UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 26, 2006
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CHINA DIRECT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-26415 13-3876100
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
5301 North Federal Highway, Suite 120, Boca Raton, Florida 33487
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (561) 989-9171
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(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI
China"), entered into an acquisition agreement with Chang Magnesium Company,
Limited., a Chinese limited liability company ("Chang Magnesium"), and its
parent, Taiyuan YiWei Magnesium Co., Ltd. ("Taiyuan YiWei Magnesium"). Under the
terms of the agreement, CDI China was to acquire a 51% equity ownership of Chang
Magnesium from Taiyuan YiWei Magnesium in exchange for a total capital
contribution to Chang Magnesium of $2,550,000, of which $1,000,000 is to be made
10 days after the closing, an additional $800,000 is to be made on or before
September 30, 2007, and the remaining $750,000 is to be made on or before
December 31, 2007. The closing of the transaction was subject to receipt by us
of audited financial statements of the operating entity and the contribution to
Chang Magnesium by Taiyuan YiWei Magnesium of property, plant or equipment of at
least $2,450,000.
On December 22, 2006 the transaction closed pursuant to its terms.
Following the closing, Taiyuan YiWei Magnesium retains a 49% equity
interest in Chang Magnesium. On the closing date Mr. Yuwei Huang entered into an
employment agreement with Chang Magnesium and CDI Shanghai Management Company,
Ltd., a wholly owned subsidiary of CDI China, to serve as CEO of Chang Magnesium
and an Executive Vice President of CDI Shanghai Management pursuant to which he
is responsible for the day to day operations of Chang Magnesium. Under the terms
of the one year agreement he will not receive any salary.
Our operations are presently conducted within two operating segments,
CDI China and China Direct Consulting. CDI China operates as a management
company for Chinese entities in which we have acquired a majority interest.
China Direct Consulting is a full service advisory division specializing in
companies based in and operating within the People's Republic of China and which
are traded on the U.S. public markets. We intend that Chang Magnesium, which
includes the operations of its wholly-owned subsidiary Taiyuan Changxin YiWei
Trading Co., Ltd. ("Changxin Trading"), will operate as a segment within CDI
China. Changxin Trading reported net revenues of $23,622,221 and $15,957,667 for
the fiscal year ended December 31, 2005 and the nine months ended September 30,
2006, and net income of $516,443 and $336,174, respectively, for those periods.
Chang Magnesium has not yet generated any revenues from its proposed operations.
The financial statements included elsewhere herein reflect the operations of
Changxin Trading for the periods presented.
About Chang Magnesium
Chang Magnesium was formed in March 2006 by Taiyuan YiWei Magnesium to
operate a newly constructed magnesium plant that will process and manufacture a
variety of magnesium by-products, including magnesium powder, magnesium scrap,
magnesium alloy and various grades of magnesium slabs. Taiyuan YiWei Magnesium
owns interests in seven subsidiary magnesium factories, a magnesium alloy
factory and a magnesium powder desulphurization reagent factory, all located in
China. It is generally regarded as the largest exporter of magnesium products in
China and the second largest producer in China. Following our acquisition of
Chang Magnesium as described above, Mr. Yuwei Huang, Taiyuan YiWei Magnesium's
Chairman, will serve as Chang Magnesium's CEO and an Executive Vice President
for CDI Shanghai Management Co. Ltd.
2
In June 2006 Taiyuan YiWei Magnesium contributed property, plant and
equipment valued at $2,567,353, which represented all the assets related to the
magnesium plant, to Chang Magnesium. This satisfied one condition preceding to
the closing of our acquisition of a majority interest in Chang Magnesium as
described above. In June 2006 Chang Magnesium acquired 100% of Changxin Trading
from Taiyuan YiWei Magnesium for approximately $125. Changxin Trading, which was
formed in November 2003, is an exporter of magnesium products.
The newly constructed magnesium plant from which Chang Magnesium will
operate is located in the Aluminum & Magnesium Industrial Park in Yangqu County,
of the Shangxi Province. According to the China Magnesium Industry Report 2005
(March 2006) China, which has been the world's leading magnesium producer for
the past eight years, has in excess of 100 magnesium manufacturers with
approximately 468,000 metric tons production in 2005. Raw magnesium production
volume increased 139% from 2000 to 2005; the production of magnesium ingot
increased 345.5% and magnesium powder increased 89.04% in the same time period.
Most of the magnesium in China is produced in the Shanxi Province which
has abundant resources of dolomite, large coal deposits and some ferrosilicon
production. In recent years, the Shangxi Province has taken a leadership
position in China in various aspects of magnesium extraction technology and
related environmental protection work and officials from the Ministry of
Commerce (MOC) have designated the Shanxi Province as the central magnesium
production region of China.
As a result the Shangxi Province has emerged as an important region for
magnesium related companies. The annual output of magnesium in the Shangxi
Province is approximately 360,000 metric tons, accounting for 55% of the world's
total magnesium output, and 77% of the total output in China. As such the
manufacturers in the region have a degree of pricing power of magnesium in both
domestic and international markets.
Chang Magnesium owns the buildings and all the equipment located at the
plant. The land use rights are owned by Taiyuan Sanxing Coal Gasification Co.,
Ltd ("Sanxing"), an unrelated third party. Sanxing has granted Chang Magnesium
with the land use rights through 2021 at no cost. The plant is approximately
250,000 square feet and has an annual production capacity of 6,000 metric tons
of magnesium and related magnesium products.
The plant has the ability to process and manufacture a variety of
magnesium by-products, including magnesium powder, magnesium scrap, magnesium
alloy and various grades of magnesium slabs, which Chang Magnesium expects to
sell in bulk. Chang Magnesium expects to produce magnesium ingot with a
magnesium element in excess of 99.95% and it intends to produce 10
specifications of magnesium ingot ranging in size from 2 kg to 150 kg. It is
anticipated that Chang Magnesium will produce magnesium alloy which meets ASTM
International standards.
It is estimated that approximately 80% of Chang Magnesium's annual
revenue from the plant will be related to sales of magnesium ingot and
approximately 20% from sales of magnesium powder, magnesium scraps, magnesium
alloy and other magnesium related products. Chang Magnesium will sell its
products directly in the global market through its subsidiary Changxin Trading.
Chang Magnesium expects the plant to commence operations in January 2007.
Changxin Trading is an exporter of magnesium products including
magnesium powder, magnesium scrap, magnesium alloy and various grades of
ordinary magnesium slabs. It purchases product from a number of suppliers,
including several related parties.
3
According to webelements.com, the Chinese government has recently
eliminated the VAT (value added tax) rebate on magnesium. Previously industry
participants were eligible for a 5% tax credit on magnesium exports. The
elimination of the tax credit has effectively increased market prices on
magnesium and currently the market price is approximately $2,100 per metric ton
on the European market. Changxin Trading exported 40,000 metric tons of
magnesium products in fiscal 2005, representing approximately 10% of China's
magnesium-related exports. Changxin Trading is reliant on a limited number of
customers which are located in the United States, Canada, Australia and Japan.
For fiscal 2005 one customer represented approximately 10% of Changxin Trading's
revenues.
Changxin Trading's operations are located at Yifen Street, Maite Moore
Business Center Suite 910 Taiyuan, China 030006
At December 22, 2006 Chang Magnesium had 35 full-time employees,
including its executive officer, which included 29 employees related to the
magnesium plant and six at Changxin Trading.
Chang Magnesium was formed as a new Sino-American joint venture. As a
Sino-American joint venture, it is governed by the Income Tax Law of the Peoples
Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws pursuant to which foreign invested
enterprises are subject to two-year tax exemption from the first profitable year
after the joint venture is established and are subject to three-year tax at a
statutory rate of 15% from the third profitable year.
As an exporter of goods, Changxin Trading receives cash incentives from
the central government of up to 14% to 15% of the gross amount of goods exported
to encourage the export of goods from China. As a result of this government
incentive, from time to time, Changxin Trading may export goods at its cost or
at a loss up to the amount of the government incentive. For the fiscal year
ended December 31, 2005 and the nine months ended September 30, 2006 these
incentives totaled $2,543,606 and $1,331,401,
From time to time Changxin Trading has engaged in transactions with
related parties, including:
o it purchases products from Taiyuan YiWei Magnesium and its affiliated
entities (collectively, the "Taiyuan YiWei Magnesium Group") for resale to its
customers. For the fiscal year ended December 31, 2005 and the nine months ended
September 30, 2006, Changxin Trading purchased $11,050,596 and $6,214,588,
respectively, of products from the Taiyuan YiWei Magnesium Group for resale. At
December 31, 2005 and September 30, 2006, Changxin Trading owed the Taiyuan
YiWei Magnesium Group $1,264,765 and $994,444, respectively, for these
purchases,
o from time to time Changxin Trading would receive working capital
advances from, or make working capital advances to, Taiyuan YiWei Magnesium and
its affiliates. The advances were non-interest bearing, unsecured and due on
demand. At December 31, 2005 Changxin Trading's financial statements which
appear elsewhere in this report reflect an aggregate of $640,981 due from
related parties, which includes $619,153 due from Taiyuan YiWei Magnesium and
its affiliates. At December 31, 2005 Changxin Trading did not owe Taiyuan YiWei
Magnesium or its affiliates any funds for working capital advances. At September
30, 2006 Changxin Trading owed Taiyuan YiWei Magnesium or its affiliates
$303,080 and Changxin Trading was not owed any funds by these entities,
4
o from time to time Changxin Trading also advances funds to its
executive officers. At December 31, 2005 and September 30, 2006 these executive
officers owed Changxin Trading $21,828 and $22,260, respectively. These amounts
are non-interest bearing, unsecured and due on demand.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
(i) Audited financial statements of Taiyuan Changxin YiWei Trading
Company, Limited for the fiscal years ended December 31, 2005 and 2004, and
(ii) Financial statements (unaudited) of Taiyuan Changxin YiWei Trading
Company, Limited for the nine months ended September 30, 2006 and 2005.
(b) Pro forma financial information.
(i) Pro forma statement of operations (unaudited) for the year ended
December 31, 2005,
(ii) Pro forma statement of operations (unaudited) for the nine months
ended September 30, 2006, and
(iii) Pro forma consolidated balance sheet (unaudited) at September 30,
2006.
(d) Exhibits
10.1 Employment agreement dated December 22, 2006 by and between CDI
Shanghai Management Company, Limited and Mr. Yuwei Huang.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CHINA DIRECT, INC.
