UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 31, 2005
Universal Flirts Corp.
(Exact name of registrant as specified in its charter)
Delaware 333-117718 20-11998142
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
A-20G, Chengming Plaza
No. 2 Nan Da Street
Xicheng District
Beijing, China 100035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 86-10-83670505
142 Mineola Avenue, Suite 2-D
Rosyln Heights New York 11577
(Former Name or Former Address, if changed since last report)
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
On March 31, 2005, Universal Flirts Corp., a Delaware corporation (the
"Company"), completed a stock exchange transaction with the stockholders of
United First International Limited, a company incorporated under the laws of
Hong Kong ("UFIL"). The exchange was consummated under Delaware law and pursuant
to the terms of that certain Securities Exchange Agreement dated effective as of
March 31, 2005 (the "Exchange Agreement"). A copy of the Exchange Agreement is
filed as an exhibit to this Current Report on Form 8-K.
Pursuant to the Exchange Agreement, the Company issued 15 million
shares of its common stock, $.001 par value, to the stockholders of UFIL,
representing approximately 50.41% of the Company's issued and outstanding common
stock, immediately upon the consummation of the exchange transaction, in
exchange for 100% of the outstanding capital stock of UFIL. Immediately, after
giving effect to the exchange, the Company had 29,756,000 shares of its common
stock outstanding. Pursuant to the exchange, UFIL became a wholly-owned
subsidiary of the Company.
The shares of the Company's common stock issued to stockholders of UFIL
in connection with the exchange were not registered under the Securities Act of
1933, as amended (the "Securities Act") and, as a result, are "restricted
securities" that may not be offered or sold in the United States absent
registration or an applicable exemption from registration. Certificates
representing these shares contain a legend stating the same. The Company intends
to carry on the business of UFIL's wholly owned subsidiary, Beijing Orsus Xelent
Technology & Trading Company Limited ("Xelent"). The Company's executive offices
are located at A-20G, Chengming Plaza, No. 2 Nan Da Street, Xicheng District,
Beijing China 100035 and its telephone number is 86-10-85613362.
For accounting purposes, the exchange is being treated as a reverse
acquisition, because the stockholders of UFIL own a majority of the issued and
outstanding shares of common stock of the Company immediately following the
exchange. Due to the issuance of the 15 million shares of the Company's common
stock, a change in control of the Company occurred on March 31, 2005, the date
of the consummation of the exchange.
No arrangements or understandings exist among present or former
controlling stockholders with respect to the election of members of the board of
directors of the Company, and, to the knowledge of the Company, no other
arrangements exist that might result in a change of control of the Company.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS
Pursuant to the Exchange Agreement, at the closing of the exchange, the
membership of the board of directors of the Company was increased from 1 to 3
directors, Darrell Lerner resigned as a director of the Company upon the
effectiveness of the exchange transaction, and Wang Xin, Liu Yu and Wang Zhibin
were appointed to serve as members of the Company's board of directors. Also
under the terms of the Exchange Agreement, all existing officers resigned as
officers of the Company effective immediately following the closing of the stock
exchange transaction and Wang Xin was elected as Chief Executive Officer and
Tian Jun was elected as Chief Financial Officer of the Company.
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ITEM 2.01 COMPLETION oF ACQUISITION OR DISPOSITION OF ASSETS
Set forth below is information concerning (i) the principal terms of
the share exchange and (ii) the business of the combined company.
THE SHARE EXCHANGE
On March 31, 2005, the Company, UFIL and the stockholders of UFIL
consummated the transactions contemplated by the Exchange Agreement. The
Exchange Agreement specified that the Company would acquire all 20 million
shares of the issued and outstanding stock of UFIL in exchange for $50,000 and
the issuance of an aggregate of 15 million shares of common stock of the
Company. On the exchange closing date, the Company issued an aggregate of 15
million shares of common stock to the stockholders of UFIL, representing
approximately 50.41% of the issued and outstanding the Company's common stock
immediately following the exchange. As a result of the stock exchange
transaction UFIL became a wholly owned subsidiary of the Company and all of the
Company's business operations are now conducted through UFIL's wholly-owned
subsidiary, Xelent.
DESCRIPTION OF THE COMPANY'S PREDECESSOR BUSINESS
The Company was organized under the laws of the State of Delaware in
May 2004. On June 1, 2004, the Company acquired all of the issued and
outstanding shares of Universal Flirts, Inc., a New York corporation, from
Darrell Lerner, the sole shareholder, in consideration for the issuance of
8,500,000 shares of the Company's common stock to Mr. Lerner pursuant to a stock
purchase and related share exchange agreement between Universal Flirts, Inc. and
the Company. Pursuant to the purchase and share exchange transaction, Universal
Flirts, Inc. became the Company's wholly-owned subsidiary.
Through its subsidiary, Universal Flirts, Inc., the Company engaged in
the business of owing and operating an online dating service. The Company's
business was never fully developed, and immediately prior to the closing of the
transactions contemplated by the Exchange Agreement with UFIL, the Company
transferred all of the stock of Universal Flirts, Inc. to Mr. Lerner in exchange
for the cancellation of 28,200,000 shares of the Company's common stock. In
connection with its acquisition of UFIL, the Company also authorized a 4-1
forward split of its common stock with a record date of March 28, 2005 and a
payable date of March 31, 2005.
DESCRIPTION OF CURRENT BUSINESS
Except as otherwise indicated by the context, references in this
Current Report to "we," "us," "our," or the "company" are to the combined
business of the Company and its wholly-owned direct subsidiary, UFIL, and UFIL's
wholly-owned subsidiary, Xelent.
General
We, through the operations of Xelent, have been engaged since May 2003
in the business of designing for retail and wholesale distribution economically
priced cellular phones. In February of 2004, Xelent registered "ORSUS" with the
State Administration for Industry and Commerce as its product trademark, also
known as "Orsus Cellular" within the industry. Since Orsus cellulars were
launched in market in April 2004, approximately 450,000 units have been sold.
This represents approximately 1% of the market in People's Republic of China
("PRC") for cellular phones.
As the market in the PRC for wireless phones continues to develop,
Xelent is gradually introducing more mature 2.5G wireless products. As the 3G
standards become more accepted and widely utilized, we anticipate that we will
seek to produce our own 3G products based on our own research and development
efforts.
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Organizational Structure
The organizational structure of the company is linear in nature and is
comprised of ten separate departments developed to ensure proper project
management and control. These departments are as follows:
o Product Planning Department, which is responsible for formulating the
medium and long-range strategic plans for us and our products,
proposing and adjusting product planning and research and development
scheduling as a part of overall strategic planning;
o Project Management Department, which is responsible for coordinating
the management of cellular phone projects, exchanging concepts and
ideas with our research and development team, providing weekly project
reports and supervising the project schedules.
o Production Management Department, which is responsible for production
planning, management of production materials and techniques, and
control and tracking of production routes;
o Technology Support and Quality Control Department, which is responsible
for technical support for software and hardware design and testing and
industrial design and mechanical design ("ID/IM") checking and
auditing, as well as tooling engineering and quality control during
mass production;
o Business Management Department, which is responsible for materials
purchase, supply chain management, business coordination and potential
consumer market development;
o Planning and Finance Department, which is responsible for overall
accounting matters, including accounting methods and processes,
auditing, compiling financial plans and monthly/quarterly/yearly
financial statements and financial budgets, and control of expenses;
o Human Resources Department, which is responsible for our employment
issues, including hiring and termination of staff;
o Administration and Strategy Planning Department, which is responsible
for administration, investment and financing analysis, legal affairs,
intellectual property support and IT support;
o Customer Service Department, which is responsible for maintenance,
spare parts ordering, authorized network management, refurbishing,
after-sale data analysis and service charge fees return, , as well as a
hotline service center and customer service training center, technical
support and after-sale service quality assurance systems of the
Company; and
o Value-added Service Department which is responsible for new business
development related to or derived from our cellular phone products. The
Value-added Service Department actively seeks strategic business
partners in SMS messaging, internet content providers and any other
value-added suppliers to the cellular phone market. The goal of the
department is to establish profit-yielding business models with solid
development and implementation plan.
