<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] 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 0-29946
QIAO XING UNIVERSAL TELEPHONE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
QIAO XING UNIVERSAL TELEPHONE, INC.
-----------------------------------------------
(Translation of Registrant's name into English)
British Virgin Islands
-----------------------------------------------
(Jurisdiction of incorporation or organization)
Qiao Xing Building
Wu Shi Industrial Zone
Huizhou City, Guangdong,
People's Republic of China
----------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Name of each exchange
class on which registered
------------- ---------------------
None N/A
<PAGE>
Securities registered or to be registered pursuant to Section 12(g) of the Act.
$.001 Par Value Common Stock ("Common Stock")
---------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
----------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of December 31, 1999:
9,600,000 Shares of Common Stock
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
-----
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 _____ Item 18 X
-----
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
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<PAGE>
EXCHANGE RATE INFORMATION
The Company has prepared its consolidated financial statements in
accordance with United States generally accepted accounting principles
consistently applied and publishes such statements in Renminbi, the functional
currency of the Company's subsidiaries and the legal tender currency of China.
All references to "Renminbi" or "RMB" are to Renminbi. All references to "U.S.
Dollars," "dollars," "US$" or "$" are to United States dollars. Conversion of
amounts from Renminbi into United States dollars for the convenience of the
reader has been made at the unified exchange rate quoted by the People's Bank of
China("PBOC")on December 31, 1999 of US$1.00 = RMB8.28.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
<TABLE>
<CAPTION>
Noon Buying Rate(1)
------------------------------------------------------------------
Calendar Year Period End Average (2) High Low
------------ ---------- ----------- ---- ---
(RMB per US$)
<S> <C> <C> <C> <C>
1995 8.3374 8.3852 8.5000 8.2916
1996 8.3284 8.3387 8.5000 8.3267
1997 8.3099 8.3193 8.3260 8.3099
1998 8.2789 8.2789 8.2801 8.2740
1999 8.2795 8.2783 8.2800 8.2770
</TABLE>
(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
New York. Since April 1994, the noon buying rate has been based on the
PBOC Rate. As a result, since April 1994, the noon buying rate and the
PBOC Rate have been substantially similar.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
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<PAGE>
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 20-F and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contains statements that are forward-looking, such as statements
relating to plans for future expansion and other business development activities
as well as other capital spending, financing sources and the effects of
competition. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to dependence upon
key personnel, control by principal shareholder, competition, material factors
relating to the operations of the business, the transfer of Hong Kong's
sovereignty, PRC considerations, dependence on China factories, and general
economic conditions.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
---------------------------------
Background and Organization
Qiao Xing Universal Telephone, Inc. (the "Company" or "Qiao Xing") is
principally engaged in the manufacturing and sales of telecommunication
terminals and equipment, including corded and cordless telephone sets, in China.
The Company's annual production capacity of telephone sets has increased from
300,000 to an estimated 5 million within the last seven years. Its actual sales
in 1999 were 4.2 million sets.
The history of the Company dates back to April 1992 when Mr. Rui Lin Wu,
the founder and the President of the Company, established Qiao Xing
Telecommunication Industry Co. Ltd. in Huizhou, People's Republic of China
("PRC" or "China"). The Company initially was engaged in the original design
manufacturing of corded telephones, whereby products are designed and
manufactured to the customer's requirements and instructions and are marketed
under the customer's designated brand name or without designated brand name.
When the Company commenced its operations in August 1992, it consisted of only
100 employees and two production lines producing telephones.
In October 1992, the Company began to develop its own brand name products
and by the end of 1992, five different models of telephones had been
successfully developed. With only one year's experience of operation, Qiao Xing
had manufactured 300,000 telephones with net sales of RMB6 million. In 1993, the
Company further enhanced its production capacity by expanding the factory area
from 400 square meters to 3,800 square meters and by increasing the number of
employees from 100 to 400. In 1993, Qiao Xing had manufactured 1,000,000
telephones with net sales of RMB50.1 million and generated a profit exceeding
RMB4.4 million. The Company continued to expand its production capacity as its
business grew. In 1994, the Company enlarged its factory area to 15,000 square
meters with 20 production lines and 1,000 employees. Since then, Qiao Xing has
successfully introduced its Model HA8188 series of 20 different styles of
telephones which it developed. In 1994, Qiao Xing produced 1,300,000 telephones
with net sales of RMB122.5 million, and generated a net profit of RMB20.0
million.
In August 1995, Qiao Xing was awarded the ISO9001 certificate, which
reflects the Company's reputation as a high quality telephone manufacturer. In
addition, by the end of 1995, the Company both increased its production to
include over 30 different types of telephones and the number of production lines
to 28, generating an annual output of 3,000,000 telephones with net sales of
RMB277.7 million. The net profit exceeded RMB34.1 million for the fiscal year
ended December 31, 1995.
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<PAGE>
In view of an increased market demand, in 1996, the Company successfully
introduced a line of cordless telephone sets (one-channel and ten-channel
products) to the market. By the end of 1996, five cordless products had been
introduced, and 150,000 sets were sold. For the fiscal year ended December 31,
1996, 3,241,000 telephone sets, including cordless phones, were produced, with
net sales of RMB351.9 million. The net profit was RMB34.5 million. In October
1997, the Company successfully introduced the special function corded telephone
sets. For the fiscal year ended December 31,1997, the Company produced 2,946,000
telephone sets with sales of RMB383.9 million. The net profit was RMB41.2
million.
For the first quarter of 1998, the Company developed and introduced caller
ID display telephones and coined telephones. During the fiscal year ended
December 31,1998, the Company produced 2,824,000 telephone sets with net sales
of US$42.4 million (RMB351.2 million). The net profit was US$5.7 million
(RMB47.3 million).
In 1999, the Company's alteration of its sales mix towards the caller ID
telephone which carried a higher profit margin successfully maintained its
growth in gross profit and net income. The caller ID telephones represented 12%
of net sales in 1999 as compared to 3% of net sales in 1998. For the fiscal year
ended December 31, 1999, the Company generated an annual output of 4,159,032
telephones with net sales of US$46.3 million. The net income for the fiscal year
ended December 31, 1999 was US$6.0 million.
The Company, formerly known as Pastiche Investments Limited, was
incorporated as an international business company under the International
Business Companies Act of the British Virgin Islands on December 6, 1994. The
Company owns the entire issued share capital in Qiao Xing Holdings Limited
("QXHL"), an international business company incorporated in the British Virgin
Islands on July 23, 1997. QXHL owns 90% of the issued share capital in Qiao Xing
Telecommunication Industry Co. Limited ("QXTI"), a PRC joint venture.
Substantially all of the Company's income is contributed by QXTI. The remaining
10% of QXTI is owned by Qiao Xing International Trading Ltd. ("QXIT"), a PRC
company owned by Rui Lin Wu (40%) and his elder son Zhi Yang Wu (60%). Messrs.
Wu and Wu are executive officers and directors of the Company. On May 25, 1999,
QXIT transferred all of its 10% equity interest in QXTI to Qiao Xing Group
Limited ("QXGL"), a privately owned company established in Mainland China. The
change in equity interest in QXTI and the supplementary joint venture agreement
have been approved by the relevant Mainland Chinese authorities. Mr. Rui Lin Wu
and Mr. Zhi Yang Wu, as the shareholders of QXGL, have agreed to vote their
minority position in QXTI in a manner consistent with QXHL.
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<PAGE>
Sino Foundations
Zhi Jian Holdings Ltd.
Wu Li (a Hong Kong
Listed Company)
100% 100%
Sino
Qiao Xing Trust Communications
Ltd.
71.16% 28.84%
Wu Holdings Ltd. Public
Shareholders
57.0% 43.0%
QIAO XING UNIVERSAL Rui Lin Wu and
TELEPHONE, INC. Zhi Yang Wu and
Zhi Zhong Wu
100% 100%
Qiao Xing Holding Qiao Xing
Group Limited.
90% 10%
Qiao Xing
Telecommunication
Industry Co. Ltd.
Industry Overview
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<PAGE>
Since 1990, the telecommunications industry has grown rapidly in China, a
country with a population of 1.2 billion whose economy is undergoing tremendous
growth, with an accompanying rise in the population's standard of living. This
rise in affluence has proven beneficial for Qiao Xing as the Chinese are more
willing to purchase phones and to upgrade from the corded to the cordless
variety. Land-line telephone subscribers numbered 70.3 million in 1997, 8.3
times the number of subscribers in 1991. The national telephone penetration rate
for land-line phones grew from 6.33% in 1996 to 8.07% in 1997, and this growth
is expected to increase to 123 million or 10% of the population by 2000.
In March 1998, the government formed the new Ministry of Information
Industry to focus on supporting local technology and locally made products in
China's telecommunications industry. In December 1999, the Ministry awarded a
multi-million dollar interest-free loan and export credit facility to Qiao Xing
due to the Company's strong worldwide export potential, aggressive marketing
capabilities and excellent management team.
Business Operations and Product Range
Qiao Xing is principally engaged in the design, manufacture and sale of
telecommunication terminals and equipment in the PRC, including primarily corded
and cordless telephone sets under the trademark of "Qiao Xing". According to
the National Statistic Bureau of the China Technology Progress Information
Centre, Qiao Xing was the largest telephone manufacturer by sales volume in the
PRC in 1999.
Qiao Xing has produced corded telephones since its formation in 1992. In
1996, it successfully developed the manufacture of one-channel and ten-channel
cordless telephones. However, since one-channel cordless phones can be easily
interfered and create a lot of noises, the Company stopped producing it in June
1997 and now concentrates on ten-channel cordless phone manufacturing.
In October 1997, the Company introduced the smart card telephones, which is
the first of many special function corded telephones that the Company expects to
develop and introduce to the market. In the first quarter of 1998, the Company
developed and introduced caller ID display telephones and coin operated
telephones. The Company developed the Digital Cordless Phone in 1999.
Presently, the Company is producing and selling 165 corded models and 25
cordless models, and have an extensive nationwide sales network that comprises
1,350 retail outlets in China.
Telephone Sales By Units
Year ended December 31
1995 1996 1997 1998 1999
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<PAGE>
<TABLE>
<CAPTION>
sets sets sets sets sets
<S> <C> <C> <C> <C> <C>
corded 2,963,007 3,092,687 2,602,003 2,339,999 3,154,412
cordless 3,181 148,695 326,993 240,168 210,578
smart card --- --- 16,995 152,574 240,633
caller ID --- --- --- 72,691 538,560
coin operated --- --- --- 18,943 14,849
Total 2,966,188 3,241,382 2,945,991 2,824,375 4,159,032
</TABLE>
<TABLE>
<CAPTION>
Average Wholesales Prices Per Set
Year ended December 31
1995 1996 1997 1998 1999
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
corded 93.18 90.94 97.21 82.09 62.55
cordless 490.85 475.13 417.51 332.03 273.20
smart card --- --- 633.12 507.53 292.68
caller ID --- --- --- 154.98 99.28
coin operated --- --- --- 328.44 263.02
</TABLE>
<TABLE>
<CAPTION>
Telephone Sales By RMB
Year ended December 31
1995 1996 1997 1998 1999
RMB'000' RMB'000' RMB'000' RMB'000' RMB'000'
<S> <C> <C> <C> <C> <C>
corded 276,093 281,249 242,646 184,020 190,282
cordless 1,561 70,649 130,921 76,207 58,696
smart card --- --- 10,367 74,100 71,739
caller ID --- --- -- 10,887 54,476
coin operated --- --- -- 5,970 8,440
Total 277,654 351,898 383,934 351,184 383,633
</TABLE>
Cordless telephones and the special function corded telephones require more
sophisticated and more hi-tech manufacturing techniques and the Company charges
a higher wholesale price and makes a greater margin for special function corded
telephones than for the ordinary one. The wholesale prices for the Company's
cordless telephones range from US$30-60 (RMB250-500). For corded telephones, two
categories have been classified, with the simpler version selling for US$6-15
(RMB50-125), and the models with more sophisticated features selling for US$15-
18 (RMB125-150) per telephone. The wholesale prices for the special corded
telephones range from US$16-80 (RMB130-660) per telephone.
Cordless telephones on average have a gross profit margin of 20 percent,
corded telephones have an approximately 21 percent gross profit margin, and
special function corded telephones have a gross profit margin of 23 to 65
percent.
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<PAGE>
The top three popular products that Qiao Xing is selling are all corded
telephones:
HE1 356,809 sets sold in 1999
8(5) B 200,543 sets sold in 1999
8(7) F 174,135 sets sold in 1999
In addition to its core products, Qiao Xing has also produced a small
quantity of digital recording telephones and telephone exchanges.
Production Facilities
The Company's current maximum production capacity of telephones is
approximately 5,000,000 units per year. The Company had produced 4,159,032 units
in 1999, consisting of 3,154,412 units of corded telephones, 210,578 units of
cordless telephones and 794,042 units of special function corded telephones.
-10-
<PAGE>
Manufacturing Process
The Company's manufacturing process is subject to stringent quality
control. This process begins with its incoming quality control process, whereby
all externally supplied parts are inspected in accordance with the standard
established by the Company. The Company's finished products are delivered to a
holding area where the quality assurance workers randomly select samples of
product from each shipment which are checked in accordance with an accepted
quality level previously drawn up and agreed with the particular customer to
ensure that the samples comply with the required specifications. The finished
products are then ready for delivery.
The following principal steps are involved in the manufacturing process
after the initial inspection process:
. Plastic Injection Molding - Plastic resins are loaded into an
injection machine, where they are melted and injected into a ready-made
mold. When the plastic piece cools down, it becomes a solid piece of
inelastic plastic part.
. Painting and Silk Screen Printing - Some individual pieces or
components need hand-spraying, using a variety of techniques including
free-hand spraying, mask or template spraying, free hand brush painting and
silk screen printing.
. Assembly - When all components have been molded and painted, they
are transferred to an assembly line. Each assembly line is operated by a
team of workers, each having a specific task in the assembly of a product.
The following steps are usually involved in producing electronic components
after the incoming quality control process. Two methods of assembly are used by
the Company, namely automatic wave soldering and surface mount technique.
. Automatic Wave Soldering - Components are soldered on to the
printed circuit boards by using automatic wave soldering machines which
pre-heat, flux and solder the circuit boards, before cutting off excess
lengths of the legs of components. Finally, the circuit boards are dipped
into a solder bath to ensure that reliable joints are formed in a single
automated process. The automatic wave-soldering machine is subject to
hourly checks to ensure that all soldering machines are at the correct
temperature in order to achieve consistency.
. Surface Mount Technique - Miniaturized components are placed onto
the surface of a circuit board by a pick and place device. The components
are attached to the circuit board using epoxy resin and the circuit board
is then passed through an oven which bakes the resin to hold the components
in place. The circuit board is subsequently placed onto a wave soldering
machine where solder flows around the components to ensure that they
achieve a correct electrical connection.
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<PAGE>
Thereafter, electronic circuit boards are transferred to sub-assembly lines
where supplementary components like switches, which cannot be processed through
the automatic wave soldering machines or the surface mount placement machines,
are assembled onto the circuit boards. All the circuit boards are then subject
to computerized in-circuit testing to ensure that the ``circuit'' is continuous
and does not contain damaged components or poorly soldered joints. The circuit
boards are then subject to a full function testing by inserting them into
specially designed test fixtures which simulate the performance of the circuit
boards as if they were already installed into their final plastic cabinet.
