UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended : September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 000-29915
Frefax Inc.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0786722
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
1255 Peel Street, Suite 550, Montreal, Quebec
CANADA H3B 1T4 (Address of principal
executive offices)
(514) 398-0515
(Issuer's telephone number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 50,331,657
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
PART I-- FINANCIAL INFORMATION....................................2
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS...................................2
-----------------------------
ITEM 2. PLAN OF OPERATION......................................3
--------------------------
1. NEWS ARTICLES............................................5
-- -------------
PART II-- OTHER INFORMATION.......................................6
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS......................................6
--------------------------
ITEM 2. CHANGES IN SECURITIES..................................6
------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................7
---------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....7
------------------------------------------------------------
ITEM 5. OTHER INFORMATION......................................7
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................7
-----------------------------------------
SIGNATURES........................................................8
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
At the end of this filing are attached audited financial statements for Frefax,
Inc. (FC) and subsidiary, for the period ending September 30th, 2000 which are
submitted in compliance with item 310 (b) of Regulation SB.
FREFAX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page number
Independent auditors' report F-1
Consolidated Interim Balance sheet at September 30, 2001 F-2
Consolidated Interim Statements of operations and comprehensive income (loss) for the F-3
period ended September 30, 2001 and cumulative period from September 26, 1997 (date of
inception) to September 30, 2001
Consolidated Interim Statement of stockholders' deficiency for the period from F-4 - F-5
September 26, 1997 (date of inception) to September 30, 2001
Consolidated Interim Statement of cash flows for the periods ended September 30, 2001 F-6
and cumulative period from September 26, 1997 (date of inception) to September 30,
2001.
Consolidated Interim Notes to financial statements F-7 - F-12
Item 2. Plan of Operation.
Subsequent to the close of the first quarter of September 30, 2001, Frefax Inc.
acquired 100% of the outstanding shares of CXN in exchange for a total of
28,836,566 newly issued shares of Frefax common stock to CXN shareholders. The
issuance of the Frefax shares to CXN effectively created a merger and change of
control, such that CXN is now a wholly owned subsidiary of Frefax. The
transaction was closed on November 13, 2001.
While events occurred subsequent to the period of this filling, new management
has incorporated all results of its operations in this filling.
The Company
CXN was incorporated on October 19th, 2000, to acquire the exclusive
commercialization rights to the most reliable and timely financial, economic and
business financial information on China, published by the China Economic
Information Network (CEINet).
CEINet is a subsidiary of the Chinese State Information Center (SIC) which
reports to the State Development Planning Commission.
CEINet was created by the SIC as a professional information service network,
responsible for producing and publishing economic information on China. CEINet
has a local information network in over 150 cities and regions all across China,
forming a financial information network that covers the entire country.
The SIC is a government sponsored institution under the direct management of the
State Development Planning Commission (SDPC). The SDPC reports directly to the
State Council, which is China's cabinet, the highest body, of state
administration.
CEINet currently publishes over 2000 financial news articles and features a week
in Mandarin. This allows CXN to provide its subscribers with over 200 new
articles daily. The articles and reports that are published by CXN are sourced
primarily from CEINet. CEINet is the Chinese Government's primary source of
financial, economic and business news, used in the planning and economic
development of China.
CXN will edit, normalize and properly classify all this data using industry
standard NewsML tags. This process allows CXN to display, hide or arrange
certain areas of the same content in different ways. This allows the content to
be automatically prepared for multi-channel publishing. The main products to be
offered by CXN include, Real-time Financial News, Corporate Profiles, Financial
Television, Market Research and Monthly Industry Reviews.
CXN presently operates from its head office in Montreal and has a staff of 28
editors, translators and support staff in its Beijing editorial office.