Date: December 27, 2006 By: /s/ James Wang
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James Wang,
Chief Executive Officer
5
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
FINANCIAL STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
F-1
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm F-3
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statement of Members' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 to F-22
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Directors
Taiyuan Changxin YiWei Trading Company, Limited
We have audited the accompanying balance sheet of Taiyuan Changxin YiWei Trading
Company, Limited as of December 31, 2005 and 2004, and the related statements of
operations, members' equity and cash flows for the year ended December 31, 2005
and 2004. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Taiyuan Changxin YiWei Trading
Company, Limited as of December 31, 2005 and 2004, and the results of its
operations and its cash flows for the year ended December 31, 2005 and 2004 in
conformity with accounting principles generally accepted in the United States.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
September 30, 2006
F-3
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
ASSETS
2005 2004
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CURRENT ASSETS:
Cash ............................................. $ 143,392 $ 374,532
Accounts receivable .............................. 312,416 -
Inventory ........................................ 453,520 689,445
Due from related party ........................... 640,981 2,131,545
Prepaid expenses and other ....................... 4,301,834 761,838
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Total Current Assets ......................... 5,852,143 3,957,360
PROPERTY AND EQUIPMENT - Net ......................... 29,122 -
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Total Assets ................................. $5,881,265 $3,957,360
========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $3,959,732 $2,215,493
Accrued expenses ................................. 80,660 16,823
Advance from customers ........................... - 625,401
Income taxes payable ............................. 356,241 163,712
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Total Current Liabilities .................... 4,396,633 3,021,429
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MEMBERS' EQUITY:
Members' Equity .................................. 603,865 603,865
Retained earnings ................................ 848,508 332,066
Other comprehensive income - foreign currency .... 32,259 -
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Total Members' Equity ........................ 1,484,632 935,931
---------- ----------
Total Liabilities and Members' Equity ........ $5,881,265 $3,957,360
========== ==========
The accompanying notes are an integral part of the statements.
F-4
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
STATEMENTS OF OPERATIONS
For the For the
Year Ended Year Ended
December 31, December 31,
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2005 2004
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NET REVENUES ................................. $ 23,622,221 $ 25,651,231
COST OF SALES ................................ 22,301,757 25,042,351
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GROSS PROFIT ................................. 1,320,464 608,880
------------ ------------
OPERATING EXPENSES:
Selling expenses ........................ 406,562 40,514
General and administrative .............. 111,085 122,987
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Total Operating Expenses ............. 517,647 163,501
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PROFIT FROM OPERATIONS ....................... 802,817 445,379
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OTHER INCOME (EXPENSE):
Other (expense) income .................. (35,895) 78,328
Interest income (expense) ............... 3,888 (27,610)
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Total Other (Expense) Income ......... (32,007) 50,718
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PROFIT BEFORE INCOME TAXES ................... 770,810 496,097
INCOME TAXES ................................. (254,367) (163,712)
------------ ------------
NET INCOME ................................... $ 516,443 $ 332,385
============ ============
The accompanying notes are an integral part of the statements.
F-5
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
STATEMENT OF MEMBERS' EQUITY
December 31, 2005 and 2004
Other Total
Members' Retained Comprehensive Members'
Equity Earnings Income Equity
---------- ---------- ---------- ----------
Balance, December 31, 2003 ................. $ 603,865 $ (319) $ - $ 603,546
Net Income for the year ............... - 332,385 - 332,385
---------- ---------- ---------- ----------
Balance, December 31, 2004 ................. 603,865 332,066 - 935,931
---------- ---------- ---------- ----------
Comprehensive Income:
Net Income for the year ............... - 516,443 - 516,443
Foreign currency translation adjustment - - 32,259 32,259
---------- ---------- ---------- ----------
Balance, December 31, 2005 ................. $ 603,865 $ 848,509 $ 32,259 $1,484,633
========== ========== ========== ==========
See notes to consolidated financial statements
F-6
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
----------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................. $ 516,443 $ 332,385
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................... 469 -
Changes in assets and liabilities:
Accounts receivable ..................................... (312,416) -
Other receivable ........................................ - 601,679
Deferred Expenses ....................................... - 946
Inventories ............................................. 235,925 (689,445)
Prepaid and other current assets ........................ (3,539,996) (761,838)
Accounts payable ........................................ 1,744,238 2,215,493
Accrued expenses ........................................ 63,837 16,823
Income tax payable ...................................... 192,529 163,712
Advance from customers .................................. (625,401) 625,401
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............ (1,724,372) 2,505,156
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties ................................... 1,490,564 (2,131,545)
Capital expenditures ....................................... (29,591) -
----------- -----------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES ...... 1,460,973 (2,131,545)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH ................................ 32,259 -
----------- -----------
NET (DECREASE) INCREASE IN CASH ................................ (231,140) 373,611
CASH - beginning of year ....................................... 374,532 921
----------- -----------
CASH - end of year ............................................. $ 143,392 $ 374,532
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest ............................................. $ - $ 29,770
=========== ===========
Income Taxes ......................................... $ 69,010 $ -
=========== ===========
The accompanying notes are an integral part of the statements.
F-7
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Taiyuan Changxin YiWei Trading Co., Ltd., a Chinese limited liability company,
is referred to in this report as the "Company", "Changxin Trading", "we", "us"
or "our".
Taiyuan Changxin YiWei Trading Co., Ltd. ("Changxin Trading"), a Chinese limited
liability company, was established November 23, 2003. Changxin Trading is a
reseller, distributor and exporter of magnesium products.
Changxin Trading resells various forms of magnesium including but not limited to
magnesium powder, magnesium scrap, magnesium alloy and various grades of
ordinary magnesium slabs. Changxin Trading resells magnesium products locally
within China and exports magnesium from China. Changxin Trading has forged
relationships with global magnesium consumers. In the past Changxin Trading has
supplied various magnesium related products to Alcoa Inc. (United States),
Alcan, Inc. (Canada), Capral (Australia), and Japan Materials Co., Ltd.
Approximately 70% of Changxin Trading revenues are derived from the distribution
of magnesium slabs. Changxin Trading exported 40,000 metric tons in 2005,
representing approximately 10% of China magnesium related exports.
In March 2006, Chang Magnesium Co. Ltd. ("Chang Magnesium") was formed by
Taiyuan YiWei Magnesium Co., Ltd. ("Taiyuan YiWei Magnesium")
In June 2006 Chang Magnesium acquired 100% of Changxin Trading from Taiyuan
YiWei Magnesium for approximately $125. As a result Changxin Trading is a wholly
owned subsidiary of Chang Magnesium.
In June 2006 Taiyuan YiWei Magnesium contributed property, plant and equipment
valued at $2,567,353, which represented all the assets related to the magnesium
plant, to Chang Magnesium. Chang Magnesium was formed by Taiyuan YiWei Magnesium
to operate a newly constructed magnesium plant that will process and manufacture
a variety of magnesium by-products, including magnesium powder, magnesium scrap,
magnesium alloy and various grades of magnesium slabs.
Taiyuan YiWei Magnesium is a diversified magnesium organization which owns
interests in seven subsidiary magnesium factories, a magnesium alloy factory and
a magnesium powder desulphurization reagent factory, all located in China. China
is generally regarded as the largest exporter for magnesium products in China
and the second largest producer in the world.
F-8
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
The newly constructed magnesium plant from which Chang Magnesium will operate is
located in the Aluminum & Magnesium Industrial Park in Yangqu County, of the
Shangxi Province. According to the China Magnesium Industry Report 2005 (March
2006) China, which has been the world's leading magnesium producer for the past
eight years, has in excess of 100 magnesium manufacturers with approximately
468,000 metric tons production in 2005. Raw magnesium production volume
increased 139% from 2000 to 2005; the production of magnesium ingot increased
345.5% and magnesium powder increased 89.04% in the same time period.
Most of the magnesium in China is produced in the Shanxi Province which has
abundant resources of dolomite, large coal deposits and some ferrosilicon
production. In recent years, the Shangxi Province has taken a leadership
position in China in various aspects of magnesium extraction technology and
related environmental protection work and officials from the Ministry of
Commerce (MOC) have designated the Shanxi Province as the central magnesium
production region of China.
As a result, the Shangxi Province has emerged as an important region for
magnesium related companies. The annual output of magnesium in the Shangxi
Province is approximately 360,000 metric tons, accounting for 55% of the world's
total magnesium output, and 77% of the total output in China. As such the
manufacturers in the region have a degree of pricing power of magnesium in both
domestic and international markets.
Chang Magnesium expects to produce magnesium ingot with a magnesium element in
excess of 99.95% and it intends to produce 10 specifications of magnesium ingot
ranging in size from 2 kg to 150 kg. It is anticipated that Chang Magnesium will
produce magnesium alloy which meets ASTM International standards.
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI China"),
entered into an acquisition agreement with Chang Magnesium. Under the terms of
the agreement CDI China agreed to infuse $1,000,000 to Chang Magnesium ("Initial
Funds") 10 days post closing. On or before September 30, 2007, CDI China shall
deliver $800,000 of investment capital to Chang Magnesium, on or before December
31, 2007 CDI China shall deliver $750,000 of investment capital to Chang
Magnesium. The closing of the transaction was subject to audited financial
statements for Chang Magnesium which reflected a contribution to Chang Magnesium
by Taiyuan YiWei Magnesium of property, plant or equipment with a minimum value
of $2,450,000. On June 1, 2006 Taiyuan YiWei Magnesium contributed property,
plant and equipment valued at $2,567,353, which represented all the assets
related to the magnesium plant, to Chang Magnesium.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China holds a 51% majority interest in Chang Magnesium.
F-9
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, entered into an employment agreement with
Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising the
operations of Chang Magnesium. The term of the five year agreement provides for
no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
We intend that Chang Magnesium, which includes the operations of its
wholly-owned subsidiary Changxin Trading, will operate as a segment within CDI
China. Chang Magnesium has not yet generated any revenues from its proposed
operations.
BASIS OF PRESENTATION
The Financial Statements reflect the name Taiyuan Changxin YiWei Trading, Co.
Ltd. The financial statements for the years ended December 31, 2005 and 2004
solely reflect the operations of Changxin Trading. Chang Magnesium was formed by
Taiyuan YiWei Magnesium in March 2006. The official stamp for Chang Magnesium
was received and the name recognized by the central government of China in
November 2006. Chang Magnesium expects to commence operations at the new plant
in January 2007. Changxin Trading commenced operations in November 2003. 2004
was the first full calendar year of operations for Changxin Trading. As of June
1, 2006, Changxin Trading is a wholly owned subsidiary of Chang Magnesium. As
such the financial statements for the years ended December 31, 2005 and 2004
solely reflect the operations of Changxin Trading.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared on the historical cost basis, except
for the certain financial instruments. The principal accounting policies adopted
are set out below.
BASIS OF FINANCIAL STATEMENTS
Changxin Trading maintains its records and prepares its financial statements in
accordance with accounting principles generally accepted in China. Certain
adjustments and reclassifications have been incorporated in the accompanying
financial statements to conform to accounting principles generally accepted in
the United States of America.
F-10
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH AND CASH EQUIVALENTS
Changxin Trading classifies highly liquid temporary investments with an original
maturity of three months or less when purchased as cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consists primarily of amounts due to Changxin Trading from
normal business activities. Changxin Trading maintains an allowance for doubtful
accounts to reflect the expected non-collection of accounts receivable based on
past collection history and specific risks identified within the portfolio. If
the financial condition of the customers were to deteriorate resulting in an
impairment of their ability to make payments, or if payments from customers are
significantly delayed, additional allowances might be required. As of December
31, 2005 and 2004, Changxin Trading recorded Accounts Receivable of $312,416 and
$0 respectively. As of December 31, 2005 and 2004, Changxin Trading recorded
allowance for doubtful accounts of $0 and $0 respectively.
Changxin Trading commenced operations in November 2003. In 2004, the first full
calendar year of operations for Changxin Trading, the standard collection policy
was to receive payment upon delivery. As such for the year ended December 31,
2004, Changxin Trading recorded an accounts receivable of $0. In 2005 as
Changxin Trading matured, Changxin Trading revised its collections policy.
