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, 2007
o
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:
001-33456
ORSUS
XELENT TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
of incorporation)
|
|
20-1198142
(I.R.S.
Employer Identification No.)
|
12
th
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:
Common
Stock, par value $0.001 per share
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
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
o
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
o
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.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
Accelerated
filer
o
|
|
|
Non-accelerated
filer
o
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
As
of June 29, 2007, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $50,170,400 based on the closing
price as reported on the American Stock Exchange
.
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 31, 2008
|
Common
Stock, $.001 par value per share
|
|
29,756,000
shares
|
PART
I
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, manufacturing and distributing economically priced
cellular phones for retail and wholesale distribution. 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.
In
January 2007, the trademark “PROXLINK” was registered for the Company's
specialized application mobile series. From April 2004 through the end of the
third quarter of 2007, we sold over 1.6 million mobile phones.
Our
cellular products are customarily equipped with leading features including
1.8-inch to 2.8-inch CSTN (Color Super Twisted Nematic) or TFT (Thin Film
Transistor) dual-color displays, up to 160 minutes video recording, up to 3
million pixels photography, MP3 (Moving Picture Experts Group Audio Layer III),
MPEG4 (Moving Picture Experts Group Audio Layer) and Universal disk (U disk)
support, dual stereo speakers, e-mail messaging multimedia messaging, 40 to
64
polyphonic ring tones, slim bar-phone and flip-phone technology, ultra thin
innovative lightweight design with handwriting and PDA functions, all at low
to
moderate price points.
We
have
established an industrial design center for the sole purpose of developing
proprietary mobile phones reflecting features and designs that are favored
by
our PRC customers. Most of our mobile phones are designed by us for our
exclusive sale and distribution with the remainder developed in conjunction
with
outside design firms. In addition, the long-term partners and manufacturers
we
employ to produce our cell-phones and accessories are the same experienced
OEM
plants utilized by global brands such as Motorola, Nokia or Ericsson. Our
current operations include the purchase of raw materials and spare parts,
outsourcing of manufacturing and customization, oversight of production and
quality control at our OEM factories, and coordination of the distribution
of
the products to retailers and customers. In an effort to reduce our reliance
on
third-party manufacturers, we are currently in negotiations to acquire a factory
to enable the self-production of our phones and accessories.
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 mature,
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:
|
·
|
Project
Management Department, which is responsible for coordinating the
management of cell
ular
phone projects,
exchanging
concepts and ideas with our research and development team, providing
weekly project reports and supervising the project
schedules;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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;
|
|
·
|
Human
Resources
Department
,
which
is responsible for our employment issues, including hiring and termination
of staff;
|
|
·
|
Financing
and Investment
Department
,
which
is responsible for overall accounting matters,
financing
and investment research and
analysis;
|
|
·
|
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
;
|
|
·
|
R&D
Department
that
is responsible for researching new models of mobile phones and developing
new technologies;
|
|
·
|
Marketing
Development Department, which is responsible for helping the Company
to
find new business partners, which will act as countryside distributors,
provincial dealers and some overseas wholesalers. The department
also
helps long-term partners and new incomers to set up marketing concepts
and
business models of Orsus Cellular;
and
|
|
·
|
Logistics
Department, responsible for collecting phones from each maintenance
station nationwide and sending the repaired phones to
customers.
|
Market
Overview and Strategic Partners
The
penetration rate for cellular phones in the PRC was approximately 35% in 2006.
According to the statistics issued by PRC Ministry of Information Industry
on
July 23, 2007, mobile subscribers in the PRC have grown by 40 million in the
past half year to 502 million, which accounted for approximately 38% of the
population of the PRC. Nokia, currently the industry’s most competitive mobile
manufacturer and supplier, estimated there would be 630 million subscribers
in
the PRC by 2010.
According
to In-Stat, 165 million multimedia phones will be sold in the PRC by 2011,
representing a penetration rate of 81%. High-pixel camera phones will be the
next competitive focus in the PRC’s multimedia phone market. Mobile phone makers
are aiming to change cell phones into personal communication and entertainment
centers. PRC mobile users show a strong preference for combined MP3
players/mobile phones. Around 70% of PRC music phone and camera phone owners
express strong interest in more high-end equipment. ABI Research forecasts
total
mobile video users at more than 32 million in 2008 in the PRC: about 27% of
these consumers will use broadcasting technology, and 73% will use unicast
streaming technology, while a number of viewers are likely to use both. Also,
ABI Research forecasts approximately 715,000 mobile video users in Hong Kong
in
2008, of which 99% will be streaming users. In Taiwan, ABI Research forecasts
that there will be over 1.5 million mobile video users in 2008, with 97%
receiving content via streaming.
On
February 26, 2006, the TD-SCDMA technology standard was officially announced
as
the 3G (Third Generation) technology standard in the PRC. However, sales of
products incorporating the 3G have not developed as rapidly as generally
anticipated (it was thought that 3G network construction and issuance of 3G
licenses would be approved by the end of 2006). Although the granting of 3G
licenses has been delayed until 2008
,
once
introduction to the market of products utilizing the 3G technology is commenced,
Xelent should be in a good position to take advantage of this business
opportunity. We have commenced the development of our own 3G cellular phone
products, including 3G PCBA (3G technologies platform) and cellular phones
with
3G PCBA, based on our existing 2G and 2.5G cellular technologies and cooperation
with our 3G solution and chips providers. Additionally, we are planning to
join
the TD-SCDMA Industry League, and we are working toward obtaining 3G cellular
phones manufacturing licenses from the PRC government.
Our
relationships with some strategic partners,
CEC
Cellular Limited (“
CECM
”),
Beijing
Xingwang Shidai Tech & Trading Co., Ltd. (“
XWSD
”)
and
CECT-Chinacom Communications Co., Ltd. (“
CECT-Chinacom
”)
have
helped us increase our market penetration. CECM serves as a manufacturer for
our
cellular phone products and also has its own sales network, which is currently
utilized to resell our 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.
More
recently, in 2007, we signed a Letter of Procurement with Unicom Huasheng
Telecommunications Technology Co. Ltd., a wholly-owned subsidiary of China
Unicom, proposing to purchase 50,000 units of our Proxlink X180. In July 2007,
an agreement was signed with Shanghai Yuede Computer Networking Engineering
Co.,
Ltd. (“
SYCN
”),
a
professional designer and developer of computer software and application
systems, which works for The Shanghai Baoshan Municipal Administration
Inspection Bureau to develop and launch a municipal networking management
inspection system, where the Proxlink X180 is used by law executors as their
wireless operations terminal. The cooperation with SYCN should further promote
the adoption of the X180 in the municipal management system of other cities
throughout the PRC, while also providing Orsus with an important, new
application software development partner. Meanwhile, an agreement was signed
with Beijing Enxiang Networking Engineering Company (“
BENE
”).
BENE
is authorized by two of the dominant PRC telecommunications operators, China
Mobile and China Unicom, as their service provider partner to run the business
through their entire network throughout the PRC. The cooperation with this
entire network service provider company should bring us more support from these
telecommunications operators and also build our recognition among their
specialized users. Meanwhile, we have continued to extend our business range
and
share the charges by supplying telecomm services to specialized
consumers.
Since
we
launched our first mobile phones in April 2004, our Orsus mobiles have
maintained robust increases in sales for each period. The design of our Orsus
mobiles continues to reflect our consideration and understanding of the habits
and tastes of our customers in the PRC, and we incorporate such desirable
features as overlapped dual screens and powerful color messaging and
photography. The Orsus mobiles were introduced into the market as lower and
moderately priced products and continued to gain popularity among consumers
in
the market following their launch in 2004. On November 23, 2004, the premier
consulting firm, CCIDNET Information Technology Co., Ltd. granted the “2004 Most
Potential Wireless Terminal Prize” to OS70, a mobile model of Orsus, during its
Annual Exhibition in the PRC. In addition, in the high performance category,
our
M62 model was awarded the “2004 Most Fashionable Wireless Terminal Prize” during
the same Annual Exhibition. These awards further evidenced the acceptance of
Orsus mobiles by the industry and the market.
Building
upon the Company’s firm foundation of success in 2004, we increased our focus on
our R&D efforts and the expansion of our sales channels. In 2005, the
Company incorporated multimedia features in response to changes in consumer
preferences for mobile phone products, and the R&D successes and the strong
sales of our multimedia mobile phones have reflected our excellent market
competitiveness. We have also made developments in the super thin mobile phone
market, which have resulted in sales that surpassed our successful multimedia
mobile phones. We were also able to position ourselves well for the introduction
of smart mobile phones in 2007, including the letter of intent for mobile
subscriptions we executed with China Unicom, a large domestic telecommunication
operator. In 2008, we will continue our development of product sales channels
and cooperation with domestic mobile operators, expand our focus on the
technology for business functions (including embedded GPS (Global Positioning
System), PUSH MAIL and information safety), and set up information platforms
for
mobile products reflecting the operating demands of our industrial users
(including the enforcement of industrial and commercial bureaus and office
platform for lawyers, which will be distributed under the name
Proxlink).
Description
of Products & Services
Since
2006,
Xelent
has developed and launched nearly 20 cellular phone models with attractive
features and functions. We outsource the manufacturing 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.
Within
several months of our start in 2003, we established ourselves in the PRC mobile
product market with our launch of the first mode of wrist mobile phone in the
PRC. We followed this with single color dual screen mobiles, models F16 and
F18,
and a dual screen multi-color screen mobile, model FG25, in response to rapid
growth of color screen mobile products in the PRC. In response to customer
preferences, we equipped models F16 and F18 with cameras, laying the foundation
for our R&D into camera and video functions and the introduction of many
models of 300,000 pixel camera mobile products, including models FG830, FG850,
OS83, OS85, OS70, OS86 and M851. We also met consumer demand with our launch
of
the 1M camera mobiles, models OSM62 and OSM72, which reflected a simple design
style with multiple functions. We followed these early successes with many
models of multimedia mobiles, such as K600, X188 and D8120. In 2007 we launched
our X180 mobile information terminals to meet the market’s demand for
information office products, providing swift and convenient mobile terminal
products for industrial application and specific customers, such as China
Unicom. In addition to those products listed above, we have also developed
many
models of GSM/GPRS mobiles, such as models N3200 and H8801. To meet changing
market demands, we will continue to introduce products of economic prices and
high performance that will reflect our advantages in appearance design and
functional development and will continue to strengthen our competitiveness
in
the domestic PRC mobile sector.
Research
& Development
Our
R&D
Department
is responsible for new products research and the development of new
technologies. It has made significant contributions to the Company's ability
to
quickly adjust our overall strategy, sustain advanced product development,
and
most importantly, enhance the technical strength and core competitive edge
of
the Company in the market. Most of our patented models and samples are developed
exclusively by our R&D Department, i
ncluding
the first telecommunications terminal fully supporting the CDMA2000-1X protocol,
the first watch-style wireless mobile, the first mobile made in China using
three-color OLED organic EL secondary display with TFT main display, the first
mobile made in China supporting four frequencies: 850/900/1800/1900MHz, the
first mobile made in China with 64 polyphonic melody, the first mobile
supporting a USB interface and 16M flash U-disk (NAND-FLASH), the first mobile
made in China with an internal 300K camera, Ultra-red, EMS, MMS, JAVA and USB.
At the
Annual
Conference on Network Application Technology, Beijing, held by CCID in February
2007, our Model M62 received the
Most
Fashionable Cell Phone of 2004 award, and our Model OS70 won the Best Potential
of 2004 award.
As
3G
technology continues to develop in the PRC, 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 our strategic
industry partners.
We
will
put our efforts toward the development of products utilizing the TD-SCDMA and
WCDMA standard. We have established a team for technology development, which
includes members from our product planning division, project management division
and industrial design center. Our p
roduct
planning division is responsible for constructing
the
medium term strategic plans
and
research and development scheduling. Our p
roject
management division
administers
our research and development efforts, overseas manufacturing and quality control
of our products
and
monitors costs, including human resource costs. Our i
ndustrial
design center
is
responsible for evaluating design plans provided by our R&D Department or by
third party industrial design
companies,
confirming
model structural design and tracing the issues on
module
production and quality.
In
addition, we have continued to negotiate with several parties, including
foreign
3G
technology providers, such as Spreadtrum Communication (Shanghai) Inc.
(“
SCI
”),
and
several 3G chipset and solution providers in order to prepare for the launch
of
3G services in coming year. Our strategic partners, such as SCI, develop 2.5G
and 3G integrated circuit and provide 2.5G GPRS and 3G TD-SCDMA chipset and
software development platforms and solutions. We believe our cooperation with
these 3G technology providers and our cooperation on future research and
development projects will help facilitate our entry into the 3G wireless
market.
Furthermore,
we have cooperation agreements with professional design houses, such as Shanghai
Huntel
Technology Limited and Tranzda Wireless,
who are
mainly involved with us in the design of MMI (U2), software and hardware
testing, CTA (China Type Approval) certification, acquisition
and
phone
main board
updating
and software adaptability testing. We are also working with our cooperative
partners, such as
Dalian
Daxian Telecom Co., Ltd., to develop
ID/MD
and the layout of cellular phone main boards. Based on our research and
development, we are able to design and develop new products. Whenever possible,
we use and lease the instruments and equipment of other professional design
houses, 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.
In
general, cell phone industry manufacturers of the PRC conduct their research
and
development based on the existing chip functions, which reflect in the form
of
application or interface level development. Both application level and interface
level development is categorized as adaptability systems, while only protocol
stack and source procedure development is recognized as software development.
Therefore, there is no exclusive right or limited use of any such systems for
us.
Competition
The
Company faces substantial competition from other wireless phone manufacturers,
such as Nokia and Motorola, which controlled more than 50% of the cellular
market in the PRC in the first three quarters of 2006.
In
addition we face competition from Ningbo Bird Corporation Ltd.
and
Lenovo
Group Limited, both of which are domestic PRC producers and controlled between
4% and 10%, respectively, of the cellular market in the PRC in
2005.
In
addition to the pursuit of operational turnover of inventory, the Company will
continue its two year strategy to increasingly stabilize its growth, which
we
believe will result in a sound increase in revenues and profits. We will also
seek to launch our 3G products as soon as possible in order to take advantage
of
the open market and offer the products meeting consumer demands and trends
before our competitors. Due to the short history of 3G products we can develop
our brands and products in this immature market and compete strongly with all
cell phone suppliers.
Government
Regulation
There
are
limited government regulations restricting or having a material effect on
Xelent, including but not limited to, 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.
The
PRC
cellphone industry is one of the most advanced in the world. The PRC government
does not promulgate obstruction or entry-restricted industry policies.
Meanwhile, the PRC owns a huge customer base and transaction system. Currently,
the industry is a relatively free environment, and we expect that future policy
will not adversely impact industrial development.
Intellectual
Property and Proprietary Rights
Xelent
has been approved to use “
”
as a
registered trademark and the China Trademark Agency has distributed a
“Notification of Acceptance” with serial number ZC3878232SL. Xelent has also
applied to use “Proxlink” as a trademark and it is expected to become a
registered trademark after two years’ probation verified by the China Trademark
Agency.
We
utilize other intellectual property with partners pursuant to contracts or
agreements in accordance with the governing laws and regulations of the
PRC.
Employees
We
have
approximately 60 employees. Of the 60 employees, 7 persons serve in management
related capacities. The remaining employees are in 10 departments: the
Project
Management Department,
which
employs 2 persons; the
Technology
Support and Quality Control
Department,
which
employs 4 persons; the
Business
Management
Department,
which
employs 2 persons; the
Planning
and Finance
Department,
which
employs 5 persons; the
Human
Resources
Department,
which
employs 8 persons; the
Financing
and Investment
Department,
which employs 1 person,
the
Customer
Service
Department,
which
employs 19 persons; the R&D Department, which employs 6 persons; the
Marketing Development Department, which employs 3 persons; and the Logistics
Department, employs 3 persons.
We
believe that our relationship with our employees is good, and there are no
collective bargaining arrangements in place.
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 occasionally 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.
For the twelve months ended December 31, 2007, we had one major customers:
Beijing Xingwang Shidai Tech & Trading Co., Ltd., which was responsible for
over 92.35% of our revenues. We have developed and enhanced our relationship
with them and positioned ourselves for long-term cooperation with them by taking
the following steps:
|
·
|
we
assisted them in coordinating their sales channels and
carriers;
|
|
·
|
we
ensured they received high performance products at the specified
prices;
and
|
|
·
|
we
responded to their feedback regarding consumer demands for our products
and reacted by adjusting our product lines and providing them our
most
favorable products.
|
Competition
from providers of similar products and services could materially adversely
affect our revenues and financial condition.
The
industry in which we compete is a rapidly evolving, highly competitive and
fragmented market driven by consumer preferences and quickly evolving
technology. Our competitors are comprised of overseas brands, such as Nokia,
Motorola and Samsung, and domestic brands, such as Lenovo, Bird, Amoi, Changhong
and Gionee, among others. We believe that the main competitive factors in the
cell phone industry are effective marketing and sales, brand recognition,
product quality, product placement and availability, niche marketing and
segmentation. We expect competition to intensify in the future due to the
increased number of competitors and the factors discussed below. Other
companies, both foreign companies and Chinese enterprises, may also enter the
PRC market with better products or services, greater financial and human
resources and/or greater brand recognition. Competitors will also continue
to
improve or expand current products and introduce new products. There can be
no
assurance that we will be able to compete effectively or that we will have
the
significant resources in technical innovation, business development, advertising
and marketing necessary to compete effectively and build our brand awareness.