Capital Needs
- -------------
The company currently has enough capital to cover operations till the end of
February 2002. The company will require an additional $1 million to $1.5 in
equity to cover costs associated with;
o Hiring of additional key staff and sales staff;
o Cover development and operating costs of the company's enterprise
portal;
o Launch marketing and advertising campaign;
o Hire additional translators and editors in China;
Based on the difficult funding environment faced by most companies, the company
will run a very streamlined sales office and support infrastructure which will
require much lower operating expense and need of ramp up capital. The company
will rely more on using content aggregators and strategic partnership to
distribute its content. This will translate to lower operating margins in the
range of 30-35%.
The company will generate revenue starting February 2002, and is expected to be
cash-flow positive by April 2003 or earlier.
Capital will be raised through, debt financing, private placements or secondary
offerings and will be completed before March 2002.
Product Development & Catalogue
- -------------------------------
During the next 12 months, the company will be rolling out all its content and
made available through its portal or through various e-content aggregators.
The company has presently available in English, a complete listing of all 1114
companies listed on the Shanghai and Shenzhen stock exchanges.
By the end of February 2002, the company will have a complete translated
database of all 84,000 companies, including all of China's non-listed state
owned enterprises and major privately owned companies.
All of this data is produced and updated on a regular basis by CEINet, the
company will be transferring the data to its own servers, where the data will be
translated, noralized and available for delivery in various formats.
The company is in the process of producing a detailed catalogue to be provided
to the market in the near future. An outline of all products in development is
listed bellow.
(i) China's Public Company Profiles
Hoover's type profile for all listed companies in China's
Shanghai and Shenzhen stock exchanges. Reports include company
overview, leading financial ratios, two-year financial data
and five-year historical stock prices. The source of this
product comes from CXN research and the research center of
China's State Planning & Development Commission (SPDC). Over
1100 profiles will be available by January 15, 2002 in XML and
PDF format.
(ii) China's Private and State Owned Company Profiles
Fact sheet information on 84,000 companies including all of
China's non-listed state owned enterprises and major privately
owned companies. This product will launch on February 25, 2002
in XML format.
(iii) China Macroeconomic Reports
Macroeconomic reports from the research center of China's
powerful State Planning and Development Commission and two of
China's prominent brokerage houses Hongyuan Securities and
Beijing Securities. These reports are available in XML format.
(iv) China's 50 Economic Expert Forum
Papers produced by China's top economists on various financial
& economical topics. On average, 7 papers are available each
month. The source of this information is the research center
of SPDC. These reports are available in XML format.
(v) Sector Research Reports on major industries in China
Sector Research Reports on major industries produced by
Hongyuan Securities Co., Beijing Securities and other
prominent Chinese brokerage houses.
(vi) China Public Company Analysis
In-depth coverage and investment analysis on China's
domestically listed companies. The data sources of this
product are prominent Chinese brokerage houses including
Hongyuan Securities Co., Beijing Securities and China
Securities.
(vii) Other China Financial, Market & Economic Development Information
CXN's primary data source is the research center of the SPDC.
All the titles included in this section are already available
in the Chinese Language. The English versions of the following
titles are currently under preparation.
1. News articles
a. Macroeconomy - information and commentary on China's
domestic economy and major international economies;
b. Industry - daily news articles covering top stories in
China by industry sector and region;
c. Markets - daily news articles and commentary covering
China's securities markets.
2. Macroeconomic and Industry Statistics
a. Macroeconomy - regular updates, historical coverage, and
analysis of China's fixed assets investment, value-added of
industry, retail sales, and industrial GDP, foreign trade,
domestic and foreign investment, government fiscal data,
pricing, consumption and livelihood;
b. Industry - regular updates, historical coverage, and analysis
of China's industrial production covering over 230 sector
headings, 32 regions, and 35 cities.
Major Expenditure - Portal
- --------------------------
The only major purchase anticipated by the company is the development and
launching is its enterprise portal.
It was originally planed to develop and maintain this portal in-house, but to
minimize capital expenditures associated to purchasing servers and maintaining
full time staff to support the infrastructure, the company has decided to
outsource all its enterprise portal needs to ECNext.
With minimal upfront development costs and monthly maintenance fees and revenue
sharing arrangement, the company will have a world-class portal online starting
January and fully implemented by March 2002.
