SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______.
Commission file number: 000-117718
ORSUS XELENT TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-11998142
(State of incorporation) (I.R.S. Employer Identification No.)
12th Floor, Tower B, Chaowai MEN Office Building
26 Chaowai Street, Chaoyang Disc.
Beijing, People's Republic Of China 100020
(Address of principal executive offices, including zip code)
86-10-85653777
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of March 17, 2006, the aggregate market value of the registrant's common
stock held by non-affiliates of the registrant was $14,464,800 based on the
closing price as reported on the OTC Bulletin Board.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 17, 2006
- --------------------------------------- -----------------------------
Common Stock, $.001 par value per share 29,756,000 shares
PART I
Item 1. Business.
Except as otherwise indicated by the context, references in this Annual
Report to "we," "us," "our," or the "Company" are to the combined business of
Orsus Xelent Technologies, Inc. and its indirect wholly-owned subsidiary,
Beijing Orsus Xelent Technology & Trading Company Limited ("Xelent").
Introduction
On March 31, 2005, we completed a stock exchange transaction (the "Exchange
Transaction") with the stockholders of United First International Limited, a
company incorporated under the laws of Hong Kong ("UFIL"). The Exchange
Transaction 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").
Pursuant to the Exchange Agreement, we issued shares of our common stock to
the stockholders of UFIL, in exchange for 100% of the outstanding capital stock
of UFIL. Pursuant to the Exchange Transaction, UFIL became our wholly owned
subsidiary. We carry on our business through UFIL's wholly owned subsidiary,
Xelent.
Description of Business
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 in the People's Republic of China
(the "PRC") as its product trademark, also known as "Orsus Cellular" within the
industry. Xelent has sold approximately 240,000 cellular phones in the PRC in
2005
The market in the PRC for cellular phones has continued to expand and we
have taken advantage of that expansion by gradually introducing more mature 2.5G
wireless products to the public in the PRC. As the 3G standards become more
accepted and widely utilized, we anticipate that we will seek to produce our own
3G products based on both our own research and development efforts and
cooperation with our strategic partners in the industry.
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;
1
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 to sign
the business agreements, contracts and other kinds of documents for
the business partners;
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 that 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.
o Marketing Development Department, which is responsible for help the
Company to find new business partners, which will act as the
countryside distributors, provincial dealers and some overseas
wholesalers. The department also helps the long-term partners and new
incomers to set up the marketing concepts and business models of Orsus
Cellular.
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 replacement and refurbishment centers
and 137 are maintenance and repair centers.
2
Market Overview and Strategic Partners
According to research conducted by China Ministry of Information Industry,
in 2005, new cellular phone users in the PRC, the largest nation in the world,
increased by 58 million, with total consumers reaching 393 million out of a
population of approximately 1.3 billion. The number of users is expected to
reach over 500 million by 2007. According to industry research publications,
global sales for cellular phones worldwide in 2005 were over 800 million units,
which represented a 21% growth rate from 2004. During that same time period,
sales for cellular phones in the Asia-Pacific Region were over 200 million
units, making this region the largest market in the world.
Our cellular products combine many of the currently popular1.8-inch to
2.2-inch TFT color displays, one to 120 minutes video recording, 300K to 200
mega pixels photography, MP3, MPEG4 and U disk support, 40 to 64 polyphonic ring
tones, handwriting and PDA functions, all at low to moderate price points.
Our relationships with our strategic partners, CEC Cellular Limited
("CECM"), Beijing Xingwang Shidai Tech & Trading Co., Ltd. ("XWSD") and Hebei
Mascot Communication Equipment Co., Ltd ("MASCOT") 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
phone 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 phones 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. MASCOT whose sales networks covers most of
the main cities all the PRC, particularly in the northern region, is a newly
developed provincial distributor since the 3rd quarter of 2005 and mainly
responsible to distribute our old products.
3
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
- ------------------------------- ---------------------------- ------------------------------- -------------------------
October 28, 2004 April 30, 2005 CECT M525+ GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
June 6, 2005 CECT OS70+ GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
September 7, 2005 C 100 CDMA
- ------------------------------- ---------------------------- ------------------------------- -------------------------
September 18, 2005 DAXIAN X680 GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
September 22, 2005 HX 8203 GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
September 28, 2005 HX 8205 GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
September 30, 2005 CECT M62+ GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
October 2, 2005 CECT M60 GSM/GPRS
- ------------------------------- ---------------------------- ------------------------------- -------------------------
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.
4
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") and Shanghai Huntel Technologies Co., Ltd.("Huntel"), who are
mainly involved with us in MMI (U2) ("Man Machine Interface") 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 Dalian Daxian Telecom Co., Ltd.
("Daxian") and 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.
As 3G continues to develop in the PRC in 2006, we anticipate that we will
be able to develop our own 3G mobile phones based on both our own research and
development efforts and cooperation with the strategic industry partners. We are
now being negotiated with several parties including foreign 3G technology
providers such as Spreadtrum Communication (Shanghai) Inc. ("SCI"), several 3G
chipset and solution providers in order to get us well prepare the launch of 3 G
services in coming future. We will put our efforts to focus on the development
of the products in TDS-CDMA and WCDMA standard. Our strategic partners, such as
SCI developed 2.5 G and 3G integrated circuit and provides 2.5G GPRS and 3G
TDS-CDMA chipset and software development platforms and solutions, are the
successful corporations in the PRC telecommunication industry. We believe the
cooperation with 3G technology providers in working on future research and
development projects 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")
5
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.
Competition
The Company faces substantial competition from other wireless phone
manufacturers such as: Nokia, Motorola and Samsung, which controlled
approximately 23.8%,13.3% and 9.6%, respectively, of the cellular market in the
PRC in 2005. In addition we face competition from Ningbo Bird Corporation Ltd
and Lenovo Group Limited, both of which are domestic PRC producers and
controlled approximately 6.1% and 4.1%, respectively of the cellular market in
the PRC in 2005.
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.
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 185 employees. Of the 185 employees, 12 persons serve
in management related capacities. The remaining employees are in 10 departments,
namely the Product Planning Department which employs eight persons, the Project
Management Department which employs seven persons; the Production Management
Department which employs 14 persons; the Technology Support and Quality Control
Department which employs 18 persons; the Business Management Department which
employs 12 persons; the Administration and Strategy Planning Department which
employs 13 persons; the Planning and Finance Department which employs 10
6
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 88 persons.
We believe that our relationship with our employees is good, and there are
no collective bargaining arrangements in place.
Item 1A. Risk Factors.
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.
7
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:
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
8
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.
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.
9
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;
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
10
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
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.
11
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 U. S. Securities and Exchange Commission 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.
12
Our securities are quoted on the OTC Bulletin Board, which limits the liquidity
and price of our securities more than if our securities were quoted or listed on
The Nasdaq Stock Market or a national exchange.
Our securities are traded in the over-the-counter market and quoted on the
OTC Bulletin Board, an inter-dealer automated quotation system for equity
securities sponsored and operated by the National Association of Securities
Dealers, Inc., or NASD, but not included in The Nasdaq Stock Market. Quotation
of our securities on the OTC Bulletin Board limits the liquidity and price of
our securities more than if our securities were quoted or listed on The Nasdaq
Stock Market or a national exchange. Lack of liquidity will limit the price at
which you may be able to sell our securities or your ability to sell our
securities at all.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
We have offices in Beijing, Shenzhen, Shanghai, Tianjin and Hong Kong. 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 office in Hong Kong is a representive office for
coordination with customers.