The electronic circuit boards are assembled into their cabinets, which are
then once again subject to a full-function testing through a wider variety of
performance-related and specification-related tests. The products are then
packed together with operation manuals and other related accessories into
shipping cartons ready for export to the Company's customers.
Each of the different product categories is subject to different product
design requirements and testing procedures, under their respective industry
standards. The similarities in certain stages of the production procedure of
these different products allow the Company a degree of flexibility in organizing
its production capacity to cope with any changes in product mix effectively.
Management believes that the Company's growth in revenue in recent years
demonstrates its ability to operate profitably with different product mixes,
such as corded telephones, cordless telephones and telephone recorders.
Management also believes that the product mix of the Company allows it to buffer
against any unexpected downturn in general demand for any single product
category better than many of the Company's competitors who are engaged solely in
the production of a single product category.
Quality Assurance System
The Company places significant emphasis on preventive measures in the
quality control process and employs quality control procedures at every critical
manufacturing stage, with the aim of identifying, analyzing and solving problems
at the earliest possible stage of the production process. The Company is
equipped with the necessary testing facilities to handle the quality control
tests and provides in-house training for its quality control staff.
Quality control tests on the production process include:
. Sampling test method is used to inspect all incoming materials on a
sample basis;
. At each stage of production process, quality control inspectors monitor
the production flow and check the quality of the products; and
. Finished products are checked by quality control staff on a sample
basis.
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<PAGE>
The Company obtained the ISO 9001 Quality System Certificate in respect of
its quality assurance system in August 1995, reflecting the Company's reputation
as a quality telecommunication equipment manufacturer.
The Company has not received any material claims for defective products
from customers for the three years ended December 31, 1999.
Sales and Marketing
Substantially all of the Company's products are sold in the PRC market and
accounted for approximately 99.7 percent and 99.5 percent of the Company's total
revenues for the years ended December 31, 1998 and 1999, respectively. The
remaining balance of products is exported to Canada, Korea and Taiwan.
The Company currently has 40 independent regional distributors and after-
sales service centers, including six wholesale agencies, serving its major
customers in different provinces in the PRC. There is at least one
representative assigned by Qiao Xing to each regional distributor to make
frequent visits in order to understand the business operation and assist
management. These regional distributors distribute the Company's
telecommunication products to a network of over 1,350 retail outlets, including
310 consignments in big department stores. The purchase orders for telephones
from these retail outlets are collected by the 40 regional distributors, who
would then place consolidated purchase orders with the Company on their own
accounts. The regional distributors are each responsible for the credit risk and
settlement of their own customers. A settlement period of 30 days to 210 days is
given by the Company to the distributors.
The second way that the Company's products are marketed is through direct
mailing. By following the telephone directory, the regional distributors will
send out product catalogues to selected households. If customers are interested,
they can contact the distributor and place an order.
The Company's sales and marketing strategy focuses on satisfying customers
with high quality product, consistent timely delivery, competitive product
pricing and efficient after-sales service. The staff of the Company communicates
regularly with the regional distributors and their customers to obtain market
information and to ascertain their needs. The Company also conducts regular
reviews to analyze customers' potential demands and to plan for new products.
Management believes that the provision of efficient after-sale service is
an important factor in influencing consumers' choices. The Company offers a one-
year warranty on its telephones. During the warranty period, all repair and
maintenance services are provided free of charge. After the warranty period,
customers assume the cost of repair and the components used. After-sale services
for the products manufactured by the Company are provided by the 40 regional
distributors.
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<PAGE>
The Company advertises through various media, including national and
regional television networks, radio, newspapers, magazines, posters, billboards
and advertising pamphlets. In addition, the "Qiao Xing" brand name is also
promoted through sponsorship of sports events. For instance, in 1996, the
Company had sponsored the China Diving Team and the 1996 Olympic Champion
Diver--Miss FU Ming Xia--in return for Miss Fu's agreement to appear in Qiao
Xing's product brochures.
The Company had spent approximately US$1.6 million in 1999 for advertising
and promotion. It is expected that US$2.0 million will be spent in 2000.
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<PAGE>
Materials and Components
More than 3,000 different parts and components are required for the
manufacture of current models of the Company's corded and cordless telephone
sets. The primary components are integrated circuits, printed circuit boards,
liquid crystal displays, resistors, transistors and diodes. Except for some
special integrated circuit items and central processing units, which are sourced
from Hong Kong, the Company obtains its major components and raw materials from
the leading suppliers in the Pearl River Delta in the PRC. In order to secure
the supply of raw materials, the Company will select at least two suppliers for
each component. Management believes that there is no seasonality factor which
might affect the supply of raw materials. For the year ended December 31, 1999,
the top five suppliers of the Company accounted for approximately 30.48% percent
of the Company's total purchases of materials and components. No single supplier
accounted for over 12 percent of the Company's total purchases of materials and
components for the year ended December 31, 1999.
The Company has formal distributorship agreements with the suppliers of the
parts and components. However, these contracts only confirm the selected
components and the price that Qiao Xing has agreed to pay; there is no firm
agreement on the quantity to be purchased. The Company believes that it has
established a very stable and friendly relationship with its suppliers, since
more than 70 percent of these suppliers have remained major suppliers of Qiao
Xing since 1993. Payment for materials and components are made in RMB with a
credit term ranging from 30 days to 270 days.
Research and Development
The Company's research and development ("R&D") and engineering functions
are performed in the PRC. As at December 31, 1999, the Company employed 58 staff
in the R&D and engineering divisions, who work closely with the Company's sales
and marketing executives to gauge the market demand in developing new products
and new models of existing products. The R&D division is currently monitoring 25
particular models of corded telephone, eight particular models of cordless
telephone, and three models of code division multiple access (CDMA) cellular
telephones.
In 1999, Qiao Xing spent US$68,000 on the R&D division. The Company
anticipates increasing the research and development funding and the budget to
purchase new technologies up to US$3.0 million in 2000. The significant increase
is due to the proposed CDMA phones developing plan.
Competition
The market for telecommunication equipment generally and corded and
cordless telephones, as well as facsimile machines, in particular in the PRC is
intensely competitive. The Company believes that the principal competitive
factors are brand name recognition, distribution capability, after-sale service,
short lead time in
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<PAGE>
product development, product quality and capability of mass production. Only
those telecommunication products that have been granted the permits issued by
the Ministry of Posts and Telecommunications are allowed to be connected to the
telephone network in the PRC.
Management considers that the products manufactured by the Company are not
competing directly with imported products with similar features, which are sold
in the higher price range. The Company currently competes directly with domestic
manufacturers in the PRC, namely BUBUGAO in GuangDong, which is currently the
second seller of telephones in the PRC, according to the statistical report
released by the Trade and Foreign Economy Statistics Division of National
Statistic Bureau. According to the Company's market research, in 1999, BUBUGAO
owned a market share of approximately 14.54 percent, and the Company accounted
for approximately 18.56 percent. However, BUBUGAO is now diversifying into home
electric appliance manufacture, including VCD sets, which will likely divert
some of its resources from the telephone manufacturing business.
ITEM 2. DESCRIPTION OF PROPERTY.
----------------------------------
The Company's principal executive offices are located at Qiao Xing
Building, Wu Shi Industrial Zone, Huizhou City, Guangdong, PRC. The Company's
production facilities are located in four five-storied industrial buildings in
Wu Shi Industrial Zone, Huizhou City, Guangdong, PRC, with a total gross floor
area of approximately 16,300 square meters.
ITEM 3. LEGAL PROCEEDINGS.
----------------------------
The Company is not a party to any material legal proceedings, nor are there
any material legal proceedings pending with respect to any property of the
Company, and the Company is not aware of any legal proceedings contemplated by
any governmental authorities involving either the Company or its property. No
director, officer or affiliate of the Company, or any associate of a director,
officer or affiliate of the Company, is an adverse party in any legal
proceedings involving the Company or its subsidiaries, or has an interest in any
such proceeding which is adverse to the Company or its subsidiaries.
ITEM 4. CONTROL OF REGISTRANT.
--------------------------------
(a) As far as is known to management of the Company, the Company is not
directly or indirectly owned or controlled by another corporation or by any
foreign government.
(b) The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of June 30, 2000
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<PAGE>
(i) by each person who is known by the Company to own beneficially
more than 10% of the outstanding Common Stock, (ii) by each executive
officer and director of the Company and (iii) by all directors and
executive officers as a group. Except as set forth below, to the
knowledge of the Company, the Company is not directly or indirectly
owned or controlled by any other corporation or by any foreign
government.
This information gives effect to securities deemed outstanding pursuant to Rule
13d-3(d)(I)under the securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
Name of Beneficial Holder Number Percent
------------------------- ------ -------
Shares Beneficially Owned
-------------------------
<S> <C> <C>
Wu Holdings Limited.................................................. 6,819,000(1) 57.0
Rui Lin Wu........................................................... 7,399,000(1)(2) 60.3
Zhi Yang Wu.......................................................... 250,000(3) 2.0
Zhang Zhi Fang....................................................... 0 0
Zhong Ai Li.......................................................... 0 0
Jie Shi.............................................................. 0 0
Liu Rong Yang........................................................ 0 0
Zi Shu Huang......................................................... 0 0
Guo Liang Zhang...................................................... 0 0
All directors and executive officers
as a group (8 persons)............................................... 7,649,000(2)(3) 61.1
</TABLE>
___________
(1) Wu Holdings Limited is a British Virgin Islands corporation which is 71.16%
owned by the Qiao Xing Trust and the remaining 28.84% is owned by Sino
Communications Ltd., a wholly owned subsidiary of a nonaffiliated
corporation listed on The Stock Exchange of Hong Kong Limited. The Qiao
Xing Trust is a Cook Islands trust which was formed for the primary benefit
of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, Chairman of the Company.
The 6,819,000 shares of Common Stock owned of record and beneficially by Wu
Holdings Limited may be deemed to also be beneficially owned by Rui Lin Wu
(within the meaning of Rule 13d-3 under the Securities Exchange Act of
1934, as amended) since he may be deemed to have and/or share the power to
direct the voting and disposition of such shares.
(2) Includes options currently exercisable to acquire 300,000 shares of common
stock.
(3) Includes options currently exercisable to acquire 250,000 shares of common
stock.
(c) To the knowledge of the Company, there are no arrangements known to
the Company, the operation of which may at a subsequent date result in a change
of control of the Company.
-17-
<PAGE>
ITEM 5. NATURE OF TRADING MARKET.
-----------------------------------
The Common Stock is traded in the over-the-counter market and is quoted on
The Nasdaq National Market under the symbol "XING." The following table sets
forth, on a quarterly basis, the high and low sales prices for the Common Stock
since its listing on The Nasdaq National Market on February 16, 1999:
Quarter ended: High Low
-------------- ---- ---
March 31, 1999 $ 6 1/4 $ 4
June 30, 1999 $ 5 $ 3 1/4
September 30, 1999 $ 4 7/16 $ 3 1/8
December 31, 1999 $ 35 1/2 $ 2 5/8
March 31, 2000 $ 55 $ 26
June 30, 2000 $ 32 7/8 $ 10 3/4
The Company does not believe that there is any principal non-United States
trading market for the Common Stock. The Company believes that a substantial
majority of the outstanding Common Stock is held in the United States by Cede &
Co. as record holder.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
-----------------------------------------------------------------------------
There are no exchange control restrictions in China on the repatriation of
dividends by the Company's subsidiaries. In addition, there are no material
British Virgin Islands laws that impose foreign exchange controls on the Company
or that affect the payment of dividends, interest or other payments to
nonresident holders of the Company's capital stock. British Virgin Islands law
and the Company's Memorandum of Association and Articles of Association impose
no limitations on the right of nonresident or foreign owners to hold or vote the
Common Stock.
ITEM 7. TAXATION.
-------------------
The following is a summary of certain anticipated material U.S. federal
income and British Virgin Islands tax consequences of an investment in the
Common Stock. The summary does not deal with all possible tax consequences
relating to an investment in the Common Stock and does not purport to deal with
the tax consequences applicable to all categories of investors, some of which
(such as dealers in securities, insurance companies and tax-exempt entities) may
be subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other national (e.g., non-U.S. and non-
British Virgin Islands) tax laws. Accordingly, each prospective investor should
consult its
-18-
<PAGE>
own tax advisor regarding the particular tax consequences to it of an investment
in the Common Stock. The following discussion is based upon laws and relevant
interpretations thereof in effect as of the date of this Annual Report, all of
which are subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source) making an investment in the Common Stock (a
"U.S. Investor"). For taxable years beginning after December 31, 1996, a trust
will be a U.S. person only if (i) a court within the United States is able to
exercise primary supervision over its administration and (ii) one or more United
States persons have the authority to control all of its substantial decisions.
In addition, the following discussion does not address the tax consequences to a
person who holds (or will hold), directly or indirectly, 10% or more of the
Common Stock (a "10% Shareholder"). Non-U.S. persons and 10% Shareholders are
advised to consult their own tax advisors regarding the tax considerations
incident to an investment in the Common Stock.
A U.S. Investor receiving a distribution with respect to the Common Stock
will be required to include such distribution in gross income as a taxable
dividend, to the extent of the Company's current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Any
distributions in excess of such earnings and profits of the Company will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital, to the extent of the U.S. Investor's adjusted tax basis in the Common
Stock, and then as gain from the sale or exchange of a capital asset, provided
that the Common Stock constitutes a capital asset in the hands of the U.S.
Investor. U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Common Stock.
Gain or loss on the sale or exchange of the Common Stock will be treated as
capital gain or loss if the Common Stock is held as a capital asset by the U.S.
Investor. Such capital gain or loss will be long-term capital gain or loss if
the U.S. Investor has held the Common Stock for more than one year at the time
of the sale or exchange, and will be taxed at the lowest rates applicable to
capital gains if the U.S. Investor has held the Common Stock for more than
eighteen months at such time.
A holder of Common Stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on such Common Stock if such dividends are
paid by a paying agent, broker or other intermediary in the United States or by
a U.S. broker or certain United States-related brokers to such holder outside
the United States. In addition, the proceeds of the sale, exchange or redemption
of Common
-19-
<PAGE>
Stock may be subject to backup withholding, if such proceeds are paid by a
paying agent, broker or other intermediary in the United States.
Backup withholding may be avoided by the holder of Common Stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of Common Stock who are not U.S.
persons ("non-U.S. holders") are generally exempt from backup withholding,
although such holders may be required to comply with certification and
identification procedures in order to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that amount withheld is claimed as federal taxes
withheld on the holder's U.S. federal income tax return relating to the year in
which the backup withholding occurred. A holder who is not otherwise required to
file a U.S. income tax return must generally file a claim for refund (or, in the
case of non-U.S. holders, an income tax return) in order to claim refunds of
withheld amounts.
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of Common Stock who is not a resident
of the BVI is exempt from BVI income tax on dividends paid with respect to the
Common Stock and all holders of Common Stock are not liable to BVI income tax on
gains realized during that year on sale or disposal of such shares; the BVI does
not impose a withholding tax on dividends paid by a company incorporated under
the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the BVI on
companies incorporated under the International Business Companies Act. In
addition, the Common Stock is not subject to transfer taxes, stamp duties or
similar charges.
There is no income tax treaty or convention currently in effect between the
United States and the BVI.