Our headquarters in Beijing have seven regional management centers and
a technical support center. We also have an unaffiliated network of service
providers, including 179 cellular phone service centers located throughout the
PRC. Of these providers, 42 are provincial replacing & refurbishing centers and
137 are maintenance and repair centers.
Market Overview and Strategic Partners
The global market demand for cellular phones, including in particular
the demand in the PRC, continues to experience double-digit growth. According to
the 2004 list of Global Top 10 Cellular Producers published by IC Insights, an
international research company, Ningbo Bird Corporation Ltd, a Chinese domestic
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brand ranked 8th worldwide. Also according to IC Insights' forecast, global
sales for cellular phones in 2004 were expected to be approximately 670 million
units, which representing a 29% growth rate from 2003. From January to September
2004, new cellular phone users in the PRC increased by 50.118 million, with
total consumers reaching approximately 320 million.
Our products combine many of the currently popular "flip-phone"
technology, dual-display, SMS(short message sending), EMS (email message
sending), MMS(multi-media message sending) and camera functions, together with
economical pricing. As a result, we currently have approximately one percent
(1%) of the domestic products market for cellular phones in the PRC.
Our relationships with our strategic partners, CEC Cellular Limited
("CECM") and Beijing Xingwang Shidai Tech & Trading Co., Ltd. ("XWSD") have help
us to increase our market penetration. CECM, which is controlled by China
Electronics Corporation Group, is a manufacturer of cellular phones with annual
production of approximately one million units. CECM serves as a manufacturer for
our cellular phones products. In addition, CECM has its own sales network, and
we sell some of our products to CECM, who in turn sells those products to its
own provincial and national sales distributors and dealers, thus increasing the
distribution capabilities for our products. XWSD is also one of our major
agents, selling our cellular phone to provincial distributors, city distributors
and dealers. XWSD employ several market promotion services companies to enhance
the sales networks of our products throughout the PRC.
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Description of Products & Services
Since inception, Xelent has developed, and where indicated launched,
the following cellular phone products:
- ------------------- ------------------- ------------------ ---------------------
Project Launch Date Model/Project Code Network
Initiation Date
- ------------------- ------------------- ------------------ ---------------------
May 17, 2003 August 8, 2003 CEC F88 Watch-style cellular,
CDMA 1X
- ------------------- ------------------- ------------------ ---------------------
May 30, 2003 September 28, 2003 CEC F16 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
June 30, 2003 November 28, 2003 CEC F18 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
January 14, 2004 March 18, 2004 CEC ORSUS FG525 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
April 18, 2004 Not launched CEC ORSUS FG 528 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
March 15, 2004 April 26, 2004 CECT OS 830 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
June 25, 2004 CEC OS 850 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
July 30, 2004 CECT OS 83 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
July 30, 2004 CECT OS 85 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
September 1, 2004 CECT OS 70 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
September 27, 2004 CECT OS 86 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
Not launched CECT OS 50 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
September 24, 2004 CECT M851 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
August 3, 2004 December 20, 2004 CECT M62 GSM/GPRS
- ------------------- ------------------- ------------------ ---------------------
September 3, 2004 March 8, 2005 CECT M72 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
September 20, 2004 March 1, 2005 CECT M80 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
September 20, 2003 March 15, 2005 CECT M81 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
October 28, 2004 April 30, 2005 CECT M36 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
November 10, 2004 May 20, 2005 CECT 2046 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
November 12, 2004 May 25, 2005 CECT 7680 GSM/GPRS
(estimated)
- ------------------- ------------------- ------------------ ---------------------
We outsource the manufacturer of our products to unaffiliated third
parties. Once our products have been manufactured, they are delivered to a
network of unaffiliated national sales distributors (see "Description of Current
Business - Market Overview and Strategic Partners) and dealers that, in turn,
distribute the products to provincial sales distributors and dealers and these
provincial sales distributors and dealers distribute our products to retailers
throughout the PRC.
Research & Development
We do business with two kinds of research and development enterprises:
We cooperate with professional design houses such as Shanghai Simcom Technology
Limited (`Simcom"). We are mainly involved in MMI (U2) ("Man Machine Interface")
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design, software and hardware testing, CTA ("China Type Approval"),
certification acquisition and phone main board updating and software
adaptability testing. In addition, we work with cooperative partners, such as
Mobicom Corporation ("Mobicom") in developing ID/MD and the layout of cellular
phone main boards. Based on this research and development, our strategic
business partners and we are then able to design and develop new products.
We mainly cooperate with other professional design houses and work
together on research and development projects. Whenever possible, we use and
lease their instruments and equipment, rather than purchasing it ourselves. In
the area of software compiling, testing & updating, we utilize data cables and
computers installed with professional software in a testing environment. All the
computers and data cables are owned by Xelent.
We are planning to build a research and development center in
cooperation with Spreadtrum Communication (Shanghai) Inc. ("SCI"), which is a
company involved in development of 3G wireless phones. SCI has developed 2.5 G
and 3G integrated circuit and provides 2.5G and 3G software development
platforms and solutions. We currently plan to commence construction on this new
research and development center prior to August 1, 2005. Cooperating with SCI in
building of a research and development center and working on future research and
development projects with SCI will help facilitate our entry into the 3G
wireless market.
We have established a team for technology development. The members of
our team are our product planning division, project management division and
industrial design center. Our product planning division is responsible for
constructing the medium term strategic plans and research and development
scheduling. Our project management division administers our research and
development efforts, overseas manufacturing and quality control of our products
and monitors costs, including human resource costs. Our industrial design center
is responsible for evaluating design plans provided by third party industrial
design companies and confirming model structural design and tracing the issues
on module production and quality.
o Introduced the first watch-style cellular based on CDMA2000IX
with joint efforts of Telson Electronics Co., Ltd, a South
Korea company, in May of 2003.
o Based on GPRS CLASS 10 module, developed the first GPRS
cellular collaborating system, with South Korea's TELSON,
which is based on WISMO PAC P5186D, the GPRS module of WAVECOM
company, in May of 2003, which was introduced on October of
2003.
o Formed a production line of 1 to 3-million Charge Coupled
Device ("CCD") pixel camera by configuring high-resolution
CMOS ("Complementary Metal Oxide Semiconductor")
We also cooperate with Sim Design Ltd. ("Sim Design") and Shenzhen
Newplan Products Design Ltd. (`Newplan") in designing cellular phone features,
appearances and functions to suit the tastes of Chinese consumers. Sim Design,
which is located in South Korea, is an ID/MD design company wholly owned by
Simcom. Newplan is a professional design company established approximately five
years ago that provides ID/MD designs tailored to suit the needs and
requirements of its customers, such as Xelent.