13
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
12th Floor, Tower B, Chaowai Office --(1) -- -- 5/01/05 to 4/30/06
MEN Office Building, 26
Chaowai Street, Chaoyang
Disc., Beijing
No. 3, Lane 600, Tianshan Office Lease 29,118.6 3,508.27 2/28/04 to 2/27/05 (1)
Rd., Changning Dist.,
Shanghai
No.185, Xinda Road, Hebei Office --(2) -- -- --
District, Tianjin
Room 1502, Jubilee Centre, Office Lease 15,673.0 1,937.0 9/5/05 to 9/4/07
18 Fenwick Street, 46
Gloucester Road, Wanchai,
Hong Kong
- ----------------
(1) From May, 1 2005 to April 30, 2006, there is a rent-free period for our
headquarter in Beijing, the rental charge is still under the negotiation
with landlord.
(2) Our Tianjin office is located in the CECM factory. The office is provided
by CECM and is cost-free to us.
Item 3. Legal Proceedings.
We are not party to any litigation, and we are not aware of any threatened
litigation that would have a material adverse effect on us or our business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of securityholders during the fourth
quarter of the fiscal period ended December 31, 2005.
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Shares of our common stock are traded on the OTC Bulletin Board under the
symbol "ORXT.OB" Our common stock has been traded on the OTC Bulletin Board
since March 2005.
14
Holders.
As of March 17, 2006, we had approximately 24 stockholders of our common
stock of record, and our common stock had a closing bid price of $2.05 per share
and a closing ask price of $1.85 per share.
The following table sets forth the quarterly average high and low bid
prices per share for our common stock for the period commencing with the
Exchange Transaction and ending on December 31, 2005:
----------------------------- ------------------------------------------
Fiscal Year Ended Common Stock
High Low
----------------------------- ------------------------------------------
December 31, 2005
----------------------------- --------------------- --------------------
First Quarter NA NA
----------------------------- --------------------- --------------------
Second Quarter $3.10 $1.90
----------------------------- --------------------- --------------------
Third Quarter $2.00 $1.10
----------------------------- --------------------- --------------------
Fourth Quarter $2.25 $1.29
----------------------------- --------------------- --------------------
The source for the high and low closing bids quotations is the Yahoo
Finance website and does not reflect inter-dealer prices. Such quotations are
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions and have not been adjusted for stock dividends or splits.
Outstanding Options, Conversions, and Planned Issuance of Common Stock.
There are no warrants or options outstanding to acquire any shares of our
common stock
Preferred Stock.
Our corporate charter permits us to issue up to 10 million shares of
preferred stock from time to time, as are determined by resolution of our Board
of Directors. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of our Company without further
action by stockholders and could adversely affect the rights and powers,
including voting rights, of holders of common stock, with us acting in
accordance with our corporate charter and bylaws. In certain circumstances, the
issuance of preferred stock could depress the market price of the common stock.
There are no shares of preferred stock outstanding.
Dividends.
We have never declared or paid any cash dividends or distributions on our
common stock. We currently intend to retain our future earnings to support
operations and to finance future growth and expansion and, therefore, do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.
15
Transfer Agent and Registrar.
Our transfer agent is Corporate Stock Transfer, located at 3200 Cherry
Creek Drive South, Suite 430, Denver, Colorado 80209. Their telephone number is
(303) 282-4800.
Securities Authorized for Issuance Under Equity Compensation Plans.
As of the fiscal year ended December 31, 2005, we have no shares of our
common stock or preferred stock that are issuable under compensation plans
approved by our security holders.
Recent Sales of Unregistered Securities.
Each issuance set forth below was made in reliance upon the exemptions from
registration requirements of the Securities Act of 1933, as amended, contained
in Section 4(2) on the basis that such transactions did not involve a public
offering. When appropriate, we determined that the purchasers of securities
described below were sophisticated investors who had the financial ability to
assume the risk of their investment in our securities and acquired such
securities for their own account and not with a view to any distribution thereof
to the public. Where required by applicable law, the certificates evidencing the
securities bear legends stating that the securities are not to be offered, sold
or transferred other than pursuant to an effective registration statement under
the Securities Act or an exemption from such registration requirements.
Each of the following individuals received their shares pursuant to the
Exchange Agreement on March 31, 2005:
------------------------------ ------------------------------
Name Shares
------------------------------ ------------------------------
Wang Xin 3,000,000
------------------------------ ------------------------------
Liu Yu 6,000,000
------------------------------ ------------------------------
Wang Zhibin 6,000,000
------------------------------ ------------------------------
16
Item 6. Selected Financial Data.
The following selected financial data has been extracted from our financial
statements for the period from April 1, 2005 (commencement of business) to
December 31, 2005. This selected financial data should be read in conjunction
with our financial statements and the related notes included in Item 8 of this
Annual Report.
---------------------------------------------------------------------
Statement of Operations Data
For the year ended December 31, 2005
---------------------------------------------------------------------
-------------------------------------------------- --- --------------
Operating Expenses $ 25,711,000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Other Income - Interest, net $ 544,000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Net Income $ 3,492,000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Weighted Average Common Shares Outstanding 29,756,0000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Net Income Per Common Share - Basic and Diluted $ 0.12
-------------------------------------------------- --- --------------
Balance Sheet Data
As of December 31, 2005
---------------------------------------------------------------------
-------------------------------------------------- --- --------------
Working Capital $ 14,158,000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Total Assets $ 31,011,000
-------------------------------------------------- --- --------------
-------------------------------------------------- --- --------------
Stockholders' Equity $ 14,939,000
-------------------------------------------------- --- --------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with our financial
statements and footnotes thereto contained in this report.
Overview
The Company was organized under the laws of State of Delaware in May 2004,
under the name "Universal Flirts Corp". On June 1, 2004, the Company acquired
all the issued and outstanding shares of Universal Flirts Inc., a New York
corporation, from Darrel 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 exchange agreement between Universal Flirts Inc. and the
Company. Pursuant to the purchase and share exchange transaction, Universal
Flirts Inc. became the wholly-owned subsidiary of the Company.
17
Pursuant to Stock Transfer Agreement dated March 29, 2005, the Company
transferred all of the common stock of Universal Flirts, Inc. to Mr. Darrell
Lerner in exchange for the cancellation of 28,200,000 shares of the Company's
common stock. The Company then had 14,756,000 shares of its common stock
outstanding.
On March 31, 2005, Universal Flirts Corp. completed a stock exchange
transaction with the stockholders of UFIL. The exchange was consummated under
the laws of State of Delaware and pursuant to the terms of Exchange Agreement.
In connection with its acquisition of UFIL, the Company also authorized a 4-1
forward split of its common stock.
Pursuant to the Exchange Agreement, Universal Flirts Corp. issued
15,000,000 shares of its common stock, $0.001 par value, to the stockholders of
UFIL, representing approximately 50.41% of the Company's issued and outstanding
common stock, in exchange for 20,000,000 outstanding shares of UFIL and cash
payment of $50,000 from UFIL. Immediately after giving effect to the exchange,
the Company had 29,756,000 shares of its common stock outstanding.
On April 19, 2005, the Company changed its listed name to Orsus Xelent
Technologies, Inc. Pursuant to the exchange, UFIL became a wholly-owned
subsidiary of the Company and most of the Company's business operations are now
conducted through Xelent, UFIL's wholly-owned subsidiary See, Item 1. Business
In July, 2005 a wholly owned subsidiary, namely Orsus Xelent Trading (HK)
Company Limited was incorporated in Hong Kong. Orsus Xelent Trading (HK) Company
Limited is engaged in the trading of cellular phones and accessories with
overseas customers.
Business Review
Since the 4th quarter 2004, the growth rate of the whole cellular phones
market in the PRC slowed down as a result from (1) the oversupply of cellular
phones in the market after the rapid growth in last few years; (2) the mass
production of the simple function cellular phones products due to rapidly
changing customer preferences; (3) obsolescence of slow-moving cellular phones
products in 2004; and (4) competition from the counterfeit and "black market"
cellular phones in the PRC market, which affect the market environment of the
PRC cellular phones industry as well as the profitability of our domestic
legitimate manufacturers. These factors caused domestic branded manufacturers to
clear inventories through price-cutting or stopping production. Most of the
small cellular phones manufacturers in the PRC were forced to operate at loss
and eventually exited the market.