Changxin Trading eased collection terms in an effort to extend more favorable
payment terms to customers in an effort to attract additional orders. As such
for the year ended December 31, 2005, Changxin Trading recorded an accounts
receivable of $312,416.
Changxin Trading sets similar collection terms for customers. However, as the
relationship matures Changxin Trading develops a level of comfort with each
customer. Furthermore, each customer will have varied credit worthiness.
Presently Changxin Trading employs three different forms of payment when dealing
with its customers.
o Letter of credit; which typically pays in 30 - 40 business days.
o Telegraphic transfer; which typically pays in 7-10 business days
o Document against payment; which typically pays in 15 - 30 business days
Typically collection terms are specified in the sales contract. Changxin Trading
seeks to dictate the collection terms depending on the customer's credit
worthiness.
F-11
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORY
Inventory, consisting of raw materials related to Changxin Trading products are
stated at the lower of cost or market utilizing the first in first out method.
Changxin Trading records inventory consisting of raw materials related to
Changxin Trading at the lower of cost or market utilizing the first in first out
method. Changxin Trading does not record as inventory those items for which it
is (i) not entitled to the inventory or (ii) the control or risk of the
inventory is not transferred to Changxin Trading. Changxin Trading will utilize
shipping records or billing statements as proof to indicate (i) entitlement to
the inventory or (ii) the inventory is under the control of Changxin Trading.
Those items for which Changxin Trading has not been presented with a bill are
recorded as prepaid expenses. Changxin Trading will recognize inventory as
suppliers present a billing statement in compliance with its accounting policy.
Inventory is discussed further in NOTE 2.
DUE TO/FROM RELATED PARTY
The financial statements include balances and transactions with related parties.
From time to time, as a private company, Changxin Trading would receive advances
From, or advance funds to related parties for working capital purposes. These
related parties would either be (i) an officer, director or shareholder of
Changxin Trading or (ii) a company in which an officer, director or shareholder
of Changxin Trading was an officer, director or shareholder or (iii) a company
in which Changxin Trading was a shareholder. These advances are non interest
bearing, unsecured and payable on demand. Due to/from related party is discussed
further in NOTE 7.
PREPAID EXPENSES
Prepaid expenses and other assets consist of prepayments to suppliers for
merchandise which has not yet been shipped from the suppliers.
ADVANCES FROM CUSTOMERS
Advances from customers consist of a prepayment to Changxin Trading for
merchandise that had not yet been shipped to their customers. Changxin Trading
will recognize the deposits as revenue as customers take delivery of the goods,
in compliance with its revenue recognition policy.
Changxin Trading commenced operations in November 2003. In 2004, the first full
calendar year of operations for Changxin Trading, the standard policy was to
request a deposit on purchase orders. This deposit amount was reflected as
Advances from Customers. In 2005, as Changxin Trading matured, and the
relationship with customers progressed, the policy towards deposits against
purchase orders was revised. Changxin Trading no longer required a deposit
against purchase orders in 2005. Advances from customers are discussed further
in NOTE 6.
F-12
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
Changxin Trading examines the possibility of decreases in the value of fixed
assets when events or changes in circumstances reflect the fact that their
recorded value may not be recoverable
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, loans and amounts due from
related parties approximate their fair market value based on the short-term
maturity of these instruments.
REVENUE RECOGNITION
Changxin Trading follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin 104 for revenue recognition. In general,
Changxin Trading records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectibility is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of Changxin Trading: Changxin Trading revenues from the sale of
products are recorded when the goods are shipped, title passes, and
collectibility is reasonably assured.
F-13
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN CURRENCIES
Transactions and balances in other currencies are converted into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation", and are included in determining net income or
loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The reporting currency is the U.S. dollar. The functional currency of Changxin
Trading is the local currency, the Chinese dollar or Renminbi ("RMB"). The
financial statements of Changxin Trading are translated into United States
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the period for revenues, costs, and expenses. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented due to fluctuations between the Chinese dollar ("RMB") and the United
States dollar. The cumulative translation adjustment and effect of exchange rate
changes on cash on December 31, 2005 and 2004 were $32,259 and $0 respectively.
On July 21, 2005, the central government of China allowed the Chinese dollar or
RMB to fluctuate, ending its decade-old policy of valuation pegged to the U.S.
dollar. The new RMB rate reflects an approximately 2% increase in value against
the U.S. dollar. Historically the Chinese government has benchmarked the RMB
exchange ratio against the U.S. dollar, thereby mitigating the associated
foreign currency exchange rate fluctuation risk. Changxin Trading does not
believe that its foreign currency exchange rate fluctuation risk is significant,
especially if the Chinese government continues to benchmark the RMB against the
U.S. dollar.
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between asset and
liability amounts that are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These deferred taxes are
measured by applying currently enacted tax laws. Valuation allowances are
recognized to reduce the deferred tax assets to the amount that is more likely
than not to be realized. In assessing the likelihood of realization, management
considers estimates of future taxable income.
F-14
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Changxin Trading uses Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of members' equity, except those due to
investments by members, changes in members' equity and distributions to members.
For Changxin Trading, comprehensive income for the year ended December 31, 2005
and 2004 included net income and foreign currency translation adjustments.
NOTE 2 - INVENTORY
At December 31, 2005 and 2004, inventories consisted of the following:
2005 2004
---- ----
Raw materials $ 453,520 $ 689,445
Inventory, consisting of raw materials related to Changxin Trading products are
stated at the lower of cost or market utilizing the first in first out method.
Changxin Trading records inventory consisting of raw materials related to
Changxin Trading at the lower of cost or market utilizing the first in first out
method.
F-15
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 3 - PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets are assets that arise on the balance
sheet because of the payment of something in advance (prepayment) or the
services for the payment will be received in the near future. The prepaid
expenses and others consist of prepayments to third party customers from us for
merchandise that had not yet been shipped. We will recognize the payments as
expenses as the Company takes delivery of the goods.
Changxin Trading is an exporter of magnesium and related products. As an
exporter of goods, Changxin Trading receives certain tax credits. These tax
credits are afforded as an incentive to export goods from China. Changxin
Trading reflects these tax credits in prepaid expenses and other when the
respective tax authority in China authorizes the tax credits, but the Company
has not received the payment.
Dec 05 Dec 04
USD USD
--- ---
Prepaid expenses ........................... 4,032,580 614,482
Other current assets ....................... 269,254 147,356
--------- -------
Sub total .................................. 4,301,834 761,838
========= =======
NOTE 4 - PROPERTY AND EQUIPMENT
At December 31, 2005 and 2004, property and equipment consisted of the
following:
Estimated Life 2005 2004
-------------- ---- ----
Office Equipment .................. 5 years $ 29,591 $ -
Less: Accumulated Depreciation .... (469) -
--------- ---------
$ 29,122 $ -
========= =========
For the years ended December 31, 2005 and 2004, depreciation expense amounted to
$469 and $0, respectively.
NOTE 5 - ACCOUNTS PAYABLE
Accounts payable was $3,959,732 and $2,215,493 as of December 31, 2005 and 2004.
Such liabilities as of December 31, 2005 and 2004 included operating payables
and other accounts payable.
F-16
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 6 - ADVANCE FROM CUSTOMERS
Advances from customers consist of a prepayment to Changxin Trading for
merchandise that had not yet been shipped to their customers. Changxin Trading
will recognize the deposits as revenue as customers take delivery of the goods,
in compliance with its revenue recognition policy. At December 31, 2005 and
2004, advances from customers amounted to $0 and $625,401 respectively.
Changxin Trading commenced operations in November 2003. In 2004, the first full
calendar year of operations for Changxin Trading, the standard policy was to
request a deposit on purchase orders. This deposit amount was reflected as
Advances from Customers.
In 2005, as Changxin Trading matured, and the relationship with customers
progressed, the policy towards deposits against purchase orders was revised.
Changxin Trading no longer required a deposit against purchase orders in 2005.
Generally, a customer will prepay for an order prior to shipment. At December
31, 2005 and 2004, our balance sheet reflected advances from customers of $0 and
$625,401. Advances from customers consist of prepayments from third party
customers to us for merchandise that had not yet been shipped. We will recognize
the deposits as revenue as customers take delivery of the goods, in compliance
with its revenue recognition policy.
F-17
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 7 - RELATED PARTY TRANSACTIONS
DUE FROM (TO) RELATED PARTIES
The financial statements include balances and transactions with related parties.
From time to time, as a private company, Changxin Trading would receive advances
From, or advance funds to related parties for working capital purposes. These
related parties would either be (i) an officer, director or shareholder of
Changxin Trading or (ii) a company in which an officer, director or shareholder
of Changxin Trading was an officer, director or shareholder or (iii) a company
in which Changxin Trading was a shareholder. These advances are non interest
bearing, unsecured and payable on demand. For the years ended December 31, 2005
and 2004, Changxin Trading reflected a Due From Related Party in the amount of
$619,153 and $2,131,545 respectively.
DUE FROM EXECUTIVE OFFICERS
Included in the Due from Related Party amount as reflected in the financial
statements are amounts due from officers or directors of Changxin Trading. Of
the total Due From Related Party amounts reflected for the years ended December
31, 2005 and 2004, of $640,981 and $2,131,545 respectively, $21,828 and $0 were
due from individuals for the year ended December 31, 2005 and 2004,
respectively. Of the amount of Due from Related Party of $21,828 as reflected
for the year ended December 31, 2005, $12,799 is due from Lifei Huang and $9,029
is Due From Xiaorui Su. These amounts are non interest bearing, unsecured and
payable on demand. Lifei Huang is the daughter of Yuwei Huang, our executive
officer and is a former officer of Changxin Trading. As of June 1, 2006 Lifei
Huang is not an officer, director or shareholder of Chang Magnesium or Changxin
Trading
Xiaorui Su is the wife of Yuwei Huang, our executive officer and is a former
officer of Changxin Trading. Xiaorui Su is not an officer, director or
shareholder of Chang Magnesium or Changxin Trading. As of June 1, 2006, Xiaorui
Su is no longer an officer of Changxin Trading.
Schedule of Due to/from Related Party:
12/31/2004 12/31/2005
---------- ----------
LiFei Huang ......................................... $ - $ 12,799
Xiaorui Su .......................................... $ - $ 9,029
---------- ----------
TOTAL ............................................... $ - $ 21,828
F-18
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
Schedule of Due to/from Related Party:
12/31/2004 12/31/2005
---------- ----------
LiFei Huang ......................................... $ - $ 12,799
Xiaorui Su .......................................... $ - $ 9,029
---------- ----------
TOTAL ............................................... $ 21,828
Entities:
Taiyuan MinWei Magnesium Industry Co. Ltd. .......... $ 56,788 $ (940,554)
Taiyuan YiWei Magnesium Co. Ltd. .................... $ 69,534 $ (334,785)
Taiyuan Qincheng YiWei Magnesium Industry Co. Ltd. .. $1,756,963 $3,002,849
Taiyuan YiWei Magnesium Factory ..................... $ 254,486 $ (930,649)
Shangxi NiChiMen YiWei Magnesium Co., Ltd. .......... $ (123,392) $ (508,505)
Shanxi Golden Trust YiWei Magnesium Industry Co. Ltd. $ 48,325 $ 260,195
Taiyuan YiWei Magnesium Co., Ltd. Song Shu Branch ... $ 68,841 $ 70,602
---------- ----------
TOTAL ............................................... $2,131,545 $ 619,153
---------- ----------
Due to/from Related Party - TOTAL ................... $2,131,545 $ 640,981
========== ==========
(1) In June 2005, Jiao Chen YiWei Magnesium Industry Co., Ltd changed its name
to Shangxi NiChiMen YiWei Magnesium Co., Ltd. ("NiChiMen")
F-19
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 8 - INCOME TAX
Changxin Trading accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and the tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax losses and tax credit carry forwards. SFAS 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets.