People's Republic of China Taxation
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
The Company and QXHL were incorporated under the International Business
Companies Act of the British Virgin Islands and, accordingly, are exempted from
payment of the British Virgin Islands income taxes. At present, substantially
all of the Group's income was generated in Mainland China by QXTI, a joint
venture enterprise established in the Coastal Economic Open Zone in Mainland
China and subject to
-20-
<PAGE>
Mainland Chinese income taxes at a rate of 27% (24% state income tax and 3%
local income tax). It is exempted from state income tax and local income tax for
three years starting from January 1, 1994, and then is subject to a 50%
reduction in state income tax and full exemption in local income tax for the
following two years. This tax holiday has expired on January 1, 1999 and QXTI
only has full exemption in local income tax in 1999. If the tax holiday of QXTI
had not existed, the Group's income tax expenses (net of minority interests)
would have been increased by approximately Rmb7,386,000, Rmb8,792,000 and
Rmb2,632,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Basic and diluted earnings per common share would have been approximately
Rmb4.45, Rmb4.85 and Rmb5.04 for the years ended December 31, 1997, 1998 and
1999, respectively.
-21-
<PAGE>
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA
----------------------------------------------
The Company prepares its Consolidated Financial Statements in accordance
with U.S. Generally Accepted Accounting Principles ("US GAAP"). The following
summary consolidated income statement data for the years ended December 31,
1997, 1998 and 1999 and the consolidated balance sheet data as of December 31,
1998 and 1999 were derived from the audited financial statements of the Company
included elsewhere in this Annual Report and should be read in conjunction with
such financial statements. The following summary consolidated income statement
data for the year ended December 31, 1995 and 1996 and the consolidated balance
sheet data as of December 31, 1995, 1996 and 1997 were derived from the audited
financial statements of the Company not included elsewhere in this Annual
Report. The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
in this Annual Report.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
--------- ---------- ---------- ---------- -----------------------
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C> <C>
Net sales 277,654 351,898 383,934 351,184 383,633 46,332
Cost of goods sold (213,807) (279,130) (300,910) (251,935) (259,658) (31,360)
--------- --------- --------- --------- --------- ---------
Gross profit 63,847 72,768 83,024 99,249 123,975 14,972
Selling expenses (17,537) (23,377) (12,183) (11,173) (15,695) (1,895)
General and administrative
expenses (8,349) (9,488) (14,952) (21,548) (28,562) (3,450)
Interest expense (1,148) (1,700) (3,390) (5,101) (5,577) (673)
Interest income 119 12 54 287 1,981 239
Other (expenses) income,
net (4) 180 (115) (961) 244 29
--------- --------- --------- --------- --------- ---------
Income before income tax 36,928 38,395 52,438 60,753 76,366 9,222
Provision for income tax (6,565) (7,900) (20,298) (2,451)
--------- --------- --------- --------- --------- ---------
Income before minority
interests 36,928 38,395 45,873 52,853 56,068 6,771
Minority interests(1)(3) (7,582) (3,931) (4,664) (5,590) (6,365) (769)
--------- --------- --------- --------- --------- ---------
Net income 29,346 34,464 41,209 47,263 49,703 6,002
========= ========= ========= ========= ========= =========
Earnings per common share(2)
- Basic Rmb 3.91 Rmb 4.60 Rmb 5.43 Rmb 5.96 Rmb 5.33 US$ 0.64
========= ========= ========= ========= ========= =========
US$ 0.47 US$ 0.56 US$ 0.66 US$ 0.72
- Diluted Rmb 3.91 Rmb 4.60 Rmb 5.43 Rmb 5.96 Rmb 5.32 US$ 0.64
========= ========= ========= ========= ========= =========
US$ 0.47 US$ 0.56 US$ 0.66 US$ 0.72
Weighted average number of
shares outstanding
- Basic 7,500,000 7,500,000 7,595,000 7,936,000 9,333,000 9,333,000
========= ========= ========= ========= ========= =========
- Diluted 7,500,000 7,500,000 7,595,000 7,936,000 9,344,000 9,344,000
========= ========= ========= ========= ========= =========
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------
As of December 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- ----------- --------- ---------- ----------------------
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalent 4,332 6,887 6,461 7,955 36,237 4,377
Working capital 13,375 45,992 101,463 127,162 55,917 6,755
Property, machinery and
equipment, net 37,122 39,149 41,345 38,813 51,299 6,195
Construction-in-progress -- -- -- 34,929 200,969 24,272
Total assets 136,698 188,895 287,478 387,893 585,348 70,695
Short-term debts 3,623 10,315 27,513 47,886 103,270 12,472
Long-term debts 8,119 8,119 18,151 25,623 15,670 1,893
Total liabilities 94,320 111,873 162,821 212,612 290,295 35,059
Shareholders' equity 34,063 67,294 110,946 163,980 277,387 33,502
</TABLE>
(1) Mr. Rui Lin Wu and Mr. Zhi Yang Wu own minority equity interests in a
subsidiary of the Company.
(2) Earnings per share is computed by dividing net income for 1995 and
1996 by 7,500,000, for 1997 by 7,595,000, for 1998 by 7,936,000, for 1999
by 9,333,000. the weighted average number of shares of Common Stock
outstanding during the year, on the basis that the share split and the
issue of 4,500,000 shares of Common Stock for the acquisition of a 90%
interest in QXIT had been consummated prior to the years presented. Diluted
earnings per common share is computed by using the weighted average number
of common and common equivalent shares outstanding during the period. For
the year ended December 31,1999, common equivalent shares comprised shares
issuable upon the exercise of stock options and warrants to the extent such
shares were dilutive.
(3) During the years ended December 31, 1993 and 1994 and for the period
from January 1 to May 22, 1995, the Company owned 78% in Qiao Xing
Telecommunication Industry Company Limited ("QXTI"), a joint venture
incorporated in the PRC. The minority shareholder of QXTI was Huizhou Qiao
Lian Economic Development Company ("QLED", a state-owned company
established in the PRC). Under the joint venture agreement, QXTI required a
unanimous vote of all joint venture partners on the following four matters:
(i) amendment of QXTI's articles of association; (ii) dissolution of QXTI;
(iii) changes in QXTI's registered share capital; and (iv) merger of QXTI
with other corporation, and there were no other matters that would have
required unanimous vote (See Notes to Financial Statements).
-23-
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS.
--------------
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto. The amounts reflected
in the following discussion are in Renminbi ("RMB"). Translation of amounts
for 1999 from Renminbi into United States dollars ("US$") is for the
convenience of readers and has been made at the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York on December 31, 1999 of US$1.00 =
RMB8.28.
Analysis of Results of Operations
---------------------------------
Fiscal 1999 compared to Fiscal 1998
-----------------------------------
Net Sales
Net sales revenue increased to $46.3 million from $42.4 million for 1998.
The increase was due to a more stable economy and stronger private consumption,
compared to 1998.
The following table presents the Company's sales revenues by category, and
the approximate percentage of total sales revenues for fiscal 1999 and 1998:
Year ended December 31
1999 1998
RMB'000 % RMB'000 %
ordinary corded telephones 190,282 49.6 184,020 52.4
ordinary cordless telephones 58,696 15.3 76,207 21.7
smart card telephones 71,739 18.7 74,100 21.1
caller ID displayed telephones 54,476 14.2 10,887 3.1
coin operated telephones 8,440 2.2 5,970 1.7
Total 383,633 100 351,184 100
=========== =========== =========== ========
Gross Profit
Gross profit was $15.0 million, compared to $12.0 million for 1998, and gross
margins improved in 1999 to 32% from 28% in 1998. The improvement in margins was
partly the result of a shift in product mix from lower priced corded phones
toward higher priced caller-ID and other special function phones. Caller-ID
phones represented 14% of net sales for 1999 versus 3% for 1998. Sales of corded
phones accounted for almost 50% of net sales for 1999, down from 52% the year
earlier.
Selling, General and Administrative Expenses
-24-
<PAGE>
Selling expenses increased by US$545,000 or 40.37% from US$1,350,000 or
3.18% of net sales in 1998 to US$1,895,000 or 4.09% of net sales in 1999. The
increase was predominantly attributable to the more positive advertising
strategies for the new Digital Cordless Phones and other new model telephones.
General and administrative expenses increased by US$848,000 or 32.6% from
US$2,602,000 in 1998 to US$3,450,000 in 1999 primarily due to (i) the Company
employed more professionals and high-level administrative staffs with the
expansion of the sales network and the R&D;(ii) the Company appointed several
professional firms to provide advisory service for corporate strategy
formulation and corporate finance arrangement and the consultant fee;(iii)
research and development expense increases.
Income Taxes
The income taxes provision amounted to US$2,451,000 for 1999, representing
a 157% increase from US$954,000 in 1998. Since the 50% reduction in state income
tax and full reduction in local income tax in 1998 and 1997 has been expired.
Income and Earning per Share
1999 earnings before interest and taxes increased 20% to $9.6 million from
$8.0 million in 1998. Net income was $6.0 million, up 5% from $5.7 million a
year earlier.
Earnings per share for 1999 were $0.64 versus $0.72 for 1998. Per share
results for 1999 reflect an increase in outstanding shares due to the Company's
initial public offering of 1,600,000 shares in February, 1999.
Fiscal 1998 compared to Fiscal 1997
-----------------------------------
Net Sales
Net sales revenue decreased by RMB32,750,000 or 9.0% from RMB383,934,000 in
1997 to RMB351,184,000 (US$42,413,530) in 1998. The decrease was primarily
attributable to the following factors: (i) the economic crisis in the Southeast
Asia area weakened the purchase power of the electronics consumable market; (ii)
the serious floods which occurred in July and August 1998 in the Long River
drainage area significantly decreased the consumers' purchase desire in that
area; (iii) the competitive rivalry in the telephone market caused the Company
to reduce the selling price of the ordinary corded and cordless phones in fiscal
1998 with the aim of maintaining its market share; and (iv) the special function
corded telephones newly introduced in 1998 were well accepted by the market
(25.9% of the sales revenue generated in fiscal 1998 was contributed by the
special function corded phones). The increased sales revenue generated from this
market segment offset the reduction of sales revenue of the ordinary phones.
-25-
<PAGE>
The following table presents the Company's sales revenues by category, and
the approximate percentage of total sales revenues for fiscal 1998 and 1997:
Year ended December 31
1998 1997
RMB'000 % RMB'000 %
ordinary corded telephones 184,020 52.4 242,646 63.2
ordinary cordless telephones 76,207 21.7 130,921 34.1
smart card telephones 74,100 21.1 10,367 2.7
caller ID displayed telephones 10,887 3.1 -- --
coin operated telephones 5,970 1.7 -- --
Total 351,184 100 383,934 100
=========== ======= =========== =======
Gross Profit
The Company's gross profit during the same period increased by
RMB16,225,000 or 20% from RMB83,024,000 in 1997 to RMB99,249,000 (US$11,986,590)
in 1998. The Company's gross profit margin increased from 22% in 1997 to 28% in
1998. The increase is primarily attributable to the following reasons: (i) the
increasing proportion of sales revenue generated by the high profit margin
products caused the average gross profit margin to increase; (ii) as a result of
the continuous effort of the research and development department, the production
cost of new models was lower than that of the old models with similar
functionality; and (iii) as the production technique improved continuously, the
material wastage was reduced.
Selling, General and Administrative Expenses
Selling expenses decreased slightly by RMB1,010,000 or 8.0% from
RMB12,183,000 or 3.0% of net sales in 1997 to RMB11,173,000 (US$1,349,400) or
3.0% of net sales in 1998. The decrease was predominantly attributable to the
change of promoting strategy of the new products. The Company tended to use more
printing media, such as advertising pamphlets, billboards, and posters, instead
of TV advertising for the promotion campaigns of the new models and new
products. As a result, the advertising and promotional expenses decreased by
RMB3,495,000 or 30.6% from 1997 to 1998.
General and administrative expenses increased by RMB6,596,000 or 44.1% from
RMB14,952,000 in 1997 to RMB21,548,000 (US$2,602,000) in 1998 primarily due to
(i) allowance for doubtful accounts increased by RMB3,516,000 from 1997 to 1998,
as provision for doubtful accounts was primarily determined and computed on the
ending balance of trade receivables by using predetermined computation method.
With the expansion of the sales network and the extension of credit terms
applicable to large orders from the related companies of the Ministry of Post
and Telecommunications in the PRC and to customers with good repayment history,
the ending balance of trade receivables increased by RMB93,566,000 from
RMB135,468,000 as of December 31, 1997 to RMB229,034,000 as of December 31,
1998; and (ii) the Company appointed several
-26-
<PAGE>
professional firms to provide advisory service for corporate strategy
formulation and corporate finance arrangement and the consultant fee increased
by RMB1,495,000 from 1997 to 1998.
Other Income/Expenses
Interest expenditure during the same period increased by RMB1,711,000 or
50.5% from RMB3,390,000 in 1997 to RMB5,101,000 (US$616,000) in 1998. The
increase was attributable to the increase of loan to supplement working capital.
Minority interest for the Company, which was RMB5,590,000 (US$675,000) in
fiscal 1998, referred to the 10% interest of a minority shareholder in Qiao Xing
Telecommunication Industry Company Limited.
Income Taxes
Since the Company is subject to a 50% reduction in state income tax and
full reduction in local income tax in 1998, the income taxes provision amounted
to RMB7,900,000 (US$954,000). If the tax holiday did not exist, the Company's
income tax expenses (net of minority interest) would have been increased by
approximately RMB8,792,000 (US$1,062,000).
Income and Earning per Share
1998 earnings before interest and taxes increased 19% to $8.00 million from
$6.7 million in 1997. Net income was $5.71 million, up 15% from $4.98 million a
year earlier.
Earnings per share for 1998 were $0.72 versus $0.66 for 1998.
-27-
<PAGE>
Liquidity and Capital Resources
-------------------------------
Fiscal 1999 compared to Fiscal 1998
-----------------------------------
The Company has no direct business operations other than its ownership of
its subsidiaries. Its ability to pay dividends and meet other obligations
depends upon the receipts of dividends or other payments from its operating
subsidiaries. There are currently no known restrictions on the Company's
subsidiaries to pay dividends to the Company; however, the Company does not
currently intend to pay dividends to its shareholders.
The Company's primary sources of financing have been cash from operating
activities and borrowings under credit agreements with various banks and
proceeds from public offerings. For the year ended December 31, 1999,
RMB110,368,000 (US$13,330,000) and RMB99,353,000 (US$12,000,000) cash flow from
operating and financing activities, respectively, and RMB181,431,000
(US$21,913,000) was used by investing activities. Consequently, cash and cash
equivalents decreased by RMB3,696,000 (US$446,000) during the year ended
December 31, 1999.
Net decrease in cash and bank deposit was RMB3,696,000 (US$446,000) for the
year ended December 31, 1999, as compared with a net increase in cash and bank
deposit of RMB105,000 for the year ended December 31, 1998. The Company's
decrease in cash flow during the year ended December 31, 1999 was primarily due
to a construction-in-progress(125,800 square meters Qiao Xing Industrial Zone of
Huizhou.)
Inventory increased slightly by RMB4,167,000 (US$503,260) from
RMB63,120,000 as of December 31, 1998 to RMB67,287,000 (US$8,126,000) as of
December 31, 1999.