The cellular phones market in the PRC is characterized by rapidly changing
customer preferences. Cellular phones with multi-media, FM ratio, large memory
capacity functions replaced camera and color display functions and rapidly
became the most popular products in 2005. Additionally, foreign manufacturers
have made substantial investment in the promotion of mid to low end products.
They have launched a significant number of new products into the PRC market and
spent a substantial amount on advertising, which has resulted in foreign
manufacturers increasing their market share to the detriment of domestic
manufacturers.
In response to the fierce competition in the PRC cellular phones market, we
enhanced the quality and function of our products to increase our competitive
edge. During 2005, multimedia cellular phones were the mainstream products in
18
the market. In the first half of 2005, we successfully developed new platforms,
namely SpreadTrum and MTK , which enabled us to develop a series of low to
moderately priced new products, namely 70A(70+), 62+, 8205, 60+ and M72, with
innovative functions, such as multi-media, MPEG4, FM radio, stereo sound, over
one mega pixels photography and large memory capacity, to meet the rapid change
in the PRC market. We intend to continue to launch new products timely with
advanced features. A two mega pixel camera and intelligent handwriting PDA
cellular phone, namely D9000, was launched into market in the end of March 2006.
Through the introduction of new products with advanced features and low and
moderate price, our products and brand would penetrate the PRC market. We
believe our revenues could be maintained at a steady growth rate in the coming
year.
In the second half of 2005, we provided the solution and software for CDMA
cellular phones manufacturers to enhance their development of innovation
features products. Additionally, we cooperated with a domestic telecommunication
operator and a cellular phone manufacturer in the production of innovative
features for CDMA cellular phones and through this process we were able to enter
the CDMA cellular phones market. Since most of the telecommunication operators
in PRC are all big enterprises, we believe that a good business relationship
with those telecommunication operators will be beneficial to our business and
we, therefore, will continue to cooperate with the telecommunication operators
whenever possible.
To establish a more diversified revenue base, we also successfully
developed the trading business in domestic and Hong Kong market. Although, the
trading activities only attributed minimal revenues to us in 2005, we believe
that the risk of concentration in a single market can be minimized and our brand
can be further promoted through the development of overseas markets for our
products.
To increase our competitiveness, we are in the process of applying for a
license to produce our own GSM cellular phone. We are seeking this license
through a joint venture with a domestic cellular phone manufacturer, namely
Chang Zhou Moben Communication Co., Ltd In addition, we are also exploring
opportunities with other domestic cellular phone manufacturers in this regard.
Although, the license application process is still at an early stage, we are
working diligently to obtain the license as quickly as we can so that we can
start to produce our own GSM cellular phone.
Going forward, we will continue to adopt effective cost control
measures to enhance our competitiveness, launch new products in timely manner,
explore business opportunities with telecommunication operators and develop the
sales in overseas market. Although the overall business environment in the PRC
cellular phone industry in 2005 was difficult and our revenues decreased by
59.47% to $29 million, the gradually improving operating environment in the
latter part of 2005 permitted us to introduce to the market, with the
cooperation of our telecommunication partner, new products with innovative
features . This enabled us to maintain products margins above 21.5% in 2005, and
compared with 20.6% in 2004, our profitability was not adversely affected by the
intense competition in the domestic PRC market.
19
The following table summarizes our operation result for the year 2005 and 2004:
- ----------------------------- ------------------------------ ------------------------------ --------------------
Year ended December 31, 2005 Year ended December 31, 2004 Comparison
- ----------------------------- ------------------------------ ------------------------------ --------------------
$' 000 % of revenue $' 000 % of revenue $'000 %
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Revenues 28,705 -- 70,822 -- -42,117 -59.47%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Cost of sales 22,370 77.93% 56,231 79.40% -33,861 -60.22%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Sales & Marketing expenses 1,554 5.41% 3,314 4.68% -1,760 -53.11%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
General & Admin expenses 1,064 3.71% 1,435 2.03% -371 -25.85%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
R&D expenses 413 1.44% 586 0.83% -173 -29.52%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Depreciation & Amortization 310 1.08% 598 0.84% -288 -48.16%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Interest expenses 25 0.09% -143 -0.20% 168 -117.48%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Other income, net 544 1.90% 64 0.09% 480 750.00%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Income before tax 3,513 12.24% 8,579 12.11% -5,066 -59.05%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Income taxes 21 0.07% 0 0.00% 21 0.00%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Minority interest 0 0.00% 120 0.17% -120 -100.00%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Net income 3,492 12.17% 8,699 12.28% -5,207 -59.86%
- ----------------------------- ------------ ----------------- ------------ ----------------- --------- ----------
Application of critical accounting policies and estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities, including those related to revenue recognition, inventories,
adequacy of allowances for doubtful accounts, valuation of long-lived assets,
income taxes, and warranties. On an on-going basis, we evaluate our estimates
based on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The policies
discussed below are considered by management to be critical to an understanding
of our financial statements.
Revenue recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT") and returns. We generally recognize product revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectibility is probable. We have a policy of including
handling costs incurred for finished goods, which are not significant, in sales
and marketing expenses.
20
Warranties
We offer warranties on the products we manufacture. 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. We provided for anticipated warranty expense in the
amount of $452,000 and paid warranty claims of $330,000 during the year ended
December 31, 2005. 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.
Trade receivables and allowance for doubtful accounts
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 are
presented net of an allowance for uncollectible amounts of $141,000 and $0 as of
December 31, 2005 and of 2004 respectively.
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.
Impairment of long-lived assets
The long-lived assets we hold and use 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
21
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.
Results of operation
Revenues
Our revenues were $28,705,000 in 2005, representing a decrease of 59.47% as
compared to the same period in 2004. The decrease was primarily due to fierce
competition of the RPC cellular phone market. The cellular phone manufactures'
enlarging production capability during the past years rapid growth of the
industry period and accelerating speed of new products launch, lead to the
shorter products lifecycle and the over supply. Additionally, the competition
from the counterfeit and "black market" cellular phones in the PRC market which
affect the operating mode and order, and market environment of the PRC cellular
phones industry. For the purpose of meet to the changing market demands, we
developed a series of new products with innovative functions to extend our
product lines by using our newly developed platform SpreadTrum and MTK in the
second half of the year.
Our revenues had increased from 3,440,000 in the first half of the year to
25,265,000 in the second half of the year, represented 88.02% of the whole year
revenues. The significant rise in the revenues was primarily due to the
introduction of a series of new products with innovative functions, such as 70A,
62+, 8205, 60+, M72 and M36. During 2005, multimedia cellular phones were the
mainstream product in the market. We captured the latest demand trend of
domestic consumption market to launch the new models with leading features
including MP3, MPEG4, FM radio and large memory capacity. Such new products also
generated a higher profit margin to us.
Additionally, in the second half of the year, we changed our strategy to
develop cellular phone products other than the GSM system. We adopted the
strategy to strengthen the cooperation with telecommunication operator and other
cellular phone manufacturers to provide solution consultation in the production
of CDMA cellular phones, model C100. The solution consultation included the
knowledge of software application, field testing, mechanical and molding design
and marketing. Through the co-operation with telecommunication operator and
other cellular phones manufacturer, we participated in the CDMA cellular phones
production and also built up a relationship with the telecommunication operator,
which would provide us an opportunity to develop a potential CDMA market, and
also generate a higher profit and stable orders from the telecommunication
operator in future. During this quarter, the sales of C100 were $5,032,000,
represents 17.53% of our revenues.