We have formed long-term strategic relationship with Simcom and Mobicom
for the development of all-in-one solution cellular phones. The capability of
Simcom and Mobicom in wireless technology, software development, wireless
application protocol, and production and testing provides us with comprehensive
solutions for wireless products.
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Competition
The Company faces substantial competition from other wireless phone
manufacturers such as: Motorola, Nokia and Samsung, which controlled
approximately 15.5%,13.6% and 11.6%, respectively, of the cellular market in the
PRC in 2004. In addition we face competition from Ningbo Bird Corporation Ltd
and Lenovo Group Limited, both of which are domestic producers and controlled
approximately 7.9% and 2.5%, respectively of the cellular market in the PRC in
2004
Facilities
We have offices in Beijing, Shenzhen, Shanghai and Tianjin. Our Beijing
office serves as our corporate headquarters. Our Shenzhen Office serves as the
base for cellular component sourcing and coordination with suppliers and
manufacturers. Our Shanghai Office is mainly responsible for sourcing and
coordination with cellular component suppliers, coordination with our research
and development partners and following up the hardware and software testing
aspects before the mass production. Our Tianjin Office is mainly responsible for
the production management. It's functions include coordination with our
principal manufacturer to adjust the produciton plan in accordance with our
sales plan, raw material supply and cellular phone delivery management and
supervision of the production processing of our principal manufacturer, as well
as the quality control.
The following is relevant information on our offices:
Address Office / Process / Monthly Monthly Lease period
Production Lease rental Rental
(rmb) (usd)
26T, Xinbaohui Plaza, Nanyou Office Lease 17,800.0 2,144.58 7/12/04 to 7/11/05
Avunue, Nanshan Dist., Shenzhen
6-B, No.5 Bldg., Yijing Garden, Office Lease 35,153.8 4,235.40 4/1/03 to 05/31/05 (!)
Chaoyang Dist., Beijing
No. 3, Lane 600, Tianshan Rd., Office Lease 29,118.6 3,508.27 2/28/04 to 2/27/05 (1)
Changning Dist., Shanghai
No.185, Xinda Road, Hebei office -- (2) -- -- --
District, Tianjin
- ----------------
(1) The Company has extended the term of these offices for two months each, and
it is expected that the Company will move to a new office facilities in
these locations at the expiration of the extended term.
(2) Our Tianjin office is located in the CECM factory. The office is provided
by CECM and is cost-free to us.
Government Regulation
There is no government regulation banning or making material effect on
Xelent, including but not limited, any law, rule or regulation or any order,
writ, judgment, injunction, decree, determination or award binding on or
applicable to Xelent. In the PRC cellular market, cellular manufacturers are
responsible for repair, replacement and return of cellular phone to customers
within the warranty period in accordance with certain rules and regulation in
the PRC.
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Intellectual Property and Proprietary Rights
Xelent has applied for"[GRAPHIC OMITTED][GRAPHIC OMITTED]"as the
registered trademark and the China Trademark Agency has distributed
"Notification of Acceptance" is serial number ZC3878232SL.
We utilize other intellectual property legally with partners that we
cooperate with through contracts or agreements.
Employees
We have approximately 220 employees. Of the 220 employees, 10 persons
serve in management related capacities. The remaining employees are in 10
departments, namely the Product Planning Department which employs 6 persons, the
Project Management Department which employs 12 persons; the Production
Management Department which employs 22 persons; the Technology Support and
Quality Control Department which employs 48 persons; the Business Management
Department which employs 16 persons; the Administration and Strategy Planning
Department which employs 15 persons; the Planning and Finance Department which
employs nine persons; the Human Resources Department which employs two persons;
the Value-added Service Department which employs one person and the Customer
Service Department which employs 89 persons.
The Company believes its relationship with its employees is good, and
there are no collective bargaining arrangements in place.
Legal Proceedings
The Company is not presently a party to any legal proceedings nor is it
aware of any pending proceedings that could potentially have a material adverse
effect upon the Company's operations.
8
CAUTIONARY STATEMENTS
You should carefully consider the following risks and the other
information set forth elsewhere in this Current Report. If any of these risks
occur, our business, financial condition and results of operations could be
adversely affected. As a result, the trading price of our common stock could
decline, perhaps significantly.
Risks Related to Our Business
Loss of significant customers, or other major customers, could casually hurt our
business by reducing our revenues and profitability.
Our success depends substantially upon retaining our significant
clients. We cannot guarantee that we will be able to retain long-term
relationships or secure renewals of short-term relationships with our
significant clients in the future.
We face intense competition.
The market we serve is intensely competitive in the PRC. There are
other providers that we compete with for business. There are low barriers to
entry for new competitors in this market and we may experience negative impacts
as a result of increased competition. In addition, our existing or potential
competitors may in the future achieve greater market acceptance and gain
additional market share, which in turn could reduce our revenues.
We depend on key personnel for the success of our business. Our business may be
severely disrupted if we lose the services of our key executives and employees
or fail to add new senior and middle managers to our management.
Our future success is heavily dependent upon the continued service of
our key executives. Our future success is also dependent upon our ability to
attract and retain qualified senior and middle managers to our management team.
If one or more of our current or future key executives and employees are unable
or unwilling to continue in their present positions, we may not be able to
easily replace them, and our business may be severely disrupted. In addition, if
any of these key executives or employees joins a competitor or forms a competing
company, we could lose customers and suppliers and incur additional expenses to
recruit and train personnel. Each of our executive officers has entered into an
employment agreement with us.
We also rely on a number of key technology staff for the operation of
our company. Given the competitive nature of our industry, the risk of key
technology staff leaving our company is little high and could disrupt our
operations.
We rely on a third party production center.
We utilize a third party production center for the manufacture of the
products we sell to our customers. Should we be required to utilize a different
source for our manufactured products our costs could be negatively affected.
Rapid growth and a rapidly changing operating environment strain our limited
resources.
We will need to increase our investment in our technology
infrastructure, facilities and other areas of operations, in particular our
product development. If we are unable to manage our growth and expansion
effectively, the quality of our products and services and in turn our customer
support could deteriorate and our business may suffer. Our future success will
depend on, among other things, our ability to:
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o Continue to develop through our research and development
facilities new technologies acceptable to the PRC market,
o continue training, motivating and retaining our existing
employees and attract and integrate new employees, including
our senior management, most of whom have been with our company
for less than one year,
o develop and improve our operational, financial, accounting and
other internal systems and controls, and
o maintain adequate controls and procedures to ensure that our
periodic public disclosure under applicable laws, including
U.S. securities laws, is complete and accurate.
We may not be able to adequately protect our intellectual property, and we may
be exposed to infringement claims by third parties.
We rely on contractual restrictions on disclosure to protect our
intellectual property rights. Monitoring unauthorized use of our information
services is difficult and costly, and we cannot be certain that the steps we
take will effectively prevent misappropriation of our technology and content.
Our management may determine in the future to make application for copyright,
trademark or trade secret protection if management determines that such
protection would be beneficial and cost-effective.
From time to time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial costs and
diversion of our resources. In addition, third parties may initiate litigation
against us for alleged infringement of their proprietary rights. In the event of
a successful claim of infringement and our failure or inability to develop
non-infringing technology or content or license the infringed or similar
technology or content on a timely basis, our business could suffer. Moreover,
even if we are able to license the infringed or similar technology or content,
license fees that we pay to licensors could be substantial or uneconomical.