Staff
- -----
The company believes it will require a staff of 75 translators and editors in
its Beijing office by the end of 2002, to support its operations. The company
currently has 28 employees in its Beijing office.
With respect to the company's sales, marketing and advertising and
administrative operations in Montreal, it is expected the current head count of
6 persons will jump to 19.
All staff will be ramped up as needed and pending budget allocation from head
office.
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
2 Acquisition of China Xin Network (Canada) inc. (1)
3.a Articles of Incorporation of the Company (2)
3.b Amendments to the Articles of Incorporation (2)
3.c By-Laws of the Company (2)
(1)Previously filed as an Exhibit to Form 8-K dated November 28, 2001
(2)Previously filed as an Exhibit to Form 10-SB12G, General form for
registration of Securities filed on March 10, 2000
Forms 8-K
- ---------
There were no 8-K filed during the first quarter ending September 30, 2001.
Following subsequent events dated November 8 merger between Frefax and China Xin
Network, Form 8-K was filled on November 28, 2001 reflecting change of control
following merger with China Xin Network. On December 17, 2001 the new management
engaged new accountants for China Xin Network and Frefax. On December 21, 2001,
two separate Form 8-Ks were filled reflecting changes to auditors.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Frefax Inc.
(Registrant)
/S/ Jean-Francois Amyot
----------------------------------
Date December 27, 2001 Jean-Francois Amyot
CEO & Chairman
FREFAX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
FREFAX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page number
Independent auditors' report F-1
Consolidated Interim Balance sheet at September 30, 2001 F-2
Consolidated Interim Statements of operations and comprehensive income (loss)
for the period ended September 30, 2001 and cumulative period
from September 26, 1997 (date of inception) to September 30, 2001 F-3
Consolidated Interim Statement of stockholders' deficiency for the period from
September 26, 1997 (date of inception) to September 30, 2001 F-4 - F-5
Consolidated Interim Statement of cash flows for the periods ended September 30,
2001 and cumulative period from September 26, 1997 (date of
inception) to September 30, 2001. F-6
Consolidated Interim Notes to financial statements F-7 - F-12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Frefax, Inc. and Subsidiary
We have audited the accompanying interim balance sheet of Frefax, Inc. and
Subsidiary (a development stage company) (the "Company") as of September 30,
2001 and the related interim statements of operations and comprehensive income
(loss), stockholders' deficiency and cash flows for the period ended September
30, 2001 and cumulative period from September 26, 1997 (date of inception) to
September 30, 2001. These consolidated interim financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated interim financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
interim 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 bases for our opinion.
In our opinion, the consolidated interim financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 2001 and the results of its operations and cash flows for
the period ended September 30, 2001 and 2000 and cumulative period from
September 26, 1997 (date of inception) to September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated interim financial statements have been prepared
assuming the Company will continue as a going concern, As discussed in Note 3 to
the financial statements, the Company has suffered recurring losses from
operations and has no established source of revenue which raises substantial
doubt about its ability to continue as a going concern. Management's plan in
regard to these matters are also described in Note 3. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Fine and Associates
Montreal, Quebec Canada
December 20, 2001
FREFAX, INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM BALANCE SHEET
SEPTEMBER 30, 2001
ASSETS
------
Current assets:
Cash $ 8,049
Prepaid and deposits 19,962
Receivable use Tax 19,149
-------------
47,160
Capital assets. (Note 1d) 60,273
-------------
107,433
LIABILITIES
-----------
Current liabilities:
Accrued expenses $ 16,650
-------------
Accrued expenses - Related party $ 74,971
-------------
Loans from related parties 37,223
-------------
Total current liabilities 128,844
-------------
Loans payable (Note 7)
Commitments and contingencies (Note 6) -
----
538,148
SHAREHOLDERS' DEFICIENCY
------------------------
Stockholders' deficiency:
Common stock - $.001 per value, 50,000,000 shares
Authorized, 50,331,657 shares issued and outstanding 50,332