Remaining competitive will require substantial human and capital resources
of us
and further developing brand awareness of our products and services, features
and functionality, and cost. We may also have to continue to rely on strategic
partnerships for critical branding and relationship leverage, which partnerships
may or may not be sufficient. We cannot assure that we will have sufficient
resources to make these investments or that we will be able to make the advances
necessary to be competitive. Increased competition may result in price
reductions, reduced gross margin and loss of market share. Failure to compete
successfully against current or future competitors could have a material adverse
effect on the Company’s business, operating results and financial
condition.
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 our operations. Given the
competitive nature of our industry, the risk of key technology staff leaving
the
Company is fairly high and could disrupt our operations.
We
rely on a third party production center
.
We
utilize a third party production center for the manufacture of the products
we
sell to our customers. Should we be required to utilize a different source
for
our manufactured products our costs could be negatively affected.
The
acquisition of a manufacturing facility is costly and such acquisition may
not
enhance our financial condition.
The
process of identifying and consummating an acquisition could result in the
use
of substantial amounts of cash, potentially dilutive issuances of equity
securities and exposure to undisclosed or potential liabilities of acquired
companies. In addition, even if we are successful in acquiring a manufacturing
facility, there are no assurances that the operations of these businesses will
enhance our future financial conditions. To the extent the business acquired
does not remain competitive, some or all of the goodwill related to that
acquisition could be charged against our future earnings, if any.
Any
acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value, and harm our operating
results.
We
plan
to review opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our markets and sales
channels, enhance our technical capabilities, or otherwise offer growth
opportunities. If we make any future acquisitions, we could issue stock that
would dilute existing stockholders’ percentage ownership, incur substantial
debt, or assume contingent liabilities.
Our
experience in acquiring other businesses and technologies is limited. Potential
acquisitions also involve numerous risks, including the following:
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problems
integrating the purchased operations, technologies, products, or
services
with our own;
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unanticipated
costs associated with the
acquisition;
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diversion
of management’s attention from our core businesses;
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adverse
effects on existing business relationships with suppliers and customers;
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risks
associated with entering markets in which we have no or limited prior
experience;
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potential
loss of key employees and customers of purchased organizations;
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increased
costs and efforts in connection with compliance with Section 404
of the
Sarbanes-Oxley Act; and
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risk
of impairment charges related to potential write-downs of acquired
assets
in future acquisitions.
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Our
acquisition strategy entails reviewing and potentially reorganizing acquired
business operations, corporate infrastructure and systems, and financial
controls. Unforeseen expenses, difficulties, and delays frequently encountered
in connection with rapid expansion through acquisitions could inhibit our growth
and negatively impact our profitability. We may be unable to identify suitable
acquisition candidates or to complete the acquisitions of candidates that we
identify. In addition, we may encounter difficulties in integrating the
operations of acquired businesses with our own operations or managing acquired
businesses profitably without substantial costs, delays, or other operational
or
financial problems.
Rapid
growth and a rapidly changing operating environment may strain our limited
resources
.
We
will
need to increase our investment in our technology infrastructure, facilities
and
other areas of operations, in particular our product development. If we are
unable to manage our growth and expansion effectively, the quality of our
products and services and in turn our customer support could deteriorate and
our
business may suffer. Our future success will depend on, among other things,
our
ability to:
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continue
to develop through our research and development facilities new
technologies acceptable to the PRC
market,
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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,
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develop
and improve our operational, financial, accounting and other internal
systems and controls, and
|
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maintain
adequate controls and procedures to ensure that our periodic public
disclosure under applicable laws, including U.S. securities laws,
is
complete and accurate.
|
Unless
we are able to take advantage of technological developments on a timely basis,
we may experience a decline in a demand for our services or may be unable to
implement our business strategy.
Our
industry is experiencing rapid change as new technologies are developed that
offer consumers an array of choices for their communications needs. In order
to
grow and remain competitive, we will need to adapt to future changes in
technology, to enhance our existing offerings and introduce new offerings to
address our customers’ changing demands. If we are unable to meet future
advances in competing technologies on a timely basis or at an acceptable cost,
we could lose customers to our competitors. Technological advances, the
introduction of new products, new designs and new manufacturing techniques
could
render our inventory obsolete, or it could shift demand into areas where we
are
not currently engaged. If we fail to adapt to those changing conditions in
a
timely and efficient manner, our revenues and profits would likely decline.
To
remain competitive, we must continue to incur significant costs in product
development, equipment and facilities and to make capital investment. These
costs may increase, resulting in greater fixed costs and operating expenses.
As
a result, we could be required to expend substantial funds for and commit
significant resources to the following: research and development activities
on
existing and potential products; additional engineering and other technical
personnel; advanced design, production and test equipment; manufacturing
services that meet changing customer needs; and technological changes in
manufacturing processes. Our future operating results will depend to a
significant extent on our ability to continue to provide new products that
compare favorably on the basis of time to market, cost and performance with
the
design and manufacturing capabilities and competing third-party suppliers and
technologies. Our failure to increase our net sales sufficiently to offset
these
increased costs would reduce our profitability.
Our
research and development efforts may not lead to successful development of
commercially viable or acceptable products, which could cause a decline in
customer use of our products.
The
markets in which we compete are characterized by:
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rapidly
changing technology;
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evolving
industry standards and transmission protocols;
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frequent
improvements in products and services; and
|
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fierce
competition from well-funded and technologically advanced companies.
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To
succeed, we must continually improve our current products and develop and
introduce new or enhanced products that adequately address the requirements
of
our customers and are competitive in terms of functionality, performance,
quality and price. We are currently developing new 3G products, however, our
research and development efforts may not lead to any new or enhanced products
or
generate sufficient market share to justify commercialization. For example,
3G
is a new and evolving technology, and we may not be able to recoup our research
and development costs and expenses, we may not be able to serve our customers’
3G needs, and customers may refuse to purchase our products.
Changes
in industry standards, technology, customer requirements and government
regulation could limit our ability to sell our products.
The
mobile phone market is characterized by changing end-user preferences and demand
for new and advanced functions and applications on wireless handsets, rapid
product obsolescence and price erosion, intense competition, evolving industry
standards and wide fluctuations in product supply and demand. This requires
us
to continuously develop new products and enhance our existing products to keep
pace with evolving industry standards and rapidly changing customer
requirements. In order to encourage widespread market adoption of 2G, 2.5G,
2.75G and 3G technologies, efforts have been made to develop industry standards,
and we have designed our products to comply with these standards. Changes in
industry standards, or the development of new industry standards, may make
our
products obsolete or negate the cost advantages we believe we have in our
products.
Our
business, operating results, financial condition and cash flows could be
adversely affected by any decline in demand for our existing products, the
introduction of products and technologies by our competitors that serve as
a
replacement or substitute for, or represent an improvement over, our existing
products, technological innovations or new standards that our existing products
do not address, or our inability to release enhanced versions of our existing
products on a timely basis. We have begun to offer products based on the 3G
standard promoted by the PRC government, and are focusing a significant portion
of our product design and sales and marketing efforts on products that comply
with such standard. We also are devoting significant resources to the
development of solutions that will support certain 2.5G wireless standards
and
3G wireless standards. If the wireless standards for which we are developing
products are not widely adopted by the market, we may not be able to sell these
2.5G and 3G solutions and our revenue could decline. Because it is not
practicable to develop products that comply with all current standards and
standards that may be adopted in the future, our ability to compete effectively
will depend on our ability to accurately select industry standards that will
be
widely adopted by the market and to design our products to support those
relevant industry standards. We may be required to invest significant effort
and
to incur significant expense to redesign our products to address relevant
standards. We may not have the financial resources to fund future innovations.
If our products do not meet relevant industry standards that are widely adopted
for a significant period of time, our revenue would decline, adversely affecting
our operating results, business and prospects.
If
the wireless communication sector in China does not maintain its current pace
of
growth, or the PRC government does not issue the Company a 3G license in the
near future, the profitability and future prospects of our business and our
liquidity could be materially and adversely affected.
Our
future success depends on the continued growth of the PRC wireless communication
industry. Any slowdown in the development of the wireless communication industry
in China or reduction in our customers’ expenditures on mobile phone products
and services may reduce market demand for our products and services.
Alternatively, if the PRC government or other relevant regulatory authorities
fail to allow construction of new wireless communication networks, or decide
to
terminate, delay or suspend construction or extension of new or existing
wireless communication networks, the profitability and future prospects for
our
business could be materially and adversely affected.
The
third
generation wireless communication, or 3G, network deployment will require
significant capital investment by PRC telecommunication operators, including
investments in wireless coverage products and services, RF parts and components
and wireless communication systems. Therefore, we believe that issuance of
3G
licenses will in general have a positive impact on the growth of our business.
Until we receive our 3G license from the PRC government, the expected return
on
our investments in 3G technology is uncertain. Continued delay in the issuance
of 3G licenses will negatively impact our business growth and
liquidity.
Our
ability to generate revenues could suffer if the PRC 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.
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.
Our
products may be subject to counterfeiting and/or imitation, which could harm
our
business and competitive position.
We
cannot
guarantee that counterfeiting or imitation of our products will not occur in
the
future or that we will be able to detect it and deal with it effectively. Any
occurrence of counterfeiting or imitation could impact negatively upon our
corporate and brand image. In addition, counterfeit or imitation products could
result in a reduction in our market share, a loss of revenues or an increase
in
our administrative expenses in respect of detection or prosecution.
We
have limited business insurance coverage
.
The
insurance industry in the PRC is still at an early stage of development.
Insurance companies in the PRC offer limited business insurance products, and
do
not, to our knowledge, offer business liability insurance. As a result, we
do
not have any business liability insurance coverage for our operations. Any
business disruption, litigation or natural disaster might result in substantial
costs and diversion of resources.
Product
defects or the failure of our products to meet specifications could cause us
to
lose customers and revenue or to incur unexpected
expenses.
If
our
products do not meet our customers’ performance or requirements, our customer
relationships may suffer. Also, our products may contain defects or fail to
meet
product specifications. Any failure or poor performance of our products could
result in:
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delayed
market acceptance of our products;
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delayed
product shipments;
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unexpected
expenses and diversion of resources to replace defective products
or
identify and correct the source of errors;
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damage
to our reputation and our customer relationships;
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delayed
recognition of sales or reduced sales; and
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product
liability claims or other claims for damages that may be caused by
any
product defects or performance
failures.
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If
the
limited warranty provisions in our contracts are unenforceable in a particular
jurisdiction or if we are exposed to product liability claims that are not
covered by insurance, a claim could harm our business.
We
may have difficulty collecting our accounts receivable.
During
the normal course of business, we extend unsecured credit to our customers.
Typical credit terms require payment to be made within 90 days of the invoice
date. We do not require collateral from our customers.
We
regularly evaluate and monitor the creditworthiness of each customer on a
case-by-case basis. We include any account balances that are determined to
be
uncollectible in the allowance for doubtful accounts. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available to management, the Company
believes that its allowance for doubtful accounts as of December 31, 2007 and
December 31, 2006 were adequate, respectively. However, actual write-off may
exceed the recorded allowance.
We
currently offer and intend to offer open account terms to certain of our
customers, which may subject us to credit risks, particularly in the event
that
any receivables represent sales to a limited number of customers or are
concentrated in particular geographic markets. The collection of our accounts
receivable and our ability to accelerate our collection cycle through the sale
of accounts receivable is affected by several factors, including, but not
limited to:
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our
credit granting policies,
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contractual
provisions,
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our
customers’ and our overall credit rating as determined by various credit
rating agencies,
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industry
and economic conditions, and
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the
customer’s and our recent operating results, financial position and cash
flows.
|
Adverse
changes in any of these factors, certain of which may not be wholly in our
control, could create delays in collecting or an inability to collect our
accounts receivable which could impair our cash flows and our financial position
and cause a reduction in our results of operations.
Our
financial results may be affected by mandated changes in accounting and
financial reporting.
We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America. These principles are subject
to interpretation by the Securities and Exchange Commission and various bodies
formed to interpret and create appropriate accounting policies. A change in
these policies may have a significant effect on our reported results and may
even retroactively affect previously reported transactions.
The
cyclical nature of the aluminum industry causes variability in our production
costs and cash flows.
Our
costs
of production depend on the market for primary aluminum, which is a highly
cyclical commodity with prices that are affected by global demand and supply
factors and other conditions. Historically, aluminum prices have been volatile
and we expect such volatility to continue. These prices are driven, in part,
by
global demand for aluminum arising from favorable global economic conditions
and
strong demand in China.
RISKS
RELATED TO DOING BUSINESS IN
THE
PRC
There
are
substantial risks associated with doing business in greater China, as set forth
in the following risk factors.
A
downturn in the PRC economy may slow down our growth and
profitability.
The
growth of the PRC economy has been uneven across geographic regions and economic
sectors. There can be no assurance that growth of the PRC 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 PRC economy. More specifically, increased penetration
of
wireless services in the less economically developed central and western
provinces of the PRC 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.
Because
we depend on governmental agencies for a portion of our revenue, our inability
to win or renew government contracts could harm our operations and reduce our
profits.
Our
inability to win or renew Chinese government contracts could harm our operations
and reduce our profits. Chinese government contracts are typically awarded
through a regulated procurement process. Some Chinese government contracts
are
awarded to multiple competitors, causing increases in overall competition and
pricing pressure. The competition and pricing pressure, in turn may require
us
to make sustained post-award efforts to reduce costs in order to realize
revenues under these contracts. If we are not successful in reducing the amount
of costs we anticipate, our profitability on these contracts will be negatively
impacted. Finally, Chinese government clients can generally terminate or modify
their contracts with us at their convenience.
We
rely on sales to the Chinese government and a significant decline in overall
government expenditures or a delay in the payment of our invoices by the
government could have a negative impact on our future operating
results.
We
believe that some of the success and growth of our business will continue to
depend on our ability to win government contracts. Many of our government
customers are subject to budgetary constraints and our continued performance
under these contracts, or award of additional contracts from these agencies,
could be jeopardized by spending reductions or budget cutbacks at these
agencies. Our operating results may also be negatively impacted by other
developments that affect these government programs generally, including the
following:
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adoption
of new laws or regulations relating to government contracting or
changes
to existing laws or regulations;
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delays
or changes in the government appropriations process; and
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delays
in the payment of our invoices by government payment offices.
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The
uncertain legal environment in the PRC could limit the legal protections
available to you
.
The
PRC
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 value as
precedent in the PRC. There are substantial uncertainties regarding the
interpretation and application of PRC laws and regulations, including but not
limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the
imposition of statutory liens, death, bankruptcy or criminal proceedings. In
the
late 1970s, the PRC 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 the PRC. However, these
laws, regulations and legal requirements are relatively recent are evolving
rapidly, and their interpretation and enforcement involve uncertainties. New
laws and regulations that affect existing and proposed future businesses may
also be applied retroactively. These uncertainties could limit the legal
protections available to foreign investors, such as the right of foreign
invested enterprises to hold licenses and permits such as requisite business
licenses.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our business and results of
operations.
A
renewed
outbreak of SARS or another widespread public health problem in the PRC, 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:
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quarantines
or closures of some of our offices that would severely disrupt our
operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the PRC
economy.
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Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our business and results of operations.
Changes
in the PRC’s political and economic policies could harm our
business
.
The
economy of PRC 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 PRC government have had a positive effect
on the economic development of the PRC, 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 PRC
economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD. These
differences include:
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level
of government involvement in the
economy;
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level
of capital reinvestment;
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control
of foreign exchange;
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methods
of allocating resources; and
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balance
of payments position.
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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 PRC economy were similar to those
of
the OECD member countries. As the PRC economy has been transitioning from a
planned economy to a more market-oriented economy, the PRC government has
implemented various measures to encourage economic growth and guide the
allocation of resources by controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways. While these measures
may
benefit the overall PRC economy, they may also have a negative effect on us,
especially if such measures create an unfriendly environment for businesses
in
the technology sector of the economy.
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 (the
“
RMB
”),
any
future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside the PRC or
to
make dividend or other payments in U.S. dollars. Although the PRC government
introduced regulations in 1996 to allow greater convertibility of the RMB 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 RMB for capital account items, including direct investment and
loans, is subject to governmental approval in the PRC, and companies are
required to open and maintain separate foreign exchange accounts for capital
account items. We cannot be certain that the PRC regulatory authorities will
not
impose more stringent restrictions on the convertibility of the RMB, especially
with respect to foreign exchange transactions.
Because
our revenues are generated in RMB and our results are reported in U.S. dollars,
devaluation of the RMB could negatively impact our results of
operations.