Changxin Trading operations in China are governed by the Income Tax Law of the
People's Republic of China concerning Foreign Investment Enterprises and Foreign
Enterprises and local income tax laws (the "PRC Income Tax Law"). Pursuant to
the PRC Income Tax Law, wholly-owned foreign enterprises are subject to tax at a
statutory rate of 33% (30% state income tax plus 3% local income tax).
The components of income before income tax consist of the following:
Year Ended December 31,
-----------------------
2005 2004
-------- --------
Chinese Operations ........................ $770,810 $496,097
======== ========
The components of the (benefit) provision for income taxes are as follows:
Year Ended December 31,
-----------------------
2005 2004
-------- --------
Peoples Republic of China-Federal and Local $254,367 $163,712
======== ========
NOTE 9 - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Changxin Trading operates in one business segment as defined under SFAS 131,
"Segment Reporting". The business of Taiyuan Changxin YiWei Trading Company,
Limited is located in and operates in China.
F-20
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 10 - SUBSEQUENT EVENTS
The Financial Statements reflect the name Taiyuan Changxin YiWei Trading, Co.
Ltd. ("Changxin Trading"). The financial statements for the years ended December
31, 2005 and 2004 solely reflect the operations of Changxin Trading.
In March 2006 Chang Magnesium was formed by Taiyuan YiWei Magnesium. In November
2006 the official stamp for Chang Magnesium was received and the name recognized
by the central government of China. Chang Magnesium expects to commence
operations at the new plant in January 2007. On June 1, 2006, Chang Magnesium
entered into an acquisition agreement to purchase 100% of Changxin Trading from
Taiyuan YiWei Magnesium. Chang Magnesium acquired Changxin Trading from Taiyuan
YiWei Magnesium in exchange for $125 (1,000 RMB). As a result, Changxin Trading
is now a wholly owned subsidiary of Chang Magnesium. As such the financial
statements for the years ended December 31, 2005 and 2004 solely reflect the
operations of Changxin Trading
On June 1, 2006, as per the terms of an acquisition agreement, Taiyuan YiWei
Magnesium was to contribute $2,450,000 worth of property plant and equipment to
Chang Magnesium. On June 1, 2006 Taiyuan YiWei Magnesium contributed property,
plant and equipment with a value of $2,567,353 to Chang Magnesium. The financial
statements for the nine months ended September 30, 2006 for Changxin Trading
reflect the contribution of $2,567,353 worth of Property, Plant and Equipment to
Chang Magnesium.
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI China"),
entered into an acquisition agreement with Chang Magnesium. Under the terms of
the agreement CDI China agreed to infuse $1,000,000 to Chang Magnesium ("Initial
Funds") 10 days after closing. On or before September 30, 2007, CDI China shall
deliver $800,000 of investment capital to Chang Magnesium and on or before
December 31, 2007 CDI China shall deliver $750,000 of investment capital to
Chang Magnesium. The closing of the transaction was subject to audited financial
statements for Chang Magnesium which reflected a contribution to Chang Magnesium
by Taiyuan YiWei Magnesium of property, plant or equipment with a minimum value
of $2,450,000. In June 2006 Taiyuan YiWei Magnesium contributed property, plant
and equipment valued at $2,567,353, which represented all the assets related to
the magnesium plant, to Chang Magnesium.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China holds a 51% majority interest in Chang Magnesium.
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, Inc., entered into an employment agreement
with Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising
the operations of Chang Magnesium. The term of the five year agreement provides
for no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
F-21
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 10 - SUBSEQUENT EVENTS (CONTINUED)
We intend that Chang Magnesium, which includes the operations of its
wholly-owned subsidiary Changxin Trading, will operate as a segment within CDI
China. Chang Magnesium has not yet generated any revenues from its proposed
operations.
NOTE 11 - OPERATING RISK
(a) Country risk
Currently, Changxin Trading revenues are primarily derived from the sale of line
of disinfectant product offerings to customers in the Peoples Republic of China
(PRC). Changxin Trading hopes to expand its operations to countries outside the
PRC, however, such expansion has not been commenced and there are no assurances
that Changxin Trading will be able to achieve such an expansion successfully.
Therefore, a downturn or stagnation in the economic environment of the PRC could
have a material adverse effect on Changxin Trading financial condition.
(b) Products risk
In addition to competing with other manufacturers of disinfectant product
offerings, Changxin Trading competes with larger U.S. companies who have greater
funds available for expansion, marketing, research and development and the
ability to attract more qualified personnel. These U.S. companies may be able to
offer products at a lower price. There can be no assurance that Changxin Trading
will remain competitive should this occur.
(c) Exchange risk
Changxin Trading can not guarantee that the current exchange rate will remain
steady, therefore there is a possibility that Changxin Trading could post the
same amount of profit for two comparable periods and because of a fluctuating
exchange rate actually post higher or lower profit depending on exchange rate of
Renminbi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) 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 allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, Changxin Trading ability to
operate the PRC subsidiaries could be affected.
F-22
TAIYUAN CHANGXIN YIWEI TRADING COMPANY LIMITED
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
F-23
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
BALANCE SHEET
September 30, 2006
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 784,977
Accounts receivable ....................................... 1,208,697
Due from related party .................................... 22,260
Prepaid expenses and other ................................ 3,227,476
----------
Total Current Assets .................................. 5,243,410
PROPERTY AND EQUIPMENT - Net .................................. 2,625,277
----------
Total Assets .......................................... $7,868,687
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $1,929,250
Accrued expenses .......................................... 139,097
Advance from customers .................................... 411,745
Income taxes payable ...................................... 591,035
Due to related party ...................................... 303,080
----------
Total Current Liabilities ............................. 3,374,207
MEMBERS' EQUITY:
Members' Equity ........................................... 3,210,443
Retained earnings ......................................... 1,184,682
Other comprehensive income - foreign currency ............. 99,355
----------
Total Members' Equity ................................. 4,494,480
----------
Total Liabilities and Members' Equity ................. $7,868,687
==========
See notes to the unaudited financial statements.
F-24
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
------------ ------------
2006 2005
------------ ------------
NET REVENUES ............................. $ 15,957,667 $ 17,484,195
COST OF SALES ............................ 15,069,758 16,132,029
------------ ------------
GROSS PROFIT ............................. 887,909 1,352,166
------------ ------------
OPERATING EXPENSES:
Selling expenses .................... 170,031 336,624
General and administrative .......... 144,308 89,840
------------ ------------
Total Operating Expenses ......... 314,339 426,464
------------ ------------
INCOME FROM OPERATIONS ................... 573,570 925,702
------------ ------------
OTHER (INCOME) EXPENSE:
Other expenses ...................... (14,365) (32,327)
Interest income ..................... 1,834 3,295
------------ ------------
Total Other (Expense) ............ (12,531) (29,032)
------------ ------------
INCOME(LOSS) BEFORE INCOME TAXES ......... 561,039 896,670
INCOME TAXES ............................. (224,865) (250,628)
------------ ------------
NET INCOME ............................... $ 336,174 $ 646,042
============ ============
See notes to the unaudited financial statements.
F-25
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
------------ ------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................................... $ 336,174 $ 646,042
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization .................... 2,159 -
Changes in assets and liabilities:
Accounts receivable .............................. (896,281) (652,713)
Inventories ...................................... 453,520 689,445
Prepaid and other current assets ................. 1,074,358 (1,790,480)
Accounts payable ................................. (2,030,482) (141,475)
Accrued expenses ................................. 58,437 (15,059)
Income taxes payable ............................. 234,794 188,305
Advance from customers ........................... 411,745 4,624,729
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ..... (355,576) 3,548,794
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Due from related parties ............................ 921,801 (3,713,154)
Capital expenditures ................................ 8,264 (28,545)
----------- -----------
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES 930,065 (3,741,699)
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH ......................... 67,096 30,049
----------- -----------
NET INCREASE (DECREASE) IN CASH ......................... 641,585 (162,856)
CASH - beginning of year ................................ 143,392 374,532
----------- -----------
CASH - end of period .................................... $ 784,977 $ 211,676
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest ...................................... $ - $ -
=========== ===========
Income Taxes .................................. $ - $ -
=========== ===========
See notes to the unaudited financial statements.
F-26
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Taiyuan Changxin YiWei Trading Co., Ltd., a Chinese limited liability company,
is referred to in this report as the "Company", "Changxin Trading", "we", "us"
or "our".
Taiyuan Changxin YiWei Trading Co., Ltd. ("Changxin Trading"), a Chinese limited
liability company, was established November 23, 2003. Changxin Trading is a
reseller, distributor and exporter of magnesium products.
Changxin Trading resells various forms of magnesium including, but not limited
to magnesium powder, magnesium scrap, magnesium alloy and various grades of
ordinary magnesium slabs. Changxin Trading resells magnesium products locally
within China and as well exports magnesium from China. Changxin Trading has
forged relationships with global magnesium consumers. In the past Changxin
Trading has supplied various magnesium related products to Alcoa Inc. (United
States), Alcan, Inc. (Canada), Capral (Australia), and Japan Materials Co., Ltd.
Approximately 70% of Changxin Trading revenues are derived from the distribution
of magnesium slabs. Changxin Trading exported 40,000 metric tons in 2005,
representing approximately 10% of China magnesium related exports.
In March 2006, Chang Magnesium Co. Ltd. ("Chang Magnesium") was formed by
Taiyuan YiWei Magnesium Co., Ltd. ("Taiyuan YiWei Magnesium")
In June 2006 Chang Magnesium acquired 100% of Changxin Trading from Taiyuan
YiWei Magnesium for approximately $125. As a result Changxin Trading is a wholly
owned subsidiary of Chang Magnesium.
In June 2006 Taiyuan YiWei Magnesium contributed property, plant and equipment
valued at $2,567,353, which represented all the assets related to the magnesium
plant, to Chang Magnesium. Chang Magnesium was formed by Taiyuan YiWei Magnesium
to operate a newly constructed magnesium plant that will process and manufacture
a variety of magnesium by-products, including magnesium powder, magnesium scrap,
magnesium alloy and various grades of magnesium slabs.
Taiyuan YiWei Magnesium is a diversified magnesium organization which owns
interests in seven subsidiary magnesium factories, a magnesium alloy factory and
a magnesium powder desulphurization reagent factory, all located in China. China
is generally regarded as the largest exporter for magnesium products in China,
and the second largest producer in the world.
F-27
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
The newly constructed magnesium plant from which Chang Magnesium will operate is
located in the Aluminum & Magnesium Industrial Park in Yangqu County, of the
Shangxi Province. According to the China Magnesium Industry Report 2005 (March
2006) China, which has been the world's leading magnesium producer for the past
eight years, has in excess of 100 magnesium manufacturers with approximately
468,000 metric tons of production in 2005. Raw magnesium production volume
increased 139% from 2000 to 2005; the production of magnesium ingot increased
345.5% and magnesium powder increased 89.04% in the same time period.