Additional paid-in capital 108,932
Accumulated deficit during the development stage (197,285)
Stock subscriptions receivable (196,349)
-------------
Total stockholders' deficiency 430,715
-------------
Total liabilities and stockholders' deficiency $ 107,433
=============
See accompanying notes to consolidated financial statements
F-2
FREFAX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS AND COMPRHEHENSIVE INCOME (LOSS)
Cumulative period
from September
26, 1997 (date of
For the period inception) to
ended September September 30,
30, 2001 2001
-------------------------------------------
$ - $ -
-------------------- --------------------
Income
Expenses:
Selling, general and administrative expenses 276,201 393,630
Total expense 276,201 393,630
-------------------- --------------------
Loss before other income (expense)
and provision for income taxes (276,201) (393,630)
Other income (expense)
Interest income 936 936
Total other income 936 936
-------------------- --------------------
Loss before provision for income taxes (275,265) (392,694)
-------------------- --------------------
Provision for income taxes - -
-------------------- --------------------
Comprehensive net (loss) (275,265) (392,694)
==================== ====================
Basic:
Net (loss) (0) (0)
==================== ====================
See accompanying notes to consolidated financial statements
F-3
FREFAX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM SEPTEMBER 26, 1997 (DATE OF INCEPTION)
TO SEPTEMBER 30, 2001
Accumulated Accumulated
Additional Deficit Other Stock Total
Common Stock Paid-in During the comprehensive Subscriptions Stockholders'
Shares Amount Capital Development Stage Income (Loss) Receivable Deficiency
----------- --------- ----------- ----------------- ------------- ------------ -----------
Issuance of common stock upon
capitalization of company 500,000 500 2,000 - - - 2,500
Issuance of common stock in
connection with limited offerings 403,000 403 297 - - - 700
Net loss from date of inception
(September 26, 1997) to
June 30, 1998 - - - (2,954) - - (2,954)
----------- --------- ----------- ----------------- ------------- ------------ -----------
Balances at June 30, 1998 903,000 903 2,297 (2,954) - - 246
Issuance of common
stock in connection with
acquisition of subsidiary 10,000,000 10,000 - - - - 10,000
Issuance of common
stock in connection with
limited offering (November 1998) 6,001,000 6,001 54,009 - (60,010) - -
Issuance of common
stock in connection with
limited offering (february 1999) 2,542,000 2,542 124,558 - - (127,100) -
Accrued interest on
subscriptions receivable - - - - - (1,755) (1,755)
Foreign Currency
translation adjustment - - - - (6,436) - (6,436)
Net loss for the year ended
June 30, 1999 - - - (49,719) - - (49,719)
----------- --------- ----------- ----------------- ------------- ------------ -----------
----------- --------- ----------- ----------------- ------------- ------------ -----------
Balances at June 30, 1999 (Forwarded)19,446,000 19,446 180,864 (52,673) (6,436) (188,865) (47,664)
See accompanying notes to consolidated financial statements
F-4
FREFAX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM SEPTEMBER 26, 1997 (DATE OF INCEPTION)
TO SEPTEMBER 30, 2001
Accumulated Accumulated
Additional Deficit Other Stock Total
Common Stock Paid-in During the comprehensive Subscriptions Stockholders'
Shares Amount Capital Development Stage Income (Loss) Receivable Deficiency
------------ --------- ------------ ------------------- --------------- ------------- ------------
------------ --------- ------------ ------------------- --------------- ------------- ------------
Balances at June 30, 1999 (19,446,000) 19,446 180,864 (52,673) (6,436) (188,865) (47,664)
Accrued interest on
subscriptins receivable - - - - - (3,742) (3,742)
Foreign currency
translation adjustment - - - - (4,936) - (4,936)
Net loss for the year ended
June 30, 2000 - - - (35,300) - - (35,300)
------------ --------- ------------ ------------------- --------------- ------------- ------------
------------ --------- ------------ ------------------- --------------- ------------- ------------
Balances at June 30, 2000 19,446,000 19,446 180,864 (87,973) (11,372) (192,607) (91,642)
Issuance of common stock
for services rendered 2,049,091 2,049 98,451 - - - 100,500
Accrued interest on
subscriptions receivable - - - - - (3,742) (3,742)
Foreign currency
translation adjustment - - - - 565 - 565
Net loss for the year ended
June 30, 2001 - - - (51,904) - - (51,904)
------------ --------- ------------ ------------------- --------------- ------------- ------------
------------ --------- ------------ ------------------- --------------- ------------- ------------