The
value
of RMB is subject to changes in the PRC’s governmental policies and to
international economic and political developments. In January, 1994, the PRC
government implemented a unitary managed floating rate system. Under this
system, the People’s Bank of China, or PBOC, began publishing a daily base
exchange rate with reference primarily to the supply and demand of RMB against
the U.S. dollar and other foreign currencies in the market during the previous
day. Authorized banks and financial institutions are allowed to quote buy and
sell rates for RMB within a specified band around the central bank’s daily
exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange
rate of the U.S. dollar to RMB from 1:8.27 to 1:8.11 and modified the system
by
which the exchange rates are determined. This modification has resulted in
an
approximate 7.3% appreciation of the RMB against the U.S. dollar from July
21,
2005 to May 2, 2007. While the international reaction to the RMB revaluation
has
generally been positive, there remains significant international pressure on
the
PRC government to adopt an even more flexible currency policy, which could
result in further fluctuations of the exchange rate of RMB against the U.S.
dollar, including possible devaluations. As all of our net revenues are recorded
in RMB, any future devaluation of RMB against the U.S. dollar could negatively
impact our results of operations.
The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and RMB
.
The
value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and RMB. For example, to the extent that we need to convert U.S. dollars
into RMB for our operational needs and should the RMB 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 RMB
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
RMB,
the U.S. dollar equivalent of our earnings from our subsidiaries in the PRC
would be reduced.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in the PRC has been
as
high as approximately 20% and the PRC has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such
as
raw materials, it may have an adverse effect on our profitability. In order
to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the PRC
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in the PRC which could, in turn, materially increase our
costs
and also reduce demand for our products and services.
We
are subject to the United States Foreign Corrupt Practices
Act.
We
are
required to comply with the United States Foreign Corrupt Practices Act, which
generally prohibits United States companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or
retaining business. In addition, we are required to maintain records that
accurately and fairly represent our transactions and have an adequate system
of
internal accounting controls. Foreign companies, including some that may compete
with us, are not subject to these prohibitions, and therefore may have a
competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC, particularly
in our industry since it deals with contracts from the Chinese Government,
and
our executive officers and employees have not been subject to the United States
Foreign Corrupt Practices Act prior to the completion of the Exchange Agreement
(defined herein). If our competitors engage in these practices they may receive
preferential treatment from personnel of some companies, giving our competitors
an advantage in securing business or from government officials who might give
them priority in obtaining new licenses, which would put us at a disadvantage.
We can make no assurance that our employees or other agents will not engage
in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on
our
business, financial condition and results of operations.
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:
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actual
or anticipated fluctuations in our quarterly operating
results,
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announcements
of new products and services by us or our
competitors,
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changes
in financial estimates by securities
analysts,
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changes
in the economic performance or market valuations of other companies
providing similar products and
services,
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|
announcements
by our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital
commitments,
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|
additions
or departures of key personnel,
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potential
litigation, or
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|
conditions
in the cellular phone market.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
Stockholders
could experience substantial dilution
.
We
may
issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
stockholders will experience dilution in their respective percentage ownership
in the Company.
We
have no present intention to pay dividends
.
We
have
never paid dividends or made other cash distributions on our common stock,
and
do not expect to declare or pay any dividends in the foreseeable future. We
intend to retain future earnings, if any, for working capital and to finance
current operations and expansion of our business.
A
large portion of our common stock is controlled by a small number of
stockholders
.
50.41%
or
15,00,000 shares of our common stock are held by three stockholders, including
30.25% held by our executive officers and directors as a group. As a result,
these stockholders are able to control 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.
Item
1B.
|
Unresolved
Staff Comments.
|
Not
applicable.
We
lease
office space in Beijing, Shenzhen, Tianjin and Hong Kong
.
Our
Beijing office serves as our corporate headquarters and is
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 mass production.
Our
Shenzhen
Office
serves
as the base for cellular component sourcing and coordination with suppliers
and
manufacturers
.
Our
Tianjin
Office is mainly responsible for production management. Its functions include
coordination with our principal manufacturer to adjust the production
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 quality control.
The
office in Hong Kong is a representative office for coordination with
customers.
The
following is relevant information on our offices:
Address
|
Office
/ Production
|
Process
/ Lease
|
Monthly
Rental (rmb)
|
Monthly
Rental (usd)
|
Lease
period
|
No.
2, Unit 1, Building 2,Guanhaixi Plaza, Chuangye Road, Nanshan Dist.,
Shenzhen
|
Office
|
Lease
|
5,500.00
|
741
|
09/19/07
to 02/19/08
|
12
th
Floor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
Disc., Beijing
|
Office
|
--
(1)
|
50,000.00
|
6,738
|
01/08
to 12/08
|
No.185,
Xinda Road, Hebei District, Tianjin
|
Office
|
--
(2)
|
--
|
--
|
--
|
No.
1, Fuyou Street, Airport Huoyun Road, Shunyi Dist.,
Beijing
|
Office
|
--
(3)
|
--
|
--
|
--
|
Room
1502, Jubilee Centre, 18 Fenwick Street, 46 Gloucester Road, Wanchai,
Hong
Kong
|
Office
|
Lease
|
19,500(HKD)
|
2,471
|
9/5/07
to 9/4/09
|
________________
(1)
From
May
1, 2006 to December 31, 2006, there is a rent-free period for our headquarters
in Beijing. We intend to renew the contract with landlord by the end of each
year.
(2)
Our
Tianjin office is located in the CECM factory. The office is provided by CECM
and is cost-free to us.
(3)
These
two
offices are provided by Beijing Xin Ganxian Logistic Company and are cost-free
to us.
Item
3.
|
Legal
Proceedings
|
We
are
party to certain litigation/arbitration with regards to amounts payable to
suppliers for
which
the
Company was not satisfied with the quality and timing of the goods
supplied. However, the amount in question is not material to the Company
and we believe that such litigation/arbitration will not have a material adverse
effect on us or our business and that we will be able to resolve these issues
through further business negotiations.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
Our
2007
Annual Meeting of Stockholders was held on December 18, 2007. At the Annual
Meeting, (i) each of our 7 nominees was elected to serve on the Board of
Directors of the Company until the next Annual Meeting of Stockholders, and
(ii)
the proposed 2007 Omnibus Long-Term Incentive Plan (the “
2007
Omnibus Plan
”)
was
approved by the stockholders. The election results are as follows:
The
voting results for the election of Directors were as follows:
Nominated
Person
|
|
Votes
For
|
|
Votes
Against
|
|
Wang
Xin
|
|
|
21,003,808
|
|
|
27,156
|
|
Liu
Yu
|
|
|
21,003,808
|
|
|
27,156
|
|
Naizhong
Che
|
|
|
21,000,308
|
|
|
27,156
|
|
Peng
Wang
|
|
|
21,003,808
|
|
|
27,156
|
|
Zhixiang
Zhang
|
|
|
21,003,808
|
|
|
27,156
|
|
Nathaniel
K. Hsieh
|
|
|
21,001,008
|
|
|
27,156
|
|
Howard
S. Barth
|
|
|
20,986,608
|
|
|
44,556
|
|
No
stockholders withheld their vote. No other person received any
votes.
The
voting results for the approval of the 2007 Omnibus Plan were as
follows:
|
Votes
received
|
For
|
15,931,664
|
Against
|
61,147
|
Abstain
|
22,046
|
Description
of the 2007 Omnibus Plan
The
purpose of the 2007 Omnibus Plan is to assist the Company in attracting,
retaining, and rewarding high-quality executives, employees, directors and
other
persons who provide services to the Company, enabling such persons to acquire
or
increase a proprietary interest in the Company and to strengthen the mutuality
of interests between such persons and to provide annual and long-term incentives
to expend their maximum efforts in the creation of shareholder value. The 2007
Omnibus Plan will be administered by the Compensation Committee, such other
committee as determined by the Board of Directors, or a subcommittee consisting
solely of non-employee, outside directors. The 2007 Omnibus Plan does not limit
the availability of awards to any particular class or classes of Eligible
Employees. If an award were to lapse or rights to an award otherwise were to
terminate, the shares subject to the award would be available for future awards
to the extent permitted by applicable federal securities laws. Awards granted
under the 2007 Omnibus Plan are not transferable, except in the event of the
participant's death. In the event of a change in control, a right to exercise
that was not previously exercisable and vested shall become fully exercisable
and vested at the time of change in control. The total number of shares reserved
and available for delivery in connection with awards under the 2007 Omnibus
Plan
shall be 4,500,000.
Awards
to
Eligible Employees under the 2007 Omnibus Plan will be made in the form of
stock
options, stock appreciation rights (“
SARs
”),
restricted stock, restricted stock units (“
RSUs
”)
and
annual incentive and performance awards. The Compensation Committee, in its
sole
discretion, designates whom is eligible to receive awards, determines the form
of each award, determines the number of shares of stock subject to each award,
establishes the exercise price of each award and such other terms and conditions
applicable to the award as the Compensation Committee deems
appropriate.
Stock
option awards can be either incentive or non-incentive. In either case, the
exercise price of the option would not be less than the fair market value of
the
underlying shares as of the date the award is granted. Options would become
exercisable at such times as may be established by the Compensation Committee
when granting the award. No stock option could be exercised more than ten years
after the date the option is granted.
A
SAR
allows the holder, upon exercise, to receive the excess of the fair market
value
of one share of Common Stock of the Company on the date of exercise over the
grant price of the SAR. The Compensation Committee shall determine the
circumstances under which a SAR may be exercised, the month of exercise and
method of settlement. SARs may be awarded independently or in tandem with other
awards.
Restricted
stock awards are awards of shares subject to such restrictions as to
transferability and risk of forfeiture as imposed by the Compensation Committee,
which restrictions may lapse separately under such circumstances such as
achievement of performance goals and/or future service requirements. Except
to
the extent restricted under the terms of the 2007 Omnibus Plan, any employee
granted restricted stock shall have all the rights of a shareholder including
the right to vote and receive dividends.
The
Compensation Committee is authorized to grant RSUs to participants which are
rights to receive stock, cash, or a combination thereof at the end of a
specified deferral period. The Compensation Committee is also authorized to
grant stock as a bonus or to grant stock in lieu of
obligations
to pay cash under the 2007 Omnibus Plan or under other compensatory
arrangements.
The
Board
of Directors of the Company may amend or terminate the 2007 Omnibus Plan at
any
time, except that any amendment or alteration to the 2007 Omnibus Plan shall
be
contingent on the approval of the Company's shareholders not later than the
annual meeting next following such Board action if such shareholder approval
is
required by any federal or state law or regulation or the rules of any stock
exchange, provided that, without the consent of an affected Participant, no
such
Board action may materially and adversely affect the rights of such Participant
under any previously granted and outstanding award.
PART
II
Item
5.
|
Market
For Registrant’s Common Equity, Related Stockholder Matters and
Issuer
Purchases of Equity
Securities.
|
Shares
of
our common stock have been listed for trading on AMEX under the ticker symbol
“ORS” since May 10, 2007. The following table sets forth the quarterly average
high and low bid prices per share for our common stock for the two most recently
completed fiscal years in the period that ended on December 31,
2007:
Fiscal
Year Ended
|
|
Common
Stock
|
|
|
|
High
|
|
Low
|
|
December
31, 2006
|
|
|
|
|
|
First
Quarter
|
|
$
|
2.40
|
|
$
|
1.85
|
|
Second
Quarter
|
|
$
|
2.60
|
|
$
|
1.90
|
|
Third
Quarter
|
|
$
|
2.06
|
|
$
|
1.10
|
|
Fourth
Quarter
|
|
$
|
3.00
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
4.04
|
|
$
|
2.55
|
|
Second
Quarter
|
|
$
|
5.60
|
|
$
|
3.05
|
|
Third
Quarter
|
|
$
|
4.05
|
|
$
|
2.00
|
|
Fourth
Quarter
|
|
$
|
7.90
|
|
$
|
2.25
|
|
The
source for the high and low closing bids quotations is the Google 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.
Holders
.
As
of
March 31, 2008, we had approximately 2,500 stockholders of our common stock
of
record, and our common stock had a closing bid price of $2.37 per
share.
Outstanding
Options, Conversions, and Planned Issuance of Common Stock
.
As
of
December 31, 2007, there were no warrants or options outstanding to acquire
any
shares of our common stock.
Preferred
Stock
.
Our
corporate charter permits us to issue up to 100 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
and Related Policy
.
We
do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.
Securities
Authorized for Issuance Under Equity Compensation Plans
.
As
of the
fiscal year ended December 31, 2007,
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected at
left)
|
Equity
compensation plans approved by security holders
|
0
(1)
|
--
(1)
|
4,500,000
|
Equity
compensation plans approved by security holders
|
None
|
None
|
None
|
Total
|
|
|
4,500,000
|
|
(1)
|
As
of December 31, 2007, no securities, options, warrants or rights
have been
issued under the 2007 Omnibus Plan approved by our security holders
on
December 18, 2007.
|
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.
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
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers.
None.
Item
6.
|
Selected
Financial Data.
|
The
following selected financial data has been extracted from our financial
statements for the year ended December 31, 2007. This selected financial data
should be read in conjunction with the consolidated financial statements and
the
notes to the consolidated financial statements starting on page F-1 and with
“
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
.”
Consolidated
Statements of Operations
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands, except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
89,923
|
|
$
|
68,108
|
|
$
|
28,705
|
|
$
|
70,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
78,368
|
|
|
60,102
|
|
|
25,711
|
|
|
62,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income - Interest, net
|
|
|
765
|
|
|
75
|
|
|
544
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
9,683
|
|
|
6,718
|
|
|
3,492
|
|
|
8,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding (Basic and diluted)
|
|
|
29,756
|
|
|
29,756
|
|
|
29,756
|
|
|
29,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share - Basic and Diluted
|
|
|
0.33
|
|
|
0.23
|
|
|
0.12
|
|
|
0.29
|
|
Consolidated
Balance Sheets
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
$
|
66,916
|
|
$
|
45,567
|
|
$
|
30,230
|
|
$
|
28,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
67,234
|
|
|
45,887
|
|
|
31,011
|
|
|
29,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
33,332
|
|
|
23,604
|
|
|
16,072
|
|
|
17,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
33,337
|
|
|
23,604
|
|
|
16,072
|
|
|
17,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
33,897
|
|
|
22,283
|
|
|
14,939
|
|
|
11,098
|
|
Item
7.
|
Management
Discussion and Analysis of Financial Conditions and Results of
Operations
|
The
following is management's discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as
well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words “believes,”
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not
be
placed on these forward-looking statements which speak only as of the date
hereof. We undertake no obligation to update these forward-looking statements.
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10-K.
OVERVIEW
The
Company was organized under the laws of State of Delaware in May 2004 under
the
name of “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 stock exchange transaction, Universal Flirts Inc. became the wholly-owned
subsidiary of the Company.
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. Immediately
following such cancellation, the Company 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 United First International Limited (“
UFIL
”),
a
company incorporated under the laws of Hong Kong. The exchange was consummated
under the laws of the State of Delaware and pursuant to the terms of the
Securities Exchange Agreement dated as of March 31, 2005 (the “
Exchange
Agreement
”).
In
connection with its acquisition of UFIL, the Company 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 the 20,000,000 outstanding shares of UFIL and a 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. Pursuant to this
exchange, UFIL became a wholly-owned subsidiary of the Company and most of
the
Company’s business operations are now conducted through UFIL’s wholly-owned
subsidiary, Beijing Orsus Xelent Technology & Trading Company Limited
(“
Xelent
”).
On
April
19, 2005, the Company, formerly known as Universal Flirts Corp., changed its
list name to Orsus Xelent Technologies, Inc.
In
July,
2005, a wholly owned subsidiary, Orsus Xelent Trading (HK) Company Limited
(“
OXHK
”),
was
incorporated under the laws of Hong Kong. This subsidiary is engaged in the
trading of cellular phones and accessories with overseas customers. In September
2005, OXHK commenced its Hong Kong operations to sell and distribute our
cellular phone products and technical support services to customers outside
the
People’s Republic of China (the “
PRC
”).
The
business operations of UFIL are conducted through its wholly-owned subsidiary,
Xelent, which is also commonly called “Orsus Cellular” within the cellular phone
industry. Xelent sells its handsets and total solutions, including economically
priced and fully-loaded cell phones for both Global System for Mobile
communications (“
GSM
”)
and
Code Division Multiple Access (“
CDMA
”)
platforms, to a diverse base of customers and dealers, such as ordinary users,
tailored operators, specialized users from all field of business or government.
Most of our mobile phone models are either designed by us for both our exclusive
distribution and joint sales under established co-brands, or developed in
conjunction with outside design firms. In February 2004, Xelent registered
“ORSUS” with the PRC State Administration for Industry and Commerce as its
product trademark.
The
cellular phone products produced by Xelent are customarily equipped with
industry leading features, including
1.8-inch
to 2.8-inch CSTN, TFT or QVGA dual-color display,
1
minute
to 4 hours video recording, 300K to 3 million pixel photography,
MP3,
MPEG4 and U disk support, dual stereo speakers,
e-mail
messaging, multimedia messaging, 40 to 64 ring tone storage, slim bar-phone
& flip-phone technology and ultra thin innovative lightweight design. Xelent
has sold approximately 1,792,300 cellular phones since its first product
launched in 2004.