Most of the magnesium in China is produced in the Shanxi Province which has
abundant resources of dolomite, large coal deposits and some ferrosilicon
production. In recent years, the Shangxi Province has taken a leadership
position in China in various aspects of magnesium extraction technology and
related environmental protection work and officials from the Ministry of
Commerce (MOC) have designated the Shanxi Province as the central magnesium
production region of China.
As a result the Shangxi Province has emerged as an important region for
magnesium related companies. The annual output of magnesium in the Shangxi
Province is approximately 360,000 metric tons, accounting for 55% of the world's
total magnesium output, and 77% of the total output in China. As such the
manufacturers in the region have a degree of pricing power of magnesium in both
domestic and international markets.
Chang Magnesium expects to produce magnesium ingot with a magnesium element in
excess of 99.95% and it intends to produce 10 specifications of magnesium ingot
ranging in size from 2 kg to 150 kg. It is anticipated that Chang Magnesium will
produce magnesium alloy which meets ASTM International standards.
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI China"),
entered into an acquisition agreement with Chang Magnesium. Under the terms of
the agreement CDI China agreed to infuse $1,000,000 to Chang Magnesium ("Initial
Funds") 10 days past closing. On or before September 30, 2007, CDI China shall
deliver $800,000 of investment capital to Chang Magnesium and on or before
December 31, 2007 CDI China shall deliver $750,000 of investment capital to
Chang Magnesium. The closing of the transaction was subject to audited financial
statements for Chang Magnesium which reflected a contribution to Chang Magnesium
by Taiyuan YiWei Magnesium of property, plant or equipment with a minimum value
of $2,450,000.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China holds a 51% majority interest in Chang Magnesium.
F-28
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
THE COMPANY (CONTINUED)
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, entered into an employment agreement with
Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising the
operations of Chang Magnesium. The term of the five year agreement provides for
no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
We intend that Chang Magnesium, which includes the operations of its
wholly-owned subsidiary Changxin Trading, will operate as a segment within CDI
China. Chang Magnesium has not yet generated any revenues from its proposed
operations.
BASIS OF PRESENTATION
The Financial Statements reflect the name Taiyuan Changxin YiWei Trading, Co.
Ltd. ("Changxin Trading"). The financial statements for the nine months ended
September 30, 2006 and 2005 reflect the operations of Changxin Trading as well
as the operations of Chang Magnesium from June 1, 2006 through September 30,
2006. Chang Magnesium was formed by Taiyuan YiWei Magnesium in March 2006. The
official stamp for Chang Magnesium was received and the name recognized by the
central government of China in November 2006. Chang Magnesium expects to
commence operations at the new plant in January 2007. Changxin Trading commenced
operations in November 2003. 2004 was the first full calendar year of operations
for Changxin Trading.
As of June 1, 2006, Changxin Trading is a wholly owned subsidiary of Chang
Magnesium. As such the financial statements for the years ended December 31,
2005 and 2004 solely reflect the operations of Changxin Trading. On June 1,
2006, Taiyuan YiWei Magnesium contributed property, plant and equipment with a
value of $2,450,000 to Chang Magnesium. As such the financial statements for the
nine months ended September 30, 2006 reflect the contribution of $2,567,353
worth of property, plant and equipment to Chang Magnesium. Furthermore the
financial statements for the nine months ended September 30, 2006 reflect the
operations of Changxin Trading as well as the operations of Chang Magnesium from
June 1, 2006 through September 30, 2006.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared on the historical cost basis, except
for the certain financial instruments. The principal accounting policies adopted
are set out below.
F-29
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BASIS OF FINANCIAL STATEMENTS
The financial statements are prepared in accordance with generally accepted
accounting principles in U.S. Certain adjustments and reclassifications have
been incorporated in the accompanying financial statements to conform to
accounting principles generally accepted in the United States of America.
CASH AND CASH EQUIVALENTS
Changxin Trading classifies highly liquid temporary investments with an original
maturity of three months or less when purchased as cash equivalents.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consists primarily of amounts due to Changxin Trading from
normal business activities. Changxin Trading maintains an allowance for doubtful
accounts to reflect the expected non-collection of accounts receivable based on
past collection history and specific risks identified within the portfolio. If
the financial condition of the customers were to deteriorate resulting in an
impairment of their ability to make payments, or if payments from customers are
significantly delayed, additional allowances might be required. For the nine
months ended September 30, 2006, Changxin Trading recorded Accounts receivable
of $1,208,697. For the nine months ended September 30, 2006 Changxin Trading
recorded allowance for doubtful accounts of $0.
Changxin Trading commenced operations in November 2003. In 2004, the first full
calendar year of operations for Changxin Trading, the standard collection policy
was to receive payment upon delivery. As a result, for the year ended December
31, 2004, Changxin Trading recorded an accounts receivable of $0. In 2005 as
Changxin Trading matured, Changxin Trading revised its collections policy.
Changxin Trading eased collection terms in an effort to extend more favorable
payment terms to customers in an effort to attract additional orders. As such
for the nine months ended September 30, 2006, Changxin Trading recorded Accounts
receivable of $1,208,697.
Changxin Trading sets similar collection terms for customers. However, as the
relationship matures Changxin Trading develops a level of comfort with each
customer. Furthermore, each customer will have varied credit worthiness.
Presently Changxin Trading employs three different forms of payment when dealing
with its customers. O Letter of credit; which typically pays in 30 - 40 business
days. O Telegraphic transfer; which typically pays in 7-10 business days O
Document against payment; which typically pays in 15 - 30 business days
F-30
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS (CONTINUED)
Typically collection terms are specified in the sales contract. Changxin Trading
seeks to dictate the collection terms depending on the customer's credit
worthiness.
INVENTORY
Inventory, consisting of raw materials related to Changxin Trading products are
stated at the lower of cost or market utilizing the first in first out method.
DUE TO/FROM RELATED PARTY
The financial statements include balances and transactions with related parties.
From time to time, as a private company, Changxin Trading would receive advances
from or advance funds to related parties for working capital purposes. These
related parties would either be (i) an officer, director or shareholder of
Changxin Trading or (ii) a company in which an officer, director or shareholder
of Changxin Trading was an officer, director or shareholder or (iii) a company
in which Changxin Trading was a shareholder. These advances are non interest
bearing, unsecured and payable on demand. Due to/from related party is discussed
further in NOTE 6.
PREPAID EXPENSES
Prepaid expenses and other assets consist of prepayments to suppliers for
merchandise which has not yet shipped by the suppliers.
ADVANCES FROM CUSTOMERS
Advances from customers consist of a prepayment to Changxin Trading for
merchandise that had not yet been shipped to the customer. Changxin Trading will
recognize the deposits as revenue as customers take delivery of the goods, in
compliance with its revenue recognition policy.
Changxin Trading commenced operations in November 2003. In 2004, the first full
calendar year of operations for Changxin Trading, the standard policy was to
request a deposit on purchase orders. This deposit amount was reflected as
Advances from Customers. In 2005, as Changxin Trading matured, and the
relationship with customers progressed, the policy towards deposits against
purchase orders was revised. Changxin Trading no longer required a deposit
against purchase orders in 2005. Advances from customers are discussed further
in NOTE 5.
F-31
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight line method over the estimated economic lives of the
assets, which are from five to ten years. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
Changxin Trading examines the possibility of decreases in the value of fixed
assets when events or changes in circumstances reflect the fact that their
recorded value may not be recoverable
The financial statements for the nine months ended September 30, 2006 reflect
the operations of Changxin Trading as well as the operations of Chang Magnesium.
On June 1, 2006, Taiyuan YiWei Magnesium contributed property, plant and
equipment with a value of $2,567,333 to Chang Magnesium. As such the financial
statements for the nine months ended September 30, 2006 reflect the contribution
of $2,567,353 worth of property, plant and equipment to Chang Magnesium.
Furthermore the financial statements for the nine months ended September 30,
2006 reflect the operations of Changxin Trading as well as the operations of
Chang Magnesium from June 1, 2006 through September 30, 2006.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosures of information about the
fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, loans and amounts due from
related parties approximate their fair market value based on the short-term
maturity of these instruments.
F-32
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
Changxin Trading follows the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin 104 for revenue recognition. In general,
Changxin Trading records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectibility is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of Changxin Trading: Changxin Trading revenues from the sale of
products are recorded when the goods are shipped, title passes, and
collectibility is reasonably assured.
FOREIGN CURRENCIES
Transactions and balances in other currencies are converted into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation", and are included in determining net income or
loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are included in determining comprehensive loss.
The reporting currency is the U.S. dollar. The functional currency of Changxin
Trading is the local currency, the Chinese dollar or Renminbi ("RMB"). The
financial statements of Changxin Trading are translated into United States
dollars using year-end rates of exchange for assets and liabilities, and average
rates of exchange for the period for revenues, costs, and expenses. Net gains
and losses resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not material during the periods
presented due to fluctuations between the Chinese dollar ("RMB") and the United
States dollar. The cumulative translation adjustment and effect of exchange rate
changes on cash on September 30, 2006 and 2005 were $99,355 and $32,259
respectively.
On July 21, 2005, the central government of China allowed the Chinese dollar or
RMB to fluctuate, ending its decade-old policy of valuation pegged to the U.S.
dollar. The new RMB rate reflects an approximately 2% increase in value against
the U.S. dollar. Historically the Chinese government has benchmarked the RMB
exchange ratio against the U.S. dollar, thereby mitigating the associated
foreign currency exchange rate fluctuation risk. Changxin Trading does not
believe that its foreign currency exchange rate fluctuation risk is significant,
especially if the Chinese government continues to benchmark the RMB against the
U.S. dollar.
F-33
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between asset and
liability amounts that are recognized for financial reporting purposes and the
amounts that are recognized for income tax purposes. These deferred taxes are
measured by applying currently enacted tax laws. Valuation allowances are
recognized to reduce the deferred tax assets to the amount that is more likely
than not to be realized. In assessing the likelihood of realization, management
considers estimates of future taxable income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMPREHENSIVE INCOME
Changxin Trading uses Statement of Financial Accounting Standards No. 130 (SFAS
130) "Reporting Comprehensive Income". Comprehensive income is comprised of net
income and all changes to the statements of members' equity, except those due to
investments by members, changes in members' equity and distributions to members.
For Changxin Trading, comprehensive income for the nine months ended September
30, 2006 and 2005 included net income and foreign currency translation
adjustments.
NOTE 2 - PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets are assets that arise on a balance
sheet because of the payment of something in advance (prepayment) or the
services for the payment will be received in the near future. The prepaid
expenses and others consist of prepayments to third party customers from us for
merchandise that had not yet shipped. We will recognize the payments as expenses
as the Company takes delivery of the goods.
F-34
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 3 - PROPERTY AND EQUIPMENT
At September 30, 2006, property and equipment consisted of the following:
Estimated Life 2006
-------------- ----
Buildings .......................... 10 years $ 930,714
Machinery .......................... 5 years 1,416,266
Office Equipment ................... 5 years 280,925
-----------
Less: Accumulated Depreciation ..... (2,628)
-----------
$ 2,625,277
===========
For the nine months ended September 30, 2006 and 2005, depreciation expense
amounted to $2,159 and $0, respectively.
