tianjin Leimone is controlled by Gu. The borrowing bears no interest and had a one-year repayment term. As of March 31, 2009 and December 31, 2008, the balance of loans was $616,425 and $551,458 among with bulk due on May 12, 2009, $30,676 due on December 25, 2009 and $33,598 due on March 9, 2010. Additionally, the Company made an advance payment to Tianjin Leimone on December 18, 2007; and as of March 31, 2009 and December 31, 2008, the balances of advance payments amounted to nil and $14,649,850 respectively.

The amount due from Beijing Leimone Shengtong Cultural Development Co., Ltd. (“Beijing Leimone Cultural”) represented a short term loan granted by the Company. Beijing Leimone Cultural was controlled by Gu. The borrowing bears no interest and no maturity date.

The amount due from TCBGCL represented an advance payment. TCBGCL is a shareholder of TCB Digital.

Tianjin Tong Guang Wanjie Import & Export Trading Co., Ltd.(“Wanjie”), an entity related to the Company through a common shareholder of TCB Digital, sells products to the Company. The balances due from Wanjie represented advances which were $3,235,801 and nil respectively as of March 31, 2009 and December 31, 2008;

712 is a minority shareholder of TCB Digital. 712 purchases raw materials from the Company. For the three months ended March 31 2009 and 2008, the Company recorded total revenues from such sales to 712 of $75,051 and nil respectively.

Zhejiang Leimone Electronics Co., Ltd. (“Zhejiang Leimone”) was controlled by Gu. Zhejiang Leimone acquired Personal Phone System Electronic Manufacturing Service from the Company in 2008. The acquisition cost was $628,141 and had not been paid as at March 31, 2009. Additionally, the Company purchases raw materials from Zhejiang Leimone. The amount due from Zhejiang Leimone represented the advance payment of nil and $30,845 and $51,136 as of December 31, 2008.

Due to related parties

As of March 31, 2009 and December 31, 2008, due to related parties were:

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

Hebei Leimone

 

$

233,727

     

$

233,434

 

Zhejiang Leimone

 

 

37,049

 

 

37,002

 

Gu

 

 

4,984,763

 

 

4,879,889

 

Others

 

 

8,805

 

 

10,844

 

 

 

 

                      

 

 

                      

 

 Total due to related parties                                                        

 

$

5,264,344

 

$

5,161,169

 


The Company borrowed money from Hebei Leimone. The borrowing bears no interest and had a two-year repayment term. As of March 31, 2009 and December 31, 2008, the balances of such loans amounted to $233,727 and $233,434 respectively; and the outstanding amount as of March 31, 2009 is due on November 21, 2009.



71



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 15 RELATED PARTY BALANCES AND TRANSCATIONS (continued)

Due to related parties (continued)

Zhejiang Leimone transferred some fixed assets to the Company which amounted to $37,002 which the Company has not yet paid as at March 31, 2009.

Gu provides fund to the Company with no interest and repayment term. As of March 31, 2009 and December 31, 2008, the balances of funds provided by Gu was $4,984,763 and $4,879,889 respectively.

NOTE 16 MINORITY INTERESTS

Minority interests on the consolidated statement of income and comprehensive income of $16,914 and $(4,737) for the three months ended March 31, 2009 and 2008 respectively represents the minority shareholders’ proportionate share of the net (income)/loss of the Company.

NOTE 17 INCOME TAX

TCB Digital and JS Leimone are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% (33% before 2008) on income reported in the statutory financial statements after appropriate tax adjustments.

JS Leimone is exempt from income tax in PRC for two years starting from the first profitable year or the year 2008, whichever is earlier, and is subject to a 50% discount on normal income tax rate for the following three years. 

TCB Digital had operating profit (loss) of approximately ($65,567) and $29,027 for the three months ended March 31, 2009 and 2008, respectively, while JS Leimone had operating profit (loss) of approximately $36,153 and $(29,619) for the three months ended March 31, 2009 and 2008, respectively, while Profit Harvest had operating profit of approximately $1,080,051 and nil for the three months ended March 31, 2009 and 2008, respectively. The additional deducted expenses in 2008 was the additional 50% of R&D expenses deducted before income tax.