In
the
market of GSM mobiles, Xelent provided its handsets to all types of customers
and dealers and continues to maintain good relationships with them. At present,
the GSM mobile devices constitute a significant percentage of the sales and
profit of the Company. In addition, Xelent has emphasized the development of
specialized application mobile terminals in accordance with market changes
and
popular features. The Company has established itself in the specialized
application field and made great efforts in its marketing since entering the
field in September 2006. Based on its evaluation of the market and the
engagement proposals received from its major customers, the Company began to
produce X180 in large volumes starting in April 2007 and took advantage of
the
great opportunity to win the specialized application mobile terminal market.
In
April
2007, the Company’s common shares were approved for listing on the American
Stock Exchange (“
AMEX
”),
and
began trading on AMEX on May 10, 2007 under the ticker symbol “ORS”. The
Company's CUSIP Number is 68749U106.
Business
Review
In
the
beginning of 2006, the Company made the strategic decision to set up cooperative
relationships with telecom operators and suppliers to increase sales and orders
for the Company. The benefits of this policy have been realized since the second
quarter of 2007.
In
early
2007, the Company, like the majority of cell-phone makers, were optimistic
that
the PRC government would issue the 3G telecom commercial license in 2007, but
this did not develop as expected.
The
Company and other cell-phone manufacturers currently expect
3G
licenses
will
be
released to China’s telecom carriers prior to August 8, 2008- the opening of
Beijing Olympic Games. To this end, the Company still
be
able
to take advantage of the
tremendous business opportunities brought by
the
3G
mobile phone rollout and will focus on the implementation of 3G mobile
technologies in the PRC. The Company will continue to negotiate and cooperate
with many 3G design companies and expects to provide qualified samples to China
Mobile for testing
to
obtain
its 3G licenses
.
In
the
past two years, the Company has been
examining
possible opportunities
to
purchase a production facility. The Company has been trying to increase the
value of fixed assets and restructure the pattern of its development, both
of
which has seen great progress in 2007. The Company is planning to put more
efforts to its
analysis
of potential acquisitions
and
expects to fulfill its industrialized development strategy in the first half
year of 2008. Specifically, we are planning to join into the TDS-CDMA Industry
League, and are working toward obtaining 3G cellular phones manufacturing
licenses for the Company (or its holding company) from the PRC government in
2008. The Company has positioned itself well to take advantage of this
opportunity.
To
further its goal of becoming
less
reliant on third-party manufacturers, the Company is continuing its discussions
with Hebei Lemon Times Communications Equipment Manufacturing Co. Ltd.
(“
Lemon
Times
”)
to
acquire a factory and will consummate the acquisition upon the completion of
negotiations and its due diligence of the target company. By the end of 2007,
both the Company and the factory
were
still
continuing
their
negotiations
and reviews and are addressing any uncertainties that arise as a result
of
the
initial audit conducted. The Company has decided to
expend
additional time and effort in this endeavor and expects
to
complete the acquisition in the second quarter of 2008. The completion of the
acquisition of Lemon Times would mean the Company would change from OEM
production to independent production of its own-brand mobile phones.
The
Company’s management team has become more experienced and has a clearer focus on
sales targets and its distribution market. Furthermore, the Company optimized
the organization of its operations during the last year. The newly setup
business center has begun to strengthen the ties between the Company, the market
and its customers. Meanwhile, the Company continued to work diligently to expand
its customer base, including that of our traditional cellphones, our tailor-made
products for telecomm operators, and our specialized application mobile
terminals, such as mobile TV, mobile Stock and Mobile Law Enforcement terminals,
including a continued push into the field of specialized applications. Even
with
these initiatives, the Company continued to grow its traditional markets, as
evidenced by the great contribution it made to the fiscal year’s highlights. For
the fiscal year ended December 31, 2007, we have achieved a 32.03% increase
in
operational revenues and 44.15% increase in net profit as compared to the same
period last year.
Throughout
2007, although the Company did not make
significant
changes
regarding
its
specific operations or undertake changes and initiatives in response
to
China's macroeconomic industrial policies, the Company still saw a strong growth
of its operational revenues. In addition the Company made overall adjustments
and innovations in its business model. The new industrial model of the Company
has
helped
it
stand out
among
many other mobile phone makers in terms of brand awareness, reputation,
interests and
other
important criteria
.
All of
the above will allow the Company
to
continue to develop its
good
ideology and
build
on
its
firm
foundation in 2008.
The
following table summarizes our operating results for the twelve months ended
December 31, 2007 and December 31, 2006, respectively:
|
|
Twelve
months ended
December
31, 2007
|
|
Twelve
months ended
December
31, 2006
|
|
Comparison
|
|
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
|
|
Revenue
|
|
|
89,923
|
|
|
-
|
|
|
68,108
|
|
|
-
|
|
|
21,815
|
|
|
32.03
|
%
|
Cost
of sales
|
|
|
74,174
|
|
|
82.49
|
%
|
|
55,226
|
|
|
81.09
|
%
|
|
18,948
|
|
|
34.31
|
%
|
Sales
& marketing expenses
|
|
|
553
|
|
|
0.61
|
%
|
|
1,045
|
|
|
1.53
|
%
|
|
(492
|
)
|
|
(47.08
|
%)
|
General
& admin. expenses
|
|
|
1,290
|
|
|
1.43
|
%
|
|
793
|
|
|
1.16
|
%
|
|
497
|
|
|
62.67
|
%
|
R&D
expenses
|
|
|
340
|
|
|
0.38
|
%
|
|
255
|
|
|
0.37
|
%
|
|
85
|
|
|
33.33
|
%
|
Depreciation
|
|
|
142
|
|
|
0.16
|
%
|
|
175
|
|
|
0.26
|
%
|
|
(33
|
)
|
|
(18.86
|
%)
|
Allowance
for obsolete inventories
|
|
|
875
|
|
|
0.97
|
%
|
|
1,387
|
|
|
2.04
|
%
|
|
(512
|
)
|
|
(36.91
|
%)
|
Allowance
for trading deposit receivable
|
|
|
923
|
|
|
1.03
|
%
|
|
767
|
|
|
1.13
|
%
|
|
156
|
|
|
20.34
|
%
|
Impairment
of Fixed Assets
|
|
|
71
|
|
|
0.08
|
%
|
|
454
|
|
|
0.67
|
%
|
|
(383
|
)
|
|
(84.36
|
%)
|
Finance
cost
|
|
|
989
|
|
|
1.10
|
%
|
|
116
|
|
|
0.17
|
%
|
|
873
|
|
|
752.59
|
%
|
Other
net income
|
|
|
765
|
|
|
0.85
|
%
|
|
75
|
|
|
0.11
|
%
|
|
690
|
|
|
920.00
|
%
|
Pre-tax
profit
|
|
|
11,331
|
|
|
12.60
|
%
|
|
7,965
|
|
|
11.69
|
%
|
|
3,366
|
|
|
42.26
|
%
|
Income
tax
|
|
|
1,648
|
|
|
1.83
|
%
|
|
1,247
|
|
|
1.83
|
%
|
|
401
|
|
|
32.16
|
%
|
Profit
|
|
|
9,683
|
|
|
10.77
|
%
|
|
6,718
|
|
|
9.86
|
%
|
|
2,965
|
|
|
44.14
|
%
|
CRITICAL
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our
discussion and analysis on 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. On an
on-going basis, we evaluate our estimates based on historical experience and
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.
RESULTS
OF OPERATIONS
Revenues
Our
Revenues were $89,923,000 for the twelve months ended December 31, 2007,
representing an increase of 32.03% as compared to $68,108,000 in the
corresponding period in 2006. The increase of our operation revenues as compared
to the same period last year was mainly due to
several
factors:
(1) we experienced a slow business period in 2006 because of the reformation
of
the cellular industry and products which affected our operation revenues for
that period, (2) in the second half year of
2007
the
Company
reduced
its operator-tailored products and increased the production and sales of
GSM/GPRS cellular phones to account for 55.14% of the total revenues
,
due to
the fact that the telecom operators could not determine their customized orders
before the institutional reformation of communication management was commenced
by the PRC government, and (3) in the fourth quarter in 2007, product sales
achieved a record high, with our GSM products continuing to meet the market’s
demand for mid-level and high-end handsets, which resulted in a higher sales
volume and triggered the increased revenue growth over the same period last
year.
At
present, we have three series of product lines based on the nature of the
products, such as function, appearance, price, target market and so on. Our
mid-level and low-end products contain a number of attractive features, such
as
MP3, MPEG4, video recording and outer card storage, while our high-end products
contain the above-mentioned features as well as PDA, GPS and office software
functions, Mobile TV, special industry applications and other attractive
features and functions.
Products
Segment
In
the
second half year of 2007, in order to offset the impact of reducing customized
cell-phones, we took advantage of our strong market adaptability formed through
many years to recover traditional channels in mass market and
significantly
increase
the sales of our GSM products.
At
the
same time, we have increased our trading activities in order to widen our
revenue streams. We have increased the number of our models of mobile phones
sold in the market as compared to the same period last year, most of which
were
newly created in the current year. In 2007, our mid-level and high-end GSM
performed extraordinarily well and
accounted
for
accumulated sales of $49,585,000.
The
following table sets forth the revenues of product segments for the twelve
months ended December 31, 2007:
|
|
Twelve
months ended December 31, 2007
|
|
|
|
$000
|
|
%
of Revenue
|
|
C8100
|
|
|
8,578
|
|
|
9.53
|
%
|
C8000
|
|
|
6,912
|
|
|
7.69
|
%
|
D907
|
|
|
4,180
|
|
|
4.65
|
%
|
M5
|
|
|
4,096
|
|
|
4.56
|
%
|
X180
|
|
|
4,017
|
|
|
4.47
|
%
|
H8801
|
|
|
3,478
|
|
|
3.87
|
%
|
M6
|
|
|
2,985
|
|
|
3.32
|
%
|
M85
|
|
|
2,513
|
|
|
2.79
|
%
|
N808
|
|
|
2,289
|
|
|
2.55
|
%
|
G588
|
|
|
1,290
|
|
|
1.43
|
%
|
TY725D
|
|
|
10,435
|
|
|
11.60
|
%
|
TY725E
|
|
|
9,560
|
|
|
10.63
|
%
|
CECTA2000
|
|
|
7,967
|
|
|
8.86
|
%
|
TY732
|
|
|
7,574
|
|
|
8.42
|
%
|
D8110
|
|
|
6,452
|
|
|
7.18
|
%
|
OBEE007
|
|
|
4,488
|
|
|
4.99
|
%
|
T680
|
|
|
1,571
|
|
|
1.75
|
%
|
N3200
|
|
|
645
|
|
|
0.72
|
%
|
N3201
|
|
|
690
|
|
|
0.77
|
%
|
Other
|
|
|
203
|
|
|
0.22
|
%
|
Total
|
|
|
89,923
|
|
|
100.00
|
%
|
For
the
twelve months ended December 31, 2007, the total revenues were $89,923,000.
The
sales of CDMA products reached $40,338,000, representing 44.86% of our total
revenue,
as
our
operator-tailored section kept growing since the beginning of the year.
This
growth
was
triggered by specialized application mobile terminals Proxlink X180 and other
intelligent mobile phones. The CDMA products included C8100, C8000, D907, M5,
X180, H8801, M6, M85, N808 and G588 with revenues of $8,578,000, $6,912,000,
$4,180,000, $4,096,000, $4,017,000, $3,478,000, $2,985,000, $2,513,000,
$2,289,000 and $1,290,000, respectively. The sale of GSM products in this period
accounted for $49,585,000, or 55.14%, of our total revenue, which was mainly
from the sales of TY725D, TY725E, CECT A2000, TY732, D8110, OBEE007, T680,
N3200, N3201 and other small sales products with revenues of $10,435,000,
$9,560,000, $7,967,000, $7,574,000, $6,452,000, $4,488,000, $1,571,000,
$645,000, $690,000 and $203,000, respectively.
Our
GSM
products are purchased from Tianjin Communication and Broadcasting Group Co.,
Ltd and Hebei Jvyuan Commerce and Trade Co., Ltd., which include TY725D/E (300K
pixel camera, Multimedia Player),CECTA2000 (Multimedia Player, Camera, Remote
Control, Anti-stolen, U-disk). Our CDMA products are provided by China
Electronic Appliance Corporation and Beijing Tian Hong Bo Communication
Apparatus Company Limited, from whom the trading products included C8100
(high-end PDA, MP3, MP4, Camera, T-flash Card, GSM & CDMA Simultaneous
Standby Dual Mode handset), and C8000 (high-end PDA, MP3, MP4, Camera, T-flash
Card, GSM & CDMA Simultaneous Standby Dual Mode handset).
The
increase in the Company’s revenues was attributable to: (1) the launch of
specialized application mobile terminals to meet the specific application
market, (2) the introduction of fashionable appearances and features to satisfy
market demand, and (3) the distribution through traditional channels.
Customer
Segments
The
following table sets forth the revenues of customer segments for the twelve
months ended December 31, 2007:
|
|
Twelve
months ended December 31, 2007
|
|
|
|
$000
|
|
%
of Revenue
|
|
Beijing
Xingwang Shidai Tech & Trading Co., Ltd.
|
|
|
83,045
|
|
|
92.35
|
%
|
Tianjin
Communication and Broadcasting Group Co., Ltd.
|
|
|
2,861
|
|
|
3.18
|
%
|
China
Electronic Appliance Corporation
|
|
|
4,017
|
|
|
4.47
|
%
|
Total
|
|
|
89,923
|
|
|
100.00
|
%
|
For
the
twelve months ended December 31, 2007, our revenues were mainly derived from
three major domestic customers, Beijing Xingwang Shidai Tech & Trading Co.,
Ltd. (“
XWSD
”),
Tianjin Communication and Broadcasting Group Co., Ltd (“
TCB
”)
and
China Electronic Appliance Corporation (“
CEAC
”),
in
the amounts of $83,045,000, $2,861,000 and $4,017,000, respectively, for a
total
amount of $89,923,000. In particular, XWSD has been our most important customer
for a long period, and accounted for 92.35% of the total sales in this year.
It
is the largest distributor and dealer in Mainland China and has sales networks
in major cities in the PRC.
Other
net income
For
the
twelve months ended December 31, 2007, other net income accounted for $765,000,
or 0.85% of the total revenue. It was mainly subject to accounting adjustment
as
some prepaid trade deposits were recovered and this contributed to other net
income.
Operating
expenses
For
the
twelve months ended December 31, 2007, our operating expenses were $78,296,000.
The operating expenses include sales and marketing, general and administrative
expenses, R & D expenses, and depreciation are set forth in the following
table together with a comparison with the corresponding amounts from the same
period in 2006:
|
|
Twelve
months ended December 31, 2007
|
|
Twelve
months ended December 31, 2006
|
|
Comparison
|
|
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
of Revenue
|
|
$000
|
|
%
|
|
Cost
of sales
|
|
|
74,174
|
|
|
82.49
|
%
|
|
55,226
|
|
|
81.09
|
%
|
|
18,948
|
|
|
34.31
|
%
|
Sales
& marketing expenses
|
|
|
553
|
|
|
0.61
|
%
|
|
1,045
|
|
|
1.53
|
%
|
|
(492
|
)
|
|
(47.08
|
%)
|
General
& Admin. expenses
|
|
|
1,290
|
|
|
1.43
|
%
|
|
793
|
|
|
1.16
|
%
|
|
497
|
|
|
62.67
|
%
|
R&D
expenses
|
|
|
340
|
|
|
0.38
|
%
|
|
255
|
|
|
0.37
|
%
|
|
85
|
|
|
33.33
|
%
|
Depreciation
|
|
|
142
|
|
|
0.16
|
%
|
|
175
|
|
|
0.26
|
%
|
|
(33
|
)
|
|
(18.86
|
%)
|
Allowance
for obsolete inventories
|
|
|
875
|
|
|
0.97
|
%
|
|
1,387
|
|
|
2.04
|
%
|
|
(512
|
)
|
|
(36.91
|
%)
|
Allowance
for trading deposit receivable
|
|
|
923
|
|
|
1.03
|
%
|
|
767
|
|
|
1.13
|
%
|
|
156
|
|
|
20.34
|
%
|
Total
|
|
|
78,297
|
|
|
87.07
|
%
|
|
59,648
|
|
|
87.58
|
%
|
|
18,649
|
|
|
31.27
|
%
|
Cost
of sales
For
the
twelve months ended December 31, 2007, our cost of sales was $74,174,000, or
82.49% of revenues. The cost of sales to revenues increased by 1.40%, as
compared to 81.09% of the corresponding period in 2006. The principal reasons
for the increase were that both production and sales of high margin
operator-customized products were reduced due to the impact of the telecom
operators split and restructuring.
Sales
and marketing expenses
Sales
and
marketing expenses mainly represent salaries of sales personnel, and marketing
and transportation costs.
For
the
twelve months ended December 31, 2007, sales and marketing expenses were
$553,000, or 0.61% of the revenues, which shows a decrease of 47.08% as compared
to $1,045,000, or 1.53% of the revenues for the corresponding period in 2006.
This sharp decrease was caused by the reduction in the number of personnel
while
changing our business model, which resulted in a corresponding decrease in
the
costs for salaries and social insurances.