Balances at June 30, 2001 21,495,091 21,495 279,315 (139,877) (10,807) (196,349) (46,223)
============ ========= ============ =================== =============== ============= ============
============ ========= ============ =================== =============== ============= ============
Issuance of common stock
on reverse takeover of CXN
(Canada) Inc. 28,836,566 28,837 (170,383) 22,448 10,807 (108,291)
Accrued interest on
subscription receivable (936) (936)
Net loss for the period
ended (275,265) (275,265)
------------ --------- ------------ ------------------- --------------- ------------- ------------
September 30, 2001 50,331,657 50,332 108,932 (392,694) (197,285) (430,715)
============ ========= ============ =================== =============== ============= ============
See accompanying notes to consolidated financial statements
F-5
FREFAX, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net (loss) (275,265)
Adjustments to reconcile net (loss) to net
cash used for operating activities:
Depreciation 3,321
Interest income on subscriptions receivable (936)
(Increase) decrease in:
Recoverable use tax (19,149)
Prepaids and deposits (19,962)
Increase (decrease) in:
Accrued expenses - related party 65,971
Accrued expenses 16,650
----------------
Net cash used for operating activities (229,370)
----------------
Cash flows from investing activities:
Acquisition of wholly owned subsidiary (108,291)
Purchase of furniture, fixtures and equipment (63,594)
----------------
Net cash used for investing activities (171,885)
----------------
Cash flows from financing activities:
Proceeds from initial capitalization of company
and from sale of common stock in connection
with private placements, -
Loans payable 409,304
----------------
Net cash provided by financing activities 409,304
----------------
Net increase (decrease) in cash 8,049
Cash, beginning of period -
----------------
Cash, end of period 8,049
----------------
Supplemental disclosure of non-cash flow information:
Cash paid during the year for:
Interest -
----------------
----------------
Income taxes -
----------------
See accompanying notes to consolidated financial statements
F-6
FEFAX, INC AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
NOTE 1 - ORGANIZATION
Frefax, Inc. (the "Company") was incorporated in the State of Florida
on September 26, 1997 as Central Group, Inc. The name of the Company
was changed on September 15, 1998 to its current name.
Pursuant to the stock purchase agreement dated July 30, 1998 between
the Company and the shareholders of Frefax, Inc. (Canada), ("Frefax
Canada"), a company incorporated in the province of Ontario, Canada,
the Company issued an aggregate of 10,000,000 shares of its $.001 par
value common stock to the shareholders of Frefax Canada in exchange for
100% of Frefax Canada's issued and outstanding common stock.
Accordingly, Frefax Canada became a wholly owned subsidiary of the
Company. Such transaction is considered a capital transaction whereby
Frefax Canada contributed its stock for the net book value of the
Company.
Frefax Canada was incorporated on September 5, 1996 for the purpose of
developing software to be utilized in reducing long distance telephone
fax charges. The Company ceased pursuing this prior to June 30, 2000.
In May 2001 the Company disposed of 100% of Frefax Inc. (Canada) for a
total net proceeds of $68,389
As of June 30, 2001, the company is considered to be a development
stage company. However, on November 8, 2001, the Company signed a
letter of intent to enter into an acquisition agreement with China Xin
Network (Canada) Inc. ("CXN"). See Note 9.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
----------------------
The Company is considered to be a development stage company as of
September 30, 2001 since planned principal operations have not yet
commenced.
b) Principles of consolidation
-----------------------------
The accompanying consolidated financial statements include the accounts
of the Company from September 26, 1997 (date of inception) and its
wholly owned subsidiary, CXN Canada from October 2001 herein after
referred to as the ("Companies") after elimination of all significant
intercompany transaction and accounts.
c) Cash and cash equivalent
------------------------
The Company considers highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
F-7
FREFAX, INC AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
d) Furniture, fixtures, and equipment
----------------------------------
Furniture, fixtures, and equipment are recorded at cost less
accumulated depreciation which is provided on the straight line basis
over the estimated useful lives of the assets which range between three
and seven years. Expenditures for maintenance and repairs are expensed
as incurred.
e) Income taxes.
