UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/a
CURRENT REPORT
Pursuant To Section 13 or 15(d) 0f The Securities Exchange Act Of 1934
Date of Report (Date of earliest event reported): March 31, 2005
Orsus Xelent Technologies, Inc.
(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
(Former name or former address, if changed since last report)
Section 9 - Financial Statements and Exhibits
Item 9.01 - Financial Statements And Exhibits
This amended Current Report on Form 8-K is being submitted for the purpose of
providing the audited financial statements of United First International Limited
("UFIL") and its subsidiaries for the year ended December 31, 2004, and the
period from May 6, 2003, to December 31, 2003.
(a) the audited financial statements of UFIL and its subsidiaries for the
year ended December 31, 2004, and the period from May 6, 2003, to
December 31, 2003, are provided following the signature page of this
Current Report.
(b) Pro forma financial information. None
(c) Exhibits. The following exhibits have been filed as a part of this
Current Report:
Exhibit
Number Description of Exhibit
------ ----------------------
23.1 Consent of Moores Rowland Mazars, Certified Public
Accountants with respect to Combined Financial
Statements of UFIL and its subsidiary for the 9-month
period ended September 30, 2004 and the period from
May 6, 2003 to December 31, 2003
23.2 Consent of Moores Rowland Mazars, Certified Public
Accountants with respect to Consolidated Financial
Statements of UFIL and its subsidiaries for the for
the year ended December 31, 2004, and the period from
May 6, 2003, to December 31, 2003
2
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.
ORSUS XELENT TECHNOLOGIES, INC.
By: /s/ Wang Xin
----------------------------
Chief Executive Officer
DATED: May 13, 2005
3
Consolidated Financial
Statements
United First International
Limited
Year ended December 31, 2004
and
period from
May 6, 2003 to December 31, 2003
United First International Limited
Index to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
Report of Independent Registered Public Accounting Firm F1
Consolidated Statements of Operations F2
Consolidated Balance Sheets F3
Consolidated Statements of Changes in Stockholders' Equity F4
Consolidated Statements of Cash Flows F5
Notes to Consolidated Financial Statements F6 - F17
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
United First International Limited
We have audited the accompanying consolidated balance sheets of United First
International Limited and its subsidiaries (the "Company") as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 2004 and
period from May 6, 2003 to December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003 and the results of its operations and its cash flows
for the year and period 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: May 5, 2005
F-1
United First International Limited
Consolidated Statements of Operations
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
From
Year ended May 6, 2003 to
December 31, December 31,
2004 2003
Note USD'000 USD'000
Operating revenues:
Net sales 70,822 5
Operating expenses:
Cost of sales 56,231 4
Sales and marketing 3,314 17
General and administrative 1,435 100
Research and development 586 --
Depreciation 598 3
-------------- --------------
Total operating expenses 62,164 124
-------------- --------------
Operating income (loss) 8,658 (119)
Interest expense (143) --
Other income, net 64 4
-------------- --------------
Income (loss) before income taxes and
minority interest 8,579 (115)
Less: provision for income taxes 6 -- --
-------------- --------------
Income (loss) before minority interest
8,579 (115)
Minority interest 120 --
-------------- --------------
Net income (loss) 8,699 (115)
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-2
United First International Limited
Consolidated Balance Sheets
As of December 31, 2004 and 2003
As of As of
December 31, December 31,
2004 2003
ASSETS Note USD'000 USD'000
Current assets:
Cash and cash equivalents 224 190
Restricted cash 2,333 --
Accounts receivable - Trade 8,250 --
Due from related companies 10 3,319 736
Due from stockholders 10 -- 1,352
Inventories 5 5,781 363
Trade deposit paid 8,126 1
Other current assets 210 61
------------ ------------
Total current assets 28,243 2,703
Property, plant and equipment, net 4 778 29
------------ ------------
Total assets 29,021 2,732
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - Trade 13,840 189
Accrued expenses and other accrued liabilities 1,053 94
Trade deposit received 2,487 --
Due to stockholders 10 311 --
Provision for warranty 182 --
------------ ------------
Total current liabilities 17,873 283
------------ ------------
Commitments and contingencies
11
Stockholders' equity:
Common stock, par value HKD1.00:
Authorized - 20,000,000 shares
Issued and outstanding - 20,000,000 shares 7 2,564 2,564
Dedicated reserves 1,042 --
Retained earnings (accumulated losses) 7,542 (115)
------------ ------------
Total stockholders' equity 11,148 2,449
------------ ------------
Total liabilities and stockholders' equity 29,021 2,732
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-3
United First International Limited
Consolidated Statements of Changes in Stockholders' Equity
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
Common stock
---------------------------
Retained
earnings/
Dedicated (accumulated
No of shares Amount reserves loses) Total
------------ ------------ ------------ ------------ ------------
USD'000 USD'000 USD'000 USD'000
------------ ------------ ------------ ------------ ------------
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 -- -- 8,699 8,699
Transfer to dedicated reserves -- -- 1,042 (1,042) --
------------ ------------ ------------ ------------ ------------
Balance at December 31,
2004 20,000,000 2,564 1,042 7,542 11,148
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-4
United First International Limited
Consolidated Statements of Cash Flows
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
From
Year ended May 6, 2003 to
December 31, December 31,
2004 2003
USD'000 USD'000
Cash flows from operating activities
Net income (loss) 8,699 (115)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 598 3