In addition, during this quarter, we commenced cellular phone trading
activities with domestic and overseas customers. In the domestic market,
although the margin would be lower than the sales of self-produced cellular
phones, we still can earn profit by using our existing strategic partners' sales
networks. In the overseas market, we have successfully stepped out from PRC
domestic market that 10,000 unit M18+ was sold to a customer in Hong Kong during
22
this quarter. We will further develop our product to overseas market, including
Southeast Asia, Hong Kong and Middle East so as to further broaden our profit
base.
Breakdown by products
For the year ended December 31, 2005, products attributed over 5% of our
revenues are shown as follows:
--------------------- -----------------------------------------------
Year ended December 31, 2005
--------------------- -----------------------------------------------
$'000 % of revenue
--------------------- ---------------------------- ------------------
C100 5,032 17.53%
--------------------- ---------------------------- ------------------
N108 2,326 8.10%
--------------------- ---------------------------- ------------------
8068 2,326 8.10%
--------------------- ---------------------------- ------------------
OS70+ 1,959 6.82%
--------------------- ---------------------------- ------------------
K600 1,443 5.03%
--------------------- ---------------------------- ------------------
The sales of OS70+, represents 6.82% of our revenues and relates to the
new products launched into market during this year. In the second half of the
year, total sales of new products were over $4,410,000, represented 15.36% of
total revenues.
The sales of C100 amounting to $5,032,000, represented 17.53% of
revenues, are the cooperation with a telecommunication operator. The trading
activities generated from the sales of GSM cellular phones N108 and 8068 and
CDMA cellular phone K600 were amount to $2,326,000, $ 2,326,000 and $1,443,000,
respectively, represented 8.10%, 8.10% and 5.03% of revenues respectively.
Through the introduction of new innovative features models and the development
of new business streams, we believe, our revenues would have a stable growth
since this quarter.
Breakdown by customers
- ------------------------------------------------- -----------------------------
Year ended December 31, 2005
- ------------------------------------------------- -----------------------------
$'000 % of revenue
- ------------------------------------------------- ----------- -----------------
Beijing Xingwang Shidai Tech & Trading Co., Ltd. 16,175 56.35%
- ------------------------------------------------- ----------- -----------------
Hebei Mascot Communication Equipment Co., Ltd 5,871 20.45%
- ------------------------------------------------- ----------- -----------------
CEC Cellular Limited 5,777 20.13%
- ------------------------------------------------- ----------- -----------------
Others 882 3.07%
- ------------------------------------------------- ----------- -----------------
Our revenues were primarily derived from three major customers. For the
year 2005, our revenues mainly generated from Beijing Xingwang Shidai Tech &
Trading Co., Ltd. ("XWSD"), Hebei Mascot Communication Equipment Co., Ltd
("MASCOT") and CEC Cellular Limited ("CECM") were $16,175,000, $5,871,000 and
$5,777,000 respectively, which represents 56.35%, 20.45% and 20.13% of the
revenue respectively. We have established strategic partnership with CECM and
XWSD for a long period of time, both of which are provincial and national
distributors and dealers, and the sales networks cover most of the main cities
23
all over the PRC. MASCOT is a newly developed provincial distributor since the
3rd quarter of 2005, its sales networks covers most of the main cities all the
PRC, particularly in the northern region.
It is our primary policy to broaden our distribution channels so as to
minimize the concentration risk to few distributors. We will explore other
opportunity continually to further develop our distribution channels. To enhance
a healthy competition, MASCOT is mainly responsible to distribute our old
products. Through the cooperation with different strategic partners in different
areas, we believe we could further extend our distribution channels would
stimulate our revenues in short-run and also strengthen our brand awareness
finally.
Other income, net
For the year ended December 31, 2005, other income, net was $544,000, and
accounted for 1.62% of the total revenues, as compared to $64,000, or 0.09% of
total revenues for the corresponding period in 2004. Other income, net had a
sharp period-to-period increase that is mainly due to a royalty fee rebate
amounting to $309,000 in the 2nd quarter of 2005.
Operating expenses
For year ended December 31, 2005, operating expenses mainly include sales
and marketing expenses, general and administrative expenses and R & D expenses
and shown as follows:
- ------------------- ------------------------- ------------------------- ----------------------
Year ended December 31, Year ended December 31, Comparison
2005 2004
- ------------------- ------------------------- ------------------------- ----------------------
$'000 % of revenue $'000 % of revenue $'000 %
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
Cost of sales 22370 77.93% 56,231 79.40% -33,861 -60.22%
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
Sales & marketing 1554 5.41% 3,314 4.68% -1,760 -53.11%
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
General & admin 1064 3.71% 1,435 2.03% -371 -25.85%
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
R&D 413 1.44% 586 0.83% -173 -29.52%
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
Total 25,401 i@ 61,566 i@ -36,165 -58.74%
- ------------------- ---------- -------------- ---------- -------------- ------------ ---------
Cost of sales
For the year ended December 31, 2005, our cost of sales were $22,370,000,
representing 77.93% of revenue, compared to $56,231,000 and 79.40% of the
corresponding period in 2004. Compared to the corresponding period in 2004, the
cost of sales had a period-to-period decrease of 60.22%, which varied in line
with our sales revenues decrease of 59.47%. Although the fierce competition led
to the cutting of sales prices for old products, the cost of sales percentage to
revenues can be maintained through our effectively control of raw materials used
and negotiation of lower materials prices with suppliers, as wellas the high
profit margin of our new products launched in the second half of the year.
24
Sales and marketing expenses
Sales and marketing expenses mainly represent the free-gift and product
model to customers and dealers respectively, cost of provision for after-sales
services, remunerations for sales personnel and development of market.
For the year ended December 31, 2005, sales and marketing expenses were
$1,554,000, accounting for 5.41% of the total revenues, as compared to
$3,314,000, or 4.68% of total revenues for the corresponding period in 2004.
Sales and marketing expenses had a period-to-period decrease of 53.11%. The
percentage in total revenues increased from 4.68% to 5.41% as compared to the
corresponding period in 2004 are due to the total revenue's decrease and the
approximately steady absolute expense. A large portion of sales and marketing
expenses was fixed expenses, such as remunerations for sales personnel. Compared
to the period ended June 30, 2005, the percentage represented in the total
revenues decreased from 20.38% to 5.41% was due to sharp recovery of our
revenues, and we effectively controlled the cost of marketing, including
remunerations for sales personnel, after-sales repair cost and free-gift and
product model to customers and dealers.
R&D expenses
The R&D cost was $413,000 for the year ended December 31, 2005, which
represents 1.44% of total revenue, compared with $586,000 and 0.83% respectively
in the same period in 2004. R&D expenses incurred in 2004 mainly represented the
ADI platform development expense and several models of mobile phone research
expense. R&D expenses incurred in the year mainly represented the development
cost on SPREADTRUM and MTK platform, some innovative features function, such as
MP3, MPEG4 and U disk could be developed with utilization of these new
platforms.
Our R&D investment would allow us to respond to the market change quickly.
We introduced many models of cellular phones with innovative functions this
quarter, such as OS70+, M62+, OX8205. We expect the investment in R&D activities
would be continued in next year. We believe that our R&D activities will
strengthen our technologies, reduce the costs of existing products and also
provide future revenue streams through the launch of new innovative products.
General and administrative expenses
General and administrative expenses consist primarily of compensation for
personnel, travel expenses, materials expenses related to ordinary
administration and fees for professional services.
For the year of December 31, 2005, general and administrative expenses were
$1,064,000, accounting for 3.71% of the total revenues, as compared to
$1,435,000, or 2.03% of the total revenues for the corresponding period in 2004.
General and administrative expenses had a period-to-period sharply decrease of
25.85%. The period-to-period sharp decrease was mainly due to reduction of
compensation for personnel by simplifying personnel and lower personnel
compensation, and reduction of daily expense by economizing travel expenses and
administrative expense.