The following table summarizes the temporary differences which result in deferred tax assets and liabilities as of March 31, 2009 and December 31, 2008:

 

 

2009

 

2008

 

 

 

 

 

 

 

Deferred tax assets:

     

 

 

     

 

 

 

Inventory impairment

 

 

169,300

 

 

92,116

 

Buy-back reverse

 

 

232,046

 

 

290,550

 

Bad debt allowance

 

 

9,972

 

 

 

Expenses deductible in next year                             

 

 

171,385

 

 

171,490

 

Accrued rental deductible in next year

 

 

822

 

 

 

Understated cost and expenses

 

 

63,857

 

 

58,679

 

Carryforward operating loss

 

 

23,115

 

 

 

 Total deferred tax assets

 

 

670,527

 

 

612,835

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

Understated sales

 

 

(11,902

)

 

(11,879

)

 

 

 

                      

 

 

                      

 

Net deferred tax assets

 

 

658,625

 

 

600,956

 

 



72



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 17 INCOME TAX

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the three months ended March 31, 2009 and 2008:

 

2009

 

2008

 

 

 

 

US statutory rates

(34%)

 

(34%)

Tax rate difference

17.74%

 

17.5%

Valuation allowance

(1.39%)

 

(6.1%)

Effect of tax holiday

(0.86%)

 

16.6%

Additional deducted expenses

0.0%

 

0.0%

 

 

 

 

Tax per financial statements

(14.0%)

 

(6.0%)

 

 

 

 


NOTE 18 STATUTORY RESERVES

The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriations to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve equals 50% of the entities’ registered capital or members’ equity. Appropriations to the statutory public welfare fund are at least 5% of the after tax net income determined in accordance with PRC GAAP. Commencing on January 1, 2006, new PRC regulations waived the requirement for appropriating retained earnings to a welfare fund. For the three months ended March 31, 2009 and 2008, the Company did not appropriate statutory surplus reserve. As of March 31, 2009 and December 31, 2008, the Company’s statutory surplus reserve amounted to $569,193 for both periods.



73



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 19 CONCENTRATION DISCLOSURE

The following table set forth the Company’s major customers whose purchases from the Company represent over 10% of the Company’s sales for the three months ended March 31, 2009 and 2008:

2009

2008

Customers

 

Sales revenue

% of total revenue

Customers

 

Sales revenue

% of total revenue

CLP Guangtong Beijing Science and Technology Co., Ltd.

$

9,211,255

32%

Beijing Orsus Xelent Technology & Trading Co., Limited.

$

2,788,470

25%

Shenzhen Pengxiang Huateng Electronic Technology Co., Ltd

 

4,724,633

16%

Shanghai Spreadbridge Information Technology Co., Ltd.

 

2,268,012

20%

Kingbong International (HK) Group Co., Ltd

 

3,184,821

11%

Beijing Beny Wave Science And Technology Co., Ltd.

 

2,026,037

18%

 

 

 

 

WINCOS Technology (HK) Co.,Ltd.

 

1,632,881

14%

Total

$

17,120,709

59%

Total

$

8,715,400

77%


The following table set forth the Company’s major suppliers whose sales to the Company represent over 10% of the Company’s purchases for the three months ended March 31, 2009 and 2008:

2009

2008

Suppliers

 

Purchases

% of total purchase

Suppliers

 

Purchases

% of total purchase

CEC CoreCast Corporation Limited

$

10,463,270

38%

Tianjin Tong Guang Group Electronics Science & Technology Co., Ltd.

$

4,696,708

29%

Hong Kong Westdragon Co., Ltd

 

3,529,528

13%

Beijing Xingwang Shidai Tech & Trading Co., Ltd.

 

3,609,414

23%

 

 

 

 

Sichuan Moba Industrial Co., Ltd.