The accounts receivable balance decreased by RMB9,790,000 (US$1,182,000)
from RMB222,819,000 as of December 31, 1998 to RMB213,029,000 (US$25,728,000) as
of December 31, 1999. The decrease in accounts receivable was attributable to
the more serious accounts receivable policy and the effort to shorten the days
sales outstanding.
As of December 31, 1999, the Company's consolidated working capital was
RMB55,917,000 (US$6,755,000) compared to RMB127,162,000 as of December 31, 1998.
The Company's aggregate capital expenditures during fiscal 1999 were
RMB190,743,000 (US$23,037,000) compared to RMB32,056,000 in fiscal 1998. This
increase primarily reflects expenditures for the acquisition of property,
machinery and equipment and additions of construction-in-progress of its new
factory in Huizhou, China. There are two pieces of land located in Mainland
China held under land use rights for terms of 44 to 50 years expiring in June
2042 and March 2050, respectively. Construction will be carried out in phases
over a ten-year period from 1999 to 2008, with total construction costs
(excluding land costs) estimated to be approximately Rmb125,000,000. As of
December 31, 1998 and 1999, land with carrying amount of approximately
Rmb27,944,000 and Rmb36,529,000, respectively, was pledged to secure certain of
the Group's short-term borrowings.
-28-
<PAGE>
Historically, the Company has financed its operations and capital
expenditures principally through cash generated from operating activities and
bank borrowings. Outstanding bank borrowings accounted for 14.9% and 17.60% of
the Company's total assets as of December 31, 1998 and December 31, 1999,
respectively. Seasonal working capital needs have been met through short-term
borrowing under a revolving line of credit.
As of December 31, 1999, the Group had banking facilities of approximately
Rmb113,045,000 for loans and trade financing. Unused facilities as of December
31, 1999 amounted to approximately Rmb9,775,000. Bills payable is a form of bank
borrowings with payment term of 90 days and are non-interest bearing unless they
become trust receipts loans which bear interest at LIBOR plus 2% as of December
31, 1998 and 1999. The weighted average interest rate on bank loans was 8.18%
and 7.11%, respectively, as of December 31, 1998 and 1999, and the weighted
average interest rate of other loans was 9.73% and 17.68%, respectively, as of
December 31, 1998 and 1999. The bills payables are secured by bank deposits
approximated Rmb16,800,000 and a personal guarantee provided by Mr. Rui Lin Wu,
a director of the Company. The bank loans are secured by bank deposits
approximated Rmb16,567,000, land recorded under construction-in-progress of
carrying amount approximated Rmb36,529,000, machinery and equipment of net book
value approximated Rmb7,615,000, bank deposits of Mr. Rui Lin Wu approximated
Rmb15,991,000, land, machinery and equipment owned by a related company, a
personal guarantee provided by Mr. Rui Lin Wu and a corporate guarantee provided
by a related company.
In February 1999, the Company issued 1,600,000 shares of common stock, par
value US$0.001 each, for cash consideration of US$5.50 per share through a
public offering, and raised US$8,800,000 (equivalent to Rmb72,864,000).
In January 2000, the Company sold 833,334 shares of common stock for $12.00
per share, aggregating $10,000,000(equivalent to Rmb 82,800,0000), to B H
Capital Investments Lp and Excalibur Limited Partnership in a private placement
offering.
Fiscal 1998 compared to Fiscal 1997
-----------------------------------
The Company has no direct business operations other than its ownership of
its subsidiaries. Its ability to pay dividends and meet other obligations
depends upon the receipts of dividends or other payments from its operating
subsidiaries. There are currently no known restrictions on the Company's
subsidiaries to pay dividends to the Company; however, the Company does not
currently intend to pay dividends to its shareholders.
The Company's primary sources of financing have been cash from operating
activities and borrowings under credit agreements with various banks. For the
year ended December 31, 1998, RMB14,711,000 (US$1,777,000) and RMB14,349,000
(US$1,733,000) cash flow from operating and financing activities, respectively,
and RMB27,576,000
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<PAGE>
(US$3,330,000) was used by investing activities. Consequently, cash and cash
equivalents increased by RMB105,000 (US$12,681) during the year ended December
31, 1998.
Net increase in cash and bank deposit was RMB105,000 (US$12,681) for the
year ended December 31, 1998, as compared with a net decrease in cash and bank
deposit of RMB426,000 for the year ended December 31, 1997. The Company's
increase in cash flow during the year ended December 31, 1998 was primarily due
to (i) the increase in net income; (ii) the decrease in the Company's inventory;
(iii) the increase in new short-term borrowings; and (iv) the net proceeds
raised from issue of common stock through a private placement.
Inventory decreased by RMB17,885,000 (US$2,160,000) from RMB81,005,000 as
of December 31, 1997 to RMB63,120,000 (US$7,623,000) as of December 31, 1998.
The decrease in inventory was predominantly due to the Company having adopted a
better inventory managing system in 1998.
However, the accounts receivable balance increased by RMB87,366,000
(US$10,551,000) from RMB135,453,000 as of December 31, 1997 to RMB222,819,000
(US$26,911,000) as of December 31, 1998. The increase in accounts receivable was
attributable to (i) the expansion of the Company's distribution network; (ii)
the extension of credit terms applicable to large orders from the related
companies of the Ministry of Post and Telecommunications in the PRC; and (iii) a
longer credit term available to customers with good repayment history. The days
sales outstanding increased from 91 days in 1997 to 176 days in 1998.
Approximately 94% of accounts receivable were less than nine months (270 days),
of which over 70% were less than six months (180 days) as of December 31, 1998.
The primary reasons why customers needed credit extensions are: (i) all these
customers are wholesale sellers and the competitive rivalry in the telephone
market caused them to offer longer credit terms to retain their sales volumes;
and (ii) the Company launched a business relationship with the related companies
of the Ministry of Post and Telecommunications in the PRC in late 1997 and
nearly all of these companies' suppliers offered a credit term of more than
three months (90 days). For large orders, the common credit term is from six
months (180 days) to ten months (300 days). The Company does not expect this
trend to continue and has made effort to shorten the days sales outstanding as
it may significantly impact the Company's liquidity if the days sales
outstanding keep increasing.
As of December 31, 1998, the Company's consolidated working capital was
RMB127,162,000 (US$15,358,000) compared to RMB101,463,000 as of December 31,
1997. The Company's aggregate capital expenditures during fiscal 1998 were
RMB32,056,000 (US$3,871,000) compared to RMB12,537,000 in fiscal 1997. This
increase primarily reflects expenditures for the acquisition of property,
machinery and equipment and additions of construction-in-progress of its new
factory in Huizhou, China. Construction-in-progress comprised cost of land used
for construction of factory and office buildings. The land is located in the PRC
held under land use rights for terms of 44 to 50 years. Construction will be
carried out in phases, and the first stage is to expand the factory area to
24,545 square meters to provide room for larger production facilities.
Subsequent construction plans are being considered. During 2000 to 2001,
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the construction cost of approximately US$0.8 million will be applied from the
net proceed of the Initial Public Offering completed in February 1999,
approximately US$0.6 million will be financed by bank loan, and approximately
US$0.8 million will be provided by the saving on rental expenses and cash from
its operations.
As of December 31, 1998, the Company had a long-term payable of
RMB19,388,000 (US$2,221,000) (before unamortized discount based on imputed
interest rate of 10.35% p.a.) in respect of accrual for the balance of the
acquisition cost of land under construction of factories and office buildings,
and are repayable within 19 years starting from 1999 by RMB1,000,000 per year.
This long-term payable is unsecured and after unamortized discount based on
imputed interest rate of 10.35% p.a., the long term payable is RMB8,657,000
(US$1,046,000). The Company intends to settle this long-term payable by cash
generated from its operations.
Historically, the Company has financed its operations and capital
expenditures principally through cash generated from operating activities and
bank borrowings. Outstanding bank borrowings accounted for 13.0% and 14.9% of
the Company's total assets as of December 31, 1997 and December 31, 1998,
respectively. Seasonal working capital needs have been met through short-term
borrowing under a revolving line of credit.
As of December 31, 1998, the Company had banking facilities of
approximately RMB64,965,000 (US$7,846,000) for loans and trade financing. Unused
facilities as of December 31, 1998 amounted to approximately RMB11,609,000
(US$1,402,000). Short-term bank loans of RMB42,700,000 (US$5,157,000) is
repayable before December 31, 1999 and bears interest at fixed rates ranging
from 7.03% to 11.09% per annum. Bills payable of RMB856,000 (US$103,000) is a
form of bank borrowings with payment term due within 90 days, and bore interest
at floating rate at LIBOR plus 2% as of December 31, 1998. Other short-term
loans of RMB4,330,000 (US$523,000) is repayable before December 31, 1999 and
bears interest at fixed rates ranging from Nil to 23.52% as of December 31,
1998. The amount of borrowings subject to 23.52% interest was RMB2,500,000
(US$302,000) as of December 31, 1998. The Company seldom obtains credit at such
a rate; however, QXTI needed RMB4,500,000 within a few days in September 1997
and it could not obtain credit through usual ways in such a short time, other
than borrowing from Rui Xing Electronic Development Company Limited, a related
party, at such a rate. Moreover, this related party borrowing is unsecured and
without pre-determined repayment terms. The Company has not obtained any
additional credit at such a rate (or a higher rate) after then. QXTI repaid this
borrowing in early 1999. Long-term bank loan of RMB9,800,000 (US$1,179,000) is
repayable in December 2000 and bears interest at a fixed rate of 9.36% per
annum.
In April and May 1998, the Company sold an aggregate of 250,000 shares of
Common Stock for $3.00 per share to 13 accredited investors in a limited private
placement offering, whereby it raised US$750,000 for legal and accounting fees
and other related expenses associated with the Company's Initial Public
Offering.
The Company anticipates that it will be able to meet its ongoing cash
requirement with cash generated from its operations, proceeds from the Offering
and borrowings, as
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needed, from existing banking relationships. In the event the Company should
consummate an acquisition, its capital requirement could increase; however,
there are no current or pending arrangements, understandings, negotiations or
agreements with respect to any potential acquisitions.
Risk Factors
------------
Economy of China
The economy of China differs from the economies of most countries; however,
although the majority of productive assets in China are still owned by the
government, economic reform policies since 1978 have emphasized decentralization
and the utilization of market mechanisms in the development of the Chinese
economy. The Company has significantly benefitted from such reforms, as the
Ministry of Post and Telecommunications since 1994 has opened the
telecommunications equipment market of China to all kinds of manufacturers.
Management believes that the basic principles underlying the reforms will
continue to provide an acceptable framework of the PRC's political and economic
systems. In addition, it currently sees no evidence that this refinement and
readjustment process may adversely affect, directly or indirectly, the Company's
operation in the future.
Inflation
The average rate of inflation in China was 21.7% in 1994. As the result of
government control of macro economics, the inflation rate decreased to 14.8% in
1995, 6.1% in 1996, 2.8% in 1997, -0.8% in 1998 and 0% in 1999. As the market
price of the major raw materials kept stable or even decreased in the past
several years and there is no evidence to show that the price of raw materials
will increase significantly in the near future, inflation does not have a
material effect on the Company's production cost.
Legal System of China
The legal system of China is based on written statutes and, in 1979, China
began the process of developing its legal system by undertaking to promulgate a
comprehensive system of law. Since its inception, the Company has not been
adversely affected by the legal system of China, and management does not believe
that the legal system of China will have a material adverse impact on the
Company's future operations.
Currency and Exchange Rate
The Company's products are currently manufactured at factories located in
China. The functional currency of the Company is Renminbi. The majorities of the
Company's revenue accrue in the areas of China and are denominated in Renminbi.
Nearly all of the Company's raw materials are purchased using Renminbi. The
Company's expenses, including wages and other production and administrative
costs, are denominated in Renminbi.
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Therefore, the fluctuations in exchange rate have not had a significant effect
on the Company's operations.
Government Control of Currency Conversion
Renminbi currently is not a freely convertible currency. The State
Administration for Exchange Control ("SAEC"), under the authority of the
People's Bank of China (the "PBOC"), controls the conversion of Renminbi into
foreign currency. The value of the Renminbi is subject to changes in central
government policies and to international economic and political developments
affecting supply and demand in the China Foreign Exchange Trading System
("CFETS") market. Since substantially all of the Company's raw materials are
provided by local suppliers using Renminbi and the majority of the Company's
expenses are denominated in Renminbi, restrictions on currency conversions did
not materially affect the Company's operations. Also, since the Company does not
expect to require any raw material that are not permitted or are limited to
purchase using foreign currencies, management believes that such restriction
will not materially affect the Company's operations in the future. However, the
Company's ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from its operating subsidiaries and its
other holdings and investments, and its operating subsidiaries located in China
may be subject to restrictions on the conversion of Renminbi to U.S. dollars
and, as a result, may be restricted to make distributions to the Company.
Dependence on China Factories
The Company has no direct business operation, other than its ownership of
its subsidiaries located in China and the results of operations and financial
condition of the Company are currently solely dependent on its China factories.
The Company currently maintains fire, casualty and theft insurance aggregating
approximately $9.6 million covering various of its stock in trade, goods and
merchandise, furniture and equipment, and factory buildings in China. The
proceeds of this insurance may not sufficiently cover material damage to, or the
loss of, any of the Company's factories due to fire, severe weather, flooding or
other cause, and such damage or loss would have a material adverse effect on the
Company's financial condition, business and prospects. However, the Company has
not materially suffered from such damage or loss to date.
Government Expectation of Telecommunications Industry
Officials of the Ministry of Posts and Telecommunications and the Ministry
of Electronics Industry have revised the Ninth Five-Year Plan (1996-2000)
telecom industry targets upward due to surging market demand. The officials
predicted that land-line telephone installation will grow to 123 million sets in
2000. In other words, there will be over 50 million telephone sets in demand
between 1998 and 2000, not including the requirements of old telephone molds.
Such industrial trend may benefit the growth of the Company's revenue in the
coming years.
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<PAGE>
Income Taxation
The Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which they
operate. The Company and QXHL were incorporated under the International Business
Companies Act of the British Virgin Islands and, accordingly, are exempted from
payment of the British Virgin Islands income taxes. At present, substantially
all of the Group's income was generated in Mainland China by QXTI, a joint
venture enterprise established in the Coastal Economic Open Zone in Mainland
China and subject to Mainland Chinese income taxes at a rate of 27% (24% state
income tax and 3% local income tax). It is exempted from state income tax and
local income tax for three years starting from January 1, 1994, and then is
subject to a 50% reduction in state income tax and full exemption in local
income tax for the following two years. This tax holiday has expired on January
1, 1999 and QXTI only has full exemption in local income tax in 1999. If the tax
holiday of QXTI had not existed, the Group's income tax expenses (net of
minority interests) would have been increased by approximately Rmb7,386,000,
Rmb8,792,000 and Rmb2,632,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Basic and diluted earnings per common share would have been
approximately Rmb4.45, Rmb4.85 and Rmb5.04 for the years ended December 31,
1997, 1998 and 1999, respectively.
Management's Expectation of Revenue and Expenses
Management intends to increase the production and sales volume of new model
telephones and special function telephones such as digital cordless phones, CT 0
cordless phones, the smart card telephones, coin operated telephones and caller
ID displayed telephones, since the average gross profit margin of these
telephones are higher than that of the other telephones. At the same time, the
Company expects to increase the export of Digital Cordless phones and CT-0
Cordless phones. In addition, the sales and production volume of the lower
profit margin products is expected to decrease in the coming years.