25
Gross profit and gross margin
For the year December 31, 2005, our gross profit was $ 6,335,000, which
represented a decrease of 56.58% as compared to the gross profit of $14,591,000
in the same period in 2004. Our gross margin for the reporting period increased
slightly from 20.06% in 2004 to 22.07% in 2005.
A slightly increase in our gross margin under a fierce competition is
attributable to new products successfully launched into the market and changea
in our products mix. Although our gross margin decreased due to price reduction
for sales promotion, it was offset by the high gross margin new products such as
CDMA cellular phone C100. Overall, the gross margin has slightly increased. We
controlled usage of raw materials effectively and reduced materials price by
negotiation with suppliers, so as to control our cost of sales.
Net income
For the year ended of December 31, 2005, our net income was $3,492,000, as
compared to net income of $8,699,000 of the same period in 2004. The recession
in our profit is due to the tough environment since the 4th quarter 2004.
Comparing with the 2nd quarter of 2005, our net income had increased sharply
from net loss US$524,000 to net income US$4,016,000 in the second half of the
year.
Liquidity and Capital Resources
We generally finance our operations from cash flow generated internally.
As of December 31, 2005, we had current assets of $30,230,000. Current
assets are mainly comprised of inventories of $4,460,000, accounts receivable of
$12,034,000, trade deposits and other receivables aggregated of $10,580,000, and
restricted cash, cash and cash equivalents of $2,974,000. Current liabilities
comprised accounts payable of $7,939,000, trade deposit received of $5,432,000,
accrued expenses and other accrued liabilities of $2,259,000, due to directors
of $320,000, and provision for warranty of $122,000.
We offer two trading terms to our customers, i.e. cash-on-delivery and on
credit term within 90 days. As of December 31, 2005, our net accounts receivable
were $12,034,000, compared to $8,250,000 as of December 31, 2004. 45.87%
increase in the accounts receivable is due to significant growth in revenue
generated during the second half of the year. We strictly request our customers
to settle the outstanding receivables before new order is made. There is no
particular change in our credit policy that three months credit period is
offered to our long-term customers, XWSD, and two months credit period is
offered to our new distributor, MASCOT. We have reviewed the credit risk
regularly. Although some of the receivables are over due, the settlement from
our major customers is continuing that about $3.3million was received in the
first quarter of 2006.
As of December 31, 2005, our inventories were $4,460,000, as compared to
$5,781,000 as of December.31, 2004, which represented moderate decrease of
22.85%. The main reason for this decrease is due to overall drop in revenue.
However, we have certain aged materials for production of older type of
26
products. We stimulated the sales of these products by reducing the selling
price. Furthermore, we modified our old products, such as OS70, M62 by adding
new functions (such as MP3, MPEG4 etc.). We have entered into agreements with
overseas business partners for the sales of the old products such as OS70, etc.
According to the agreements, we shall also develop our new solution platform by
utilization of our old materials' inventories and launch the new products into
the oversea market. The geographical difference could enhance difference demand
to these products. We also have critically evaluated our inventories, provision
for obsolete inventories amounting to $223,000 were made in this year.
As of December 31, 2005, our cash and bank balances were mainly denominated
in Renminbi ("RMB") and Hong Kong Dollar. Our revenue and expenses, assets and
liabilities are mainly denominated in RMB. Renminbi had ceased to pledge at a
relative constant rate to the United States dollar. Although Renminbi had been
slightly inflated in July 2005, as a result of the change in pledging RMB
against a basket of currencies instead of singly of the US dollar, our
activities, assets and liabilities are mainly denominated in Renminbi, any
further possible inflation of Renminbi would be benefit to us. We consider that
the exposure to exchange fluctuations is relatively low and therefore we have
not engaged in any hedging activity.
Cash Flows
As of December 31 2005, we have the restricted cash, cash and cash
equivalents of $2,974,000, compared to $2,557,000 as of December 31, 2004, which
representing an increase of 16.31%. It is mainly due to the repayment from a
related company in the first quarter of 2005 and cash generated from our
operating profit. $3,715,000 increase in accounts receivable and $6,266,000
decrease in accounts payable were due to significant growth in revenue since the
second half of the year
Our gearing ratio, calculated as total debts over total assets, was 51.83%
as of December 31, 2005, 61.76% as of December 31, 2004.
Contingent Liabilities
As of December 31, 2005, we had not entered into any guarantee contracts
nor any non-disclosed contracts which will affect stockholders' equity or share
structure.
Off Balance Sheet Arrangements
As of December 31, 2005, we had no off balance sheet arrangements.
27
Contractual Commitments
The Company is obligated to make future under various contracts, including
purchase and operating leases. The Company does not have any long-term debt or
capital lease obligations. The following table summarized the Company's
contractual obligations at December 31, 2005, reported by maturity of
obligation.
Payments due by period
---------------------------------------------------
Contractual Obligations Total Less than 1-3 years 3-5 years More than
1 year 5 years
- -------------------------------- --------- --------- --------- --------- ---------
$ '000 $ '000 $ '000 $ '000 $ '000
Long-term Debt Obligations - - - - -
Capital Lease Obligations - - - - -
Operating Lease Obligations 54 27 27 - -
Purchase Obligations 852 852 - - -
Other long-term liabilities
reflected on the registrant's
balance sheet under GAAP - - - - -
--------- --------- --------- --------- ---------
Total 906 879 27 - -
========= ========= ========= ========= =========
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the sensitivity of income to changes in interest rates,
foreign exchanges, commodity prices, equity prices and other market-driven rates
or prices. We are not presently engaged in and, if a suitable business target is
not identified by us prior to the prescribed liquidation date of the trust fund,
we may not engage in, any substantive commercial business. Accordingly, we are
not and, until such time as we consummate a business combination, we will not
be, exposed to risks associated with foreign exchange rates, commodity prices,
equity prices or other market-driven rates or prices. The net proceeds of our
initial public offering held in the trust fund have been invested only in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the
Investment Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be significant.
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.
28
Item 8. Financial Statements and Supplementary Data.
Reference is made to pages F-1 through F-17 comprising a portion of this
annual report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules, regulations and related forms, and that such information is
accumulated and communicated to our principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Company, under the supervision of our chief executive officer and chief
financial officer, carried out an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures as of December 31, 2005.
Based upon that evaluation, management, including our chief executive officer
and chief financial officer, concluded that the Company's disclosure controls
and procedures were effective in alerting it in a timely manner to information
relating to the Company required to be disclosed in this report.
During our fiscal year 2005, there were no significant changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our current directors and executive officers are as follows:
Name Age Positions Held and Tenure
Wang Xin 37 Chief Executive Officer and a Director
Zhao Hongwei 40 Chief Financial Officer
Liu Yu 40 Director
Wang Zhibin 36 Director
29
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.
Zhao Hongwei has served as our Chief Financial Officer since October 26,
2005. Mr. Zhao has over 15 years' experience in accounting and financial
management, mainly with listed companies in Hong Kong and Foreign Invested
Enterprise in the PRC, most recently serving as the regional financial
controller of XinAo Gas Holdings Limited, a listed company in Hong Kong.
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.
Audit Committee
We do not have an audit committee of our Board of Directors nor do we have
an audit committee financial expert, because we do not believe the nature of our
business is such that an audit committee or audit committee financial expert
would be useful or necessary. Furthermore, our equity securities are not listed
on an exchange or automated quotation system that requires its listed companies
to appoint an audit committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires our directors, officers and persons owning more than 10% of our common
stock to file reports of ownership and changes of ownership with the Securities
and Exchange Commission. Based on its review of the copies of such reports
furnished to us, or representations from certain reporting persons that no other
reports were required, we believe that all applicable filing requirements were
complied with during the fiscal year dated December 31, 2005.
30
Item 11. Executive Compensation.
There was no officer whose salary and bonus for the period exceeded
$100,000.