On June 1, 2006, Taiyuan YiWei Magnesium contributed property, plant and
equipment with a value of $2,567,353. As such the financial statements for the
nine month period ended September 30, 2006 reflect the contribution of
$2,567,353 worth of property, plant and equipment to Chang Magnesium.
NOTE 4 - ACCOUNTS PAYABLE
Accounts payable was $1,929,250 and $2,074,018 as of September 30, 2006 and
2005. Such liabilities as of September 30, 2006 and 2005 included, operating
payables and other accounts payable.
NOTE 5 - ADVANCE FROM CUSTOMERS
Advances from customers consist of a prepayment to Changxin Trading for
merchandise that had not yet shipped to the customer. Changxin Trading will
recognize the deposits as revenue as customers take delivery of the goods, in
compliance with its revenue recognition policy. At September 30, 2006 and 2005,
advances from customers amounted to $411,745 and $5,250,130 respectively. In
2005, as Changxin Trading matured, and the relationship with customers
progressed, the policy towards deposits against purchase orders was revised.
Changxin Trading no longer required a deposit against purchase orders in 2005.
As a result, the advance from customer decreased significantly in 2006.
Generally, a customer will prepay for an order prior to shipment. At September
30, 2006 and 2005, our balance sheet reflected advances from customers of
$411,745 and $5,250,130. Advances from customers consist of prepayments from
third party customers made to us for merchandise that had not yet been shipped.
We will recognize the deposits as revenue as customers take delivery of the
goods, in compliance with its revenue recognition policy.
F-35
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 6 - RELATED PARTY TRANSACTIONS
DUE FROM EXECUTIVE OFFICERS
The financial statements include balances and transactions with related parties.
From time to time, as a private company, Changxin Trading would receive advances
from or advance funds to related parties for working capital purposes. These
related parties would either be (i) an officer, director or shareholder of
Changxin Trading or (ii) a company in which an officer, director or shareholder
of Changxin Trading was an officer, director or shareholder or (iii) a company
in which Changxin Trading was a shareholder. These advanced are non interest
bearing, unsecured and payable on demand.
For the nine months ended September 30, 2006 Changxin Trading reflected a Due
from Related Party in the amount of $22,260.
9/30/2006
---------
LiFei Huang ....................... $ 13,052
Xiaorui Su ........................ $ 9,208
---------
TOTAL ............................. $ 22,260
=========
Lifei Huang is the daughter of Yuwei Huang, our executive officer, and is a
former officer of Changxin Trading. Lifei Huang is an employee of Changxin
Trading. As of June 1, 2006 Ms. Huang is not an officer, director or shareholder
of Chang Magnesium.
Xiaorui Su is the wife of Yuwei Huang, our executive officer, and is a former
officer of Changxin YiWei Trading. As of June 1, 2006 Xiaorui Su is not an
officer, director or shareholder of Chang Magnesium or Changxin Trading.
F-36
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
DUE FROM (TO) RELATED PARTIES
For the nine months ended September 30, 2006 Changxin Trading reflected a Due To
Related Party in the amount of $303,080. These amounts are non interest bearing,
unsecured and payable on demand
9/30/2006
---------
Taiyuan MinWei Magnesium Industry Co. Ltd. ...................... $(235,426)
Taiyuan YiWei Magnesium Co. Ltd. ................................ $ 253,324
Taiyuan Qincheng YiWei Magnesium Industry Co. Ltd. .............. $(381,316)
Taiyuan YiWei Magnesium Factory ................................. $(341,047)
Shangxi NiChiMen YiWei Magnesium Co., Ltd. (1) .................. $(567,148)
Shanxi Golden Trust YiWei Magnesium Industry Co. Ltd. ........... $ 968,533
---------
ENTITIES: TOTAL ................................................. $(303,080)
(1) Effective on June 1, 2005 Taiyuan Jiao Chen YiWei Magnesium Industry Co.,
Ltd. ("Jiao Chen") changed its name to Shangxi NichiMen YiWei Magnesium Co.,
Ltd. ("NiChiMen")
NOTE 7 - MEMBERS' EQUITY
As of June 1, 2006, a result, Changxin Trading is a wholly owned subsidiary of
Chang Magnesium. As such the financial statements for the years ended December
31, 2005 and 2004 solely reflect the operations of Changxin Trading. On June 1,
2006, Taiyuan YiWei Magnesium contributed property, plant and equipment with a
value of $2,567,353 to Chang Magnesium. As such the financial statements for the
nine months ended September 30, 2006 reflect the contribution of $2,567,353
worth of property, plant and equipment to Chang Magnesium. Furthermore the
financial statements for the nine months ended September 30, 2006 reflect the
operations of Changxin Trading as well as the operations of Chang Magnesium from
June 1, 2006 through September 30, 2006.
F-37
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 8 - SUBSEQUENT EVENTS
On October 15, 2006 our wholly owned subsidiary, CDI China, entered into an
acquisition agreement with Chang Magnesium. Under the terms of the agreement CDI
China agreed to infuse $1,000,000 to Chang Magnesium ("Initial Funds") 10 days
past closing. On or before September 30, 2007, CDI China shall deliver $800,000
of investment capital to Chang Magnesium and on or before December 31, 2007 CDI
China shall deliver $750,000 of investment capital to Chang Magnesium. The
closing of the transaction was subject to audited financial statements for Chang
Magnesium which reflected a contribution to Chang Magnesium by Taiyuan YiWei
Magnesium of property, plant or equipment with a minimum value of $2,450,000. In
June 2006 Taiyuan YiWei Magnesium contributed property, plant and equipment
valued at $2,567,353, which represented all the assets related to the magnesium
plant, to Chang Magnesium.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China, Inc. holds a 51% majority interest in Chang Magnesium.
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, entered into an employment agreement with
Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising the
operations of Chang Magnesium. The term of the five year agreement provides for
no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
We intend that Chang Magnesium, which includes the operations of its
wholly-owned subsidiary Changxin Trading, will operate as a segment within CDI
China. Chang Magnesium has not yet generated any revenues from its proposed
operations.
F-38
TAIYUAN CHANGXIN YIWEI TRADING COMPANY, LIMITED
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
NOTE 9 - OPERATING RISK
(a) Country risk
Currently, Changxin Trading revenues are primarily derived from the sale of line
of disinfectant product offerings to customers in the Peoples Republic of China
(PRC). Changxin Trading hopes to expand its operations to countries outside the
PRC, however, such expansion has not been commenced and there are no assurances
that Changxin Trading will be able to achieve such an expansion successfully.
Therefore, a downturn or stagnation in the economic environment of the PRC could
have a material adverse effect on Changxin Trading financial condition.
(b) Products risk
In addition to competing with other manufacturers of disinfectant product
offerings, Changxin Trading competes with larger U.S. companies who have greater
funds available for expansion, marketing, research and development and the
ability to attract more qualified personnel. These U.S. companies may be able to
offer products at a lower price. There can be no assurance that Changxin Trading
will remain competitive should this occur.
(c) Exchange risk
Changxin Trading cannot guarantee that the current exchange rate will remain
steady, therefore there is a possibility that Changxin Trading could post the
same amount of profit for two comparable periods and because of a fluctuating
exchange rate actually post higher or lower profit depending on exchange rate of
Renminbi converted to US dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(d) 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 allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, Changxin Trading ability to
operate the PRC subsidiaries could be affected.
F-39
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The acquisition by China Direct, Inc. (the "Company") of Shanghai Lang Chemical
Company, Inc. ("Lang Chemical"), a privately held Chinese company, closed
October 1, 2006. China Direct acquired 51% equity ownership of Shanghai Lang
Chemical Company Limited in exchange for an initial capital infusion of
US$375,000 and a follow-up capital infusion of US$326,250 to be made on or
before June 30, 2007. The Company's two shareholders, Messrs. Chen and Zhu each
retained a 24.5% equity interest in Lang Chemical, and remained as officers. The
purchase price was determined based on arm's length negotiations and no finder's
fees or commissions were paid in connection with the acquisition.
Shanghai Lang Chemical Company., Ltd. ("Lang Chemical") was established in
January 1998 with registered capital of $603,865 (RMB 5,000,000). Shanghai Lang
Chemical Co., Ltd. is located in the Shanghai region of the Yangtze River delta.
Lang Chemical specializes in the sale and distribution of industrial grade
synthetic chemicals. It maintains a relationship with both the supplier and the
customer, managing the logistics of the distribution channel. Lang Chemical is a
distribution agent in the eastern section of China for manufacturers such as
BASF YPC Co., Ltd, Celanese (China) Holding Co., Ltd. and Lucite International
(China) Chemical Industry Co., Ltd. Lang Chemical primarily distributes products
to industrial manufacturing company and trading companies, including property
developers, textile factories and pharmaceutical factories located in Eastern
China. Products sold and distributed by Lang Chemical are used by customers as a
raw material in the production of a variety of finished products including
paint, glue, plastics, textiles, leather goods as well as various medical
products. Lang Chemical was founded in January 1998 by Mr. Chen and Ms. Zhu.
Lang Chemical generates revenues through a commission ranging from 3% to 5% of
the sale, with the amount of commission varying depending on the product sold.
Lang Chemical maintains a small inventory of chemicals at various storage
centers across the eastern section of China. In most cases, Lang Chemical remits
full payment to the suppliers upon receipt of the products for its inventory.
Approximately 20% of Lang Chemical sales are derived from smaller orders of
these chemicals sold from their inventory. These chemicals, which include
acrylic acid, butyl acrylate, methyl acrylate, vinyl acetate, glacial acetic
acid, vinyl acetic, methanol and VAE, are typically subject to price
fluctuations. Lang Chemical maintains a small inventory of these chemicals in an
effort to supply the customer efficiently on short term notice and to reduce the
impact of fluctuating prices. These smaller orders are generally less than 10
tons and are shipped to the customer directly from one of Lang Chemical's
storage centers. at a 3 % to 5% markup. Generally the customer pays the full
amount of the order at the time the order is placed.
The balance of the approximately 80% of the Lang Chemical sales are derived from
frequently used products which are shipped directly from the supplier to the
customer. In most cases these are larger orders which Lang Chemical cannot
supply from their inventory. Usually these larger orders are in excess of 10
tons and will be shipped from the suppliers to the clients directly. Lang
Chemical will bill and collect payment from the customer. Generally customers
will pay 10% to 20% of the purchase price as a deposit to Lang Chemical. Lang
Chemical must pay the full balance to the suppler before the order is shipped.
Upon receipt of the goods the customer will remit the balance of the payment for
the order to Lang Chemical. Although Lang Chemical pays the suppliers upon
receipt, the products can be returned with full refund only in the event there
is an issue with quality.
F-40
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Lang Chemical utilizes storage centers located in Shanghai as well as Qidong
City and Jiangyin City in Jiangsu Province to provide the infrastructure to
support its distribution channels. These storage centers aggregate approximately
119,000 cubic feet of liquid storage tanks and approximately 38,000 square feet
of warehouse space used for solid or dry materials. The storage centers located
in Shanghai and Qidong City are operated by unrelated third parties and Lang
Chemical uses the storage space on an as needed basis. The Jiangyin City storage
facility is owned by Lang Chemical.