We have limited business insurance coverage.
The insurance industry in the PRC is still at an early stage of
development. Insurance companies in the PRC offer limited business insurance
products, and do not, to our knowledge, offer business liability insurance. As a
result, we do not have any business liability insurance coverage for our
operations. Any business disruption, litigation or natural disaster might result
in substantial costs and diversion of resources.
Our ability to generate revenues could suffer if the Chinese market for cellular
phones does not develop as anticipated.
The cellular phones market in the PRC has evolved rapidly over the last
four years, with the introduction of new products, development of consumer
preferences, market entry by new competitors and adaptation of strategies by
existing competitors. We expect each of these trends to continue, and we must
continue to adapt our strategy to successfully compete in our market. It is
extremely difficult to accurately predict consumer acceptance and demand for
various existing and potential new offerings and services, and the future size,
composition and growth of this market.
Risks Related to Doing Business in the PRC
A downturn in the Chinese economy may slow down our growth and profitability.
The growth of the Chinese economy has been uneven across geographic
regions and economic sectors. There can be no assurance that growth of the
Chinese economy will be steady or that any downturn will not have a negative
effect on our business. Our profitability will decrease if expenditures for
wireless services decrease due to a downturn in the Chinese economy. More
specifically, increased penetration of wireless services in the less
economically developed central and western provinces of China will depend on
those provinces achieving certain income levels so that cellular phones and
related services become affordable to a significant portion of the population.
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Government regulation of the telecommunications industry may become more
complex.
Government regulation of the telecommunications industry is highly
complex. New regulations could increase our costs of doing business and prevent
us from efficiently delivering our services. These regulations may stop or slow
down the expansion of our user base and limit the access to our services.
The uncertain legal environment in China could limit the legal protections
available to you.
The Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which decided legal cases
have little precedential value. In the late 1970s, the Chinese government began
to promulgate a comprehensive system of laws and regulations governing economic
matters. The overall effect of legislation enacted over the past 20 years has
significantly enhanced the protections afforded to foreign invested enterprises
in China. However, these laws, regulations and legal requirements are relatively
recent and are evolving rapidly, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to foreign investors, such as the right of foreign invested
enterprises to hold licenses and permits such as requisite business licenses.
Any recurrence of severe acute respiratory syndrome, or SARS, or another
widespread public health problem, could adversely affect our business and
results of operations.
A renewed outbreak of SARS or another widespread public health problem
in China, where all of our revenue is derived, and in Beijing where our
operations are headquartered, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including
the following:
o quarantines or closures of some of our offices which would
severely disrupt our operations,
o the sickness or death of our key officers and employees, and
o a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect our business and results of operations.
Changes in China's political and economic policies could harm our business.
The economy of China has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of China, we cannot predict the future
direction of these economic reforms or the effects these measures may have on
our business, financial position or results of operations. In addition, the
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include:
o economic structure;
o level of government involvement in the economy;
o level of development;
o level of capital reinvestment;
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o control of foreign exchange;
o methods of allocating resources; and
o balance of payments position.
As a result of these differences, our business may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.
Restrictions on currency exchange may limit our ability to receive and use our
revenues effectively.
Because almost all of our future revenues may be in the form of
Renminbi, any future restrictions on currency exchanges may limit our ability to
use revenue generated in Renminbi to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the Renminbi for current account transactions, significant
restrictions still remain, including primarily the restriction that foreign
invested enterprises may only buy, sell or remit foreign currencies, after
providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of Renminbi for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the Renminbi, especially with respect to foreign
exchange transactions.
The value of our securities will be affected by the foreign exchange rate
between U.S. dollars and Renminbi.
The value of our common stock will be affected by the foreign exchange
rate between U.S. dollars and Renminbi. For example, to the extent that we need
to convert U.S. dollars into Renminbi for our operational needs and should the
Renminbi appreciate against the U.S. dollar at that time, our financial position
and the price of our common stock may be adversely affected. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of declaring
dividends on our ordinary shares or for other business purposes and the U.S.
dollar appreciates against the Renminbi, the U.S. dollar equivalent of our
earnings from our subsidiaries in China would be reduced.
Risks Related to our Common Stock
The market price for our common stock may be volatile.
The market price for our common stock is likely to be highly volatile
and subject to wide fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operating
results,
o announcements of new products and services by us or our
competitors,
o changes in financial estimates by securities analysts,
o changes in the economic performance or market valuations of
other companies providing similar products and services,
o announcements by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
o additions or departures of key personnel,
o potential litigation, or
12
o conditions in the cellular phone market.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
Stockholders could experience substantial dilution.
We may issue additional shares of our capital stock to raise additional
cash for working capital. If we issue additional shares of our capital stock,
our stockholders will experience dilution in their respective percentage
ownership in the company.
We have no present intention to pay dividends.
We have never paid dividends or made other cash distributions on our
common stock, and do not expect to declare or pay any dividends in the
foreseeable future. We intend to retain future earnings, if any, for working
capital and to finance current operations and expansion of our business.
A large portion of our common stock is controlled by a small number of
stockholders.
A large portion of our common stock is held by a small number of
stockholders. As a result, these stockholders are able to influence the outcome
of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduce the public float and liquidity of our common stock which can in
turn affect the market price of our common stock.
We may be subject to "penny stock" regulations.
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). Penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from those rules, to deliver a standardized risk disclosure
document prepared by the SEC, which specifies information about penny stocks and
the nature and significance of risks of the penny stock market. A broker-dealer
must also provide the customer with bid and offer quotations for the penny
stock, the compensation of the broker-dealer, and our sales person in the
transaction, and monthly account statements indicating the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise exempt from
those rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the trading activity in the secondary market for
stock that becomes subject to those penny stock rules. Whenever any of our
securities become subject to the penny stock rules, holders of those securities
may have difficulty in selling those securities.
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Current Report contains forward-looking statements that involve
risks and uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "could," "expect," "plan,"
"intend," "anticipate," "believe," "estimate," "predict," "potential," or
"continue," or the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the "Cautionary Statements" section
above. These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward-looking statements after the date of this Current Report to
conform such statements to actual results or to changes in our expectations.
14
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information about our executive officers
and directors and their respective ages and positions as of March 31, 2005. The
directors listed below will serve until the next annual meeting of the Company's
stockholders:
Name Age Positions Held and Tenure
Wang Xin 35 Chief Executive Officer and a Director
Tian Jun 35 Chief Financial Officer
Liu Yu 38 Director
Wang Zhibin 35 Director
Wang Xin has served as Chief Executive Officer and a member of our
Board of Directors since March 31, 2005. From April 2003 to present, he has also
served as Director and General Manager of Xelent. Prior to joining Xelent, he
served as the as the General Manager of the Sales and Marketing Division of
Shanghai Cellstar International Trading Co., Ltd. from January 2003 to April
2003, Director of Logistics & Customer Service of Shanghai Cellstar
International Trading Co., Ltd. from November 1997 to January 2003, and Director
and Vice President of Beijing VA Communication Equipment Co., Ltd. from May 1996
to October 1997.