Loss on disposal of property, plant and equipment 7 --
Loss on liquidation of a subsidiary 120 --
Minority interest (120) --
Changes in assets and liabilities:
Accounts receivable - Trade (8,250) --
Inventories, net (5,418) (363)
Trade deposit paid (8,125) (1)
Other current assets (149) (61)
Provision for warranty 182 --
Trade deposit received 2,487 --
Accounts payable - Trade 13,651 189
Accrued expenses and other accrued liabilities 959 94
-------------- --------------
Net cash provided by (used in) operating activities 4,641 (254)
-------------- --------------
Cash flows from investing activities
Purchase of property, plant and equipment (1,397) (32)
Proceeds from sales of property, plant and equipment 43 --
Loan to related companies (7,107) (736)
Repayment from related companies 4,524 --
Repayment from (advance to) stockholders 1,352 (1,352)
Increase in restricted cash (2,333) --
Net cash used in investing activities (4,918) (2,120)
-------------- --------------
Cash flows from financing activities
Issuance of capital -- 2,564
Advance from stockholders 311 --
Net cash provided by (used in) financing 311 2,564
-------------- --------------
Net increase in cash and cash equivalents 34 190
Cash and cash equivalents, beginning of fiscal year / period 190 --
-------------- --------------
Cash and cash equivalents, end of fiscal year / period 224 190
============== ==============
Supplemental disclosure of cash flow information
Cash paid during the fiscal year / period for:
Interest expense 143 --
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
F-5
United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
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 operations since its incorporation.
Pursuant to the agreement entered into between UFI and Mr. Wang Xin, Mr.
Liu Yu and Mr. Wang Zhibin, who own 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 USD1,207,000, 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 mobile software and
technology, including the design and trading of mobile 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 mobile 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.
In accordance with USGAAP, the accompanying financial statements of the
Company have been prepared as if the Merger 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
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting principles
The consolidated financial statements and accompanying notes are prepared
in accordance with generally accepted accounting principles in the United
States of America ("USGAAP").
Basis of consolidation
The results of the subsidiaries acquired or disposed of during the year 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 costs 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 USD862,000 and paid warranty claims of
USD680,000 during the year ended December 31, 2004. 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
consolidated 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 consolidated
financial statements.
F-7
- --------------------------------------------------------------------------------
United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
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
the year from transactions and other events, excluding the changes
resulting from investments by owners and distributions to owners. No
comprehensive income is recorded in any year or period 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 year 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. No allowance for uncollectible
receivables was recorded as of December 31, 2004 and 2003.
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 year 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 consolidated 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.
F-8
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment (Continued)
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.
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 consolidated 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 year.
F-9
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation (continued)
Translation adjustments, when material, resulting from this process are
recorded in accumulated other comprehensive income (loss) within
stockholders' equity. No other comprehensive income for foreign currency
translation was recorded for the year/period ended December 31, 2004 and
2003 because the Renminbi has been pegged at a constant rate to the United
States dollar for the entire periods.
Cash equivalents
The Company considers short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Use of estimates
The preparation of the consolidated 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 year.
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.
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
manufacturing mobile phones which are all sold in the PRC. There is no
reportable business or geographical segment identified and no segment
information is required to be disclosed.
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.
F-10
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
3. CONCENTRATIONS
The Company is engaged principally in the development of mobile software
and technology, including the design and trading of mobile 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
mobile phones mainly 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:
From
Year ended May 6, 2003
December 31, to December 31,
2004 2003
% %
Customer A 77 --
Customer B 21 --
Customer C -- 31
Customer D -- 19
Customer E -- 9
Customer F -- 9
=============== ===============
Trade deposits received and trade receivable balances related to these
customers were USD2,487,000 and USD8,250,000 as of December 31, 2004
respectively.
Suppliers accounted for over 5% of the Company's purchases are as follows:
From
Year ended May 6, 2003
December 31, to December 31,
2004 2003
% %
Supplier A 44 --
Supplier B 28 --
Supplier C 10 --
Supplier D 5 --
Supplier E -- 80
Supplier F -- 16
=============== ===============
Trade deposits paid and trade payable balances related to these suppliers
were USD1,665,000 and USD1,077,000 as of December 31, 2004 respectively.