 

3,553,670

22%

Total

$

13,992,798

51%

Total

$

11,859,792

74%




74



GOLD LION HOLDING LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2009 & 2008


NOTE 20 OPERATING RISK

Industry risk

The industry in which we compete is a rapidly evolving, highly competitive and fragmented market driven by consumer preferences and quickly evolving technology. Increased competition may result in price reductions, reduced gross margin and loss of market share. Failure to compete successfully against current or future competitors could have a material adverse effect on the Company’s business, operating results and financial condition.

Product risk of obsolescence

From the second half of year 2007, the Company began to involve in the agent business of some famous high-end smart phones. Because of the restructure of China Unicom, one type of smart phones could not be sold as expected and inventory impairment loss arose. Such uncertain and unpredictable events could take significant effect on the Company’s profits in the future.

Exchange risk

The Company can not guarantee the Renminbi and US dollars exchange rate will remain steady, therefore the Company could post the same profit for two comparable periods and post higher or lower profit depending on exchange rate of Renminbi and US dollars. The exchange rate could fluctuate depending on changes in the political and economic environments without notice.

Political risk

Currently, PRC is in a period of growth and is openly promoting business development in order to bring more business into PRC. Additionally PRC currently allows a Chinese corporation to be owned by a United States corporation. If the laws or regulations relating to ownership of a Chinese corporation are changed by the PRC government, the Company's ability to operate the PRC subsidiaries could be affected.

Interest risk

The Company is exposed to interest rate risk arising from short-term variable rate borrowings from time to time. The Company’s future interest expense will fluctuate in line with any change in borrowing rates. The Company does not have any derivative financial instruments as of December 31, 2008 and 2007 and believes its exposure to interest rate risk is not material.

NOTE 21 Commitment

Operating lease commitment

The Company has operating leases and the lessor of the premises for TCB Digital is TCBGCL, a common shareholder of TCB Digital. Pursuant to these leases which rates of rent are all at Rmb 8 per square meter per month for both production facilities and dormitory space, the commitment of the Company is as follows:

As of March 31, 2009

 

 

 

 

 

 

 

2009 April – December

 

$

150,698

 

2010

 

200,930

 

2011

 

200,930

 

2012

 

117,209

 

 

 

 

 

 

Total minimum lease payments

 

$

669,767

 





75





UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF ZOOM

Unaudited Pro Forma Condensed Combined Balance Sheet As of December 31, 2008

 

 

As of December 31, 2008

 

 

 

Historical

 

 

 

 

 

 

Pro-forma

 

 

 

Zoom

 

Gold Lion

 

Adjustment

 

Combined

 

Spin-out

(1)

Combined

 

 

 

(in thousands, except per share data)

 

Current assets

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Cash and cash equivalents

 

$

1,205

 

$

813

 

$

 

$

2,018

 

$

(1,205

)

$

813

 

Restricted cash

 

 

 

 

8,754

 

 

 

 

8,754

 

 

 

 

8,754

 

Accounts receivable

 

 

1,163

 

 

12,367

 

 

 

 

13,530

 

 

(1,163

)

 

12,367

 

Other receivables, net

 

 

234

 

 

1,120

 

 

 

 

1,354

 

 

(234

)

 

1,120

 

Advance to suppliers

 

 

 

 

24,275

 

 

 

 

24,275

 

 

 

 

24,275

 

Inventories, net

 

 

2,903

 

 

3,742

 

 

 

 

6,645

 

 

(2,903

)

 

3,742

 

Due from related parties

 

 

 

 

6,070

 

 

 

 

6,070

 

 

 

 

6,070

 

Total current assets

 

 

5,505

 

 

57,141

 

 

 

 

62,646

 

 

(5,505

)

 

57,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

103

 

 

7,055

 

 

 

 

7,158

 

 

(103

)

 

7,055

 

Long-term investments

 

 

960

 

 

66

 

 

 

 

1,026

 

 

(960

)

 

66

 

Due from related parties-long term

 

 

 

 

247

 

 

 

 

247

 