Tian Jun has served as our Chief Financial Officer since March 31,
2005. From September 2004 to present, she has also served as Chief Financial
Officer of Xelent. Prior to joining Xelent, she served as the as the Financial
Controller of Ion Global (Beijing) from April 2000 to September 2004, Financial
Controller of the Beijing branch of Taier Paike International Ltd. from August
1998 to April 2000, and Senior Auditor of Ernst & Young Hua Ming Accountings
from May 1993 to August 1998.
Liu Yu has served as a member of our Board of Directors since March 31,
2005 and a member of the Board of Directors of Xelent since May 1990. From May
1998 to present he has also served as Chairman of the Board of Beijing
Huanyitong Technology & Trading Co., Ltd. From May 1995 to April 1998, he served
as General Manager of Beijing Lianwanjia Telecommunication Trading Center.
Wang Zhibin has served as a member of our Board of Directors since
March 31, 2005, and a member of the Board of Directors of Xelent since August
2004. From May 1998 to present, he has also served as General Manager of Beijing
Glory Real Estate Development Co., Ltd., and a director of Beijing Huanyitong
Technology & Trading Co., Ltd. From May 1995 t o April 1998, he served as a
Manager of Beijing Lianwanjia Telecommunication Trading Center.
Board Composition and Committees
Wang Xin, Liu Yu and Wang Zhibin current serve as Directors of the
Company. At present , there are not committees of the Board.
Director Compensation
The following table sets forth certain information concerning the
compensation to be paid by the Company for services of its directors from and
after April 1, 2005:
15
Name Title Annual Compensation
Wang Xin Chief Executive Officer and Director -- (1)
Liu Yu Director $12,000 (2)
Wang Zhibin Director $12,000 (2)
- ---------------
(1) Mr. Wang is paid a salary by Xelent for his services as Chief Executive
Officer of that Company (see "Executive Compensation"), and it is
anticipated that he will not receive any additional compensation for
serving as a member of the Board of Directors of the Company.
(2) Compensation to each director will be commenced from April 1, 2005.
Indebtedness of Directors and Executive Officers
None of our directors or officers or their respective associates or
affiliates is indebted to us.
Family Relationships
There are no family relationships among our directors or officers.
Legal Proceedings
As of the date of this Current Report, no director, officer, affiliate
or stockholder of the Company is a party to any material proceeding that is
adverse to the Company.
16
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company's wholly-owned subsidiary, Xelent, for services
rendered in all capacities from January 1, 2004 through the fiscal year ended
December 31, 2004, for all officers and directors of the Company.
Name and Principal Underlying Other
Positions Salary Bonus Compensation Options
Wang Xin , Chief Executive Officer $4,500 -- -- --
Tian Jun, Chief Financial Officer $7,700 -- -- --
Qu Gongbo, Vice President $23,000 -- -- --
Wang Xiaolong, Vice President $14,500 -- -- --
The amounts listed in the table above were paid by Xelent, the wholly owned
subsidiary of our wholly owned subsidiary UFIL. While we do have employment
agreements with our executive officers, the salary for our executive officers is
at the discretion of our board of directors. We expect to pay substantially
similar compensation to our executives in the future and anticipate continuing
to pay them through Xelent.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2005, certain
information with respect to the beneficial ownership of common stock of the
Company by (i) each director and officer of the Company, (ii) each person known
to the Company to be the beneficial owner of five percent or more of the
outstanding shares of common stock of the Company, and (iii) all directors and
officers of the Company as a group. Unless otherwise indicated, the person or
entity listed in the table is the beneficial owner of, and has sole voting and
investment power with respect to, the shares indicated.
Amount and Nature of Beneficial
Ownership(1)
--------------------------------
Number Percent of
Name of Beneficial Owner of Shares (2) Voting Stock (3)
Wang Xin, Chief Executive Officer and Director 3,000,000 10.09%
Liu Yu, Director 6,000,000 20.16%
Wang Zhibin, Director 6,000,000 20.16%
Tian Jun, Chief Financial Officer -- --
Darrell Lerner 7,700,000 25.88%
Directors and executive officers as a group
(4 persons) 50.41%
* Less than 1%
(1) On March 31, 2005, there were 27,956,000 shares of common stock of the
Company outstanding. Each person named above has sole investment and
voting power with respect to all shares of the common stock shown as
beneficially owned by the person, except as otherwise indicated below.
(2) Under applicable rules promulgated by the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a person is deemed the "beneficial owner"
of a security with regard to which the person, directly or indirectly,
has or shares (a) the voting power, which includes the power to vote or
17
direct the voting of the security, or (b) the investment power, which
includes the power to dispose or direct the disposition of the
security, in each case irrespective of the person's economic interest
in the security. Under these SEC rules, a person is deemed to
beneficially own securities which the person has the right to acquire
within 60 days through (x) the exercise of any option or warrant or (y)
the conversion of another security.
(3) In determining the percent of common stock of the Company owned by a
person (a) the numerator is the number of shares of common stock of the
Company beneficially owned by the person, including shares the
beneficial ownership of which may be acquired within 60 days upon the
exercise of options or warrants or conversion of convertible
securities, and (b) the denominator is the total of (i) the 29,756,000
shares of common stock of the Company outstanding on March 31, 2005 and
(ii) any shares of common stock of the Company which the person has the
right to acquire within 60 days upon the exercise of options or
warrants or conversion of convertible securities. Neither the numerator
nor the denominator include shares which may be issued upon the
exercise of any other options or warrants or the conversion of any
other convertible securities.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements of the Business Acquired. The required audited
financial statements of UFIL are provided following the signature page of this
Current Report.
b. Exhibits. Except as otherwise noted, the following exhibits have
been filed as a part of this Current Report:
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Securities Exchange Agreement by and among Universal
Flirts Corp, United First International Limited and
the Shareholders of United First International
Limited.
10.2 National Sales and Agency Contract by and among CEC
Mobile Co. Ltd., Beijing Prosperous Times Commercial
& Trading Co., Ltd. and Beijing Orsus Xelent
Technology & Trading Company Limited dated May 26,
2004. (1)
10.3 National Sales and Agency Contract by and among CEC
Mobile Co. Ltd., Beijing Prosperous Times Commercial
& Trading Co., Ltd. and Beijing Orsus Xelent
Technology & Trading Company Limited dated March 18,
2004. (1)
10.4 National Sales and Agency Contract by and among CEC
Mobile Co. Ltd., Beijing Prosperous Times Commercial
& Trading Co., Ltd. and Beijing Orsus Xelent
Technology & Trading Company Limited dated April 29,
2004. (1)
10.5 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Chengxin Electronic Technology Co., Ltd. dated May
28, 2004 (1)
10.6 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Chengxin Electronic Technology Co., Ltd. dated May
28, 2004 (1)
10.7 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Chengxin Electronic Technology Co., Ltd. dated May
28, 2004 (1)
18
10.8 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Suncom Logidtics Limited dated April 14, 2004 (1)
10.9 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Suncom Logistics Limited dated May 27, 2004 (1)
10.10 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Suncom Logistics Limited dated May 27, 2004 (1)
10.11 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai
Suncom Logistics Limited dated May 27, 2004 (1)
10.12 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Truly
Semiconductor Co., Ltd. dated May 21, 2004 (1)
10.13 National Sales and Agency Contract by and among CEC
Mobile Co., Ltd., Beijing Prosperous Times Commercial
& Trading Co., Ltd. and Beijing Orsus Xelent
Technology & Trading Company Limited dated May 26,
2004 (1)
10.14 National Sales and Agency Contract by and among CEC
Mobile Co., Ltd., Beijing Prosperous Times Commercial
& Trading Co., Ltd. and Beijing Orsus Xelent
Technology & Trading Company Limited dated May 26,
2004 (1)
23.1 Consent of Moores Rowland Mazars, Certified Public
Accountants
-------------------------
(1) TO BE FILED BY AMENDMENT.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNIVERSAL FLIRTS CORP.