Summary Compensation Table
- ----------------------------- -------- ----------- --------- ----------------
Name and Principal position Year Salary Bonus Other Annual
Compensaton
- ----------------------------- -------- ----------- --------- ----------------
Wang Xin, CEO 2005 $60,000 NA NA
- ----------------------------- -------- ----------- --------- ----------------
Zhao Hongwei, CFO 2005 $30,000 NA NA
- ----------------------------- -------- ----------- --------- ----------------
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.
We have no stock option, retirement, pension, or profit-sharing programs
for the benefit of directors, officers or other employees, but our Board of
Directors may recommend adoption of one or more such programs in the future.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 17, 2006:
o each person known by us to be the beneficial owner of more than 5% of
our outstanding shares of common stock;
o each of our officers and directors; and
o all our officers and directors as a group.
31
Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common stock
beneficially owned by them.
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%
Zhao Hongwei, 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 17, 2006, there were 27,956,000 shares of our common stock
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 U. S. Securities and Exchange
Commission 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 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 our common stock owned by a person (a) the
numerator is the number of shares of our common stock 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 our common stock outstanding on March 17,
2006 and (ii) any shares of our common stock 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.
32
Item 13. Certain Relationships and Related Transactions.
Messrs Wang Xiu, Liu Yu and Wang Zhibin have outstanding loans to the
Company in the amount of $320,000, which loans are unsecured, interest-free and
repayable by the Company on demand.
Item 14. Principal Accounting Fees and Services.
The firm of Moores Rowland Mazars acts as our principal accountant. The
following is a summary of fees paid to our principal accountant for services
rendered.
Audit Fees
During the fiscal year ended December 31, 2005, the fees for our principal
accountant were $87,500 in connection with our initial public offering
(financial statements included in the Form S-1 and Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 1, 2005) and the
review of our Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.
Audit Related Fees
During 2005, our principal accountant did not render assurance and related
services reasonably related to the performance of the audit or review of
financial statements.
Tax Fees
During 2005, our principal accountant did not render services to us for tax
compliance, tax advice and tax planning.
All Other Fees
During 2005, there were no fees billed for products and services provided
by the principal accountant other than those set forth above.
Audit Committee Approval
We currently do not have an audit committee. Our Board of Directors
approved the engagement of Moores Rowland Mazars as our independent registered
public accounting firm in a meeting held May 9, 2005.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements.
Our financial statements as set forth in the Index to Financial Statements
attached hereto commencing on page F-1 are hereby incorporated by reference.
33
(b) Exhibits.
The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by reference
herein:
Exhibit
Number Exhibit Description
- ------------- ------------------------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 Securities Exchange Agreement by and among Universal Flirts
Corp, United First International Limited and the
Shareholders of United First International Limited (2)
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. (2)
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. (2)
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. (2)
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 (2)
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 (2)
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 (2)
10.8 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logidtics Limited dated April 14, 2004 (2)
10.9 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
10.10 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
34
10.11 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
10.12 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Truly Semiconductor
Co., Ltd. dated May 21, 2004 (2)
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 (2)
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 (2)
21.1 Subsidiaries of the Company (3)
24.1 Power of Attorney (set forth on signature page)
31.1 Certification of Principal Executive Officer under Section
302 of the Sarbanes-Oxley Act of 2002 (3)
31.2 Certification of Principal Financial Officer under Section
302 of the Sarbanes-Oxley Act of 2002 (3)
32.2 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 (3)
- ------------
(1) Incorporation by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-125687).
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 4, 2005.
(3) Filed herewith
35
Orsus Xelent Technologies, Inc.
Index to Consolidated Financial Statements
Year ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Page
----
Report of Independent Certified Registered Public Accounting Firm F-1
Consolidated Statements of Operations F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F6 - F17
35
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Orsus Xelent Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Orsus Xelent
Technologies, Inc. and its subsidiary (the "Company") as of December 31, 2005
and 2004, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
for the years 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: March 29, 2006
F-1
Orsus Xelent Technologies, Inc.
Consolidated Statements of Operations
Years ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
2005 2004
Note USD'000 USD'000
Operating revenues - Net sales 28,705 70,822
----------- -----------
Operating expenses:
Cost of sales 22,370 56,231
Sales and marketing 1,554 3,314
General and administrative 1,064 1,435
Research and development 413 586
Depreciation 310 598
----------- -----------
Total operating expenses 25,711 62,164
----------- -----------
Operating income 2,994 8,658
Interest expense (25) (143)
Other income, net 544 64
----------- -----------
Income before income taxes and minority
interest 8 3,513 8,579
Income taxes (21) --
----------- -----------
Income before minority interest 3,492 8,579
Minority interest -- 120
----------- -----------
Net income 3,492 8,699
Other comprehensive income
Foreign currency translation adjustment 349 --
----------- -----------
Comprehensive Income 3,841 8,699
=========== ===========
Earnings per share
Basic and diluted 4 0.12 0.29
=========== ===========
Weighted average number of common shares
outstanding 29,756,000 29,756,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
Orsus Xelent Technologies, Inc.
Consolidated Balance Sheets
As of December 31, 2005 and 2004
- ---------------------------------------------------------------------------------------
2005 2004
Note US$'000 US$'000
ASSETS
Current assets
Cash and cash equivalents 2,974 224
Restricted cash -- 2,333
Accounts receivable - Trade 12,034 8,250
Due from related company 11 -- 3,319
Inventories 7 4,460 5,781
Trade deposits paid 10,580 8,126
Other current assets 182 210
--------- ---------
Total current assets 30,230 28,243
Property, plant and equipment, net 6 781 778
--------- ---------
Total assets 31,011 29,021
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - Trade 7,939 13,840
Accrued expenses and other accrued liabilities 2,259 1,103
Trade deposits received 5,432 2,487
Due to directors 7 320 311
Provision for warranty 122 182
--------- ---------
Total current liabilities 16,072 17,923
--------- ---------
12
Commitments and contingencies
Stockholders' equity Preferred stock, US$0.001 par value:
Authorized: 100,000,000 shares, no shares issued -- --
Common stock and paid-in capital, US$0.001 par value:
Authorized: 100,000,000 shares
Issued and outstanding: 29,756,000 shares as of
December 31, 2005 and as of December 31, 2004 30 30
Additional paid-in capital 2,484 2,484
Dedicated reserves 9 1,042 1,042
Other comprehensive income 349 --
Retained earnings 11,034 7,542
--------- ---------
Total stockholders' equity 14,939 11,098
--------- ---------
Total liabilities and stockholders' equity 31,011 29,021
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Orsus Xelent Technologies, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------------------------------------------
Common stock issued
-----------------------
Other Retained
Additional compre- earnings/
No. of paid-in Dedicated hensive (accumulated
shares Amount capital reserves income losses) Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
---------- ---------- ---------- ---------- ---------- ------------ ----------
Balance as of
January 1, 2004 15,000,000 15 2,549 -- -- (115) 2,449
Reverse merger and
recapitalization 14,756,000 15 (65) -- -- -- (50)
Net income -- -- -- -- -- 8,699 8,699
Transfer to dedicated
reserves -- -- -- 1,042 -- (1,042) --
---------- ---------- ---------- ---------- ---------- ------------ ----------
Balances as of
December 31, 2004 29,756,000 30 2,484 1,042 -- 7,542 11,098
Net income -- -- -- -- -- 3,492 3,492
Foreign currency
translation
adjustment -- -- -- -- 349 -- 349
Balances as of
December 31, 2005 29,756,000 30 2,484 1,042 349 11,034 14,939
========== ========== ========== ========== ========== ============ ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Orsus Xelent Technologies, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 2005 and 2004
- ----------------------------------------------------------------------------------------------
2005 2004
US$'000 US$'000
Cash flows from operating activities
Net income 3,492 8,699
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation 310 598
Loss on disposal of property, plant and equipment -- 7
Provision for bad debts 149 --
Provision for obsolete inventory 98 269
Loss on liquidation of a subsidiary -- 120
Minority interest -- (120)
Exchange difference 53 --
Changes in assets and liabilities:
Accounts receivable - trade (3,715) (8,250)
Inventories, net 1,376 (5,687)
Trade deposits paid (2,239) (8,125)
Other current assets 34 (149)
Trade deposits received 2,879 2,487
Accounts payable - trade (6,266) 13,651
Provision for warranty (65) 182
Accrued expenses and other accrued liabilities 1,317 959
Provision for taxation 21 --
--------- ---------
Net cash (used in) provided by operating activities (2,556) 4,641
--------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (503) (1,397)
Proceeds from sales of property, plant and equipment -- 43
Repayment from a related company 3,407 4,524
Loan to a related company -- (7,107)
Repayment from stockholders -- 1,352
Decrease (increase) in restricted cash 2,395 (2,333)
--------- ---------
Net cash provided by (used in) investing activities 5,299 (4,918)
--------- ---------
Cash flows from financing activities
Advance from stockholders 1 311
--------- ---------
Net cash provided by financing 1 311
--------- ---------
Net increase in cash and cash equivalents 2,744 34
Cash and cash equivalents, beginning of the year 224 190
Exchange gain on cash and cash equivalents 6 --
--------- ---------
Cash and cash equivalents, end of the year 2,974 224
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND REORGANIZATION
Orsus Xelent Technologies, Inc. ("ORXT"), formerly known as Universal
Flirts Corp., was organized under the laws of the State of Delaware on May
25, 2004. Through its subsidiary, Universal Flirts, Inc., ORXT engaged in
developing and operating an online dating service.