 

 

 

247

 

Deferred tax assets

 

 

 

 

613

 

 

 

 

613

 

 

 

 

613

 

Goodwill

 

 

 

 

103

 

 

 

 

103

 

 

 

 

103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

6,568

 

$

65,225

 

$

 

$

71,793

 

$

(6,568

)

$

65,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’
EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term loans

 

$

 

$

18,894

 

$

 

$

18,894

 

$

 

$

18,894

 

Notes payable

 

 

 

 

17,508

 

 

 

 

17,508

 

 

 

 

17,508

 

Accounts payable

 

 

1,211

 

 

3,581

 

 

 

 

4,792

 

 

(1,211

)

 

3,581

 

Advance from customers

 

 

 

 

3,785

 

 

 

 

3,785

 

 

 

 

3,785

 

Dividends payable

 

 

 

 

578

 

 

 

 

578

 

 

 

 

578

 

Taxes payable

 

 

 

 

775

 

 

 

 

775

 

 

 

 

775

 

Accrued expenses and other payables

 

 

399

 

 

2,833

 

 

 

 

3,232

 

 

(399

)

 

2,833

 

Due to related parties

 

 

 

 

5,161

 

 

 

 

5,161

 

 

 

 

5,161

 

Deferred tax liabilities

 

 

 

 

12

 

 

 

 

12

 

 

 

 

12

 

Total current liabilities

 

 

1,610

 

 

53,127

 

 

 

 

54,737

 

 

(1,610

)

 

53,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term loans

 

 

 

 

1,167

 

 

 

 

1,167

 

 

 

 

1,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

1,610

 

 

54,294

 

 

 

 

55,904

 

 

(1,610

)

 

54,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MINORITY INTERESTS

 

 

 

 

6,489

 

 

 

 

6,489

 

 

 

 

6,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares, issued and
outstanding; par value

 

 

94

 

 

 

 

211

(2)

 

305

 

 

 

 

305

 

Additional paid-in capital

 

 

31,786

 

 

3,553

 

 

(211

)

 

35,128

 

 

 

 

35,128

 

Statutory surplus reserve

 

 

 

 

569

 

 

 

 

569

 

 

 

 

569

 

Accumulated other comprehensive
income

 

 

345

 

 

244

 

 

 

 

589

 

 

 

 

589

 

Accumulated retained earning

 

 

(27,260

)

 

76

 

 

 

 

(27,184

)

 

(4,958

)

 

(32,142

)

Treasury stock

 

 

(7

)

 

 

 

 

 

(7

)

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

 

 

4,958

 

 

4,442

 

 

 

 

9,400

 

 

(4,958

)

 

4,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY

 

$

6,568

 

$

65,225

 

$

 

$

71,793

 

$

(6,568

)

$

65,225

 




76





Unaudited Pro Forma Condensed Combined Balance Sheet As of March 31, 2009

 

 

As of March 31, 2009

 

 

 

Historical

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zoom

 

Gold Lion

 

Adjustments

 

Combined

 

Spin-out

 

Pro-Forma
Combined

 

 

 

(in thousands, except per share data)

 

Current assets

     

 

            

     

 

                

     

 

              

     

 

              

     

 

              

     

 

              

 

Cash and cash equivalents

 

$

981

 

$

3,273

 

$

 

$

4,254

 

$

(981)

 

$

3,273

 

Restricted cash

 

 

 

 

11,978

 

 

 

 

11,978

 

 

 

 

11,978

 

Notes receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

999

 

 

5,389

 

 

 

 

6,388

 

 

(999

)

 

5,389

 

Other receivables, net

 

 

212

 

 

675

 

 

 

 

887

 

 

(212

)

 

675

 

Advance to suppliers

 

 

 

 

35,850

 

 

 

 

35,850

 

 

 

 

35,850

 

Inventories, net

 

 

2,522

 

 

3,346

 

 

 

 

5,868

 

 

(2,522

)

 

3,346

 

Prepaid expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from inter-company

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from related parties