General and administrative expenses are forecasted to increase in next
year, since (i) management intends to employ more professionals; and (ii)
research and development expense is expected to increase continuously.
Year 2000 Disclosure
Management is fully aware of the Year 2000 issue and has been addressing
this issue since early 1998. The Company's current Year 2000 action plan
includes seven phases: (i) by September 1998, to complete a comprehension
analysis on all kinds of Year 2000 problems including both IT and Non-IT
systems, both internal and external systems; (ii) during October 1998, to
develop Year 2000 strategy and test plan for Year 2000 compliance systems; (iii)
during November and December 1998, to execute test plan and develop contingency
plan; (iv) during January to June 1999, to monitor the existing hardware and
software and modify or replace them when further problems found; (v) during July
to September 1999, to test and monitor the modified (or replaced) systems
completed on or before June 1999; (vi) during October to December 1999, review
and refine the
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contingency plan; and (vii) during January to June 2000, closely monitor the
systems and execute the contingency plan if exceptional error occurs.
All Phases mentioned above have been completed.As the Company's material
Non-IT systems such as industrial process controllers and testing equipment are
not date-related, the Company sees no evidence that any essential process
function will be impacted by Year 2000 threats. As for IT systems such as
database, communications, logistics and financial systems, internal computer
specialists are upgrading the historical database and the related applications
to ensure that they are compliant with Year 2000 features. The computer
specialists had finished the upgrade in September 1999. Generally, Year 2000 has
no significant potential impact on the Company's internal IT systems. However,
Year 2000 can have a material adverse effect on businesses that are not prepared
internally, such as telecommunication system and banking transactions. Amount of
lost revenue due to Year 2000 issues that related to third parties is uncertain.
The Company intends to handle this problem by keeping paper records and
reconciliation of transactions and balance with third parties and establishing
contingency plan for unexpected cases. All Year 2000 related projects have been
staffed exclusively with internal resources and the aggregate costs are expected
to be approximate RMB300,000 (US$36,000) and approximate RMB100,000 (US$12,000)
has been used up to December 31, 1998.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
---------------------------------------------------------------------
Due the stable interest rate in P.R.C, we do not think any market risk on
interest rates exists, though the Company has variable rate bank borrowings.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
-----------------------------------------------
The executive officers and directors of the Company are as follows:
Name Age Position
---- --- --------
Rui Lin Wu 48 Chairman and Chief Executive Officer
Zhi Yang Wu 27 Vice Chairman and Secretary
Zhi Fang Zhang 46 Executive Director
Zhong Ai Li 29 Executive Director
Jie Shi 32 Chief Financial Officer
Liu Rong Yang 27 Non-Executive Director
Zi Shu Huang 46 Non-Executive Director
Guo Liang Zhang 58 Non-Executive Director
None of the directors and officers was selected pursuant to any agreement
or understanding with any other person. There is no family relationship between
any
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director or executive officer and any other director or executive officer,
except Rui Lin Wu and his son Zhi Yang Wu and Mei Lian Li, the wife of Zhi Yang
Wu.
Mr. Rui Lin Wu is the Chairman and Chief Executive Officer of the Company.
He is the founder of the Company and has over 12 years of experience in the
telecommunication industry. He is responsible for the Company's overall
strategic planning, policy making and finance. Prior to his career in the
telecommunications industry, he was a general manager of a fashion and garment
factory from 1980 to 1986. Currently, Mr. Wu is a member of the China National
Association of Industry and Commerce, senior analyst of the China National
Condition and Development Research Center, and a member of the Poverty Fund of
China.
Mr. Zhi Yang Wu is the Vice Chairman of the Company and the elder son of
Mr. Rui Lin Wu. Mr. Wu also serves as the Secretary of the Company. Mr. Wu
received a Diploma in Business Management from Huizhou University of the PRC. He
joined the Company in 1992 and is responsible for the Company's overall
strategic planning, policy making and the overseas market development.
Mr. Zhi Fang Zhang serves as an executive director of the Company. He is
the Chairman of HomeWay Information Technology Co., Ltd. HomeWay is a famous
Internet company in China. Mr. Zhang received his bachelor degree of law from
PeKing University and achieved the master of law from Fletcher School of Law and
Diplomacy in U.S.
Mr. Zhong Ai Li is Deputy General Manager of Qiao Xing Telecommunication
Industry Co., Ltd. (``QXTI'') and has served as a director of the Company since
September 1997. From August 1992 to July 1994, he served as deputy manager of
QXTI's marketing department. From August 1994 to February 1997, Mr. Li served as
manager of Shenzhen Baoan Chang He Electronic Co., Ltd. From February 1997 to
September 1997, he served as manager of QXTI's marketing department. Mr. Li has
served as Deputy General Manager of QXTI since September 1997.
Mr. Jie Shi has served as the Chief Financial Officer and Controller of
Finance of the Company since September 1997. He also serves as Deputy General
Manager of QXTI since September 1997. From July 1994 to September 1997, Mr. Shi
served as department head of the finance department of QXTI. From July 1993 to
July 1994, he served as deputy section chief of the finance department of
Guizhou Province Bijie Region Power Supply Bureau. From September 1992 to July
1993, Mr. Shi served as section chief of the finance department of Guizhou
Province Bijie City Seasoning Factory.
Ms. Liu Rong Yang serves as a non-executive director of the Company. Ms.
Yang has worked for Huizhou Lian Zhuang Wire and Cable Limited as deputy
managing director Since January 1998. From 1996 to 1998, she served as the
deputy managing director for Huizhou Zhong Qiao Electronics Limited.
Mr. Zi Shu Huang serves as a non-executive director of the Company. He has
served as the general manager of Huizhou City Xiaojinkou Economic Development
Company since
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September 1997. This company specializes in the manufacturing of electronic
parts and business trading.
Mr. Guo Liang Zhang is assistant to the chairman of QXTI and served as a
director of the Company from September 1997 to July 1998 and has served as a
non-executive director of the Company since August 1999. From March 1992 to May
1994, Mr. Zhang served as vice general manager of Jiling Telecommunication
Industry Co., Ltd. This company is principally engaged in the manufacturing and
sales of telecommunications terminals and equipment. Mr. Zhang received a degree
of Bachelor of Arts in Chinese from Jilin Province Huadian Normal College.
Audit Committee
The Board of Directors has established an Audit Committee, which consists
of Rui Lin Wu, Heng Xu and Zi Shu Huang. The functions of the Audit Committee
are to recommend annually to the Board of Directors the appointment of the
independent public accountants of the Company, discuss and review the scope and
the fees of the prospective annual audit and review the results thereof with the
independent public accountants, review and approve non-audit services of the
independent public accountants, review compliance with existing accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls and
compliance with federal and state laws relating to financial reporting.
ITEM 11. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
----------------------------------------------------------
The aggregate compensation paid by the Company to all directors and
executive officers of the Company as a group with respect to its fiscal year
ended December 31, 1999 on an accrual basis, for services in all capacities, was
RMB 2,156,940 (US$260,500). During the fiscal year ended December 31, 1999, the
Company contributed an aggregate amount of RMB 69,290 (US$8,368) toward the
pension plans of the directors and executive officers.
The Company has not entered into an employment agreement with Mr. Rui Lin
Wu. Currently, Mr. Wu serves as President of the Company at an annual salary of
RMB 1,267,000 (US$153,000). Mr. Wu's remuneration package includes benefits with
respect to a motor car.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
-------------------------------------------------------------------------
As of June 30, 2000, the following options to purchase shares of common
stock were outstanding:
. Warrants to purchase 40,000 shares(20,000 shares at 3.25 per share and
20,000 shares at 5.5 per share)at any time until November 1, 2004;
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. Warrants to purchase 300,000 shares at 46.96 per share at any time until
December 31, 2004;
. Warrants to purchase 300,000 shares at 24.378 per share at any time until
May 26, 2005;
. Options to purchase 995,000 shares at 15.00 per share at any time until
April 14, 2005 of which 995,000 are held by directors and officers of the
Company as a group.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
---------------------------------------------------------
The following table is provided to facilitate the investors' understanding
of the relationships between the Company and each of the following related
parties and their transactions with the Company. For further information
regarding related party transactions, please see Note 27 to the Consolidated
Financial Statements.
Name of related parties Existing relationship with the Company
----------------------------------- ------------------------------------------
Mr. Zhi Jian Wu Li The major shareholder
Mr. Rui Lin Wu Director and father of Mr. Zhi Jian Wu Li
Mr. Zhi Yang Wu Director and brother of Mr. Zhi Jian Wu
Li
Mr. Zhi Zhong Wu Brother of Mr. Zhi Jian Wu Li
Ms. Qing Li Wife of Mr. Rui Lin Wu
Wu Holdings Limited Intermediate holding company
Ben Xing Telecommunication Component
Limited Common director
Jia Xing Electronics Supplies Company
Limited Common director
Qiao Xing Commercial Limited Common director
Qiao Xing Electronics Holdings Company
Limited Common director
Qiao Xing Group Limited Common directors
Qiao Xing International Company Common director
Qiao Xing Investment Limited Common director
Qiao Xing Properties Limited Common directors
Rui Xing Electronic Development
Company Limited Common director
Regarding purchases from related parties, (i) QXTI purchases plastic covers
and molding from QXPL with an on going basis since October 1995. QXPL has common
directors (i.e., Rui Lin Wu and Zhi Yang Wu) with QXUT. QXPL is equipped with
the latest computer software and automatic machineries to provide on time and
quality services to QXTI. Since QXPL is located next to the Company, it provides
an additional convenience for QXTI to closely monitor the progress of their
work. The purchase price is determined on the open bid basis (i.e., only when
the price offered by QXPL is not higher than third-party's quotation, QXPL's
product can be accepted by QXTI); (ii) QXIC purchases the Integrated Circuit
(``IC'') from overseas suppliers for QXTI since 1997. QXIC has a common director
(i.e., Zhi Yang Wu) with QXUT. QXIC specializes in overseas sourcing of IC and
electronic components and provides a direct access channel to the world
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<PAGE>
electronics market for the Company with minimal searching cost incurred. If the
quality of the IC produced by local manufacturers can meet QXTI's requirement,
QXTI will purchase the IC from local suppliers and stop requiring QXIC to
purchase for them. The purchase price is also determined on the open bid basis;
(iii) QXCL started a pilot run on telephone research and assembling, and the
caller ID displayed telephones newly developed by QXCL were well accepted by the
market. However, QXCL did not have complete assembling line capability nor its
own distribution network. QXCL has a common director (i.e., Zhi Yang Wu) with
QXUT. Since the wholesale price of QXCL's products is very close to the
manufacturing cost of the similar products of QXTI, QXTI purchased all of the
semi-finished products from QXCL and successfully promoted them to the market
with average gross profit margin of approximately 30%. In 1999, since QXTI was
able to produce such telephones by itself, it stopped purchasing telephones from
QXCL, and QXCL also terminated its pilot run of telephone assembling in the
beginning of 1999; (iv) QXTI purchases printed circuit boards (``PCB'') from
RXED with an on-going basis since October 1995. RXED has a common director
(i.e., Rui Lin Wu) with QXUT and it provides flexibility on supplying different
type of PCB when QXTI demands. The purchase price is also determined on the open
bid basis; and (v) QXTI purchases the custom-made components such as electronic
locks and mini speakers from BXTC with an on going basis since January 1995.
BXTC has a common director (i.e., Rui Lin Wu) with QXUT. The purchase price is
also determined on the open bid basis.
Regarding amounts due from/to affiliates, the amount due from Rui Lin Wu,
Zhi Yang Wu, Zhi Jian Wu Li and Mei Lian Li represented the balance of cash
advanced, the amount due from Qiao Xing Group Limited and Qiao Xing Investment
Limited represented amount borrowed from QXTI by these companies for working
capital uses, and the amount due from Wu Holdings Limited ("WHL") mainly
represented amount borrowed from QXTI for settlement of WHL's audit fees. The
balances due from the related parties were unsecured, non-interest bearing and
repayable on demand. The amount due to Zhi Yang Wu represented the unpaid
compensations owed to him. The amount due to Qing Li and RXED represented amount
borrowed from these related parties for working capital uses. The amount due to
RXED was unsecured, bore interest at 26% per annum and was without pre-
determined repayment terms. The other balances due to the related parties were
unsecured, non-interest bearing and without pre-determined repayment terms.
As of December 31,1999, QXTI had provided corporate guarantee to an
unrelated party who is a friend of Mr. Rui Lin Wu for bank borrowings of
approximately HK$1,200,000 (equivalent to approximately RMB1,279,000 and US
$155,000).
The Company believes that the terms of the agreements and transactions
referenced above which involve the Company's officers, directors, principal
shareholders or affiliates were fair, reasonable and consistent with terms that
the Company could have obtained from unaffiliated third parties.
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PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
-----------------------------------------------------
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
------------------------------------------
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
------------------------------------------------------------------------------
AND USE OF PROCEEDS.
--------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Use of Proceeds
---------------
(1) The effective date of the Securities Act registration statement
for which the use of proceeds is being disclosed is February 16,
1999, Commission file number 333-9274.
(2) The date of commencement of the offering was February 17, 1999.
(3) The offering did not terminate before any securities were sold.
(4) (i) The offering has terminated and did not terminate before
the sale of all securities registered.
(ii) The managing underwriter was Barron Chase Securities, Inc.
(iii) The title of each class of securities registered is $.001
par value common stock ("Common Stock").
(iv) The Company registered 1,600,000 shares of Common Stock
for its account and the aggregate offering price of the
Common Stock was $8,800,000 ($5.50 per share). All of the
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foregoing shares of Common Stock were sold as of the date
hereof.
(v) From the effective date of the Securities Act registration
statement (February 16, 1999) through June 30, 2000, the
actual amount of expenses incurred for the Company's
account in connection with the issuance and distribution
of the securities registered for underwriting discounts
and commissions, finder's fees, expenses paid to or for
underwriters, and other expenses were:
$792,000 - Underwriting discount (9%)
0 - Finders' fees
264,000 - Expenses paid to underwriters (3%)
1,225,000 - Other expenses - legal, accounting,
printing, travel, promotion,
underwriter financial advisory fee,
DTC report fee;
$2,281,000 - Total expenses
None of the above payments was a direct or indirect
payment to directors, officers, general partners or their
associates, persons owning 10% or more of any class of
equity securities of the Company and affiliates of the
Company. All of the above payments were direct or indirect
payments to others.
(vi) The net offering proceeds to the Company after deducting
the total expenses of $2,281,000 described in (v) above
were $6,519,000.