In
addition, the after-sale maintenance services were shifted to the materials
suppliers, and the costs of all the after-sale services, excluding the
employees’ salaries, were borne by our cooperative partners. This resulted in a
significant reduction of our sales and marketing expenses.
R&D
expenses
Our
R&D expenses were $340,000 or 0.38% of total revenue for the twelve months
ended December 31, 2007, which represented a 33.33% increase, as compared with
$255,000 and 0.37% of total revenue in the same period of 2006. The increase
was
attributed to the increased spending in the research and development of
promising and high profit margin advanced smart mobile terminals.
General
and administrative expenses
General
and Administrative expenses primarily consisted of compensation for personnel,
depreciation, travel expenses, rental, materials expenses related to ordinary
administration and fees for professional services.
For
the
twelve months ended December 31, 2007, the total general and administrative
expenses including allowance of obsolete inventories, allowance for trading
deposit receivable and impairment of fixed assets were $3,159,000, or 3.51%
of
the total revenue. After deducting the allowance for trading deposit receivable
of $923,000, the allowance for obsolete inventories of $875,000, and impairment
of fixed assets of $71,000, the actual general and administrative expenses
were
$1,290,000 or 1.43% of the total revenue, representing an increase of $497,000
or 62.67% as compared to $793,000 or 1.16% of the total revenues for the
corresponding period in 2006.
The
sharp
increase was mainly due to accounting reclassification that some provision
for
bad debts previously recorded under the administrative expenses were removed
and
included to other net income.
Allowance
for obsolete inventories
For
the
twelve months ended December 31, 2007, allowance for obsolete inventories were
$875,000, which was due to the fact that old models prior to 2007 were not
popular any more and some related obsolete inventories could not be used to
produce new models of handsets.
Gross
Profit and Gross Profit Margin
For
the
twelve months ended December 31, 2007, our gross profit was $15,749,000,
reflecting a significant increase of $2,867,000, or 22.26% as compared to
$12,882,000 for the same period of last year. In addition, our gross profit
margin for the reporting period was 17.51%, representing a decrease of 1.40%
as
compared to 18.91% for the same period of 2006.
The
gross
profit margin decrease in general is attributable to:
|
1.
|
the
impact that operators’ business restructuring were still in the
transitional period, leading to their failure to timely implement
the
customized mobile terminals.
|
|
2.
|
the
reduction of operator-tailored production and sales and the increase
in
sales of low profit margin traditional cell-phone by the
Company.
|
|
3.
|
the
fact that 74.4% of products lines generated less than 17% gross profit
margin.
|
Net
profit
For
the
twelve months ended December 31, 2007, our net profit was $9,683,000 or a net
profit margin of 10.77%, representing an increase of $2,965,000, or 44.14%,
as
compared to $6,718,000, or a net profit margin of 9.86% in the same period
of
2006. The increase in our net profit is due to our new business strategy on
marketing and cost controls.
LIQUIDITY
AND SOURCE OF CAPITAL
We
generally finance our operations from cash flow generated internally and the
short-term loans from the domestic banks.
As
of
December 31, 2007, we had current assets of $66,916,000. Current assets are
mainly comprised of accounts receivable of $57,743,000, trade deposits paid
of
$839,000, cash and cash equivalents of $2,928,000, inventories of $4,000, other
current assets of $4,196,000 and a pledge deposit of $1,206,000. Our current
liabilities of $33,332,000 included accounts payable of $10,854,000, short-term
bank loan of $9,160,000, short-term mortgage loan of $68,000, other accrued
expenses and the accrued liabilities of $8,048,000, tax payables of $3,047,000,
amounts due to directors of $323,000, trade deposits received of $1,709,000
and
provision of warranty of $123,000. Also, we had a long-term mortgage loan of
$5,000 as of December 31, 2007.
We
offer
two different trading terms to our customers: cash-on-delivery and on credit
term within 30-60 days. As of December 31, 2007, our accounts receivable had
increased from $31,425,000 as of December 31, 2006 to $57,743,000. Our accounts
receivable consisted of (1) $33,791,000, or 58.52%
of
the
total accounts receivable,
that
was
newly created in the fourth quarter of 2007, and (2) $23,952,000, or 41.48%
that
was aged by four to six months. Subsequent payments of $6,413,000 were received
as of March 10, 2008.
As
of
December 31, 2007, our trade deposits paid were $839,000, which represented
a
decrease of $8,150,000 or 90.67%, as compared to $8,989,000 as of December
31,
2006. The trade deposit paid was comprised of the deposit for the order of
specialized application devices and the advance payment on other popular
cellular phones. The decrease of trade deposits paid was caused by
the
reduction in
the
productions and sales of operator-tailored handsets that demand large amount
of
advance payment.
As
of
December 31, 2007, our other current assets were $4,196,000, which represented
a
deep increase, as compared to $86,000 as of December 31, 2006. It mainly
represented a deposit of investment of $4,102,000 for acquiring our production
facility.
As
of
December 31, 2007, accounts payable were $10,854,000, which represented a
decrease of $110,000 or 1.00%, as compared to $10,964,000 as of December 31,
2006. The mainly accounts payable was attributable to unpaid products from
our
vendor China Electronic Apparatus Company and Shanghai Simcom
Limited.
As
of
December 31, 2007, accrued expenses and other accrued liabilities were
$8,048,000, indicating a significant growth of $3,604,000 or 81.10%, as compared
to $4,444,000 as of December 31, 2006. The increase was constituted by the
outstanding tax of $6,953,000 caused by the time difference between USGAAP
and
PRCGAAP
determinations
of
the
value-added tax (VAT).
As
of
December 31, 2007, tax payable was $3,047,000, which was attributable mainly
to
profit tax at the rate of 12% and the deferred tax in 2007.
As
of
December 31, 2007, cash and bank balances were mainly denominated in Renminbi
(“
RMB
”).
Our
revenue and expenses, assets and liabilities are mainly denominated in RMB
and
USD. Our activities in the operation are mainly denominated in RMB. In the
accounting period, RMB currency is quoted officially against USD currency
according to a floating exchange rate. However, the appreciation of the RMB
against USD did not bring us with risks of currency exchanges because we had
few
USD in stock.
CASH
FLOWS
As
of
December 31, 2007, we had cash and cash equivalents of $2,928,000. This
represented an increase of $507,000, or 20.94% as compared to $2,421,000 as
of
December 31, 2006.
As
of
December 31, 2007, our short-term bank loans were $9,160,000, which was mainly
comprised of $2,461,000 from Huaxia Bank and $6,699,000 from Beijing Rural
Bank.
During
the year, we had obtained a mortgage loan of $122,000 from a financial
institution when acquiring a motor vehicle. As of December 31, 2007, $68,000
was
matured within one year and $5,000, which was matured over one year, was
considered a long-term loan.
Our
gearing ratio, calculated as total debts over total assets, was 49.58%, as
of
December 31, 2007. It decreased slightly compared to 51.44% as of December
31,
2006.
CONTINGENT
LIABILITIES
On
June
20, 2007, we entered into a guarantee contract to serve as guarantor of a loan
in the amount of RMB120,000,000 to CECT-Chinacom Communications Co., Ltd.
(“
CECT-Chinacom
”)
from
Beijing Rural Bank to provide CECT-Chinacom with capital for equipment purchases
between June 20, 2006 and June 16, 2010. Under the guarantee contract, we shall
perform all obligations of CECT-Chinacom under the Loan Contract if
CECT-Chinacom fails to perform its obligations as set forth in the Loan Contract
for any reason, including, but not limited to, ceasing production, going out
of
business, dissolving the business, having its business license withdrawn, and
filing for bankruptcy.
OFF
BALANCE SHEET ARRANGEMENTS
As
of
December 31, 2007, we had no off balance sheet arrangements.
CONTRACTUAL
COMMITMENTS
We
are
obligated to make future payments 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, 2007, reported by maturity of obligation.
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
|
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
$
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Lease Obligations
|
|
|
51
|
|
|
31
|
|
|
20
|
|
|
-
|
|
|
-
|
|
Purchase
Obligations
|
|
|
14,083
|
|
|
14,083
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,134
|
|
|
14,114
|
|
|
20
|
|
|
--
|
|
|
--
|
|
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. The Company, in the normal course of doing business, is exposed to
market risk through changes in interest rates with respect to bank loans. Bank
loans at December 31, 2007 were $9,160,000. The interest rate for the twelve
months ended December 31, 2007 was charged at 7.344% to 7.956% per
annum.
Currency
Risk
The
Company considers RMB its functional currency since a substantial portion of
the
Company’s business activities are based in RMB. However, the Company has chosen
the United States dollar as its reporting currency. Our sales and purchases
are
conducted within the PRC in RMB. Conversion of RMB into foreign currencies
is
regulated by the People’s Bank of China through a unified floating exchange rate
system. Although the PRC government has stated its intention to support the
value of the RMB, there can be no assurance that such exchange rate will not
again become volatile or that the RMB will not devalue significantly against
the
U.S. dollar. Exchange rate fluctuations may adversely affect the value, in
U.S.
dollar terms, of our net assets and income derived from our operations in the
PRC. In addition, the RMB is not freely convertible into foreign currency and
all foreign exchange transactions must take place through authorized
institutions.
Transactions
in currencies other than the functional currency during the period 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. When there are material adjustments
under
this process they are recorded in accumulated other comprehensive income under
the stockholders’ equity section of the balance sheet.
Country
Risk
Our
business, assets and operations are located and conducted in the PRC. While
the
PRC’s economy has experienced significant growth in the past twenty years,
growth has been uneven, both geographically and among various sectors of the
economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall economy of the PRC, but may also have a negative effect
on
us. For example, our operating results and financial condition may be adversely
affected by government control over capital investments or changes in tax
regulations applicable to us. If there are any changes in any policies by the
PRC government and our business is negatively affected as a result, then our
financial results, including our ability to generate revenues and profits,
will
also be negatively affected.
Item
8.
|
Financial
Statements and Supplementary
Data.
|
Reference
is made to pages F-1 through F-18 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(T).
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosures. Our management, including our Chief
Executive Officer and our Chief Financial Officer, does not expect that our
disclosure controls or procedures will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues are instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
We
carried out an evaluation, under the supervision and with the participation
of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of [December 31, 2007], the end of the annual period
covered by this report. The evaluation of our disclosure controls and procedures
included a review of the disclosure controls’ and procedures’ objectives,
design, implementation and the effect of the controls and procedures on the
information generated for use in this report. In the course of our evaluation,
we sought to identify errors, control problems or acts of fraud and to confirm
the appropriate corrective actions, including process improvements, were being
undertaken.
Based
on
the foregoing, our Chief Executive Officer and our Chief Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective and were operating at the
reasonable assurance level.
Internal
Control Over Financial Reporting
(a)
Management’s Annual Report on Internal Control Over Financial
Reporting.
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, the Company has conducted an
evaluation of the effectiveness of its internal control over financial reporting
as of December 31, 2007, based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on management’s evaluation under the framework in Internal
Control - Integrated Framework, management concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2007.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
(b)
Changes in Internal Control Over Financial Reporting.
During
our fiscal year 2007, 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,
Executive Officers and Corporate
Governance.
|
As
of
December 31, 2007, our current directors and executive officers were as
follows:
Name
|
Age
|
Positions
Held
|
Wang
Xin
|
38
|
Chief
Executive Officer and a Director
|
Zhao
Hongwei
|
41
|
Chief
Financial Officer
|
Liu
Yu
|
41
|
Director
|
Naizhong
Che
|
64
|
Director
|
Peng
Wang
|
35
|
Director
|
Zhixiang
Zhang
|
39
|
Director
|
Nathaniel
K. Hsieh
|
42
|
Director
|
Howard
S. Barth
|
55
|
Director
|
Wang
Xin
has served as Chief Executive Officer and a member of our Board of Directors
since March 31, 2005. From April 2003 to present, he has also served as Director
and General Manager of Xelent. Prior to joining Xelent, he served as the as
the
General Manager of the Sales and Marketing Division of Shanghai Cellstar
International Trading Co., Ltd. from January 2003 to April 2003; Director of
Logistics & Customer Service of Shanghai Cellstar International Trading Co.,
Ltd. from November 1997 to January 2003; and Director and Vice President of
Beijing VA Communication Equipment Co., Ltd. from May 1996 to October
1997.
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 April 2003. 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.
Naizhong
Che has served as a member of our Board of Directors since February 7, 2007.
He
earned his B.S. from Beijing University of Posts and Telecommunications. Now
retired, he has broad experience in the communications industry including
R&D, production, imports and exports. He served twelve years with the
Ministry of Information Industry of China Posts and Telecommunications Industry
Standardization Institute in various capacities.
Peng
Wang
has served as a member of our Board of Directors since February 7, 2007. He
earned his bachelor’s degree at Central University of Finance and Economics and
his master’s at Guanghua School of Management, Peking University. His expertise
includes formulating, planning and implementing marketing strategies for
technology companies. He is currently General Manager for Beijing Youlilianxu
Technology Co., Ltd. where he is responsible for products in the PRC, including
ViewSonic projection, Samsung MP4 and LG projection.
Zhixiang
Zhang has served as a member of our Board of Directors since February 7, 2007.
He earned bachelor and master’s degrees at Central University of Finance and
Economics. He has extensive experience in corporate financial management, audits
and financial strategy, and most recently was the Financial Controller for
CECT-Chinacom Communications Co., Ltd.
Nathaniel
K. Hsieh has served as a member of our Board of Directors since February 7,
2007. He is a member of the Illinois and Iowa Bar Associations. He earned his
L.L.M. at Georgetown University and his J.D. at the University Of Iowa College
Of Law. He is the Founder and President of Tritent International Corp. of
Chicago, Illinois, which oversees tobacco import and manufacturing operations
for one of the 60 independent tobacco manufacturers in U.S.
Howard
S.
Barth has served as a member of our Board of Directors since February 7, 2007.
He is a member of the Canadian Institute of Chartered Accountants and the
Ontario Institute of Chartered Accountants. He earned his B.A. and M.B.A. at
York University and has over 25 years of experience as a certified accountant.
Until recently, he was chief executive officer and president with Yukon Gold
Corporation, Inc., a public company which is dual-listed in the U.S. and
Canadian markets. He is currently a director of Yukon Gold Corporation Inc.,
an
OTC BB and TSX listed company, and has served on its audit committee. He is
also
a member of the Board of Directors and chairman of the audit committee for
Nuinsco Resources Limited, a TSX listed exploration company, and New Oriental
Energy & Chemical Corp., a NASDAQ listed company. He is also currently a
director for Uranium Hunter Corporation, an OTC BB company.
Subsequent
Events
On
March
5, 2008, Mr. Nathaniel K. Hsieh resigned from his position as a member of the
Board of Directors of the Company and all position held on the Board of
Director’s committees.
On
March
5, 2008, Mr. Gao Jian was elected to the Board of Directors of the Company
by
unanimous written consent of the Board of Directors, effective immediately,
and
was elected by the Board of Directors to serve on its Audit Committee and
Compensation Committee.
Mr.
Gao
Jian, age 39, earned his Master of Business Administration degree at the
University of Liverpool in UK in July 2000. Mr. Gao Jian has been engaging
in
real estate and telecommunication industries for years. Since June 2007, Mr.
Gao
Jian has been serving as chairman of the Board of Directors of Royal Junction
Construction Materials Co., Ltd. From May 2001 to January 2003, Mr. Gao Jian
worked as the General Manager of Dacheng Real Estate Development Group and
Dacheng Telecommunications Technology Co., Ltd. From 1996 to 1999, Mr. Gao
Jian
worked as sales director for CellStar International Trading Co., Ltd., where
he
was responsible for sales, marketing and strategic planning.
On
March
5, 2008, the Mr. Howard S. Barth was appointed as Chairman of the Board’s Audit
Committee.
Family
Relationships
There
are
currently no family relationships between the directors or executive officers
of
the Company.
Involvement
in Certain Legal Proceedings.
None
Board
of Directors Meetings and Committees
The
Board
of Directors held 8 meetings during the fiscal year ended December 31, 2007.
Each Directors member attended, either in person or telephonically, at least
75%
of the aggregate Board of Directors meetings and meetings of committees on
which
he served during his tenure as a director or committee member.
On
February 7, 2007, our Board of Directors approved and authorized the
establishment of three new committees to facilitate and assist the Board of
Directors in the execution of its responsibilities: the Audit Committee, the
Compensation Committee and the Nominations/Corporate Governance Committee.
In
accordance with American Stock Exchange listing standards, all the committees
are comprised solely of non-employee, independent Directors. Charters for each
committee are available on the Company’s website at www.orsus-xelent.com. The
charter of each committee is also available in print to any stockholder who
requests it. The table below shows current membership for each of the standing
committees of our Board of Directors.