By: /s/ Wang Xin
-------------------------
Its: Chief Executive Officer
------------------------
DATED: April 4, 2005
20
United First International Limited
Index to Combined Financial Statements
9-month period ended September 30, 2004 and period from May 6, 2003 to December
31, 2003
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F1
Combined Statements of Operations F2
Combined Balance Sheets F3
Combined Statements of Changes in Stockholders' Equity F4
Combined Statements of Cash Flows F5
Notes to Combined Financial Statements F6 - F14
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
United First International Limited
We have audited the accompanying combined balance sheets of United First
International Limited and its subsidiary (the "Company") as of September 30,
2004 and December 31, 2003, and the related combined statements of operations,
changes in stockholders' equity and cash flows for the nine months period ended
September 30, 2004 and period from May 6, 2003 to December 31, 2003. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 2004 and December 31, 2003 and the results of its operations and
its cash flows for the periods then ended in conformity with accounting
principles generally accepted in the United States of America.
Moores Rowland Mazars
Chartered Accountants
Certified Public Accountants
Hong Kong
Date:
F-1
United First International Limited
Combined Statements of Operations
9-month period ended September 30, 2004 and periods from May 6, 2003 to December
31, 2003 and September 30, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
(Unaudited)
9-month From May From May
period ended 6, 2003 to 6, 2003 to
September September 31, December
30, 2004 30, 2003 2003
Note USD USD USD
Operating revenues:
Net sales 52,917 -- 5
------------ ------------ ------------
Operating expenses:
Cost of sales 42,592 -- 4
Sales and marketing 2,396 8 17
General and administrative 988 65 100
Research and development 456 -- --
Depreciation 514 1 3
------------ ------------ ------------
Total operating expenses 46,946 74 124
------------ ------------ ------------
Operating income (loss) 5,971 (74) (119)
Interest expense (90) -- --
Other income, net 32 3 4
------------ ------------ ------------
Income (loss) before income taxes and
minority interest 5,913 (71) (115)
Less: provision for income taxes 6 -- -- --
------------ ------------ ------------
Income (loss) before minority interest 5,913 (71) (115)
Minority interest 120 -- --
------------ ------------ ------------
Net income (loss) 6,033 (71) (115)
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-2
United First International Limited
Combined Balance Sheets
As of September 30, 2004 and December 31, 2003
- --------------------------------------------------------------------------------
(amounts in thousands, except share data)
As of As of
September 30, December 31,
2004 2003
Note USD USD
ASSETS
Current assets:
Cash and cash equivalents 262 190
Accounts receivable - Trade 2,910 --
Due from related companies 9 7,107 736
Due from stockholders 9 1,352 1,352
Inventories 5 9,546 363
Trade deposit paid 846 1
Other current assets 21 61
------------- -------------
Total current assets 22,044 2,703
Property, plant and equipment, net 4 728 29
------------- -------------
Total assets 22,772 2,732
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - Trade 13,189 189
Accrued expenses and other accrued liabilities 802 94
Provision for warranty 299 --
------------- -------------
Total current liabilities 14,290 283
------------- -------------
Commitments and contingencies 10
Stockholders' equity:
Common stock, par value HKD1.00:
Authorized - 20,000,000 shares 7
Issued and outstanding - 20,000,000 shares 2,564 2,564
Retained earnings (accumulated losses) 5,918 (115)
------------- -------------
Total stockholders' equity 8,482 2,449
------------- -------------
Total liabilities and stockholders' equity 22,772 2,732
============= =============
The accompanying notes are an integral part of these combined financial
statements.
F-3
United First International Limited
Combined Statements of Changes in Stockholders' Equity
9-month period ended September 30, 2004 and period from May 6, 2003 to December
31, 2003
- --------------------------------------------------------------------------------
(amounts in thousands, except share data)
Common stock
---------------------------
Retained
No of shares Amount earnings Total
------------ ------------ ------------ ------------
USD USD USD
Issuance of capital 20,000,000 2,564 -- 2,564
Net loss -- -- (115) (115)
------------ ------------ ------------ ------------
Balance at December 31, 2003 20,000,000 2,564 (115) 2,449
Net income -- -- 6,033 6,033
------------ ------------ ------------ ------------
Balance at September 30, 2004 20,000,000 2,564 5,918 8,482
============ ============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-4
United First International Limited
Combined Statements of Cash Flows
9-month period ended September 30, 2004 and periods from May 6, 2003 to December
31, 2003 and September 30, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
(Unaudited)
9-month From May From May
period ended 6, 2003 to 6, 2003 to
September September December
30, 2004 30, 2003 31, 2003
USD USD USD
Cash flows from operating activities
Net income (loss) 6,033 (71) (115)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 514 1 3
Loss on disposal of property, plant and equipment 7 -- --
Provision for warranty 299 -- --
Loss on liquidation of a subsidiary 120 -- --
Minority interest (120) -- --
Changes in assets and liabilities:
Accounts receivable - Trade (2,910) -- --
Inventories, net (9,183) (7) (363)
Trade deposit paid (845) (26) (1)
Other current assets 40 (2) (61)
Accounts payable - Trade 13,000 -- 189
Accrued expenses and other accrued liabilities 708 1 94
------------ ------------ ------------
Net cash provided by (used in) operating activities 7,663 (104) (254)
------------ ------------ ------------
Cash flows from investing activities
Purchase of property, plant and equipment (1,263) (28) (32)
Proceeds on sales of property, plant and equipment 43 -- --
Repayment from a related company 736 -- --
Loan to a related company (7,107) -- (736)
Due from shareholders -- (1,420) (1,352)
------------ ------------ ------------
Net cash used in investing activities (7,591) (1,448) (2,120)
------------ ------------ ------------
Cash flows from financing activities
Issuance of capital -- 2,564 2,564
------------ ------------ ------------
Net cash provided by (used in) financing -- 2,564 2,564
------------ ------------ ------------
Net increase in cash and cash equivalents 72 1,012 190
Cash and cash equivalents, beginning of fiscal period 190 -- --
------------ ------------ ------------
Cash and cash equivalents, end of fiscal period 262 1,012 190
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid during the fiscal period for:
Interest expense 90 -- --
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-5
United First International Limited
Notes to Combined Financial Statements
9-month period ended September 30, 2004 and period from May 6, 2003 to December
31, 2003
- --------------------------------------------------------------------------------
(amounts in thousands, except share data)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND REORGANIZATION
United First International Limited ("UFI") was incorporated in Hong
Kong on September 8, 2004 as a limited liability company. As disclosed
in Note 7 below, as of September 8, 2004, UFI has authorized and
outstanding common stock of 10,000 shares and 1 share respectively with
a par value of Hong Kong Dollars (HKD) 1.00. On September 16, 2004, the
authorized common stock increased from 10,000 shares to 20,000,000
shares by creation of an additional 19,990,000 shares of HKD1.00 each.