F-11
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
As of As of
December 31, December 31,
2004 2003
USD'000 USD'000
------------ ------------
Moulds 1,033 --
Leasehold improvement 47 --
Plant and machinery 14 --
Office equipment 200 18
Motor vehicles 83 14
------------ ------------
1,377 32
Accumulated depreciation (599) (3)
------------ ------------
778 29
============ ============
5. INVENTORIES
Inventories consisted of the follows:
As of As of
December 31, December 31,
2004 2003
USD'000 USD'000
------------ ------------
Raw materials 5,781 --
Trading goods -- 363
------------ ------------
5,781 363
============ ============
F-12
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
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 year
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 November 30, 2004. Since
Xelent has registered as a wholly-owned foreign investment enterprise
("WOFIE"), it is subject to tax laws applicable to WOFIE in the PRC and is
fully exempt from the PRC enterprise income tax of 33% for two years
followed by a 50% reduction for the next three years, commencing with
fiscal year 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:
From
Year ended May 6, 2003
December 31, to December 31,
2004 2003
% %
Statutory rate 33 33
Tax exemption (33) --
Tax losses -- (33)
--------------- ---------------
=============== ===============
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 HKD20,000,000 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 HKD20,000,000 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 consolidated financial statements,
authorized and outstanding common stock of 20,000,000 shares have been
treated as issued for all year presented.
F-13
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United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
8. DISTRIBUTION OF INCOME
The Company's income is substantially contributed by Xelent, a company
registered in the PRC. Income of Xelent is distributable to its
stockholders after transfer to dedicated reserves as required under its
articles of association and relevant PRC rules and regulations.
Prior to the re-organization to a WOFIE, dedicated reserves of Xelent
include a statutory surplus reserve and a statutory public welfare fund. In
accordance with the relevant PRC Companies Law and rules and regulations,
it is required to transfer amounts equal to at least 10% and 5% of its
after- tax income to the statutory surplus reserve and statutory public
welfare fund, respectively.
The statutory surplus reserve can only be utilized to offset prior years'
losses or for capitalization as paid-in capital, whereas the statutory
public welfare fund shall be utilized for collective staff welfare benefits
such as building staff quarters or housing. No distribution of the
remaining reserves shall be made other than on liquidation of Xelent.
Since Xelent has registered as a WOFIE, in accordance with its Articles of
Association and the relevant PRC regulations, it is required to appropriate
to a general reserve fund an amount not less than 10% of the amount of
after-tax income and a staff welfare and bonus fund an amount to be
determined by the directors.
The general reserve fund can be used to make good losses in previous years.
The staff welfare and bonus fund, which is to be used for the welfare of
the staff and workers of the subsidiary, is of a capital nature.
9. 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 were USD9,000
and USD1,000 for the year ended December 31, 2004 and period ended December
31, 2003 respectively.
F-14
United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
10. 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
b. Summary of related party balance
As of As of
December 31, December 31,
2004 2003
Note USD'000 USD'000
Due from related companies
Beijing Huan Yitong Tech & Trading Co., Ltd. (i) 3,319 --
Beijing Xingwang Shidai Tech & Trading Co., Ltd. (ii) -- 736
------------ ------------
3,319 736
============ ============
Due from stockholders
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (iii) -- 1,352
============ ============
Due to stockholders
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (iii) 311 --
============ ============
F-15
- --------------------------------------------------------------------------------
United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
10. RELATED PARTY TRANSACTIONS (CONTINUED)
c. Summary of related party transactions
Period from
Year ended May 6 to
December 31, December 31,
2004 2003
Note USD'000 USD'000
Loan to related companies
Beijing Huan Yitong Tech & Trading Co., Ltd. (i) 7,107 --
Beijing Xingwang Shidai Tech & Trading Co., Ltd. (ii) -- 736
============ ============
Repayment from related companies
Beijing Xingwang Shidai Tech & Trading Co., Ltd. 736 --
Beijing Huan Yitong Tech & Trading Co., Ltd. 3,788 --
============ ============
Note:
(i) Loan to a related company is unsecured interest-free and repayable on
or before July 30, 2005.
(ii) Loan to a related company is unsecured interest-free and repayable on
or before September 20, 2004.
(iii)The amounts due from/to stockholders are unsecured, interest-free and
repayable on demand.
11. COMMITMENTS AND CONTINGENCIES
The Company leases certain staff quarters and office premises under
non-cancelable operating leases. Rental expenses under operating leases
were USD126,000 and USD40,000 for the year ended December 31, 2004 and
period ended December 31, 2003 respectively.
The following table summarizes the approximate future minimum rental
payments under non- cancelable operating leases in effect as of December
31, 2004:
As of
December 31,
2004
USD
2005 28
============
F-16
United First International Limited
Notes to Consolidated Financial Statements
Year ended December 31, 2004 and period from May 6, 2003 to December 31, 2003
================================================================================
12. POST BALANCE SHEET EVENT
On March 31, 2005, Universal Flirts Corp. ("UFC"), a Delaware corporation
listed in USA NASDAQ - OTCBB, completed a stock exchange transaction with
the stockholders of the Company. Pursuant to the Exchange Agreement, UFC
issued 15 million shares of its common stock, $0.001 par value,
representing approximately 50.41% of its issued and outstanding common
stock, immediately upon the consummation of the exchange transaction, and
paid USD50,000 to the stockholders of the Company, in exchange for 100% of
the outstanding capital stock of the Company. Immediately, after giving
effect to the exchange, the Company became a wholly-owned subsidiary of
UFC.
F-17
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: January 17, 2005
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
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Total 56 64
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F-14