Audit
Committee
|
Nominating/Corporate
Governance
Committee
|
Compensation
Committee
|
Howard
S. Barth (Chair)
|
Naizhong
Che (Chair)
|
Naizhong
Che (Chair)
|
Gao
Jian
|
Zhixiang
Zhang
|
Gao
Jian
|
Zhixiang
Zhang
|
Peng
Wang
|
Peng
Wang
|
Audit
Committee
The
Audit
Committee is currently comprised of Howard S. Barth (Chair), Gao Jian and
Zhixiang Zhang, each of whom are “independent” as independence is currently
defined in applicable Securities and Exchange Commission’s (the “
SEC
”)
rules
and by the Company Guide of the American Stock Exchange. Since its formation
in
February of 2007, the Audit Committee met 4 times. The Board of Directors has
determined that Howard S. Barth qualifies as an “audit committee financial
expert,” as defined in applicable SEC rules implementing Section 407 of the
Sarbanes-Oxley Act of 2002. The Board of Directors made a qualitative assessment
of Mr. Barth’s level of knowledge and experience based on a number of factors,
including his formal education and experience.
The
Audit
Committee is responsible for overseeing the Company’s corporate accounting,
financial reporting practices, audits of financial statements and the quality
and integrity of the Company’s financial statements and reports. In addition,
the Audit Committee oversees the qualifications, independence and performance
of
the Company’s independent auditors. In furtherance of these responsibilities,
the Audit Committee’s duties include the following: evaluating the performance
of and assessing the qualifications of the independent auditors; determining
and
approving the engagement of the independent auditors to perform audit, reviewing
and attesting to services and performing any proposed permissible non-audit
services; evaluating employment by the Company of individuals formerly employed
by the independent auditors and engaged on the Company’s account and any
conflicts or disagreements between the independent auditors and management
regarding financial reporting, accounting practices or policies; discussing
with
management and the independent auditors the results of the annual audit;
reviewing the financial statements proposed to be included in the Company’s
annual report on Form 10-K; discussing with management and the independent
auditors the results of the auditors’ review of the Company’s quarterly
financial statements; conferring with management and the independent auditors
regarding the scope, adequacy and effectiveness of internal auditing and
financial reporting controls and procedures; and establishing procedures for
the
receipt, retention and treatment of complaints regarding accounting, internal
accounting control and auditing matters and the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. The Audit Committee operates under the written Audit Committee
Charter adopted by the Board of Directors in February of 2007, a copy of which
may be obtained by writing the Secretary of the Company at 12th Floor, Tower
B,
Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang Disc., Beijing,
People’s Republic of China 100020. The Report of the Audit Committee is included
elsewhere in this proxy statement.
Nominating/Corporate
Governance Committee
The
Nominating and Corporate Governance Committee (the “
Nominating
Committee
”)
is
responsible for preparing a list of candidates to fill the expiring terms of
directors serving on our Board of Directors. The Nominating Committee submits
the list of candidates to the Board of Directors who determines which candidates
will be nominated to serve on the Board of Directors. The names of nominees
are
then submitted for election at our Annual Meeting of Stockholders. The
Nominating Committee also submits to the entire Board of Directors a list of
nominees to fill any interim vacancies on the Board of Directors resulting
from
the departure of a member of the Board of Directors for any reason prior to
the
expiration of his term. In recommending nominees to the Board of Directors,
the
Nominating Committee keeps in mind the functions of this body. The Nominating
Committee considers various criteria, including the ability of the individual
to
meet the American Stock Exchange “independence” requirements, general business
experience, general financial experience, knowledge of the Company’s industry
(including past industry experience), education, and demonstrated character
and
judgment. The Nominating Committee will consider director nominees recommended
by a stockholder if the stockholder mails timely notice to the Secretary of
the
Company at its principal offices, which notice includes (i) the name, age and
business address of such nominee, (ii) the principal occupation of such nominee,
(iii) a brief statement as to such nominee’s qualifications, (iv) a statement
that such nominee consents to his or her nomination and will serve as a director
if elected, (v) whether such nominee meets the definition of an “independent”
director under the rules of the American Stock Exchange listing standards and
(vi) the name, address, class and number of shares of capital stock of the
Company held by the nominating stockholder. Any person nominated by a
stockholder for election to the Board of Directors will be evaluated based
on
the same criteria as all other nominees. The Nominating Committee also oversees
our adherence to our corporate governance standards. The members of the
Nominating Committee are Naizhong Che (Chair), Zhixiang Zhang and Peng Wang,
each of whom is “independent” as defined by the Company Guide of the American
Stock Exchange. Since its formation in February of 2007, the Nominating
Committee met 3 times. The Nominating Committee operates under the written
Nominating Committee Charter adopted by the Board of Directors in February
of
2007, a copy of which may be obtained by writing the Secretary of the Company
at
12th Floor, Tower B, Chaowai MEN Office Building, 26 Chaowai Street, Chaoyang
Disc., Beijing, People’s Republic of China 100020.
During
the fiscal year ended December 31, 2007, there were no changes to the procedures
by which holders of our common stock may recommend nominees to the Board of
Directors.
Compensation
Committee
The
Board
of Directors established the Compensation Committee in February 2007. The
Compensation Committee is currently comprised of the following Directors of
the
Company: Naizhong Che (Chair), Gao Jian and Peng Wang, each of whom is
“independent” as defined by the Company Guide of the American Stock Exchange.
Since its formation, the Compensation Committee met 2 times. The Compensation
Committee reviews and, as it deems appropriate, recommends to the Board of
Directors’ policies, practices and procedures relating to the compensation of
the officers and other managerial employees and the establishment and
administration of employee benefit plans. It advises and consults with the
officers of the Company as may be requested regarding managerial personnel
policies. The Compensation Committee also has such additional powers as may
be
conferred upon it from time to time by the Board of Directors. The Compensation
Committee operates under the written Compensation Committee Charter adopted
by
the Board of Directors in February of 2007, a copy of which may be obtained
by
writing the Secretary of the Company at 12th Floor, Tower B, Chaowai MEN Office
Building, 26 Chaowai Street, Chaoyang Disc., Beijing, People’s Republic of China
100020.
Compensation
Committee Interlocks and Insider Participation in Compensation
Decisions
During
the last fiscal year, none of the Company’s executive officers served on the
board of directors or compensation committee of any other entity whose executive
officers served either the Company’s Board of Directors or Compensation
Committee.
Audit
Committee Report
The
Audit
Committee was established on February 7, 2007 and is composed of non-management
Directors. It is currently composed of three independent Directors, Howard
S.
Barth (Chair), Gao Jian and Zhixiang Zhang, and operates under the written
Audit
Committee charter adopted by the Board of Directors on February 7,
2007.
Under
its
charter, the Audit Committee provides assistance and guidance to the Board
in
fulfilling its oversight responsibilities to the Company’s stockholders with
respect to the Company’s corporate accounting and reporting practices as well as
the quality and integrity of the Company’s financial statements and reports. The
Company’s principal executive officer and principal financial officer have the
primary responsibility for the financial statements and the reporting process,
including the systems of internal controls. The Company’s independent auditors
are responsible for auditing the Company’s financial statements and expressing
an opinion on the conformity of the audited financial statements with generally
accepted accounting principles. The Audit Committee’s responsibility is to
monitor and oversee these processes.
To
this
end, the Audit Committee has reviewed and discussed the audited financial
statements of the Company for the fiscal year ended December 31, 2007 with
management and Mazars CPA Limited, the Company’s independent auditor. The Audit
Committee discussed with Mazars CPA Limited certain matters related to the
conduct of the audit as required by Statement on Auditing Standards 61, as
amended by Statement on Auditing Standards 90. In addition, the Audit Committee
has received from Mazars CPA Limited the written disclosures and the letter
regarding the auditor’s independence required by Independence Standards Board
Standard No. 1 and has discussed with Mazars CPA Limited its independence.
In
reliance on the reviews and discussions described above, the Audit Committee
recommended to the Board of Directors that the Company’s audited financial
statements for the fiscal year ended December 31, 2007 be included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007, and
the Board of Directors accepted the Audit Committee’s
recommendation.
The
Audit
Committee selected Mazars CPA Limited as the Company’s independent auditors for
the fiscal year ending December 31, 2007. The selection of auditors is
determined by the Audit Committee. This matter is not being submitted to the
stockholders for approval as this is not required under applicable
law.
Following
the reorganization of Moores Rowland Mazars (the “
Former
Auditors
”)
on
June 1, 2007, eight of its partners have joined
Mazars
CPA Limited
and
the
Former Auditors changed its name to Mazars CPA Limited. As such, the Former
Auditors resigned as the independent auditors of the Company, effective June
29,
2007. The Audit Committee of the Board of Directors of the Company (the
“
Audit
Committee
”)
approved the resignation of the Former Auditors on June 29, 2007.
As
key
members of the Former Auditors servicing the Company previously have joined
Mazars CPA Limited, the Audit Committee appointed Mazars CPA Limited as the
Company's new independent auditors, effective from June 29, 2007.
AUDIT
COMMITTEE
Howard
S.
Barth (Chair)
Gao
Jian
Zhixiang
Zhang
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers and persons who own more than 10% of a registered
class of the Company’s equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of the Company. Directors, officers and greater than 10%
shareholders are required to furnish the Company with copies of all
Section 16(a) forms they file.
To
the
Company’s knowledge, based solely on a review of the copies of such reports
furnished to the Company, with respect to the fiscal year ended
December 31, 2007, the officers, directors and beneficial owners of more
than 10% of our common stock have filed their initial statements of ownership
on
Form 3 on a timely basis, and the officers, directors and beneficial owners
of
more than 10% of our common stock have also filed the required Forms 4 or 5
on a
timely basis, except for the timely filing of Form 3’s by Naizhong Che, Peng
Wang, Zhixiang Zhang, Gao Jian, and Howard S. Barth upon their appointment
as
Directors of the Company due to unforeseen delays, which were all subsequently
filed with the Securities and Exchange Commission. There were no transactions
that were not reported timely.
Code
of Ethics
On
February 7, 2007, the Company adopted a Code of Business Conduct and Ethics
that
applies to all its employees including its executive officers, which was filed
as
Exhibit
14 to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007.
Item
11.
|
Executive
Compensation.
|
Compensation
Discussion and Analysis
General
Philosophy
We
currently compensate our senior management and key employees through a single
method of base salary. However, a mixed compensation program of base salary,
bonus and equity compensation is under consideration and will be designed to
impact all employees by setting general levels of compensation and helping
to
create an environment of goals, rewards and expectations. Because we believe
the
performance of every employee is important to our success, we are mindful of
the
effect of executive compensation and incentive programs on all of our
employees.
At
the
senior-most levels, we will design the incentive compensation to reward
company-wide performance by tying awards primarily to earnings growth and stock
appreciation. At lower levels, we will design the incentive compensation to
reward the achievement of specific operational goals within areas under the
control of the relevant employees, although company-wide performance will also
be a factor.
The
newly
adopted 2007 Omnibus Long-Term Incentive Plan (the “
2007
Omnibus Plan
”)
will
assist the Company in attracting, retaining, and rewarding high-quality
executives, employees, directors and other persons who provide services to
the
Company, enabling such persons to acquire or increase a proprietary interest
in
the Company and to strengthen the mutuality of interests between such persons
and to provide annual and long-term incentives to expend their maximum efforts
in the creation of shareholder value. The 2007 Omnibus PlanP will be
administered by the Compensation Committee, such other committee as determined
by the Board of Directors, or a subcommittee consisting solely of non-employee,
outside directors. The 2007 Omnibus Plan does not limit the availability of
awards to any particular class or classes of Eligible Employees. Awards granted
under the 2007 Omnibus Plan are not transferable, except in the event of the
participant's death. A total of 4,500,000 shares is currently reserved and
available for delivery in connection with awards under the 2007 Omnibus
Plan.
Base
Salaries
We
want
to provide our senior management with a level of assured cash compensation
in
the form of base salary that facilitates an appropriate lifestyle given their
professional status and accomplishments. For our chief executive officer, we
concluded that a base salary of between $65,000 and $75,000 was appropriate
in
this regard for the fiscal year ending December 31, 2006. Similarly, we
concluded that a base salary of between $30,000 and $40,000 was appropriate
for
our chief financial officer for the fiscal year ending December 31, 2006. These
ranges were not objectively determined, but instead reflect levels that we
concluded were appropriate based upon our general experience. We performed
a
similar analysis with respect to other senior management. We provide a
significant level of competition for our senior vice presidents. We believe
that
this gives us the opportunity to attract and retain talented managerial
employees both at the senior executive level and below.
Summary
Compensation Table
Name
& Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation
($)
|
Change
in Pension value and Nonqualified deferred compensation
earnings
($)
|
All
other Compensation
($)
|
Total
($)
|
Wang
Xin, CEO
|
2007
2006
|
65,378
66,309
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
65,378
66,309
|
Zhao
Hongwei, CFO
|
2007
2006
|
51,200
30,110
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
51,200
30,110
|
Wang
Xiaolong, Vice-President
|
2007
2006
|
29,932
25,757
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
29,932
25,757
|
Zhou
Liangyun Vice-President
|
2007
2006
|
29,932
22,989
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
29,932
22,989
|
Wan
Feng, CEO Assistant
|
2007
2006
|
26,781
20,395
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
N/A
N/A
|
26,781
20,395
|
As
of as
of December 31, 2007 the Company did not have any grants of plan-based awards,
outstanding equity awards at fiscal year-end, option exercises and stock vested,
pension benefits, or nonqualified deferred compensation. The Company did not
have any post-employment payments to report.
There
was
no officer whose salary and bonus for the period exceeded $100,000. 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
recently adopted our 2007 Omnibus Long-Term Incentive Plan (the “
2007
Omnibus Plan
”),
as
approved by our shareholders at the Annual Meeting on December 18, 2007, but
there were been no grants under the 2007 Omnibus Plan as of December 31, 2007.
For additional information on the 2007 Omnibus Plan, please see the Current
Report on Form 8-K filed with the Securities and Exchange Commission on January
11, 2008.
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 31, 2008 for each person known by us to be the
beneficial owner of more than 5% of our outstanding shares of common stock.
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
(2)
|
|
Title
of
Class
|
|
Name
and Address of Beneficial Owner
(1)
|
|
Number
of
Shares
(3)
|
|
Percent
of
Voting
Stock
(4)
|
|
Common
|
|
|
Wang
Xin, Chief Executive Officer and Director
|
|
|
3,000,000
|
|
|
10.09
|
%
|
Common
|
|
|
Liu
Yu, Director
|
|
|
6,000,000
|
|
|
20.16
|
%
|
Common
|
|
|
Wang
Zhibin
|
|
|
6,000,000
|
|
|
20.16
|
%
|
__________________
|
(1)
|
Unless
otherwise noted, the address is that of the
Company.
|
|
(2)
|
On
March 31, 2008, there were 29,756,000 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.
|
|
(3)
|
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.
|
|
(4)
|
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
31, 2008 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 includes shares which may be issued upon the exercise
of any
other options or warrants or the conversion of any other convertible
securities.
|
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of March 31, 2008 for each of our officers and directors and
all
our officers and directors as a group. 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
(2)
|
|
Title
of
Class
|
|
Name
and Address of Beneficial Owner
(1)
|
|
Number
of
Shares
(3)
|
|
Percent
of
Voting
Stock
(4)
|
|
Common
|
|
|
Wang
Xin, Chief Executive Officer and Director
|
|
|
3,000,000
|
|
|
10.09
|
%
|
Common
|
|
|
Liu
Yu, Director
|
|
|
6,000,000
|
|
|
20.16
|
%
|
Common
|
|
|
Zhao
Hongwei, Chief Financial Officer
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Naizhong
Che, Director
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Peng
Wang, Director
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Zhixiang
Zhang, Director
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Gao
Jian, Director
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Howard
S. Barth, Director
|
|
|
--
|
|
|
--
|
|
Common
|
|
|
Directors
and executive officers as a group (4 persons)
|
|
|
9,000,000
|
|
|
30.25
|
%
|
__________________
|
(1)
|
Unless
otherwise noted, the address is that of the
Company.
|
|
(2)
|
On
March 31, 2008, there were 29,756,000 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.
|
|
(3)
|
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.
|
|
(4)
|
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
31, 2008 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 includes shares which may be issued upon the exercise
of any
other options or warrants or the conversion of any other convertible
securities.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
.
As
of the
fiscal year ended December 31, 2007,
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected at
left)
|
Equity
compensation plans approved by security holders
|
(1)
|
(1)
|
4,500,000
|
Equity
compensation plans approved by security holders
|
0
|
0
|
0
|
Total
|
|
|
4,500,000
|
|
(1)
|
As
of December 31, 2007, no securities, options, warrants or rights
have been
issued under the 2007 Omnibus Plan approved by our security holders
on
December 18, 2007.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Related
Party Transaction Policy
Other
than the Company's Code of Business Conduct and Ethics, the Board does not
have
a specific written policy regarding the review of related party transactions.
The Board does, however, follow certain procedures relating to the approval
of
transactions involving related parties. Related parties generally include
executive officers and directors, stockholders owning more than 5% of the
Company’s common stock or immediate family members of any such persons. A
related party transaction will be approved only if it is disclosed to the Board
and is approved by a majority of the disinterested members of the Board. Prior
to approving any related party transaction, the members of the Board reviewing
such transaction must (i) be satisfied that they received all material facts
relating to the transaction, (ii) have considered all relevant facts and
circumstances available to them and (iii) have determined that the transaction
is in (or not inconsistent with) the best interests of the Company’s
stockholders. No director that is an interested party in a transaction may
participate in the discussion or approval of such transaction. Other than as
disclosed below, during fiscal year ended December 31, 2007, based on written
representations from the executive officers and directors of the Company, there
were no related party transactions.