(vii) From the effective date of the Securities Act registration
statement (February 16, 1999) through June 30, 2000, the
actual amount of net offering proceeds to the Company for
which at least $100,000 has been used are as follows:
Direct/Indirect Payment Direct/Indirect
Payment
To Affiliates To Others
----------------------- ---------------
Construction of plant, building
and facilities $ 0 $ 1,589,000
Purchase and installation of
machinery and equipment $ 0 $ 549,600
Purchases of real estate $ 0 $
-41-
<PAGE>
Acquisition of other business(es) $ 0 $ 0
Repayment of indebtedness $ 0 $ 0
Working capital $ 0 $ 950,400
Development of new products $ 0 $ 1,430,000
Expansion of distribution network $ 0 $ 2,000,000
and payment of advertising and
promotion fees
(viii) The Company does not believe that the use of
proceeds set forth in (vii) above represents a
material change in the use of proceeds described in
the February 16, 1999 Prospectus.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
-------------------------------
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
-------------------------------
See the Consolidated Financial Statements listed in Item 19 hereof and
filed as a part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
--------------------------------------------
(a) The following financial statements are being filed as part of this
Annual Report on Form 20-F:
. Report of Independent Certified Public Accountants
. Consolidated statements of operations for the years ended December
31, 1997, 1998 and 1999
. Consolidated balance sheets at December 31, 1998 and 1999
. Consolidated statements of changes in shareholders' equity for the
years ended December 31, 1997, 1998 and 1999
. Consolidated statements of cash flows for the years ended December
31, 1997, 1998 and 1999
-42-
<PAGE>
. Notes to and forming part of the financial statements
(b) The following exhibits are being filed as part of this Annual Report
on Form 20-F:
2.1 Common Stock and Warrants Purchase Agreement dated as of December 30,1999-
uncorporated by reference to the proxy statement filed June 16,2000.
2.2 Convertible Debenture and Warrants Purchase Agreement dated as of May 24,
2000-incorporated by reference to the Proxy Statement filed June 16, 2000.
-43-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC.
===================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
TOGETHER WITH AUDITORS' REPORT
--------------------------------------------------------
Approved by the Board of Directors on April 30, 2000, and signed on behalf of
the Board of Directors by:
Directors: ______________________ _____________________
RUI LIN WU ZHI YANG WU
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Qiao Xing Universal Telephone,
Inc.:
We have audited the accompanying consolidated balance sheets of Qiao Xing
Universal Telephone, Inc. (a company incorporated in the British Virgin Islands;
"the Company") and Subsidiaries ("the Group") as of December 31, 1998 and 1999,
and the related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended December 31, 1997, 1998 and 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Qiao Xing Universal
Telephone, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and cash flows for the years ended December 31,
1997, 1998 and 1999, in conformity with generally accepted accounting principles
in the United States of America.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
Hong Kong,
April 30, 2000.
-1-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
AS OF DECEMBER 31, 1998 AND 1999
--------------------------------
<TABLE>
<CAPTION>
Note 1998 1999
------------ ------------- ------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and bank deposits 6,566 2,870 347
Pledged bank deposits 1,389 33,367 4,030
Accounts receivable, net 4 222,819 213,029 25,728
Prepayments and deposits 5 9,884 9,890 1,194
Other receivables 6 1,058 2,517 304
Inventories, net 7 63,120 67,287 8,126
Deferred tax asset 18 - 758 92
Due from related parties 27 9,315 824 100
------------- ---------------- --------------
Total current assets 314,151 330,542 39,921
Property, machinery and equipment, net 8 38,813 51,299 6,195
Construction-in-progress 9 34,929 200,969 24,272
Intangible asset 10 - 2,538 307
------------- ---------------- --------------
Total assets 387,893 585,348 70,695
============= ================ ==============
LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY
-------------------------------
Current liabilities:
Short-term borrowings 11 47,886 103,270 12,472
Accounts payable 43,939 37,592 4,540
Other payables 12 3,752 16,437 1,985
Accrued liabilities 13 10,016 11,301 1,365
Due to related parties 27 2,614 3,335 403
Taxation payable 18 78,782 102,690 12,401
------------- ---------------- --------------
Total current liabilities 186,989 274,625 33,166
Long-term bank loan 9,800 - -
Long-term payable 14 7,657 7,501 906
Shareholders' loans 15 8,166 8,169 987
------------- ---------------- --------------
Total liabilities 212,612 290,295 35,059
------------- ---------------- --------------
Minority interests 11,301 17,666 2,134
------------- ---------------- --------------
Shareholders' equity:
Common stock, par value Rmb0.008
(equivalent of US$0.001); authorized -
50,000,000 shares; outstanding and fully
paid - 8,000,000 shares as of December
31, 1998 and 9,600,000 shares as of
December 31, 1999 16 64 79 10
Additional paid-in capital 12,559 76,256 9,210
Dedicated reserves 20 6,295 8,609 1,040
Retained earnings 20 145,052 192,441 23,242
Cumulative translation adjustments 10 2 -
------------- ---------------- --------------
Total shareholders' equity 163,980 277,387 33,502
------------- ---------------- --------------
Total liabilities, minority interests
and shareholders' equity 387,893 585,348 70,695
============= ================ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
__________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1999 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
-2-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
----------------------------------------------------
<TABLE>
<CAPTION>
Note 1997 1998 1999
------------ ----------------- ---------------- ----------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C>
Net sales 28.a 383,934 351,184 383,633 46,332
Cost of goods sold (300,910) (251,935) (259,658) (31,360)
----------------- ---------------- ----------------- -------------------
Gross profit 83,024 99,249 123,975 14,972
Selling expenses (12,183) (11,173) (15,695) (1,895)
General and administrative (14,952) (21,548) (28,562) (3,450)
expenses
Interest expense (3,390) (5,101) (5,577) (673)
Interest income 54 287 1,981 239
Other (expenses) income, net (115) (961) 244 29
----------------- ---------------- ----------------- -------------------
Income before income tax 52,438 60,753 76,366 9,222
Provision for income tax 18 (6,565) (7,900) (20,298) (2,451)
----------------- ---------------- ----------------- -------------------
Income before minority 45,873 52,853 56,068 6,771
interests
Minority interests (4,664) (5,590) (6,365) (769)
----------------- ---------------- ----------------- -------------------
Net income 20 41,209 47,263 49,703 6,002
================= ================ ================= ===================
Earnings per common share
- Basic 21 Rmb 5.43 Rmb 5.96 Rmb 5.33 US$ 0.64
================= ================ ================= ===================
- Diluted 21 Rmb 5.43 Rmb 5.96 Rmb 5.32 US$ 0.64
================= ================ ================= ===================
Weighted average number of
shares outstanding
- Basic 21 7,595,000 7,936,000 9,333,000 9,333,000
================= ================ ================= ===================
- Diluted 21 7,595,000 7,936,000 9,344,000 9,344,000
================= ================ ================= ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
__________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1999 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
-3-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
----------------------------------------------------
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Cash flows from operating activities:
-------------------------------------
Net income 41,209 47,263 49,703 6,002
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Depreciation of property, machinery and equipment 7,940 8,836 9,794 1,182
Net loss (gain) on disposals of property, machinery
and equipment 453 (65) (92) (11)
Compensation cost for stock options issued to
external consultants - - 4,628 560
Interest expense on shareholders' loans 765 648 575 69
Minority interests 4,664 5,590 6,365 769
(Increase) Decrease in operating assets -
Accounts receivable (68,034) (87,366) 9,790 1,183
Prepayments and deposits (860) (2,874) 4,458 539
Other receivables (2,854) 1,896 (1,459) (175)
Inventories (11,974) 17,885 (4,167) (503)
Deferred tax asset - - (758) (92)
Increase (Decrease) in operating liabilities -
Accounts payable (1,707) (2,690) (6,347) (766)
Other payables 478 2,393 12,685 1,531
Accrued liabilities 2,939 1,336 1,285 155
Taxation payable 22,508 21,859 23,908 2,887
----------- --------- --------- ---------
(4,473) 14,711 110,368 13,330
----------- --------- --------- ---------
Cash flows from investing activities:
-------------------------------------
Acquisitions of property, machinery and equipment (12,537) (6,784) (23,009) (2,779)
Acquisitions of intangible assets - - (2,538) (307)
Additions of construction-in-progress - (25,272) (165,196) (19,951)
Proceeds from disposals of property, machinery and
equipment 1,948 545 821 99
(Increase) Decrease in due from related parties (13,091) 3,935 8,491 1,025
----------- --------- --------- ---------
(23,680) (27,576) (181,431) (21,913)
----------- --------- --------- ---------
Cash flows from financing activities:
-------------------------------------
New short-term borrowings 24,713 35,000 59,264 7,157
New advance from related parties 6,962 5,349 1,680 203
New long-term bank loan 9,800 - - -
New loans from shareholders 232 - 3 -
Repayment of short-term borrowings (7,515) (14,627) (3,880) (469)
Repayment of long-term bank loan - - (9,800) (1,184)
Repayment of advance from related parties (7,462) (8,301) (959) (116)
Repayment of long-term payable - - (1,000) (121)
Repayment of shareholders' loans - (185) - -
Net proceeds from issue of common stock 1,678 5,113 54,045 6,530
Dividends paid to minority shareholders of a
subsidiary (681) (8,000) - -
----------- --------- --------- ---------
27,727 14,349 99,353 12,000
----------- --------- --------- ---------
Effect of translation adjustments - 10 (8) (1)
----------- --------- --------- ---------
Increase in pledged bank deposits - (1,389) (31,978) (3,862)
----------- --------- --------- ---------
Net (decrease) increase in cash and bank deposits (426) 105 (3,696) (446)
Cash and bank deposits, beginning of year 6,887 6,461 6,566 793
----------- --------- --------- ---------
Cash and bank deposits, end of year 6,461 6,566 2,870 347
=========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
___________________
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on December 31, 1999 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
-4-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
----------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
----------------------------------------------------
<TABLE>
<CAPTION>
Accumulated other
comprehensive
Common stock income -
------------------------ cumulative
Number of Additional Dedicated Retained translation
Note shares Amount paid-in capital reserves earnings adjustments
------ ------------ ---------- ----------------- ----------- ---------- -----------------
'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 7,500 60 4,359 3,396 59,479 -
Issue of common stock for cash 250 2 2,070 - - -
Stock issuance costs - - (394) - - -
Net income - - - - 41,209 -
Shareholders' contribution 15 - - 765 - - -
Transfer to dedicated reserves - - - 867 (867) -
------------ ---------- ---------------- ----------- --------- --------------
Balance as of December 31, 1997 7,750 62 6,800 4,263 99,821 -
Issue of common stock for cash 250 2 6,208 - - -
Stock issuance costs - - (1,097) - - -
Net income - - - - 47,263 -
Shareholders' contribution 15 - - 648
Transfer to dedicated reserves - - - 2,032 (2,032) -
Translation adjustments - - - - - 10
------------ ---------- ---------------- ----------- --------- --------------
Balance as of December 31, 1998 8,000 64 12,559 6,295 145,052 10
Issue of common stock for cash 1,600 15 72,849 - - -
Stock issuance costs - - (26,756) - - -
Issue of stock purchase warrants
to underwriter - - 7,937 - - -
Issue of stock options to external
consultants - - 9,092 - - -
Net income - - - - 49,703 -
Shareholders' contribution 15 - - 575 - - -
Transfer to dedicated reserves - - - 2,314 (2,314) -
Translation adjustments - - - - - (8)
------------ ---------- ---------------- ----------- --------- --------------
Balance as of December 31, 1999 9,600 79 76,256 8,609 192,441 2
============ ========== ================ =========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. ORGANIZATION
----------------
Qiao Xing Universal Telephone, Inc. ("the Company") was incorporated in the
British Virgin Islands on December 6, 1994. On July 28, 1997, the Company
changed its name from Pastiche Investments Limited to Qiao Xing Universal
Telephone, Inc., the present one. In addition, on July 28, 1997, the Company
consummated a 1,000 for 1 share split ("the Share Split") and as a result the
then outstanding 3,000 shares of common stock with a par value of US$1 each
became 3,000,000 shares of common stock with a par value of US$0.001 each. The
effect of the Share Split has been reflected retroactively in the accompanying
balance sheets and in all per share computations.
Prior to July 23, 1997, the Company was dormant and on July 23, 1997 the Company
became an investment holding company by establishing a wholly-owned subsidiary,
Qiao Xing Holdings Limited ("QXHL"), in the British Virgin Islands by the
subscription of 1 share of QXHL at par value of US$1. On July 28, 1997, the
Company acquired from Strong World International Limited ("SWIL"; a company
incorporated in Hong Kong) 90% interest in Qiao Xing Telecommunication Industry
Company Limited ("QXTI"), by using QXHL as the immediate holding company,
through the issue of 4,500,000 shares of common stock (after the Share Split) of
the Company to the then shareholders of SWIL ("the Share Exchange"). Since the
Company and SWIL were owned by the same shareholders immediately before and
after the acquisition, the acquisition of QXTI by the Company through QXHL has
been accounted for as a reorganization of entities under common control on a
historical cost basis in a manner similar to a pooling of interests. On this
basis, the 4,500,000 shares of common stock of the Company issued for this
acquisition have been treated as issued for all years presented.
In August 1997, the Company issued 250,000 shares of common stock, par value
US$0.001 each, for cash consideration of US$1.00 per share, and raised
US$250,000 (equivalent to Rmb2,072,000). In April and May 1998, the Company
issued 250,000 shares of common stock, par value US$0.001 each, for cash
consideration of US$3.00 per share, and raised US$750,000 (equivalent to
Rmb6,210,000).
In February 1999, the Company issued 1,600,000 shares of common stock, par value
US$0.001 each, for cash consideration of US$5.50 per share through a public
offering, and raised US$8,800,000 (equivalent to Rmb72,864,000).
-6-
<PAGE>
1. ORGANIZATION (Cont'd)
----------------
QXTI is an equity joint venture established in the People's Republic of China
("Mainland China") on April 28, 1992 to be operated for an initial term of 15
years until April 27, 2007. Upon establishment, QXTI was 78% owned by Hong Kong
Shui Hing Electrical Appliance Factory ("SHEAF"; an unincorporated entity
established in Hong Kong) and 22% owned by Huizhou Qiao Lian Economic
Development Company ("QLED"; a state-owned company established in Mainland
China). According to the joint venture agreement and the articles of
association, the board of directors of QXTI consisted of 5 members, with 3
designated by SHEAF and 2 designated by QLED. The joint venture required an
unanimous vote of all joint venture partners, i.e. SHEAF and QLED, on the
following four matters: (i) amendment of QXTI's articles of association; (ii)
dissolution of QXTI; (iii) changes in QXTI's registered share capital; and (iv)
merger of QXTI with other corporations, and there were no other matters that
would have required unanimous vote. The registered capital of QXTI was
HK$15,000,000 (equivalent to Rmb10,500,000), of which HK$11,700,000 (equivalent
to Rmb 8,190,000) was to be contributed by SHEAF and HK$3,300,000 (equivalent to
Rmb2,310,000) was to be contributed by QLED, in the form of cash and/or
machinery and equipment, before March 2, 1995. Neither joint venture partner
contributed its share of the capital, and QXTI was financed by loans totalling
HK$15,000,000 (equivalent to Rmb10,500,000) advanced by Mr. Rui Lin Wu (held in
trust for Mr. Zhi Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings
Limited and Specialist Consultants Limited, the shareholders of SWIL and it was
agreed that SWIL should have beneficial interest in QXTI via this loan
financing. On March 2, 1995, as a consequence of the aforementioned loan
financing, SWIL replaced SHEAF as registered holder in respect of the 78%
interest in QXTI. The transfer of interest in QXTI from SHEAF to SWIL was
accounted for as a reorganization of companies under common control, similar to
a pooling of interests, since Mr. Zhi Jian Wu Li controlled both SHEAF and SWIL.