On the same date, the outstanding common stocks of the Company were
increased to 20,000,000 shares by allotting 3,999,999 shares, 8,000,000
shares and 8,000,000 shares to Mr. Wang Xin, Mr. Liu Yu and Mr. Wang
Zhibin respectively. UFI has had no operation since its incorporation.
Pursuant to the agreement entered into between UFI and Mr. Wang Xin,
Mr. Liu Yu and Mr. Wang Zhibin, who owns 20%, 40% and 40% interests
respectively in Beijing Orsus Xelent Technology & Trading Company
Limited ("Xelent") (English translation for identification purpose
only) on November 1, 2004, UFI consummated a merger with Xelent, and
paid USD1,207, to all owners of Xelent, in exchange for all their
beneficial interests in Xelent ("the Agreement"). Xelent was
established in the People's Republic of China ("PRC") on May 6, 2003 as
a PRC company with limited liability. The principal activities of
Xelent were the development of cellular software and technology,
including the design and trading of cellular phones. Xelent has a 55%
interest in Shanghai Sapphine Telecom Tech Co., Ltd. ("Sapphine")
(English translation for identification purpose only), a company
engaged in research and development of cellular phones which is
incorporated in the PRC. On August 19, 2004, the owners of Sapphine
signed an agreement to liquidate the company.
On November 3, 2004, the Beijing Municipal Bureau of Commerce (the
"Bureau") approved the transfer of interests and the application for
the change of Xelent's status to a wholly-owned foreign investment
enterprise ("WOFIE") with limited liability. Upon granting WOFIE status
and completion of the Agreement, the operating period of Xelent was for
an initial term of 10 years until November 9, 2014 and UFI became the
sole registered owner of Xelent.
Consistent with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combination", transfers of net
assets or exchanges of equity interests between entities under common
control do not constitute business combinations. Because UFI and Xelent
were beneficially owned by the same stockholders group, Mr. Wang Xin,
Mr. Liu Yu and Mr. Wang Zhibin, immediately before and after the
combination, the Agreement has been accounted for as a combination of
entities under common control on a historical cost basis in a manner
similar to a pooling of interests.
The accompanying combined financial statements of the Company have been
prepared to illustrate the retroactive effect of the Agreement as if
the Agreement had occurred and UFI had been incorporated at the
beginning of the earliest period presented, as of May 6, 2003.
In this report, UFI, Xelent and Sapphine are collectively referred to
as the "Company".
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The combined financial statements and accompanying notes are prepared
in accordance with generally accepted accounting principles in the
United States of America ("USGAAP").
Basis of combination
The accompanying combined financial statements include the accounts of
the following entities, a) UFI; and b) Xelent and Sapphine, because
they are companies under the common control of Mr. Wang Xin, Mr. Liu Yu
and Mr. Wang Zhibin collectively. See "Basis of financial statement
presentation and reorganization" within Note 1 for more information on
the basis of presentation of the combined financial statements.
The results of the subsidiaries acquired or disposed of during the
period are consolidated from the effective dates of acquisition or to
the effective dates of disposal respectively.
All significant intercompany accounts and transactions have been
eliminated upon combination.
Revenue recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT") and returns. The Company generally recognizes product revenue
when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable, and collectibility is
probable. The Company has a policy of including handling costs incurred
for finished goods, which are not significant, in the sales and
marketing expenses.
Research and development
All cost of research and development activities are expensed as
incurred.
Warranties
The Company offers warranties for products it manufactures. Terms
generally are for one year from the date of sale. Provision for
warranty expense is established for costs that are expected to be
incurred after the sales and delivery of products under warranty. The
Company provided for anticipated warranty expense in the amount of
USD515 during the nine-month period ended September 30, 2004, and paid
warranty claims of USD216. The warranty provision is determined based
on known product failures, historical experience of the level of
repairs and replacements, and other currently available evidence.
Income taxes
Provision for income and other related taxes have been provided in
accordance with the tax rates and laws in effect in PRC.
Income tax expense is computed based on pre-tax income included in the
combined statements of operations. Deferred income taxes are provided,
using the liability method, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of
assets and liabilities and their reported amounts. The tax consequences
of those differences are classified as current or non-current based
upon the classification of the related assets or liabilities in the
combined financial statements.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", requires the
presentation of comprehensive income, in addition to the existing
statements of operations. Comprehensive income is defined as the change
in equity during a period from transactions and other events, excluding
the changes resulting from investments by owners and distributions to
owners. No comprehensive income is recorded in any of the periods
presented.
Trade receivables
Trade receivables are recorded at original invoice amount, less an
estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis, thus trade receivables do not
bear interest. Trade receivables are periodically evaluated for
collectibility based on past credit history with customers and their
current financial condition. Changes in the estimated collectibility of
trade receivables are recorded in the results of operations for the
period in which the estimate is revised. Trade receivables that are
deemed uncollectible are offset against the allowance for uncollectible
accounts. The Company generally does not require collateral for trade
receivables.
Inventories
Inventories are stated at the lower of cost or market. Potential losses
from obsolete and slow-moving inventories are provided for when
identified. Cost, which comprises all costs of purchase and, where
applicable, other costs that have been incurred in bringing the
inventories to their present location and condition, is calculated
using the weighted average method. Market represents the estimated
selling price in the ordinary course of business less the estimated
costs of completion and the estimated costs necessary to make the sale.
Property, plant and equipment
Property, plant and equipment are stated at original cost less
accumulated depreciation.
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to its present working
condition and location for its intended use. Expenditures incurred
after the assets have been put into operation, such as repairs and
maintenance, overhaul and minor renewals and betterments, are normally
charged to operating expenses in the period in which they are incurred.
In situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected to
be obtained from the use of the assets, the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the combined financial statements and
any gain or loss resulting from their disposal is recognized in the
year of disposition as an element of other income, net.
Depreciation is provided to write off the costs of property, plant and
equipment over their useful lives from the date on which they become
fully operational and after taking into account their estimated
residual values, using the following methods:
Moulds Sum-of-the-units method
Leasehold improvements Straight-line method over the lease term
Machinery and equipment Straight-line method at 20% p.a.
Office equipment Straight-line method at 20% p.a.
Motor vehicles Straight-line method at 20% p.a.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of long-lived assets
The long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of assets may not be recoverable. It is reasonably
possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability
of assets to be held and used is by comparing the carrying amount of an
asset to future net undiscounted cash flows to be generated by the
assets. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
Operating leases
Leases where substantially all the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating
leases. Rental payables under operating leases are recognized as
expenses on the straight-line basis over the lease terms.
Foreign currency translation
The Company considers Renminbi as its functional currency as a
substantial portion of the Company's business activities are based in
Renminbi. However, the Company has chosen the United States dollar as
its reporting currency.
Transactions in currencies other than the functional currency during
the year are translated into the functional currency at the applicable
rates of exchange prevailing at the time of the transactions. Monetary
assets and liabilities denominated in currencies other than functional
currency are translated into functional currency at the applicable
rates of exchange in effect at the balance sheet date. Exchange gains
and losses are recorded in the combined statements of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the
balance sheet date, equity accounts are translated at historical
exchange rates, and revenues, expenses, gains and losses are translated
at the weighted average rates of exchange prevailing during the period.
Translation adjustments, when material, resulting from this process are
recorded in accumulated other comprehensive income (loss) within
stockholders' equity.