Messrs.
Wang Xin and Liu Yu have outstanding loans to the Company in the amount of
$323,000, which loans are unsecured, interest-free and repayable by the Company
on demand of the noteholder.
The
Company has bank loans amounting to $6,699,000 that were guaranteed by a
director, Mr. Liu Yu.
The
Company has a mortgage loan amounting to $73,000 that was guaranteed by a
director, Mr. Wang Xin.
Director
Independence
Messrs.
Naizhong Che, Peng Wang, Zhixiang Zhang, Gao Jian, and Howard S. Barth are
all
non-employee Directors, and all of whom our Board of Directors has determined
are independent pursuant to the rules of the AMEX Rules and the Securities
and
Exchange Commission. All of the members of our Board of Directors Audit
Committee, Nominating/Corporate Governance Committee and Compensation Committee
are independent pursuant to the rules of the AMEX Rules and the Securities
and
Exchange Commission.
Item
14.
|
Principal
Accounting Fees and
Services.
|
Our
independent accountant is Mazars CPA Limited. As reported in our Form 8K filed
on July 6, 2007, the Company appointed Mazars CPA Limited as its independent
accountant effective as of June 29, 2007. Our previous independent accountant
was Moores Rowland Mazars, and this firm underwent a re-organization in 2007
and
did not continue as Moores Rowland Mazars. Certain member of Moores Rowland
Mazars formed Mazars CPA Limited, and we hired that firm to be our independent
accountant. Set below are aggregate fees billed by Moores Rowland Mazars and
Mazars CPA Limited for professional services rendered for the audit of the
Company’s annual financial statements for the year ended December 31, 2007 and
2006, and the review of the financial statements included in the Company’s Form
10Q and Form 10QSB for 2007 and 2006.
Audit
Fees
During
the fiscal year ended December 31, 2007, the fees for our principal accountant
were $90,000, which was composed of $22,500 for two quarterly reviews, and
$67,500 for the preparation of this annual report on Form 10-K. During the
fiscal year ended December 31, 2006, the fees for our principal accountant
were
$81,500, which was composed of $22,500 for quarters review and $59,000 for
the
preparation of the annual report on Form 10-K.
Audit
Related Fees
During
the fiscal years ended December 31, 2007 and December 31, 2006, our principal
accountants did not render assurance and related services reasonably related
to
the performance of the audit or review of financial statements.
Tax
Fees
During
the fiscal year ended December 31, 2007 and December 31, 2006, our principal
accountant did not render services to us for tax compliance, tax advice and
tax
planning.
All
Other Fees
During
the fiscal years ended December 31, 2007 and December 31, 2006, there were
no
fees billed for products and services provided by the principal accountants
other than those set forth above.
The
Audit
Committee has reviewed the above fees for non-audit services and believes such
fees are compatible with the independent registered public accountants’
independence.
Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
Accountant
The
policy of the Audit Committee, and the Board of Directors acting as a whole
prior to the establishment of the Audit Committee, is to pre-approve all audit
and non-audit services provided by the independent accountants. These services
may include audit services, audit-related services, tax fees, and other
services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is subject to a specific budget. The Audit Committee, and the Board of
Directors acting as a whole prior to the establishment of the Audit Committee,
has delegated pre-approval authority to certain committee members when
expedition of services is necessary. The independent accountants and management
are required to periodically report to the full Audit Committee, and the Board
of Directors acting as a whole prior to the establishment of the Audit
Committee, regarding the extent of services provided by the independent
accountants in accordance with this pre-approval delegation, and the fees for
the services performed to date. None of the fees paid to the independent
accountants during fiscal years ended December 31, 2007 and 2006, under the
categories Audit-Related and All Other fees described above were approved by
the
Audit Committee, and the Board of Directors acting as a whole prior to the
establishment of the Audit Committee, after services were rendered pursuant
to
the de minimis exception established by the SEC.
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.
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 of Orsus Xelent Technologies, Inc. (incorporated
by
reference from Exhibit 3.1 to the Registration Statement on Form
SB-2
filed with the Securities and Exchange Commission on July 28, 2004
as
amended by that Plan of Merger and Agreement of Merger attached as
Exhibit
2.1 to the Current Report on Form 8-K filed with the SEC on April
20,
2005)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
from
Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 7, 2007, as amended by the Current
Report on Form 8-K filed with the SEC on March 5, 2007)
|
|
|
4.1
|
Specimen
Certificate of Common Stock (incorporated by reference to Exhibit
4.1 to
Amendment 2 to the Registration Statement on Form SB-2/A filed with
the
Securities and Exchange Commission on October 19, 2004)
|
|
|
10.1
|
Contract
of Suretyship, dated June 20, 2007, between Yayuncun Branch of Beijing
Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
|
|
10.2
|
X180
Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
Distribution Company and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2007)
|
|
|
10.3
|
2007
Omnibus Long-Term Incentive Plan (incorporated by reference from
Exhibit
10.1 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on January 11, 2008)
|
|
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from Exhibit
14
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 7, 2007)
|
|
|
16.1
|
Letter
from Moores Rowland Mazars to the Securities and Exchange Commission
dated
July 5, 2007 (incorporated by reference from Exhibit 16.1 to the
Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
July 6, 2007)
|
|
|
21.1
|
List
of Subsidiaries *
|
|
|
24.1
|
Power
of Attorney (included on signature page)
|
|
|
31.1
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002 *
|
|
|
31.2
|
Certification
of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002 *
|
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer under
Section 906 of the Sarbanes-Oxley Act of
2002*
|
*
Filed
herewith
Orsus
Xelent Technologies, Inc.
Index
to Consolidated Financial Statements
Year
ended December 31, 2006
|
|
Page
|
|
|
|
Report
of Independent 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
|
|
F-6
- F-18
|
Report
of Independent Registered Public Accounting Firm
To
the
Audit Committee, Board of Directors and Stockholders
Orsus
Xelent Technologies, Inc.
We
have
audited the accompanying consolidated balance sheets of Orsus Xelent
Technologies, Inc. and its subsidiaries (the “
Company
”)
as of
December 31, 2007 and 2006, and the related consolidated statements of
operations and other comprehensive income, changes in stockholders' equity
and
cash flows for each of 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 audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing auditing procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. Our audits also included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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, 2007 and 2006, and the results of its operations and its cash flows for
each
of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Mazars
CPA Limited
Certified
Public Accountants
Hong
Kong
Date:
March 31, 2008
Orsus
Xelent Technologies, Inc.
Consolidated
Statements of Operations and other Comprehensive Income
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
|
|
|
|
Years
ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
Operating
revenues - Net sales
|
|
|
|
|
|
89,923
|
|
|
68,108
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operating revenues
|
|
|
|
|
|
(74,174
|
)
|
|
(55,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
income
|
|
|
|
|
|
15,749
|
|
|
12,882
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
|
|
|
(553
|
)
|
|
(1,045
|
)
|
General
and administrative
|
|
|
|
|
|
(2,213
|
)
|
|
(1,560
|
)
|
Research
and development
|
|
|
|
|
|
(340
|
)
|
|
(255
|
)
|
Depreciation
|
|
|
|
|
|
(142
|
)
|
|
(175
|
)
|
Allowance
for obsolete inventories
|
|
|
|
|
|
(875
|
)
|
|
(1,387
|
)
|
Loss
on disposal of property, plant and equipment
|
|
|
|
|
|
(71
|
)
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
|
|
|
(4,194
|
)
|
|
(4,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
|
|
|
11,555
|
|
|
8,006
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
Finance
costs
|
|
|
|
|
|
(989
|
)
|
|
(116
|
)
|
Other
income, net
|
|
|
|
|
|
765
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
11,331
|
|
|
7,965
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
4
|
|
|
(1,648
|
)
|
|
(1,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
9,683
|
|
|
6,718
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
1,931
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
11,614
|
|
|
7,344
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (US$)
|
|
|
|
|
|
0.33
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
|
|
|
29,756,000
|
|
|
29,756,000
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Orsus
Xelent Technologies, Inc.
Consolidated
Balance Sheets
As
of
December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
|
|
|
|
As
of December 31,
|
|
ASSETS
|
|
|
|
2007
|
|
2006
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
2,928
|
|
|
2,421
|
|
Accounts
receivable, net of allowance
|
|
|
|
|
|
57,743
|
|
|
31,425
|
|
Inventories,
net
|
|
|
6
|
|
|
4
|
|
|
1,230
|
|
Trade
deposits paid, net
|
|
|
|
|
|
839
|
|
|
8,989
|
|
Advance
to third party
|
|
|
|
|
|
-
|
|
|
288
|
|
Other
current assets
|
|
|
7
|
|
|
4,196
|
|
|
86
|
|
Pledged
deposit
|
|
|
9
|
|
|
1,206
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
66,916
|
|
|
45,567
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
8
|
|
|
318
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
67,234
|
|
|
45,887
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
|
9
|
|
|
9,160
|
|
|
6,268
|
|
Current
portion of mortgage loan
|
|
|
13
|
|
|
68
|
|
|
-
|
|
Accounts
payable - Trade
|
|
|
|
|
|
10,854
|
|
|
10,964
|
|
Accrued
expenses and other accrued liabilities
|
|
|
|
|
|
8,048
|
|
|
4,444
|
|
Trade
deposits
received
|
|
|
|
|
|
1,709
|
|
|
251
|
|
Due
to directors
|
|
|
12
|
|
|
323
|
|
|
330
|
|
Provision
for warranty
|
|
|
|
|
|
123
|
|
|
53
|
|
Tax
payables
|
|
|
|
|
|
3,047
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
33,332
|
|
|
23,604
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
current liabilities
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan
|
|
|
13
|
|
|
5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
14
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, US$0.001 par value:
Authorized:
100,000,000 shares, no shares issued
|
|
|
|
|
|
-
|
|
|
-
|
|
Common
stock and paid-in capital, US$0.001 par value:
Authorized:
100,000,000 shares
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding: 29,756,000 shares as of
December
31, 2007 and 2006
|
|
|
|
|
|
30
|
|
|
30
|
|
Additional
paid-in capital
|
|
|
|
|
|
2,484
|
|
|
2,484
|
|
Dedicated
reserves
|
|
|
|
|
|
1,042
|
|
|
1,042
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
2,906
|
|
|
975
|
|
Retained
earnings
|
|
|
|
|
|
27,435
|
|
|
17,752
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
|
|
|
33,897
|
|
|
22,283
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
|
67,234
|
|
|
45,887
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Orsus
Xelent Technologies, Inc.
Consolidated
Statements of Changes in Stockholders' Equity
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
|
|
Common
stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
of shares
|
|
Amount
|
|
Additional
paid-in
capital
|
|
Dedicated
reserves
|
|
Other
compre-
hensive
income
|
|
Retained
earnings
|
|
Total
|
|
|
|
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
of January 1, 2006
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
349
|
|
|
11,034
|
|
|
14,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,718
|
|
|
6,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
626
|
|
|
-
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
of January 1, 2007
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
975
|
|
|
17,752
|
|
|
22,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,683
|
|
|
9,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,931
|
|
|
-
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2007
|
|
|
29,756,000
|
|
|
30
|
|
|
2,484
|
|
|
1,042
|
|
|
2,906
|
|
|
27,435
|
|
|
33,897
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Orsus
Xelent Technologies, Inc.
Consolidated
Statements of Cash Flows
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
|
|
Years
ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
income
|
|
|
9,683
|
|
|
6,718
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
142
|
|
|
175
|
|
Loss
on disposal of property, plant and equipment
|
|
|
71
|
|
|
454
|
|
Allowance
for doubtful accounts
|
|
|
587
|
|
|
767
|
|
Allowance
for obsolete inventories
|
|
|
875
|
|
|
1,387
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(23,925
|
)
|
|
(19,072
|
)
|
Inventories,
net
|
|
|
436
|
|
|
1,989
|
|
Trade
deposits paid, net
|
|
|
7,952
|
|
|
1,245
|
|
Other
current assets
|
|
|
(4,104
|
)
|
|
102
|
|
Trade
deposits received
|
|
|
1,441
|
|
|
(5,359
|
)
|
Accounts
payable - trade
|
|
|
(865
|
)
|
|
2,765
|
|
Provision
for warranty
|
|
|
66
|
|
|
(73
|
)
|
Accrued
expenses and other accrued liabilities
|
|
|
3,167
|
|
|
2,133
|
|
Tax
payables
|
|
|
1,664
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,810
|
)
|
|
(5,497
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(199
|
)
|
|
(156
|
)
|
Repayment
from (loan to) third parties
|
|
|
308
|
|
|
(288
|
)
|
Pledged
deposit paid
|
|
|
-
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
109
|
|
|
(1,572
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Advance
from a director
|
|
|
99
|
|
|
-
|
|
Proceeds
from short-term bank loans
|
|
|
5,195
|
|
|
6,268
|
|
Proceeds
from long-term loan
|
|
|
122
|
|
|
-
|
|
Repayment
of short-term bank loans
|
|
|
(2,734
|
)
|
|
-
|
|
Repayment
of long-term loan
|
|
|
(49
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash
provided
by
financing
activities
|
|
|
2,633
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(68
|
)
|
|
(801
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of the year
|
|
|
2,421
|
|
|
2,974
|
|
|
|
|
|
|
|
|
|
Effect
on exchange rate changes
|
|
|
575
|
|
|
248
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the year
|
|
|
2,928
|
|
|
2,421
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
732
|
|
|
116
|
|
Interest
income
|
|
|
21
|
|
|
-
|
|
Tax
paid
|
|
|
47
|
|
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
(note)
|
Orsus
Xelent Technologies, Inc. (“
ORS
”),
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., ORS engaged in developing and operating an online dating
service.
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, ORS was a development stage company, which, other than providing
an online dating service, had no operations or revenues. After recapitalization,
ORS exited the development stage after March 31, 2005.
Upon
the
completion of the reorganization, ORS 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
incorporated in Beijing, the PRC that is engaged in the business of design,
retail and wholesale distribution of cellular phones.
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 ORS 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 cellular phone and accessories, and is 100%
owned
by OXHBVI.
Note:
All
financial figures mentioned in this note are in dollar
amounts.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United
States of
America (“
USGAAP
”).
The
financial statements include the accounts of Orsus Xelent Technologies, Inc.
and
its subsidiaries. All significant intercompany transactions and balances 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.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
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$67 and US$81 as of December 31, 2007 and 2006 respectively
and paid warranty claims of US$1 and US$157 during the years ended December
31,
2007 and 2006 respectively. 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 various countries of operations.
Income
tax expense is computed based on pre-tax income included in the consolidated
statements of operations. 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.
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 term.
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$Nil and US$230 as of
December 31, 2007 and of 2006 respectively.
Inventories
Inventories
are stated at the lower of weighted average cost or market. Potential losses
from obsolete and slow-moving inventories are provided for when
identified.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Property,
plant and equipment
Property,
plant and equipment are stated at original cost less accumulated depreciation
and amortization.
The
cost
of an asset comprises its purchase price and any directly attributable costs
of
bringing the asset to its present working condition and location for its
intended use. Expenditures incurred after the assets have been put into
operation, such as repairs and maintenance, overhaul and minor renewals and
betterments, are normally charged to operating expenses in the period in which
they are incurred. In situations where it can be clearly demonstrated that
the
expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the assets, the expenditure is
capitalized.
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the year of disposition as an
element of other income, net.
Depreciation
is provided to write off the costs of property, plant and equipment over their
useful lives from the date on which they become fully operational and after
taking into account their estimated residual values, using the following
methods:
Moulds
|
Sum-of-the-units
method
|
Leasehold
improvements
|
Straight-line
method over the lease term
|
Machinery
and equipment
|
Straight-line
method at 20% p.a.
|
Office
equipment
|
Straight-line
method at 20% p.a.
|
Motor
vehicles
|
Straight-line
method at 20% p.a.
|
|
Impairment
of long-lived assets
|
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs
to
sell.
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.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Foreign
currency translation (Continued)
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.
Translation
adjustments, when material, resulting from this process are recorded in
accumulated other comprehensive income within stockholders’ equity. Other
comprehensive income for foreign currency translation was recorded for the
years
ended December 31, 2007 and 2006 after the Renminbi ceased to be pledged to
the
United States Dollars during last 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 separate financial
information is available that is evaluated regularly by the operating decision
maker in deciding how to allocate resources and in assessing performance. The
Company operates in a single business segment of trading of cellular phones.
The
Company adopted SFAS No. 131, “Disclosure about Segments of an Enterprise and
Related Information”. The Group’s results of operations and financial position
were affected by the implementation of SFAS No. 131 as it operates in more
than
one geographical areas. Segment information is disclosed in note 3 to the
consolidated financial statements.