On May 22, 1995, Qiao Xing International Trade Limited ("QXINT"; a privately
owned company established in Mainland China), which is owned by Mr. Rui Lin Wu
(40%) and Mr. Zhi Yang Wu (60%), a son of Mr. Rui Lin Wu, replaced QLED as
registered holder in respect of the 22% interest in QXTI and a new joint venture
agreement and articles of association were executed. According to the new joint
venture agreement and articles of association, the board of directors of QXTI
consists of 3 members, with 2 designated by SWIL and 1 designated by QXINT. Mr.
Rui Lin Wu and Mr. Zhi Yang Wu, as the shareholders of QXINT, have agreed to
vote their minority position in QXTI in a manner consistent with SWIL.
Subsequent to the transfers of interests in QXTI, the loans of HK$15,000,000
(equivalent to Rmb10,500,000) were capitalized as a capital contribution.
-7-
<PAGE>
1. ORGANIZATION (Cont'd)
----------------
On November 3, 1995, the contribution and profit sharing ratio was changed from
78%:22% to 80%:20%. The registered capital of QXTI was increased from
HK$15,000,000 (equivalent to Rmb10,500,000) to HK$35,000,000 (equivalent to
Rmb32,012,000), of which 80% of the total enlarged capital or HK$28,000,000
(equivalent to Rmb25,610,000) was to be contributed by SWIL and 20% of the total
enlarged capital or HK$7,000,000 (equivalent to Rmb6,402,000) was to be
contributed by QXINT. Subsequently, pursuant to a supplementary agreement
between SWIL and QXINT executed on December 6, 1995, the contribution and profit
sharing ratio between SWIL and QXINT was further changed from 80%:20% to 90%:10%
and, accordingly, SWIL's obligation to the total enlarged capital of QXTI was
increased to HK$31,500,000 (equivalent to Rmb28,811,000) and QXINT's obligation
to the total enlarged capital of QXTI was reduced to HK$3,500,000 (equivalent to
Rmb3,201,000). On December 31, 1995, QXTI transferred its retained earnings of
HK$20,000,000 (equivalent to Rmb21,512,000) to capital as contributions made by
SWIL and QXINT.
Following the transfer of the 90% interest in QXTI from SWIL to QXHL (see
above), on July 28, 1997, a revised joint venture agreement and articles of
association relating to QXTI was entered into between QXHL and QXINT, under
which QXTI was changed from a contractual joint venture to an equity joint
venture and the joint venture period was extended to 30 years until April 27,
2022. According to the revised joint venture agreement and articles of
association, the board of directors of QXTI consists of 3 members, with 2
designated by QXHL and 1 designated by QXINT. Mr. Rui Lin Wu and Mr. Zhi Yang
Wu, as the shareholders of QXINT, have agreed to vote their minority position in
QXTI in a manner consistent with QXHL.
On May 25, 1999, QXINT transferred all of its 10% equity interest in QXTI to
Qiao Xing Group Limited ("QXGL"), a privately owned company established in
Mainland China. The change in equity interest in QXTI and the supplementary
joint venture agreement have been approved by the relevant Mainland Chinese
authorities. Mr. Rui Lin Wu and Mr. Zhi Yang Wu, as the shareholders of QXGL,
have agreed to vote their minority position in QXTI in a manner consistent with
QXHL.
2. SUBSIDIARIES
----------------
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Percentage of
equity interest
Place of attributable to
Name incorporation the Group Principal activities
----------------------------------- -------------- --------------- -----------------------
<S> <C> <C> <C>
Qiao Xing Holdings Limited ("QXHL") The British 100% Investment holding
Virgin Islands
Qiao Xing Telecommunication Mainland China 90% Manufacturing and sales
Industry Company Limited ("QXTI") of telecommunication
equipment
</TABLE>
-8-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------
a. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company,
its subsidiaries and its equity joint venture which is considered as a de
facto subsidiary. All material intra-group balances and transactions have
been eliminated on consolidation.
b. Subsidiaries
------------
A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its issued voting share capital as long-term
investment.
c. Inventories
-----------
Inventories are stated at the lower of cost, on a weighted average basis,
and market value. Costs of work-in-process and finished goods are composed
of direct materials, direct labor and an attributable portion of
manufacturing overheads.
d. Property, machinery and equipment
---------------------------------
Property, machinery and equipment are stated at cost. Gains or losses on
disposals are reflected in current operations. The Group capitalizes
certain external direct costs of materials and services consumed in
developing or obtaining internal-use computer software as software costs.
Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets after
taking into account the estimated residual value. The estimated useful
lives are as follows: land - 50 years, buildings - 8 to 30 years,
machinery, equipment and software - 6 to 12 years, furniture and office
equipment - 5 to 10 years, and motor vehicles - 8 years. All ordinary
repair and maintenance costs are expensed as incurred.
The Group recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without
interest charges) indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair
value of the assets.
e. Intangible asset
----------------
Intangible asset represents acquisition cost to obtain certain proprietary
technical know-how provided by a third party, and is stated at cost and
amortized on a straight-line basis over the estimated useful life of 6
years. The carrying amount of intangible asset is reviewed if facts and
circumstances suggest that it may be impaired. If this review indicates
that the carrying amount of intangible asset will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity
acquired over the remaining amortization period, the carrying amount of
intangible asset is reduced by the estimated shortfall of cash flows.
As of December 31, 1999, amortization of intangible asset has not yet
commenced since the production associated with the technical know-how has
not yet started.
-9-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
-----------------------------------------------
f. Construction-in-progress
-----------------------
Construction-in-progress represents land costs as well as factories and
office buildings under construction. It is the Company's policy to
capitalize interest during the construction phase of qualifying assets in
accordance with Statement of Financial Accounting Standards No. 34.
g. Sales
----
Sales represent (i) the invoiced value of goods, net of value-added tax
("VAT"), supplied to customers, and (ii) machinery rental. Sales are
recognized upon delivery of goods and passage of title to customers and
machinery rental is recognized as it accrues.
All of the Group's sales made in Mainland China by QXTI are subject to
Mainland Chinese value-added tax at a rate of 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Group on purchases
("input VAT").
h. Advertising costs
-----------------
Costs incurred for producing and communicating advertising are generally
expensed when incurred.
i. Research and development expenditures
-------------------------------------
Research and development expenses are charged to expenses as incurred.
j. Income taxes
------------
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements
or tax returns. Deferred income tax is provided using the liability
method. Under the liability method, deferred income tax is recognized for
all significant temporary differences between the tax and financial
statement bases of assets and liabilities.
k. Operating leases
----------------
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expenses on
a straight-line basis over the period of the relevant leases.
-10-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
-----------------------------------------------
l. Foreign currency translation
----------------------------
The Group considers Renminbi ("Rmb") to be its functional currency as most
of the Group's business activities are based in Renminbi.
The investment holding companies in the Group maintain their accounts in
United States dollars ("US$") and the translation of their financial
statements into Renminbi is performed for balance sheet accounts using the
closing exchange rate in effect at each of the balance sheet dates and for
revenue and expense accounts using the average exchange rate during each
reporting period. Gains and losses resulting from translation are included
in shareholders' equity separately as cumulative translation adjustments.
Gain (loss) from foreign currency transactions amounted to approximately
Nil, Rmb10,000 and (Rmb8,000) for the years ended December 31, 1997, 1998
and 1999.
m. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130") which requires the Group to report all changes in equity
during a period, except for those resulting from investment by owners and
distribution to owners, in financial statements for the period in which
they are recognized. The Group has disclosed comprehensive income, which
encompasses net income and currency translation adjustments, in Note 19.
Prior years' financial statements have been restated to conform to the SFAS
No. 130 requirements.
n. Earnings per common share
-------------------------
Earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing the net income by the
weighted average number of shares of common stock outstanding during the
period, on the basis that the Share Split and the Share Exchange by the
issue of 4,500,000 shares of common stock for the acquisition of 90%
interest in QXTI (see Note 1) had been consummated prior to the periods
presented. Diluted earnings per common share is computed by using the
weighted average number of common and common equivalent shares outstanding
during the period. For the year ended December 31, 1999, common equivalent
shares comprised shares issuable upon the exercise of stock options and
warrants to the extent such shares were dilutive.
o. Stock-based compensation
------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB No. 25"). Pro forma
disclosures were made assuming hypothetical fair value method application
as prescribed by Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123").
The Company accounts for stock options and warrants issued to external
consultants in accordance with the expense recognition provisions of SFAS
No.123. The Company values stock options and warrants issued based on
Black-Scholes option-pricing model and recognizes this value as an expense
over the period in which the options vest.
-11-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
----------------------------------------------
p. Fair value of financial instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and bank deposits and short-term borrowings
The carrying amounts approximate fair values because of the short maturity
of those instruments.
Long-term payable
The fair value of the Group's long-term payable is estimated based on the
quoted market prices for the same or similar issues.
q. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
4. ACCOUNTS RECEIVABLE
-------------------------
Accounts receivable comprised:
<TABLE>
<CAPTION>
1998 1999
---------------- -------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Trade receivables
- Sales 229,034 221,794 26,787
- Machinery rental 115 1,398 168
----------- ------------- --------
229,149 223,192 26,955
Less: Allowance for doubtful accounts (6,330) (10,163) (1,227)
----------- ------------- --------
Accounts receivable, net 222,819 213,029 25,728
=========== ============= ========
</TABLE>
-12-
<PAGE>
5. PREPAYMENTS AND DEPOSITS
------------------------------
Prepayments and deposits comprised:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Prepaid advertising expenses 445 511 61
Prepayments for research and development
projects 473 721 87
Deposits for purchase of raw materials 493 2,752 332
Deposits for purchase of fixed assets 398 658 80
Utilities deposits 76 188 23
Deferred stock issuance costs 7,869 - -
Deferred compensation costs* - 4,464 539
Others 130 596 72
------------ ------------ ----------
9,884 9,890 1,194
============ ============ ==========
</TABLE>
* Deferred compensation costs represented the unamortized portion of the fair
value of stock options granted to external consultants (see Note 17.b).
6. OTHER RECEIVABLES
-----------------------
Other receivables comprised:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Advances to sales agents 608 413 50
Other advances 450 1,518 183
Interest receivable - 561 68
Others - 25 3
------------ ------------ -------
1,058 2,517 304
============ ============ =======
</TABLE>
-13-
<PAGE>
7. INVENTORIES
-----------------
Inventories comprised:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Raw materials 16,573 21,573 2,605
Work-in-process 11,199 14,973 1,808
Finished goods 39,322 37,873 4,574
------------ ------------ ---------
67,094 74,419 8,987
Less: Allowance for obsolete and
slow-moving inventories (3,974) (7,132) (861)
------------ ------------ ---------
Inventories, net 63,120 67,287 8,126
============ ============ =========
</TABLE>
8. PROPERTY, MACHINERY AND EQUIPMENT
-------------------------------------
Property, machinery and equipment comprised:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Land 5,364 5,364 648
Buildings 2,775 6,896 833
Machinery, equipment and software 45,357 57,688 6,967
Furniture and office equipment 9,775 12,950 1,564
Motor vehicle 4,020 6,337 765
------------ ------------ ---------
67,291 89,235 10,777
Less: Accumulated depreciation (28,478) (37,936) (4,582)
------------ ------------ ---------
Property, machinery and equipment, net 38,813 51,299 6,195
============ ============ =========
</TABLE>
Land and buildings of the Group are located in Mainland China, where private
ownership of land is not allowed. Rather, entities acquire the right to use land
for a designated term. As of December 31, 1999, the Group was still in the
process of applying the land use right.
Certain of the machinery and equipment with net book value of approximately
Rmb8,481,000 and Rmb7,615,000 as of December 31, 1998 and 1999, respectively,
were pledged to secure certain of the Group's short-term borrowings (see Note
11).
-14-
<PAGE>
9. CONSTRUCTION-IN-PROGRESS
-----------------------------
Construction-in-progress comprised:
<TABLE>
1 9 9 8 1 9 9 9
-------------- ------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Land 34,163 127,595 15,410
Construction costs - 71,764 8,667
Interest capitalized 766 1,610 195
-------------- ---------------- ----------------
34,929 200,969 24,272
============== ================ ================
</TABLE>
Construction-in-progress comprised cost of land and construction costs of
factories and office buildings. There are two pieces of land located in
Mainland China held under land use rights for terms of 44 to 50 years expiring
in June 2042 and March 2050, respectively. Construction will be carried out in
phases over a ten-year period from 1999 to 2008, with total construction costs
(excluding land costs) estimated to be approximately Rmb125,000,000. As of
December 31, 1998 and 1999, land with carrying amount of approximately
Rmb27,944,000 and Rmb36,529,000, respectively, was pledged to secure certain of
the Group's short-term borrowings (see Note 11).
10. INTANGIBLE ASSET
---------------------
Intangible asset represents acquisition cost to obtain certain proprietary
technical know-how provided by a third party. As of December 31, 1999,
amortization of intangible asset has not yet commenced since the production
associated with the technical know-how has not yet started.
11. SHORT-TERM BORROWINGS
--------------------------
Short-term borrowings comprised:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 9
---------------- ------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Bills payable 856 31,460 3,800
Bank loans 42,700 70,560 8,522
Other loans 4,330 1,250 150
---------------- ---------------- ----------------
47,886 103,270 12,472
================ ================ ================
</TABLE>
All of the short-term borrowings were denominated in Renminbi. Bills payable is
a form of bank borrowings with payment term of 90 days and are non-interest
bearing unless they become trust receipts loans which bear interest at LIBOR
plus 2% as of December 31, 1998 and 1999. The weighted average interest rate on
bank loans was 8.18% and 7.11%, respectively, as of December 31, 1998 and 1999,
and the weighted average interest rate of other loans was 9.73% and 17.68%,
respectively, as of December 31, 1998 and 1999.
-15-
<PAGE>
11. SHORT-TERM BORROWINGS (Cont'd)
--------------------------
The bills payables are secured by bank deposits approximated Rmb16,800,000 and a
personal guarantee provided by Mr. Rui Lin Wu, a director of the Company. The
bank loans are secured by bank deposits approximated Rmb16,567,000, land
recorded under construction-in-progress of carrying amount approximated
Rmb36,529,000 (see Note 9), machinery and equipment of net book value
approximated Rmb7,615,000 (see Note 8), bank deposits of Mr. Rui Lin Wu
approximated Rmb15,991,000, land, machinery and equipment owned by a related
company, a personal guarantee provided by Mr. Rui Lin Wu and a corporate
guarantee provided by a related company (see Note 26).
12. OTHER PAYABLES
---------------------
Other payables comprised:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 9
-------------- -------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Long-term payable - current portion 1,000 1,000 121
Payable for purchase of land recorded
under construction-in-progress - 8,900 1,074
Payable for land registration fee for
land recorded under construction-in
-progress 1,000 - -
Payable for purchase of fixed assets 109 114 14
Payable for operating lease rental 1,618 1,200 145
Payable for software costs - 3,254 393
Refundable deposits - 700 85
Others 25 1,269 153
-------------- ----------- ----------
3,752 16,437 1,985
============== =========== ==========
</TABLE>
-16-
<PAGE>
13. ACCRUED LIABILITIES
------------------------
Accrued liabilities comprised:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 9
------------- --------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Accrual for operating expenses
- Salaries 2,832 2,750 332
- Staff education and training 1,512 1,512 183
- Advertising expenses 1,439 582 70
- Others 83 1,228 149
Provision for salary fund* 1,667 2,122 256
Provision for staff welfare fund* 2,483 3,107 375
------------- ------------- ------------
10,016 11,301 1,365
============= ============= ============
</TABLE>
* Salary fund is provided at 14% of total salary expenses of QXTI and staff
welfare fund is provided at 1% of the statutory after-tax profit of QXTI.