------------
The Company accounts for income taxes in accordance with the "liability
method" of accounting for income taxes. Accordingly, deferred tax
assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Current income taxes are based on the respective
periods' taxable income for federal, state and foreign income tax
reporting purposes.
f) Earnings per share
-----------------
Earnings per common share is computed pursuant to SFAS No. 128
"Earnings Per Share." Basic earnings per share is computed as net
income (loss) available to common shareholders divided by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur
from common shares issuable through stock options, warrants and
convertible preferred stock.
g) Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
FREFAX, INC AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h) Faire value disclosure at September 30, 2001
--------------------------------------------
The carrying value of recoverable use fax, loan receivable - unsecured,
accrued expenses - related party, and loans from related party is a
reasonable estimate of their fair value.
i) Foreign currency translation
----------------------------
The functional currency for the Company's foreign operation is the
applicable local currency, Canadian dollars. The translation from
Canadian dollars to U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet
date and for revenue and expense accounts using a weighted average
exchange rate during the period. The resulting translation adjustments
are recorded as a component of comprehensive income. Gains or losses
resulting from foreign currency transactions are included in the
statements of operations.
j) Effect of new accounting standards
----------------------------------
The Company does not believe that any recently issued accounting
standards, not yet adopted by the Company, will have a material impact
on its financial position and results of operations when adopted.
During June 2001 SFAS No. 141, "Business Combinations" was issued. This
standard addresses financial accounting and reporting for business
combinations. All business combinations within the scope of SFAS 141
are to be accounted for using one method - the purchase method. Use of
the pooling-of-interests method is prohibited. The provisions of SFAS
141 apply to all business combinations initiated after June 30, 2001.
It also applies to all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or
later.
During June 2001 SFAS No. 142, "Goodwill" and Other Intangible Assets"
was issued. This standard addresses how intangible assets that are
acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in
financial statements upon their acquisition. SFAS 142 also addresses
how goodwill and other intangibles assets should be accounted for after
they have been initially recognized in the financial statements. The
provision of SFAS 142 is effective for fiscal years beginning after
December 15, 2001.
F- 9
FREFAX, INC AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. The Company has not established
revenues sufficient to cover its operating costs and allow it to
continue as a going concern. It is the intent of the Company to seek
financing trough the acquisition of an active company. See Note 10.
NOTE 4 - ACCRUED EXPENSES RELATED PARTY
Accrued expenses at September 30, 2001 consist of $9,000 professional
fees which have been subsequently paid directly by the Company's
President and $65,971 represent management fees charged by the
Company's President.
NOTE 5 - PROVISION FOR INCOME TAX
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related to differences between the financial statement
and income tax bases of assets and liabilities for financial statement
and income tax reporting purposes. Deferred tax assets and liabilities
represent the future tax return consequences of these temporary
differences, which will either be taxable or deductible in the year
when the assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities attributable to
the book-tax basis differentials are computed by the Company at a rate
of approximately 34% for federal and 6% for state.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
a) Lack of Insurance
The Company does not maintain any property,
product liability, general liability or any other form of insurance,
Although the Company is not aware of any claims resulting from product
malfunctions, there is no assurance that none exists.
b) Rent
CXN Canada Inc. leases office space under temporary lease
expiring in June 2002, minimum monthly payments are $2,465. CXN Canada
Inc. also leases office space in China under a lease expiring in August
2003, minimum monthly payments are $6,261.