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.
|
Recent
accounting pronouncements
There
are
no new accounting pronouncements for which adoption is expected to have a
material effect on the Company’s financial statements in future accounting
periods.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
|
The
Company is engaged principally in the design and trading of cellular
phones primarily to three dealers in the PRC. The Company buys certain
major materials from five major suppliers. In addition, the Company
subcontracts material purchasing and assembly works of cellular phones
mainly to five subcontracting factories. The Company’s policy is 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.
|
|
(a)
|
Customers
accounted for over 10% of the Company's operating revenues are as
follows:
|
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
|
|
|
|
|
|
Customer
A
|
|
|
92
|
|
|
53
|
|
Customer
B
|
|
|
-
|
|
|
19
|
|
Customer
C
|
|
|
-
|
|
|
15
|
|
No
trade
deposit was received from the above customers as of December 31, 2007 and
December 31, 2006. Trade receivables from the above customers were US$54,144
and
US$31,425 as of December 31, 2007 and 2006, respectively.
|
(b)
|
Suppliers
accounted for over 10% of the Company's purchases are as
follows:
|
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
|
|
|
|
|
|
Supplier
A
|
|
|
35
|
|
|
-
|
|
Supplier
B
|
|
|
15
|
|
|
15
|
|
Supplier
C
|
|
|
14
|
|
|
11
|
|
Supplier
D
|
|
|
8
|
|
|
15
|
|
Supplier
E
|
|
|
-
|
|
|
20
|
|
Supplier
F
|
|
|
-
|
|
|
10
|
|
Gross
trade deposits paid to the above suppliers were US$410 and US$6,753 as of
December 31, 2007 and 2006 respectively. Trade payables owed to the above
suppliers were US$2,990 and US$1,348 as of December 31, 2007 and 2006
respectively.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
3.
|
CONCENTRATIONS
(CONTINUED)
|
|
(c)
|
Geographical
segments accounted for over 10% of the Company’s revenue are as
follows:
|
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
Revenues
|
|
|
|
|
|
|
|
PRC
|
|
|
89,923
|
|
|
60,001
|
|
Singapore
|
|
|
-
|
|
|
8,107
|
|
|
|
|
|
|
|
|
|
|
|
|
89,923
|
|
|
68,108
|
|
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
Carrying
amount of long-lived assets
|
|
|
|
|
|
PRC
|
|
|
312
|
|
|
310
|
|
HK
|
|
|
6
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Total
long -lived assets
|
|
|
318
|
|
|
320
|
|
ORS
and
its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which it operates. Provision
for income and other related taxes have been provided in accordance with the
tax
rates and laws in effect in the various countries of operations.
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.
UFI
was
incorporated in Hong Kong and has no assessable profit for the years presented.
OXTHK was also incorporated in Hong Kong. Accordingly, Hong Kong Profits Tax
has
not been provided and has incurred a loss for taxation purposes.
The
Company’s income is principally generated in the PRC by BOXT. 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 of 24% for two years commencing in fiscal year 2005,
followed by a 50% reduction for the next three years.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
4.
|
INCOME
TAXES (CONTINUED)
|
On
March
16, 2007, a New Enterprise Income Tax Law (“
NEITL
”)
was
issued in the PRC. Prior to the issuance of the NEITL, domestic enterprises
(“
DE
”)
and
foreign invested enterprises (“
FIE
”)
in the
PRC were taxed under different enterprise income tax laws. The NEITL unified
the
enterprise tax law applicable to both DE and FIE commencing in fiscal year
beginning from January 1, 2008. The different enterprise income tax
(“
EIT
”)
rates
with effective from January 1, 2008 are as follows:
Unified
EIT rate effective January 1, 2008
|
|
|
25
|
%
|
Small
scale / low profit enterprises
|
|
|
20
|
%
|
Hi-tech
enterprise
|
|
|
15
|
%
|
By
virtue
of the NEITL, it is expected that BOXT will be subject to the unified EIT rate
of 25% under the NEITL. However, the 50% tax reduction, which has already been
obtained by BOXT under the old tax laws, can still be maintained and the
remaining tax holiday, which was commenced before 2008, can still be enjoyed
by
BOXT, until the year to expiry at 2009.
In
July
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 (FIN 48), which clarifies the accounting and disclosure for
uncertainty in tax positions, as defined, and prescribes the measurement process
and a minimum recognition threshold for a tax position, taken or expected to
be
taken in a tax return, that is required to be met before being recognized in
the
financial statements. Under FIN 48, the Company must recognize the tax benefit
from an uncertain position only if it is more-likely-than-not the tax position
will be sustained on examination by the taxing authority, based on the technical
merits of the position. The tax benefits recognized in the financial statements
attributable to such position are measured based on the largest benefit that
has
a greater than 50% likelihood of being realized upon the ultimate resolution
of
the position.
As
of
January 1, 2007, the Company is subject to the provisions of FIN 48, and has
analyzed its filing positions in all of the federal, state and foreign
jurisdictions where it is required to file income tax returns, as well as for
all open years for those jurisdictions. As of December 31, 2006, and December
31, 2007, the Company has identified the following jurisdictions as “major” tax
jurisdictions, as defined, in which it is required to file income tax returns:
United States; Hong Kong and PRC. Based on the evaluations noted above, the
Company has concluded that there are no significant uncertain tax positions
requiring recognition in its consolidated financial statements. Based on a
review of tax positions for all open years, no reserves for uncertain income
tax
positions have been recorded pursuant to FIN 48 during the year ended December
31, 2007, and the Company does not anticipate that it is reasonably possible
that any material increase or decrease in its unrecognized tax benefits will
occur within twelve months.
Upon
adoption of FIN 48 on January 1, 2007, and as of December 31, 2007, the Company
had no unrecognized tax benefits or accruals for the potential payment or
interest and penalties. The Company’s policy is to record interest and penalties
in this connection as a component of the provision for income tax expense.
For
the year ended December 31, 2007, no interest or penalties were
recorded.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
4.
|
INCOME
TAXES (CONTINUED)
|
|
(a)
|
Income
tax expenses comprised the
following:
|
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
Current
tax
|
|
|
|
|
|
United
States
|
|
|
-
|
|
|
-
|
|
Hong
Kong
|
|
|
-
|
|
|
32
|
|
PRC
|
|
|
1,648
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
|
|
1,648
|
|
|
1,247
|
|
|
(b)
|
Reconciliation
from the expected statutory tax rate in the PRC of 24%
(2006:
24%)
is
as follows:
|
|
|
2007
|
|
2006
|
|
|
|
%
|
|
%
|
|
|
|
|
|
|
|
Statutory
rate - PRC
|
|
|
24.0
|
|
|
24.0
|
|
Difference
in tax rates in the countries that the Company operates
|
|
|
-
|
|
|
(0.1
|
)
|
Tax
exemption
|
|
|
(14.9
|
)
|
|
(14.7
|
)
|
Non-deductible
items
|
|
|
5.5
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
14.6
|
|
|
15.5
|
|
Basic
earnings per share is computed based on the net income for the year and on
the
weighted average number of shares of common stock outstanding during each
period.
The
Company had no potential common stock equivalents with a dilutive effect for
any
years presented, therefore basic and diluted earnings per share are the
same.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share amounts)
Inventories
consisted of the followings:
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
-
|
|
|
1,115
|
|
Trading
goods
|
|
|
4
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
1,230
|
|
|
The
Company has changed its mode of operation from keeping inventories
for
resale to indent trading during the year ended December 31, 2007
and
resulted in significant decrease in inventories at the balance sheet
date.
|
Included
in other current assets was a deposit of US$4,102 in relation to a proposed
acquisition paid
pursuant
to a letter of intent entered into during the year.
8.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment is summarized as follows:
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
Moulds
|
|
|
4
|
|
|
107
|
|
Leasehold
improvements
|
|
|
123
|
|
|
115
|
|
Plant
and machinery
|
|
|
19
|
|
|
18
|
|
Office
equipment
|
|
|
284
|
|
|
266
|
|
Motor
vehicles
|
|
|
284
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
595
|
|
|
|
|
|
|
|
|
|
Accumulated
depreciation
|
|
|
(396
|
)
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
318
|
|
|
320
|
|
|
Property,
plant and equipment with an aggregate net book value as of December
31,
2007 of US$177 were pledged to secure the mortgage loan granted to
a
subsidiary of the Company as set out in note 13 to the financial
statements. No such pledge as of December 31,
2006.
|
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
|
All
bank loans are secured by personal guarantee provided by the director,
Mr.
Liu Yu. Bank loans amounted to US$6,699, renewed during the year,
are
further secured by a pledged deposit of US$1,206 and guarantee provided
by
a guaranty company. Remaining bank loans of US$2,461, obtained during
the
year, are further secured by co-guarantees provided by two third
party
companies and a major customer of the Company. All bank loans are
repayable within one year at interest rates ranging from 7.344% to
7.956%
per annum.
|
10.
|
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 equity owners 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 2005, 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.
Since
BOXT has became 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. No such
transfer was made in years presented.
The
general reserve fund can be used to make good losses in previous years. The
staff welfare and bonus fund, which is to be used for the welfare of the staff
and workers of the subsidiary, is of a capital nature.
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$63 and US$27 for the
years
ended December 31, 2007 and 2006 respectively.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
12.
|
RELATED
PARTY TRANSACTION
|
|
(a)
|
Name
and relationship of related parties
|
Related
party
|
Relationship
with the Company during the year ended December 31,
2007
|
|
|
Mr.
Wang Xin
|
Director
and stockholder of the Company
|
Mr.
Liu Yu
|
Director
and stockholder of the Company
|
Mr.
Wang Zhibin
|
Director
and stockholder of the Company #
|
|
(b)
|
Summary
of related party balances
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Note
|
|
US$’000
|
|
US$’000
|
|
Due
to directors
|
|
|
|
|
|
|
|
Mr.
Wang Xin, Mr. Liu Yu and Mr. Wang Zhibin
|
|
|
|
|
|
-
|
|
|
330
|
|
Mr.
Wang Xin and Mr. Liu Yu
|
|
|
(i)
|
|
|
323
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
loans guaranteed by a director
|
|
|
|
|
|
|
|
|
|
|
Mr.
Liu Yu
|
|
|
9
|
|
|
6,699
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan guaranteed by a director
|
|
|
|
|
|
|
|
|
|
|
Mr.
Wang Xin
|
|
|
13
|
|
|
73
|
|
|
-
|
|
Note
:
|
(i)
|
The
amounts are unsecured, interest-free and repayable on
demand.
|
|
#
|
Ceased
to be a director since February 7,
2007.
|
The
mortgage loan is secured by a motor vehicle of a subsidiary of the Company
as
set out in note 8 to the financial statements and a personal guarantee provided
by the director, Mr. Wang Xin. It was charged at a fixed interest rate of 7.56%
per annum and repayable on February 9, 2009.
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
Current
portion
|
|
|
68
|
|
|
-
|
|
Non-current
portion
|
|
|
5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
-
|
|
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
14.
|
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 US$133 and US$51
for the year ended December 31, 2007 and 2006 respectively.
The
following table summarizes the approximate future minimum rental payments under
non-cancelable operating leases in effect as of December 31, 2007 and
2006:
|
|
2007
|
|
2006
|
|
|
|
US$’000
|
|
US$’000
|
|
|
|
|
|
|
|
2007
|
|
|
-
|
|
|
27
|
|
2008
|
|
|
31
|
|
|
-
|
|
2009
|
|
|
20
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
27
|
|
Tax
penalty
In
accordance with PRC’s tax regulations, BOXT’s sales are subject to a 17% of
value added tax (“
VAT
”)
upon
the issuance of VAT invoices to customers. BOXT follows the practice of
reporting its revenue for VAT purposes when invoices are issued. As of December
31, 2007 and 2006, there were sales amounted to approximately US$117,824 and
US$61,324 respectively for which VAT invoices have not yet been issued.
Furthermore,
BOXT reports its revenue for PRC enterprise income tax (“
EIT
”)
purposes when VAT invoices are issued instead of when goods are delivered.
All
unbilled revenue will become taxable when invoice are issued.
The
above
practice is not in strict compliance with the relevant laws and regulations
in
respect of VAT and EIT. Despite the fact that BOXT has made full provision
on
VAT and EIT including surcharge in the financial statements, BOXT may be subject
to a penalty for the deferred reporting of above tax obligations. The exact
amount of penalty cannot be estimated with any reasonable degree of certainty.
The board of directors considers it is more likely than not that the tax penalty
will not be imposed.
Orsus
Xelent Technologies, Inc.
Notes
to Consolidated Financial Statements
Years
ended December 31, 2007 and 2006
(Dollars
in thousands except share data and per share
amounts)
14.
|
COMMITMENTS
AND CONTINGENCIES
(CONTINUED)
|
|
(c)
|
Contingencies
(Continued)
|
Financial
guarantee contract
On
June
20, 2007, BOXT entered into a guarantee contract for three years to June 16,
2010 to serve as guarantor of a bank loan amounting to approximately US$15,350
(equivalent to RMB120,000) to an independent third-party, CECT-Chinacom
Communications Co., Ltd. (“
CECT
”),
from
Beijing Rural Bank to provide CECT with capital for equipment purchases. Under
the guarantee contract, BOXT shall perform all obligations of CECT under the
loan contract if CECT fails to perform its obligations as set forth in the
loan
contract, including, but not limited to, ceasing production, going out of
business, dissolving the business, having its business license withdrawn, and
filing for bankruptcy.
According
to a valuation report dated March 27, 2008 issued by an independent professional
valuer, the fair value of the undiscounted maximum potential amount of future
payments, which was estimated by the independent professional valuer, that
BOXT
could be required to make under the guarantee contract is amounted to US$102
(equivalent to approximately RMB745) as of the date of inception. At the balance
sheet date, there is no change in the estimated fair value of the financial
guarantee since the date of inception in accordance with the above mentioned
valuation report.
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:
April 1, 2008
____________________
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
|
|
|
Wang
Xin
|
|
(Principal
Executive Officer) and Director
|
|
|
|
|
|
|
|
/s/
Zhao Hongwei
|
|
Chief
Financial Officer
|
|
|
Zhao
Hongwei
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Liu Yu
|
|
Chairman
of the Board of Directors
|
|
|
Liu
Yu
|
|
|
|
|
|
|
|
|
|
/s/
Naizhong Che
|
|
|
|
|
Naizhong
Che
|
|
|
|
|
|
|
|
|
|
/s/
Peng Wang
|
|
|
|
|
Peng
Wang
|
|
|
|
|
|
|
|
|
|
/s/
Zhixiang Zhang
|
|
|
|
|
Zhixiang
Zhang
|
|
|
|
|
|
|
|
|
|
/s/
Gao Jian
|
|
|
|
|
Gao
Jian
|
|
|
|
|
|
|
|
|
|
/s/
Howard S. Barth
|
|
|
|
April
1, 2008
|
Howard
S. Barth
|
|
|
|
|
Index
to Exhibits
Exhibit
Number
|
Exhibit
Description
|
|
|
3.1
|
Certificate
of Incorporation of Orsus Xelent Technologies, Inc. (incorporated
by
reference from Exhibit 3.1 to the Registration Statement on Form
SB-2
filed with the Securities and Exchange Commission on July 28, 2004
as
amended by that Plan of Merger and Agreement of Merger attached
as Exhibit
2.1 to the Current Report on Form 8-K filed with the SEC on April
20,
2005)
|
|
|
3.2
|
Amended
and Restated Bylaws of the Registrant (incorporated by reference
from
Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 7, 2007, as amended by the
Current
Report on Form 8-K filed with the SEC on March 5, 2007)
|
|
|
4.1
|
Specimen
Certificate of Common Stock (incorporated by reference to Exhibit
4.1 to
Amendment 2 to the Registration Statement on Form SB-2/A filed
with the
Securities and Exchange Commission on October 19, 2004)
|
|
|
10.1
|
Contract
of Suretyship, dated June 20, 2007, between Yayuncun Branch of
Beijing
Rural Commercial Bank and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to
the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 12, 2007)
|
|
|
10.2
|
X180
Mobile Terminal Purchase Contract, dated May 31, 2007, among Unicom
Huasheng Telecommunication Technology Co., Ltd., Dalian Daxian
Distribution Company and Beijing Orsus Xelent Technology & Trading
Company Limited (incorporated by reference from Exhibit 10.1 to
the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 6, 2007)
|
|
|
10.3
|
2007
Omnibus Long-Term Incentive Plan (incorporated by reference from
Exhibit
10.1 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on January 11, 2008)
|
|
|
14.1
|
Code
of Business Conduct and Ethics (incorporated by reference from
Exhibit 14
to the Current Report on Form 8-K filed with the Securities and
Exchange
Commission on February 7, 2007)
|
|
|
16.1
|
Letter
from Moores Rowland Mazars to the Securities and Exchange Commission
dated
July 5, 2007 (incorporated by reference from Exhibit 16.1 to the
Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
July 6, 2007)
|
|
|
21.1
|
List
of Subsidiaries *
|
|
|
24.1
|
Power
of Attorney (included on signature page)
|
|
|
31.1
|
Certification
of Principal Executive Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002 *
|
|
|
31.2
|
Certification
of Principal Financial Officer under Section 302 of the Sarbanes-Oxley
Act
of 2002 *
|
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer
under
Section 906 of the Sarbanes-Oxley Act of
2002*
|
*
Filed
herewith
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