Lang Chemical has 17 full time employees, of which five are in management, two
are in accounting, six are in sales, two are in the international trade
department and the remaining two are in the logistics department. Lang
Chemical's management includes Mr. Jingdong Chen and Ms. Qian Zhu who are the
CEO and Chairman and CFO, respectively. Mr. Chen and Ms. Zhu are husband and
wife.
Lang Chemical's principal executive offices are located at Suite 901, No. 970,
Da Liang Rd., Shanghai, China in a 3,270 square foot office space owned by Ms.
Zhu. Lang Chemical owns office space located at 58 Jinqiao Rd, Suite 21A
Shanghai with total space of approximately 4,360 square feet. Currently Lang
Chemical does not have any personnel in this space and there are no Lang
Chemical operations at this location.
Lang Chemical also owns a storage facility in the Jiangsu Province is located in
the Beixin Fine Chemical Industrial Park, Qidong, Jiangsu Province. This
facility, which consists of a 105,000 cubic foot storage tank area and 21,800
square feet of warehousespace, is owned and operated by Lang Chemical. Lang
Chemical purchased the land in April 2005 at a cost of $308,900 and it owns the
warehouse, storage area as well as the land use rights.
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI China"),
entered into an acquisition agreement with Chang Magnesium Company, Limited, a
Chinese limited liability company ("Chang Magnesium"). Under the terms of the
agreement CDI China agreed to infuse $1,000,000 to Chang Magnesium ("Initial
Funds") 10 days post closing. On or before September 30, 2007, CDI China shall
deliver $800,000 of investment capital to Chang Magnesium and on or before
December 31, 2007 CDI China shall deliver $750,000 of investment capital to
Chang Magnesium. The closing of the transaction was subject to audited financial
statements for Chang Magnesium which reflected a contribution to Chang Magnesium
by Taiyuan YiWei Magnesium Co., Ltd. ("Taiyuan YiWei Magnesium") of property,
plant or equipment with a minimum value of $2,450,000. In June 2006 Taiyuan
YiWei Magnesium contributed property, plant and equipment valued at $2,567,353,
which represented all the assets related to the magnesium plant, to Chang
Magnesium.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China holds a 51% majority interest in Chang Magnesium.
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, entered into an employment agreement with
Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising the
operations of Chang Magnesium. The term of the five year agreement provides for
no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
F-41
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Chang Magnesium, established in March 2006, is involved in the manufacture, sale
and exporting of magnesium and magnesium related products. Chang Magnesium
Company, Limited expects to operate a newly constructed magnesium plant that
will process and manufacture a variety of magnesium by-products, including
magnesium powder, magnesium scrap, magnesium alloy and various grades of
magnesium slabs.
The newly constructed magnesium plant from which Chang Magnesium will operate is
located in the Aluminum & Magnesium Industrial Park in Yangqu County, of the
Shangxi Province. According to the China Magnesium Industry Report 2005 (March
2006) China, which has been the world's leading magnesium producer for the past
eight years, has in excess of 100 magnesium manufacturers with approximately
468,000 metric tons production in 2005. Raw magnesium production volume
increased 139% from 2000 to 2005; the production of magnesium ingot increased
345.5% and magnesium powder increased 89.04% in the same time period.
Most of the magnesium in China is produced in the Shanxi Province which has
abundant resources of dolomite, large coal deposits and some ferrosilicon
production. In recent years, the Shangxi Province has taken a leadership
position in China in various aspects of magnesium extraction technology and
related environmental protection work and officials from the Ministry of
Commerce (MOC) have designated the Shanxi Province as the central magnesium
production region of China.
As a result the Shangxi Province has emerged as an important region for
magnesium related companies. The annual output of magnesium in the Shangxi
Province is approximately 360,000 metric tons, accounting for 55% of the world's
total magnesium output, and 77% of the total output in China. As such the
manufacturers in the region have a degree of pricing power of magnesium in both
domestic and international markets.
Chang Magnesium expects to produce magnesium ingot with a magnesium element in
excess of 99.95% and it intends to produce 10 specifications of magnesium ingot
ranging in size from 2 kg to 150 kg. It is anticipated that Chang Magnesium will
produce magnesium alloy which meets ASTM International standards.
Chang Magnesium holds a 100% interest in Taiyuan Changxin YiWei Trading Co.,
Ltd. ("Changxin Trading"). Changxin Trading, a Chinese limited liability
company, was established November 23, 2003. Changxin Trading is a reseller,
distributor and exporter of magnesium products. Changxin Trading resells various
forms of magnesium including but not limited to magnesium powder, magnesium
scrap, magnesium alloy and various grades of ordinary magnesium slabs. Changxin
Trading resells magnesium products locally within China and as well exports
Magnesium from China. Changxin Trading has forged relationships with global
magnesium consumers. In the past Changxin Trading has supplied various magnesium
related products to Alcoa Inc. (United States), Alcan, Inc. (Canada), Capral
(Australia), and Japan Materials Co., Ltd. Approximately 70% of Changxin Trading
revenues are derived from the distribution of magnesium slabs. Changxin Trading
exported 40,000 metric tons in 2005, representing approximately 10% of China
magnesium related exports.
We intend that Chang Magnesium, which includes the operations of its
wholly-owned subsidiary Changxin Trading, will operate as a segment within CDI
China. Chang Magnesium has not yet generated any revenues from its proposed
operations.
F-42
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The unaudited pro forma condensed balance sheet combines the Company, Lang
Chemical and Chang Magnesium balance sheets as of September 30, 2006, gives pro
forma effect to the above transaction as if it had occurred on September 30,
2006. The pro forma statement of operations combines the Company, Lang Chemical
and Chang Magnesium for the nine months ended September 30, 2006, and the pro
forma statement of operations for the year ended December 31, 2005 assume that
the acquisition of Lang Chemical and Chang Magnesium took place on January 1,
2005.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred had the acquisition of Lang Chemical and Chang Magnesium by the
Company occurred as of October 1, 2006 or during the period presented nor is it
necessarily indicative of the future financial position or operating results.
These pro forma financial statements should be read in conjunction with the
audited historical financial statements and the related notes thereto for the
Company, Lang Chemical and Chang Magnesium included in the Form 8-K/A dated
October 25, 2006 and December 22, 2006 filed with Securities Exchange
Commission.
A preliminary allocation of the purchase price has been made to major categories
of assets and liabilities in the accompanying pro forma financial statements
based on available information. The actual allocation of purchase price and the
resulting effect on income from operations may differ significantly from the pro
forma amounts included herein. These pro forma adjustments represent the
Company's preliminary determination of purchase accounting adjustments and are
based upon available information and certain assumptions that the Company
believes to be reasonable. Consequently, the amounts reflected in the pro forma
financial statements are subject to change, and the final amounts may differ
substantially.
F-43
China Direct, Inc.
Proforma Statement of Operations
For the Year Ended December 31, 2005
(Unaudited)
China Lang Chang
Direct, Chemical, Magnesium, Proforma Proforma
Inc. Inc. Inc. Adjustments Consolidated
----------- ------------ ------------ ----------- ------------
Revenues ........................................... $ 1,538,428 $ 31,737,463 $ 23,622,221 $ - $ 56,898,112
Cost of sales ...................................... 109,522 31,239,107 22,301,757 - 53,650,386
----------- ------------ ------------ --------- ------------
Gross profit: ...................................... 1,428,906 498,356 1,320,464 - 3,247,726
Operating expenses:
Sales, general, and administrative-related parties 141,188 - - - 141,188
Sales, general and administrative ................ 557,283 582,465 517,647 - 1,657,395
----------- ------------ ------------ --------- ------------
Total operating expenses ...................... 698,471 582,465 517,647 - 1,798,583
Operating income (loss) ....................... 730,435 (84,109) 802,817 - 1,449,143
Other income (expense)
Other income (expense) ........................... - 38,463 (35,895) - 2,568
Interest income (expense) ........................ - (17,606) 3,888 - (13,718)
Unrealized gain (loss) on trading securities ..... 28,650 - - - 28,650
Realized gain (loss) on sale of trading securities 6,176 - - - 6,176
----------- ------------ ------------ --------- ------------
34,826 20,857 (32,007) - 23,676
Net income (loss) before discontinued operations
and income tax and minority interest ............. 765,261 (63,252) 770,810 - 1,472,819
Net income (loss) before income tax ................ 765,261 (63,252) 770,810 - 1,472,819
Income tax benefit (expense) ....................... (304,428) - (254,367) - (558,795)
----------- ------------ ------------ --------- ------------
Net income (loss) before Minority Interest ......... 460,833 (63,252) 516,443 - 914,024
Minority Interest in loss of subsidiary ............ - - - $(222,064) (b) (222,064)
----------- ------------ ------------ --------- ------------
Net income (loss) .................................. $ 460,833 $ (63,252) $ 516,443 $(222,064) $ 691,960
=========== ============ ============ ========= ============
Foreign currency ................................... - 19,952 32,259 - 52,211
Unrealized gain on marketable securities held
for sale, net of income tax ........................ 45,300 - - - 45,300
----------- ------------ ------------ --------- ------------
Comprehensive income ............................... $ 506,133 $ (43,300) $ 548,702 $(222,064) $ 789,471
=========== ============ ============ ========= ============
See Notes to Unaudited Proforma Financial Statements.
F-44
China Direct, Inc.
Proforma Statement of Operations
For the Nine-Months Ended September 30, 2006
(Unaudited)
China Lang Chang
Direct, Chemical, Magnesium, Proforma Proforma
Inc. Inc. Inc. Adjustments Consolidated
----------- ------------ ------------ ----------- ------------
Revenues ........................................... $ 483,407 $ 25,186,818 $ 15,957,667 $ - $ 41,627,892
Cost of revenues ................................... 347,707 24,866,372 15,069,758 - 40,283,837
----------- ------------ ------------ --------- ------------
Gross profit: ...................................... 135,700 320,446 887,909 - 1,344,055
Operating expenses:
Sales, general, and administrative-related parties 16,894 - - - 16,894
Sales, general and administrative ................ 1,092,279 297,214 314,339 - 1,703,832
----------- ------------ ------------ --------- ------------
Total operating expenses ...................... 1,109,173 297,214 314,339 - 1,720,726
Operating (loss) income ....................... (973,473) 23,232 573,570 - (376,671)
Other income (expense)
Registration rights penalty ...................... (13,013) - - - (13,013)
Other (expense) .................................. - 1,060 (14,365) - (13,305)
Interest expense ................................. 205 (8,851) 1,834 - (6,812)
Unrealized gain (loss) on trading securities ..... 234,148 - - - 234,148
Realized gain on sale of trading securities ...... 118,560 - - - 118,560
----------- ------------ ------------ --------- ------------
339,900 (7,791) (12,531) - 319,578
Net (loss) income before income tax and minority
interest .......................................... (633,573) 15,441 561,039 - (57,093)
Income tax benefit (expense) ....................... 245,742 - (224,865) - 20,877
----------- ------------ ------------ --------- ------------
Net income (loss) before minority interest ......... (387,831) 15,441 336,174 - (36,216)
Minority Interest in income of subsidiary .......... - - - (7,566) (b)-1 -
- - - (164,725) (b)-2 (172,291)
----------- ------------ ------------ --------- ------------
Net (loss) income .................................. $ (387,831) $ 15,441 $ 336,174 $(172,291) $ (208,507)
=========== ============ ============ ========= ============
Foreign currency ................................... - 35,505 99,355 - 134,860
Unrealized gain on marketable securities held
for sale, net of income tax ........................ 442,853 - - - 442,853
----------- ------------ ------------ --------- ------------
Comprehensive income ............................... $ 55,022 $ 50,946 $ 435,529 $(172,291) $ 369,206
=========== ============ ============ ========= ============
See Notes to Unaudited Proforma Financial Statements.