F-10
FREFAX, INC AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001 AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO JUNE 30, 2001
NOTE 7 - Loans Payable
The loans payable bear interest at prime +2% and are convertible at the
option of the holder at a rate of $ 0.25 per common share for a total
conversion of 1,597,215 common shares and 3,187,831 warrants.
NOTE 8 - STOCKHOLDERS' DEFICIENCY
a) Capitalization
--------------
The Company was organized during September 1997 by issuing an aggregate
of 500,000 shares of its $.001 par value common stock to its founder
for $2,500.
b) Acquisition of Subsidiary
-------------------------
Pursuant to a stock purchase agreement dated July 30, 1998 between the
Company and the shareholders of Frefax Canada, the Company issued an
aggregate of 10,000,000 shares of its $.001 par value common stock to
the shareholders of Frefax Canada in exchange for 100% of Frefax Canada
issued and outstanding common stock. Accordingly, after such
transaction, Frefax Canada became a wholly owned subsidiary of the
Company. Such transaction is considered a capital transaction whereby
Frefax Canada contributed its stock for the net book value of the
Company, and accordingly, no goodwill is recorded.
c) Limited Offering Memorandums
----------------------------
During October 1997, the Company commenced two Limited Offerings
pursuant to Rule 504 of Regulation D promulgated under the Securities
Act of 1933. The Company offered 400,000 shares of its common stock at
$.001 per share and 4,000 shares of its common stock at $ .10 per
share, respectively. The Company sold an aggregate of 403,000 shares of
common stock yielding net proceeds of $700.
d) Private Offerings
-----------------
i) During November 1998, the Company offered 7,500,000
shares of its common stock at $.01 per share pursuant to rule
504 of regulation D promulgated under the Securities Act of
1933. The Company sold a total of 6,001,000 shares of common
stock in exchange for a promissory note of $60,010 which has
been classified as a stock subscription receivable thereby
reducing stockholder's equity.
ii) During February 1999, the Company offered 10,000,000
shares of its common stock at $.05 per share pursuant to Rule
504 of Regulation D promulgated under the Securities Act of
1933. The Company sold a total of 2,542,000 shares of common
stock in exchange for a promissory note of $127,100, which has
been classified as a stock subscription receivable thereby
reducing stockholder's equity.
The above promissory notes are callable on demand and accrue interest at a rate
of 2% per annum. As of September 30, 2001, the Company accrued $10,175 of
interest receivable in connection with such notes.
F-11
FREFAX, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2001
AND
CUMULATIVE PERIOD FROM SEPTEMBER 26, 1997
(DATE OF INCEPTION) TO SEPTEMBER 30, 2001
NOTE 8 - STOCKHOLDERS' DEFICIENCY (cont'd)
e) Shares issued for services rendered
In June 2001, 2,049,091 shares of common stock were issued in exchange
for services rendered at a value of $100,500, or $.05 per share,
including a total of 1,622,728 shares issued to the Chairman as
compensation.
NOTE 9 - RELATED PARTY TRANSACTIONS
a) In June 2001, 1,622,728 shares of common stock were issued to the
Chairman for compensation at a value of $80,000, or $.05 per share.
NOTE 10 - SUBSEQUENT EVENT
On November 8, 2001, the Company acquired China Xin Network Inc., a
Canadian corporation Under the acquisition agreement, the Company
acquired all of the outstanding common stock of CXN in exchange for
28,836,566 newly issued common shares of the Company's common stock to
be issued on a 2 for 1 basis to the existing CXN shareholders. The
acquisition will be treated as a reverse acquisition. Therefore the
historical financial statements prior to November 8, 2001 will be those
of CXN. The transaction is considered a capital transaction whereby CXN
contributes its stock for the net assets of the Company.
In addition, the Company was declared to have no assets and liabilities
at that date. In connection with that, the former Chairman of the
Company agreed to take full responsibility for any and all outstanding
liabilities of the company.
As a result of the issuance of 28,836,566 new shares of common stock,
the Company is in excess of its 50,000,00 authorized shares by 331,657
shares.
F-12