Cash equivalents
The Company considers short-term, highly liquid investments with
maturities of three months or less to be cash equivalents.
Use of estimates
The preparation of the combined financial statements in conformity with
USGAAP requires the Company's 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
financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual amounts could differ from those
estimates. Estimates are used for, but not limited to, the accounting
for certain items such as allowance for doubtful accounts,
depreciation, inventory allowance, provision for warranty, taxes and
contingencies.
F-9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment information
Operating segments are defined as components of a company about which
separated financial information is available that is evaluated
regularly by the operating decision maker in deciding how to allocate
resources and in assessing performance. The Company operates in a
single business segment of trading of cellular phones which are all
sold in the PRC. There is no reportable business or geographical
segment identified and no segment information is disclosed accordingly.
Related parties
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
Recently issued accounting standards
There are no new accounting pronouncements for which adoption is
expected to have a material effect on the Company's financial
statements.
3. CONCENTRATIONS
The Company is engaged principally in the development of cellular
software and technology, including the design and trading of cellular
phones for sale primarily to two dealers in the PRC. Although there are
multiple sources of supply of raw materials, the Company buys certain
major materials from two major suppliers. In addition, the Company
subcontracts assembly works of cellular phones to two subcontracting
factories. Management believes that the sole agent arrangement gives
the dealers more incentive to promote the Company's products and reduce
the Company's exposure to the distribution market. Time would be
required to locate other qualified suppliers and subcontracting
factories, which could, however, cause a delay in manufacturing and may
be disruptive to the Company's operations.
Customers accounted for over 5% of the Company's operating revenues are
as follows:
(Unaudited)
9-month From May 6, From May 6,
period ended 2003 to 2003 to
September September 30, December 31,
30, 2004 2003 2003
% % %
Customer A 88 N/A --
Customer B 9 N/A --
Customer C -- N/A 31
Customer D -- N/A 19
Customer E -- N/A 9
Customer F -- N/A 9
============ ============ ============
Trade receivable balances related to these customers were USD2,880 and
USDNil as of September 30, 2004 and December 31, 2003 respectively.
F-10
3. CONCENTRATIONS (CONTINUED)
Suppliers accounted for over 5% of the Company's purchases are as
follows:
(Unaudited)
9-month From May 6, From May 6,
period ended 2003 to 2003 to
September September 30, December 31,
30, 2004 2003 2003
% % %
Supplier A 46 -- --
Supplier B 32 -- --
Supplier C 6 -- --
Supplier D 6 -- --
Supplier E -- -- 80
Supplier F -- -- 16
============ ============ ============
Trade payable balances related to these suppliers were USD3,765 and
USD189 as of September 30, 2004 and December 31, 2003 respectively.
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
As of As of
September December
30, 2004 31, 2003
USD USD
Moulds 939 --
Leasehold improvement 47 --
Plant and machinery 14 --
Office equipment 179 18
Motor vehicles 64 14
--------- ---------
1,243 32
Accumulated depreciation (515) (3)
--------- ---------
728 29
========= ==========
F-11
5. INVENTORIES
Inventories consisted of the follows:
As of As of
September December
30, 2004 31, 2003
USD USD
Raw materials 9,505 --
Trading goods 41 363
--------- ---------
9,546 363
========= =========
6. TAXATION
The Company is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates.
UFI was incorporated in Hong Kong and has no assessable profit for the
periods presented. All of the Company's income is generated in PRC by
Xelent. Provision for income taxes has not been made as Xelent was
exempted from PRC income taxes in respect of hiring unemployed people
in cities and the countryside for the period from May 6, 2003 to
December 31, 2005.
The reconciliation of PRC statutory income to the effective income tax
rate based on income stated in the statements of operations is as
follows:
(Unaudited)
9-month From May 6, From May 6,
period ended 2003 to 2003 to
September September 30, December 31,
30, 2004 2003 2003
% % %
------------ ------------ ------------
Statutory rate 33 33 33
Tax exemption (33) -- --
Tax losses -- (33) (33)
------------ ------------ ------------
-- -- --
============ ============ ============
F-12
7. COMMON STOCK
UFI was incorporated in Hong Kong on September 8, 2004 as a limited
liability company. UFI had authorized and outstanding common stock of
10,000 shares and 1 share respectively, par value HKD1.00 each, with
one vote for each share.
By an ordinary resolution passed by written resolution signed by all
stockholders on September 16, 2004, the authorized common stock of UFI
was increased to HK$20,000,000 by the creation of an additional
19,990,000 shares of common stock of HKD1.00 each.
On the same date, the common stock of UFI issued and outstanding was
increased to HK$20,000,000 by allotting 19,999,999 shares of common
stock of HKD1.00 each at par by the capitalization of part of the
stockholders' loans. These shares rank pari passu with the existing
shares in all respects.
For the purpose of preparation of these combined financial statements,
authorized and outstanding common stock of 20,000,000 shares have been
treated as issued for all periods presented.
8. PENSION COSTS
As stipulated by PRC regulations, the Company maintains a defined
contribution retirement plan for all of its employees who are residents
of PRC. All retired employees of the Company are entitled to an annual
pension equal to their basic annual salary upon retirement. The Company
contributed to a state sponsored retirement plan approximately 20% of
the basic salary of its employees and has no further obligations for
the actual pension payments or post-retirement benefits beyond the
annual contributions. The state sponsored retirement plan is
responsible for the entire pension obligations payable to all
employees. The pension expenses for the periods ended September 30,
2004 and 2003 were USD8 and USDNil respectively, and for the period
ended December 31, 2003 was USD1.
9. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
Related party Existing relationship with the Company
------------- --------------------------------------
Mr. Wang Xin Director and stockholder of the Company
Mr. Liu Yu Director and stockholder of the Company
Mr. Wang Zhibin Director and stockholder of the Company
Mr. Yan Zhao Ex-stockholder of Xelent
Beijing Huan Yitong Tech & Trading Co., Ltd. * A company owned by Mr. Liu Yu and Mr. Wang
Zhibin
Beijing Xingwang Shidai Tech & Trading Co., Ltd. * A company owned by Mr. Yan Zhao
* English translation for identification purpose only
F-13
9. RELATED PARTY TRANSACTIONS (CONTINUED)
b. Summary of related party transactions
As of As of
September 30, December 31,
2004 2003
USD USD
------------- -------------
Loan to related companies
Beijing Xingwang Shidai Tech & Trading Co., Ltd. -- 736
Beijing Huan Yitong Tech & Trading Co., Ltd. 7,107 --
============= =============
Due from stockholders
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin 1,352 1,352
============= =============
Note:
(i) The loan to a related company is unsecured, interest-free and
repayable on or before September 20, 2004.
(ii) The loan to a related company is unsecured, interest-free and
repayable on or before July 30, 2005.
(iii) The amounts due from stockholders are unsecured, interest-free
and will be repayable on demand.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain staff quarters and office premises under
non-cancelable operating leases. Rental expenses under operating leases
were USD100 and USD27 for the periods ended September 30, 2004 and 2003
respectively, and for the period ended December 31, 2003 was USD40.
The following table summarizes the approximate future minimum rental
payments under non-cancelable operating leases in effect as of
September 30, 2004 and December 31, 2003:
As of As of
September 30, December 31,
2004 2003
USD USD
2004 33 51
2005 23 13
------------- -------------
Total 56 64
============= =============
F-14