As described in Note 2 below, prior to the reorganization with United First
International Limited ("UFI"), a company incorporated in the Hong Kong
Special Administrative Region ("HK") of the People's Republic of China (the
"PRC"), on March 31, 2005, ORXT was a development stage company, which,
other than providing an online dating service, had no operations or
revenues. After recapitalization, ORXT exited the development stage after
March 31, 2005.
Upon the completion of the reorganization, ORXT assumed the business
operations of UFI as primarily undertaken by its subsidiary, Beijing Orsus
Xelent Technologies & Trading Co., Limited ("BOXT") (English translation
for identification purpose only), an enterprise established in Beijing, the
PRC that is engaged in the business of designing for retail and wholesale
distribution cellular phones. BOXT had 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 was incorporated in the PRC. On August 19, 2004, the owners of
Sapphine signed an agreement to liquidate Sapphine.
On July 14, 2005, Orsus Xelent Holdings (BVI) Limited ("OXHBVI") was
incorporated in the British Virgin Islands ("BVI") with issued capital of
US$2. OXHBVI is 100% owned by ORXT and the principal activity of OXHBVI is
investment holding. On July 22, 2005, Orsus Xelent Trading (HK) Company
Limited ("OXTHK") was incorporated in HK with issued capital of HK$100
(equivalent to US$13), a company engaged in trading of mobile phone and
accessories, and is 100% owned by OXHBVI.
2. REORGANIZATION
a) Reorganization
On March 18, 2005, the board of directors approved a 4-for-1 forward
split of its issued and outstanding common stock with a record date of
March 28, 2005.
Pursuant to a Stock Transfer Agreement dated March 29, 2005, ORXT
transferred all of the common stock of Universal Flirts, Inc. to Mr.
Darrell Lerner in exchange for the cancellation of 28,200,000 shares
of ORXT's common stock. Subsequently, ORXT had 14,756,000 shares of
its common stock outstanding.
b) Recapitalization
Effective on March 31, 2005, ORXT completed a stock exchange
transaction with the stockholders of UFI. Pursuant to the Securities
Exchange Agreement, ORXT issued 15,000,000 shares of its common stock
to the stockholders of UFI, in exchange for 20,000,000 outstanding
shares of UFI and cash payment of US$50,000 from UFI. After giving
effect to the exchange, ORXT had 29,756,000 shares of its common stock
outstanding. As a result of the exchange, UFI became a wholly-owned
subsidiary of ORXT.
F-6
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. REORGANIZATION (CONTINUED)
b) Recapitalization (Continued)
For accounting purposes, the transaction has been treated as a
recapitalization of UFI with ORXT being the legal survivor and UFI
being the accounting survivor and the operating entity. That is, the
historical financial statements prior to March 31, 2005 are those of
UFI, even though they are labeled as those of ORXT. Retained earnings
of the accounting survivor, UFI, is carried forward after the
recapitalization. Operations prior to the recapitalization are those
of the accounting survivor, UFI. Earnings per share for periods prior
to the recapitalization are restated to reflect the equivalent number
of shares. Upon completion of the transaction, the financial
statements become those of the operating company, with adjustments to
reflect the changes in equity structure and receipt of the
assets/liabilities of the public shell, ORXT. Accordingly, the
Company's stockholders' equity as of December 31, 2004 has been
recapitalized and restated.
Following the recapitalization, ORXT held 100% of the issued and
outstanding shares of UFI and UFI became a wholly-owned subsidiary of
ORXT. In this report, ORXT, UFI, BOXT Sapphine, OXHBVI and OXTHK are
collectively referred to as the "Company".
c) Merger under common control
UFI was incorporated in Hong Kong on September 8, 2004 and was 20%,
40% and 40% owned by 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 owned 20%, 40% and 40% interests
respectively in BOXT on November 1, 2004, UFI consummated a merger
with BOXT, and paid USD1,207,000, to all owners of Xelent, in exchange
for all their beneficial interests in BOXT ("the Agreement"). BOXT was
established in the PRC on May 6, 2003 as a PRC company with limited
liability. The principal activities of BOXT were the development of
cellular phones software and technology, including the design and
trading of cellular phones.
On November 3, 2004, the Beijing Municipal Bureau of Commerce (the
"Bureau") approved the transfer of interests and the application for
the change of BOXT status to a wholly-owned foreign investment
enterprise ("WOFIE") with limited liability. Upon granting WOFIE
status, the operating period of BOXT was for an initial term of 10
years until November 9, 2014 and UFI became the sole registered owner
of BOXT.
Consistent with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations", 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.
F-7
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. 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 consolidation.
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 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 US$452,000 and paid warranty claims of
US$330,000 during the year ended December 31, 2005. 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-8
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. 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.
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 are presented net of an allowance for
uncollectible amounts of US$141,000 and US$0 as of December 31, 2005 and of
2004 respectively.
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 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-9
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. 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
o Straight-line method over the lease term Machinery and equipment
o Straight-line method at 20% p.a.
o Office equipment Straight-line method at 20% p.a.
o 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-10
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. 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. Other comprehensive income for foreign currency
translation was recorded for the year ended December 31, 2005 after the
Renminbi ceased to be pegged to the United States Dollar during the year.
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
trading of mobile 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.
F-11
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of shares of common stock outstanding during each period as restated as a
result of the reorganization and recapitalization as described in Note 2.
The 29,756,000 shares in connection with the recapitalization were included
in the computation of earnings per share as if outstanding at the beginning
of each period presented.
The Company had no potential common stock equivalents with a dilutive
effect for any period presented, therefore basic and diluted earnings per
share are the same.
5. CONCENTRATIONS
The Company is engaged principally in the development of mobile software
and technology, including the design and trading of cellular phones for
sale primarily to three dealers in the PRC. The Company buys certain major
materials from six major suppliers. In addition, the Company subcontracts
assembly works of cellular phones mainly to five 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. On the other hand, the diversification
of suppliers will reduce the risk of increasing production cost.
Customers accounted for over 10% of the Company's operating revenues as
follows:
2005 2004
% %
Customer A 20 77
Customer B 56 21
Customer C 20 -
========== ==========
Trade deposits received from the above customers were US$0 and US$2,487,000
at December 31, 2005 and December 31, 2004, respectively. Trade receivables
from the above customers were US$11,508,000 and US$8,250,000 at December
31, 2005 and December 31, 2004, respectively.