F-45
China Direct, Inc.
Proforma Consolidated Balance Sheet
September 30, 2006
(Unaudited)
China Lang Chang
Direct, Chemical, Magnesium, Proforma Proforma
Inc. Inc. Inc. Adjustments Consolidated
---------- ---------- ----------- ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 883,508 $ 276,785 $ 784,977 $ - $ 1,945,270
Accounts receivable, net of allowance for doubtfulll
accounts .......................................... - 666,837 1,208,697 - 1,875,534
Other Receivable ................................... - 105,182 - - 105,182
Inventory .......................................... - 161,463 - - 161,463
Prepaid expenses ................................... 256,267 658,151 3,227,476 - 4,141,894
Investment in trading securities ................... 528,869 - - - 528,869
Investment in marketable securities held for sale .. 1,494,600 - - - 1,494,600
Due from related party ............................. - - 22,260 - 22,260
---------- ---------- ----------- ----------- ------------
Total current assets ............................. 3,163,244 1,868,418 5,243,410 - 10,275,072
Property and equipment, net of accumulated
depreciation .................................... 17,982 1,124,767 2,625,277 (49,947) (a)-1 2,726,065
- - - (992,014) (a)-2 -
Prepaid expenses ................................. 320,333 - - - 320,333
Other assets ..................................... 30,000 - - - 30,000
---------- ---------- ----------- ----------- ------------
Total assets .................................. $3,531,559 $2,993,185 $ 7,868,687 $(1,041,961) $ 13,351,470
========== ========== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable and accrued expenses ............ $ 76,467 $ 603,253 $ 2,068,347 $ - $ 2,748,067
Loan payable-short term .......................... - 135,041 - - 135,041
Accrued compensation ............................. 14,149 - - - 14,149
Advance from customer ............................ - 368,752 411,745 - 780,497
Deferred revenues-short term ..................... 366,300 - - - 366,300
Other Payable .................................... - 331,872 - - 331,872
Income tax payable ............................... - - 591,035 - 591,035
Due to related party ............................. - 465,458 303,080 - 768,538
Due to executive officers ........................ 139,441 - - - 139,441
Deferred income tax payable ...................... 323,733 - - - 323,733
---------- ---------- ----------- ----------- ------------
Total current liabilities ..................... 920,090 1,904,376 3,374,207 - 6,198,673
Long term loans payable ............................ - 281,618 - - 281,618
Deferred revenues-long term ........................ 457,875 - - - 457,875
Minority interest .................................. - - - 721,739 (a)-1 4,124,850
- - - 3,403,111 (a)-2 -
Stockholders' (Deficit) Equity:
Preferred stock, 10,000,000 shares authorized,
none issued ..................................... - - - - -
Common stock, 1,000,000,000 shares authorized,
10,997,183 issued and outstanding ............... 10,997 - - - 10,997
Additional paid-in capital ....................... 1,581,444 603,865 3,210,443 (603,865) (a)-1 4,832,694
- - - (3,210,443) (a)-2 -
- - - 701,250 (c)-1 -
- - - 2,550,000 (c)-2 -
Less: Subscription Receivable .................... - - - (701,250) (c)-1 (3,251,250)
- - - (2,550,000) (c)-2 -
Accumulated comprehensive income ................. 505,456 35,505 99,355 - 640,316
Retained earnings ................................ 55,697 167,821 1,184,682 (167,821) (a)-1 55,697
- - - (1,184,682) (a)-2 -
---------- ---------- ----------- ----------- ------------
Total stockholders' (deficit) equity .......... 2,153,594 807,191 4,494,480 (5,166,811) 2,288,454
---------- ---------- ----------- ----------- ------------
Total liabilities and stockholders'
(deficit) equity ............................. $3,531,559 $2,993,185 $ 7,868,687 $(1,041,961) $ 13,351,470
========== ========== =========== =========== ============
See Notes to Unaudited Proforma Financial Statements.
F-46
CHINA DIRECT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited pro forma combined balance sheet of China Direct,
Inc. ("the Company") at September 30, 2006 is presented as if the acquisition of
Shanghai Lang Chemical Company., Ltd. ("Lang Chemical") and Chang Magnesium
Company, Limited ("Chang Magnesium"), had occurred on September 30, 2006. The
pro forma combined condensed statements of operations of China Direct, Inc.
("the Company") for the year ended December 31, 2005 and the nine months ended
September 30, 2006 are presented as if the acquisitions of Lang Chemical and
Chang Magnesium occurred on January 1, 2005 and January 1, 2006, respectively.
These unaudited pro forma combined condensed financial statements are based upon
the historical financial statements of China Direct, Inc., Shanghai Lang
Chemical Company., Ltd. and Chang Magnesium Company., Ltd. after considering the
effect of the adjustments described in these footnotes.
The accompanying unaudited pro forma combined condensed financial statements do
not give effect to any cost savings, revenue synergies or restructuring costs
which may result from the integration of China Direct, Inc., Shanghai Lang
Chemical Company, Ltd. and Changxin Magnesium Company, Ltd. operations. Further,
actual results may be different from these unaudited pro forma combined
financial statements.
NOTE 2 - THE ACQUISITIONS
The acquisition by China Direct, Inc. (the "Company") of Shanghai Lang Chemical
Company, Inc. ("Lang Chemical"), a privately held Chinese company, closed
October 1, 2006. China Direct acquired 51% equity ownership of Shanghai Lang
Chemical Company Limited in exchange for an initial capital infusion of $375,000
and a follow-up capital infusion of $326,250 to be made on or before June 30,
2007. The Company's two shareholders, Messrs. Chen and Zhu each retained a 24.5%
equity interest in Lang Chemical, and remained as officers. The purchase price
was determined based on arm's length negotiations and no finder's fees or
commissions were paid in connection with the acquisition.
The estimated purchase price and the preliminary adjustments to historical book
value of Shanghai Lang Chemical Company, Limited as a result of the acquisition
are as follows:
Purchase price:
Purchase price ............................................... $ 701,250
Net Assets Acquired(September 30, 2006):
Total Assets ................................................. 2,993,185
Liabilities .................................................. (2,185,994)
Other Comprehensive Income ................................... (35,505)
-----------
Net Assets ................................................... 771,686
Additional Paid in capital ................................... 701,250
-----------
Total Net Assets ............................................. 1,472,936
*51% ownership
Net Assets Acquired(September 30, 2006): .................. 751,197
-----------
Net Assets acquired in excess of purchase price .............. $ 49,947
===========
F-47
CHINA DIRECT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 2 - THE ACQUISITIONS (CONTINUED)
The acquisition by China Direct, Inc. (the "Company") of Chang Magnesium
Company, Ltd. ("Chang Magnesium"), a privately held Chinese company, closed
December 22, 2006. China Direct acquired 51% equity ownership of Chang Magnesium
in exchange for an initial capital infusion of $1,000,000 and a follow-up
capital infusion of $800,000 and $750,000 to be made by September 30, 2007 and
December 31, 2007, respectively. The purchase price was determined based on
arm's length negotiations and no finder's fees or commissions were paid in
connection with the acquisition.
The estimated purchase price and the preliminary adjustments to historical
book value of Taiyuan Changxin YiWei Trading Company, Limited as a result
of the acquisition are as follows:
Purchase Price:
Purchase price ............................................... $ 2,550,000
Net Assets Acquired(September 30, 2006):
Total Assets ................................................. 7,868,687
Liabilities .................................................. (3,374,207)
Other Comprehensive Income ................................... (99,355)
-----------
Net Assets ................................................... 4,395,125
Additional Paid in capital ................................... 2,550,000
-----------
Total Net Assets ............................................. 6,945,125
*51% ownership
Net Assets Acquired(September 30, 2006): .................. 3,542,014
-----------
Net Assets acquired in excess of purchase price .............. $ 992,014
===========
49% ownership ................................................ 3,403,111
NOTE 3 PRO FORMA ADJUSTMENTS
The pro forma adjustments are comprised of the following elements:
(a)-1 Reflects the payment of purchase consideration totaling $701,250 for
Lang Chemical. Purchase allocation to net assets acquired is a
preliminary estimate made by management. The estimate assumes that
historical values of net assets acquired approximate fair value. The
excess net assets acquired over purchase are allocated to property and
equipment.
(a)-2 Reflects the payment of purchase consideration totaling $2,550,000 for
Chang Magnesium. Purchase allocation to net assets acquired is a
preliminary estimate made by management. The estimate assumes that
historical values of net assets acquired approximate fair value. The
excess net assets acquired over purchase are allocated to property and
equipment.
F-48
CHINA DIRECT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 3 - PRO FORMA ADJUSTMENTS (CONTINUED)
(b)-1 Reflects the minority interest of the pro forma adjustments to net
income (loss) before minority interest based on 51% ownership of Lang
Chemical.
(b)-2 Reflects the minority interest of the pro forma adjustments to net
income (loss) before minority interest based on 51% ownership of Chang
Magnesium.
(c)-1 Reflects the contributed capital of the pro forma adjustments to
additional paid-in capital based on purchase price for Lang Chemical.
(c)-2 Reflects the contributed capital of the pro forma adjustments to
additional paid-in capital based on purchase price for Chang Magnesium.
NOTE 4 - SUBSEQUENT EVENTS
On October 15, 2006 our wholly owned subsidiary, CDI China, Inc. ("CDI China"),
entered into an acquisition agreement with Chang Magnesium Company, Limited, a
Chinese limited liability company ("Chang Magnesium"). Under the terms of the
agreement CDI China agreed to infuse $1,000,000 to Chang Magnesium ("Initial
Funds") 10 days post closing. On or before September 30, 2007, CDI China shall
deliver $800,000 of investment capital to Chang Magnesium and on or before
December 31, 2007, CDI China shall deliver $750,000 of investment capital to
Chang Magnesium. The closing of the transaction was subject to audited financial
statements for Chang Magnesium which reflected a contribution to Chang Magnesium
by Taiyuan YiWei Magnesium Co., Ltd. ("Taiyuan YiWei Magnesium") of property,
plant or equipment with a minimum value of $2,450,000. In June 2006 Taiyuan
YiWei Magnesium contributed property, plant and equipment valued at $2,567,353,
which represented all the assets related to the magnesium plant, to Chang
Magnesium.
On December 22, 2006 the transaction closed pursuant to its terms. As a result
CDI China holds a 51% majority interest in Chang Magnesium.
At the closing of the transaction, CDI Shanghai Management Company, Limited, a
wholly owned subsidiary of CDI China, entered into an employment agreement with
Yuwei Huang. Mr. Huang will serve as Executive Vice President, supervising the
operations of Chang Magnesium. The term of the five year agreement provides for
no annual compensation with bonuses at the discretion of the company. The
agreement contains customary confidentiality provisions.
F-49