Suppliers accounted for over 10% of the Company's purchases are as follows:
2005 2004
% %
Supplier A 10 44
Supplier B 19 -
Supplier C 15 -
Supplier D 14 -
Supplier E 12 -
Supplier F 7 10
========== ==========
Trade deposits from the above suppliers were US$759,000 and US$1,323,000 at
December 31, 2005 and December 31, 2004. Trade payables owed to the above
suppliers were US$529,000 and US$0 at December 31, 2005 and December 31,
2004, respectively.
F-12
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
2005 2004
US$'000 US$'000
Moulds 1,239 1,033
Leasehold improvements 112 47
Plant and machinery 14 14
Office equipment 255 200
Motor vehicles 86 83
-------- --------
1,706 1,377
Accumulated depreciation (925) (599)
-------- --------
781 778
======== ========
7. INVENTORIES
Inventories consisted of the followings:
2005 2004
US$'000 US$'000
Raw materials 4,257 5,781
Trading goods 203 --
-------- --------
4,460 5,781
======== ========
8. INCOME TAXES
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.
ORXT had a net operating loss carry-forward for income tax reporting
purposes of approximately US$227,070 that might be offset against future
taxable income. These net operating loss carry-forwards are severely
limited when the Company experiences a change in control. Therefore,
following the recapitalization as mentioned in Note 2, the amount available
to offset future taxable income might be limited. No tax benefit has been
reported in the financial statements because the Company believes there is
more likely than not the carry-forwards will be limited. Accordingly, the
potential tax benefits of the loss carry-forwards are offset by a valuation
allowance of the same amount.
F-13
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES (CONTINUED)
No provision for withholding or United States federal or state income taxes
or tax benefits on the undistributed earnings and/or losses of the
Company's subsidiaries has been provided as the earnings of these
subsidiaries, in the opinion of the management, will be reinvested
indefinitely. Determination of the amount of unrecognized deferred taxes on
these earnings is not practical, however, unrecognized foreign tax credits
would be available to reduce a portion of the tax liability.
UFI was incorporated in Hong Kong and has no assessable profit for the year
presented. OXTHK was also incorporated in Hong Kong and Hong Kong Profits
Tax has been provided at the rate of 17.5% on OXT's estimated assessable
profits for the year.
Since BOXT 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 for two years followed by a
50% reduction for the next three years, commencing fiscal year 2005.
Reconciliation from the expected statutory tax rate in PRC of 24% (2004:
33%) is as follows:
2005 2004
% %
Statutory rate - PRC 24.0 33.0
Difference in tax rates in the countries that the
Company operates (0.1) --
Tax exemption (23.8) (33.0)
Non-deductible expenses 0.6 --
-------- --------
Effective tax rate 0.7 --
======== ========
9. DISTRIBUTION OF INCOME
The Company's income is substantially contributed by BOXT, a company
incorporated in the PRC. Income of BOXT 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 in November 2004, dedicated
reserves of BOXT 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 BOXT.
F-14
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. DISTRIBUTION OF INCOME (CONTINUED)
Since BOXT has became as a WOFIE, in accordance with its Articles of
Association and the relevant PRC regulations, it is required to transfer 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.
10. 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
obligation payable to all employees. The pension expenses were US$15,000
and US$9,000 for the years ended December 31, 2005 and 2004 respectively.
11. RELATED PARTY TRANSACTION
a. Name and relationship of related parties
Related party Relationship with the Company during the year ended
------------- December 31, 2005
---------------------------------------------------
Mr. Wang Xin Director and stockholder of the Company
Mr. Liu Yu Director and stockholder of the Company
Mr. Wang Zhibin Director and stockholder of the Company
Beijing Huan Yitong Tech A company owned by Mr. Liu Yu and Mr. Wang Zhibin
& Trading Co., Ltd.*
*English translation for identification purpose only
F-15
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTION (CONTINUED)
b. Summary of related party balances
2005 2004
Note US$'000 US$'000
---- ------- -------
Due from related company
Beijing Huan Yitong Tech & Trading Co., Ltd. * -- 3,319
======= =======
Due to directors
Mr. Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin (i) 320 311
======= =======
c. Summary of related party transactions
2005 2004
USD'000 USD'000
Repayment from related company
Beijing Huan Yitong Tech & Trading Co., Ltd. * 3,319 --
======= =======
Note:
(i) The amounts are unsecured, interest-free and repayable on demand.
* Ceased to be related party since April 26, 2005.
12. COMMITMENTS AND CONTINGENCIES
(a) Operating lease commitments
The Company leases certain staff quarters and office premises under
non-cancelable operating leases. Rental expenses under operating
leases were USD83,000 and USD126,000 for the year ended December 31,
2005 and 2004 respectively.
The following table summarizes the approximate future minimum rental
payments under non-cancelable operating leases in effect as of
December 31, 2005 and 2004:
2005 2004
USD'000 USD'000
2005 -- 28
2006 27 --
2007 27 --
--------- ---------
44 28
========= =========
F-16
Orsus Xelent Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(b) Contingencies
In accordance with PRC's tax regulations, the Company's sales are
subject to a 17% of value added tax ("VAT") upon the issue of VAT
invoices to customers. As of December 31, 2005, there were sales
amounted to approximately USD 21,300,000 for which VAT invoices have
not yet been issued ("Uninvoiced sales"). Despite the fact that the
Company has made full provision of the VAT regarding these Uninvoiced
sales, the Company may be subject to penalties for the amounts. The
exact amount of penalty cannot be estimated with reasonable degree of
certainty.
F-17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORSUS XELENT TECHNOLOGIES, INC.
By: /s/ Wang Xin
-----------------------
Wang Xin
Chief Executive Officer
DATED: March 31, 2006
--------------------
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby appoint
Wang Xin as attorney-in-fact with full power of substitution, severally, to
execute in the name and on behalf of the registrant and each such person,
individually and in each capacity stated below, one or more amendments to the
annual report which amendments may make such changes in the report as the
attorney-in-fact acting deems appropriate and to file any such amendment to the
report with the U. S. Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Wang Xin Chief Executive Officer March 31, 2006
- ------------------ (Principal Executive Officer)
Wang Xin and Director
/s/ Zhal Hongwei Chief Financial Officer March 31, 2006
- ------------------ (Principal Accounting Officer)
Zhal Hongwei
/s/ Liu Yu Director March 31, 2006
- -----------------
Liu Yu
/s/ Wang Zhibin Director March 31, 2006
- ------------------
Wang Zhibin
Exhibit
Number Exhibit Description
- ------------- ------------------------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
10.1 Securities Exchange Agreement by and among Universal Flirts
Corp, United First International Limited and the
Shareholders of United First International Limited (2)
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. (2)
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. (2)
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. (2)
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 (2)
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 (2)
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 (2)
10.8 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logidtics Limited dated April 14, 2004 (2)
10.9 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
10.10 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
10.11 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Shanghai Suncom
Logistics Limited dated May 27, 2004 (2)
10.12 Purchase Contract by and among Beijing Orsus Xelent
Technology & Trading Company Limited and Truly Semiconductor
Co., Ltd. dated May 21, 2004 (2)
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 (2)
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 (2)
21.1 Subsidiaries of the Company (3)
24.1 Power of Attorney (set forth on signature page)
31.1 Certification of Principal Executive Officer under Section
302 of the Sarbanes-Oxley Act of 2002 (3)
31.2 Certification of Principal Financial Officer under Section
302 of the Sarbanes-Oxley Act of 2002 (3)
32.2 Certification under Section 906 of the Sarbanes-Oxley Act of
2002 (3)
- ------------
(1) Incorporation by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-125687).
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 4, 2005.
(3) Filed herewith