The salary fund is for the payment of non-recurring bonus, while the staff
welfare fund is for employees' welfare.
14. LONG-TERM PAYABLE
----------------------
Long-term payable represents the balance of land costs for the construction of
factories and office buildings, and is repayable by nineteen annual installments
of Rmb1,000,000 each, except for the last installment payable due in December
2017 amounting to approximately Rmb1,388,000. The repayment installments can be
summarized as follows:
<TABLE>
1 9 9 8 1 9 9 9
---------- -----------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Payable during the following period:
- 1999 1,000 - -
- 2000 1,000 1,000 121
- 2001 1,000 1,000 121
- 2002 1,000 1,000 121
- 2003 1,000 1,000 121
- Years subsequent to 2003 14,388 14,388 1,737
---------- ----------- ---------
Total minimum lease payments 19,388 18,388 2,221
Less: interest imputed at market rate (10,731) (9,887) (1,194)
---------- ----------- ---------
Present value of minimum lease payments 8,657 8,501 1,027
Current portion (1,000) (1,000) (121)
---------- ----------- ---------
Long-term payable 7,657 7,501 906
========== =========== =========
</TABLE>
-17-
<PAGE>
15. SHAREHOLDERS' LOANS
------------------------
These represent unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi
Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist
Consultants Limited, the Company's shareholders, which are non-interest bearing.
The shareholders have agreed not to demand the Group for repayment before
January 1, 2001. For financial reporting, interest expense of approximately
Rmb765,000, Rmb648,000 and Rmb575,000 for the years ended December 31, 1997,
1998 and 1999, respectively, were imputed according to cost of borrowings in
Mainland China, and were recorded as interest expense and shareholders'
contribution.
16. COMMON STOCK
-----------------
As of January 1, 1997 (the earliest date covered by this report), the Company
had 3,000 shares of common stock, par value US$1.00 each, outstanding. On July
28, 1997, the Company consummated a 1,000 for 1 share split ("the Share Split")
and as a result the then outstanding 3,000 shares of common stock, par value
US$1.00 each, became 3,000,000 shares of common stock, par value US$0.001 each.
Also on July 28, 1997, the Company issued 4,500,000 shares of common stock
(after the Share Split), par value US$0.001 each, for the acquisition of 90%
interest in QXTI (see Note 1). The effect of the Share Split and the issue of
4,500,000 shares of common stock for the acquisition of QXTI have been reflected
retrospectively in all per share computations.
In August 1997, the Company issued 250,000 shares of common stock, par value
US$0.001 each, for cash consideration of US$1.00 per share, and raised
US$250,000 (equivalent to Rmb2,072,000). In April and May 1998, the Company
issued 250,000 shares of common stock, par value US$0.001 each, for cash
consideration of US$3.00 per share, and raised US$750,000 (equivalent to
Rmb6,210,000).
In February 1999, the Company issued 1,600,000 shares of common stock, par value
US$0.001 each, for cash consideration of US$5.50 per share through a public
offering, and raised US$8,800,000 (equivalent to Rmb72,864,000).
-18-
<PAGE>
17. STOCK OPTIONS
------------------
In connection with the public offering of the Company's shares in February 1999,
the Company has granted common stock purchase warrants ("the Underwriter
Warrants") to the underwriter to purchase up to 160,000 shares of the Company at
an exercise price of $7.98 per share, exercisable during a five-year period
commencing on February 19, 1999.
On October 31, 1999, the Company issued 40,000 common stock purchase options to
certain external consultants, at exercisable prices ranging from US$3.25 to
US$5.50 per share, exercisable during a five-year period commencing on October
31, 1999.
The 1999 Stock Compensation Plan of the Company ("the Plan") allows for the
issuance of either incentive stock options to employees, or non-qualified
options to employees, directors and external consultants. A total of 2,000,000
common shares have been authorized and reserved for issuance under the Plan. As
of December 31, 1999, 680,000 incentive stock options and 325,000 non-qualified
options were issued to certain employees and external consultants, respectively,
at an exercise price of US$6.32 per share, exercisable during a five-year period
commencing on November 2, 1999.
Changes in outstanding stock options and warrants during the year ended December
31, 1999 were as follows:
<TABLE>
1 9 9 9
--------------------------------------
No. of stock Weighted
options / average
warrants exercise price
----------------- -----------------
US$
<S> <C> <C>
Outstanding, beginning of year - -
Granted at market price 1,865,000 6.48
-----------------
Outstanding, end of year 1,865,000 6.48
=================
Exercisable, end of year 1,865,000 6.48
=================
</TABLE>
-19-
<PAGE>
17. STOCK OPTIONS (Cont'd)
------------------
a. Stock options to employees
--------------------------
The Company has elected to follow APB No. 25 to account for the 680,000
incentive stock options granted to employees, under which the Company
recognized no compensation expense as no options were granted at price
below the market price on the grant date. Had compensation expense for the
incentive stock options been recognized based on fair value on the grant
date in accordance with SFAS No. 123, the Company's pro forma net income
and earnings per common share during the year would have been as follows:
<TABLE>
<CAPTION>
1 9 9 9
----------------------------
Rmb'000 US$'000
<S> <C> <C>
Pro forma net income 32,842 3,966
Pro forma earnings per share
- Basic Rmb 3.52 US$ 0.42
- Diluted Rmb 3.51 US$ 0.42
============== ============
</TABLE>
b. Stock options to external consultants
-------------------------------------
The Company has adopted SFAS No. 123 to account for the total of 525,000
common stock purchase options and warrants granted to the underwriter and
external consultants. For the year ended December 31, 1999, the fair value
of Underwriter Warrants and stock options granted to external consultants
amounted to approximately Rmb7,937,000 (equivalent to US$959,000) and
Rmb9,092,000 (equivalent to US$1,099,000), respectively, as computed using
the Black-Scholes option-pricing model on the grant date, and has been
recognized as stock issuance costs and operating expense.
-20-
<PAGE>
17. STOCK OPTIONS (Cont'd)
--------------------
The weighted average fair value of the common stock purchase options and
warrants on the grant dates were as follows:
<TABLE>
<CAPTION>
1 9 9 9
------------
US$
<S> <C>
The Underwriter Warrants 5.99
Stock options granted under the Plan 2.99
Stock options granted to external consultants on October 31, 1999 3.12
============
</TABLE>
The fair values were computed based on the following weighted average
assumptions:
<TABLE>
<CAPTION>
1 9 9 9
-----------------
<S> <C>
Risk-free interest rate 5.81%
Expected dividend yield 0.00%
Expected option life 5 years
Expected stock price volatility 291.27%
=================
</TABLE>
18. INCOME TAXES
-----------------
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
The Company and QXHL were incorporated under the International Business
Companies Act of the British Virgin Islands and, accordingly, are exempted from
payment of the British Virgin Islands income taxes. At present, substantially
all of the Group's income was generated in Mainland China by QXTI, a joint
venture enterprise established in the Coastal Economic Open Zone in Mainland
China and subject to Mainland Chinese income taxes at a rate of 27% (24% state
income tax and 3% local income tax). It is exempted from state income tax and
local income tax for three years starting from January 1, 1994, and then is
subject to a 50% reduction in state income tax and full exemption in local
income tax for the following two years. This tax holiday has expired on January
1, 1999 and QXTI only has full exemption in local income tax in 1999. If the
tax holiday of QXTI had not existed, the Group's income tax expenses (net of
minority interests) would have been increased by approximately Rmb7,386,000,
Rmb8,792,000 and Rmb2,632,000 for the years ended December 31, 1997, 1998 and
1999, respectively. Basic and diluted earnings per common share would have been
approximately Rmb4.45, Rmb4.85 and Rmb5.04 for the years ended December 31,
1997, 1998 and 1999, respectively.
-21-
<PAGE>
18. INCOME TAXES (Cont'd)
-------------------
Provision for income tax comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8 1 9 9 9
----------------- ----------------- ---------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Mainland Chinese
income tax
- current 6,565 7,900 21,056 2,543
- deferred - - (758) (92)
----------------- ----------------- ----------------- -----------------
6,565 7,900 20,298 2,451
================= ================= ================= =================
</TABLE>
The reconciliation of Mainland China statutory income tax rate to the effective
income tax rate based on income before income tax stated in the consolidated
statements of operations is as follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8 1 9 9 9
----------------- ----------------- -----------------
<S> <C> <C> <C>
Mainland Chinese statutory income tax 27.00% 27.00% 27.00%
rate
Effect of tax holiday (15.42%) (16.02%) (3.00%)
Non-deductible activities 0.42% 1.81% 2.58%
Others 0.52% 0.21% -
----------------- ----------------- -----------------
Effective income tax rate 12.52% 13.00% 26.58%
================= ================= =================
</TABLE>
Taxation payable comprised:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 9
----------------- --------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Mainland Chinese value-added tax 64,317 67,168 8,112
Mainland Chinese income tax 14,465 35,522 4,289
----------------- ----------------- -----------------
78,782 102,690 12,401
================= ================= =================
</TABLE>
-22-
<PAGE>
19. COMPREHENSIVE INCOME
---------------------------
Comprehensive income and its components, net of tax, comprised:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8 1 9 9 9
----------------- ----------------- ---------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Net income 41,209 47,263 49,703 6,002
Other comprehensive
income - translation
adjustments - 10 (8) (1)
----------------- ----------------- ----------------- -----------------
Comprehensive income 41,209 47,273 49,695 6,001
================= ================= ================= =================
</TABLE>
20. DISTRIBUTION OF INCOME
---------------------------
Substantially all of the Group's income is contributed by QXTI, an equity joint
venture enterprise established in Mainland China. Income of QXTI as determined
under generally accepted accounting principles in Mainland China ("Mainland
Chinese GAAP") is distributable to its joint venture partners after transfer to
dedicated reserves and staff welfare fund as required under Mainland Chinese
Company Law and QXTI's articles of association, at rates determined by QXTI's
board of directors.
Dedicated reserves include statutory surplus reserve and discretionary surplus
reserve. Pursuant to the Notice [1995] 31 issued by Ministry of Finance on
August 24, 1995 ("the Notice") and QXTI's articles of association, provision of
these reserves are recommended by QXTI's board of directors. During the year
ended December 31, 1997, QXTI appropriated 1% of its statutory after-tax profit
to each of the statutory surplus reserve and the discretionary surplus reserve.
For the years ended December 31, 1998 and 1999, QXTI appropriated 2% of its
statutory after-tax profit to each of the statutory surplus reserve and the
discretionary surplus reserve. The statutory surplus reserve can only be
utilized to offset prior years' losses or for capitalization as paid-in capital,
whereas the discretionary surplus reserve can be utilized for QXTI's future
development or capitalization as paid-in capital.
Pursuant to the Notice and QXTI's articles of association, QXTI appropriated 1%
of its statutory after-tax profit for the years ended December 31, 1997, 1998
and 1999 to the staff welfare fund which shall be utilized for collective staff
benefits such as building of staff quarters or housing. No distribution shall
be made other than on liquidation of QXTI. In the financial statements prepared
under generally accepted accounting principles in the United States of America
("US GAAP"), amounts appropriated to staff welfare fund were charged against
income and the related provisions are reflected as accrued liabilities in the
consolidated balance sheets.
Unappropriated profit is to be carried forward as retained earnings for future
distribution. The amount of profit available for distribution to the
shareholders will be determined based on the lower of the unappropriated profit
as reported under Mainland Chinese GAAP and under US GAAP.
-23-
<PAGE>
20. DISTRIBUTION OF INCOME (Cont'd)
---------------------------
Analysis of the appropriations of profit in the financial statements prepared
under Mainland Chinese GAAP and under US GAAP is as follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 9
----------------------------------------------- --------------------------------------------
Mainland Chinese Mainland Chinese
GAAP US GAAP GAAP US GAAP
--------------------- --------------------- --------------------- ------------------
Rmb'000 Rmb'000 Rmb'000 Rmb'000
<S> <C> <C> <C> <C>
Income after tax but before
minority interests 54,153 52,853 52,381 56,068
Minority interests (5,737) (5,590) (5,971) (6,365)
--------------------- --------------------- --------------------- -------------------
Income after minority
interests 48,416 47,263 46,410 49,703
Transfer to statutory surplus
reserve (1,016) (1,016) (1,157) (1,157)
Transfer to discretionary
surplus reserve (1,016) (1,016) (1,157) (1,157)
Transfer to staff welfare
fund, under Mainland Chinese
GAAP (Note 13) (549) - (643) -
--------------------- --------------------- --------------------- -------------------
Unappropriated profit for the
year 45,835 45,231 43,453 47,389
Retained earnings, beginning
of year 136,255 99,821 148,564 145,052
Recognition of prior years'
provisions (33,526) - - -
--------------------- --------------------- --------------------- -------------------
Retained earnings,
end of year 148,564 145,052 192,017 192,441
===================== ===================== ===================== ===================
</TABLE>
-24-
<PAGE>
20. DISTRIBUTION OF INCOME (Cont'd)
---------------------------
The reconciliation of the Group's consolidated retained earnings (representing
unappropriated profit) as of December 31, 1998 and 1999 as reported under
Mainland Chinese GAAP and under US GAAP is as follows:
<TABLE>
<CAPTION>
1998 1999
------- -----------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Retained earnings, under Mainland Chinese GAAP 148,564 192,017 23,190
Amounts not recorded in the statutory
accounts prepared under Mainland Chinese
GAAP:
- Provision for obsolete and slow-moving
inventories (3,974) - -
- Deferred tax asset - 758 92
Share by minority interests of the
reconciling items 397 (76) (9)
Others 65 (258) (31)
------- ------- -------
Retained earnings, under US GAAP 145,052 192,441 23,242
======= ======= =======
</TABLE>
21. EARNINGS PER COMMON SHARE
------------------------------
The following represents a reconciliation from basic earnings per common share
to diluted earnings per common share:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ---------------------------
'000 '000 '000 '000
<S> <C> <C> <C> <C>
Net income Rmb 41,209 Rmb 47,263 Rmb 49,703 US$ 6,002
----------- ----------- ----------- ----------
Weighted average common
shares - basic 7,595 7,936 9,333 9,333
Effect of dilutive stock
options and warrants - - 11 11
----------- ----------- ----------- -----------
Weighted average common
shares - diluted 7,595 7,936 9,344 9,344
----------- ----------- ----------- -----------
Earnings per common share
- Basic Rmb 5.43 Rmb 5.96 Rmb 5.33 US$ 0.64
=========== =========== =========== ===========
- Diluted Rmb 5.43 Rmb 5.96 Rmb 5.32 US$ 0.64
=========== =========== =========== ===========
</TABLE>
-25-
<PAGE>
22. RETIREMENT PLAN
--------------------
The Group's employees in Mainland China are all employed by QXTI. As stipulated
by Mainland Chinese regulations, QXTI maintains a defined contribution
retirement plan for all of its employees who are permanent residents of the
Guangdong Province, Mainland China. All retired employees of QXTI are entitled
to an annual pension equal to their basic annual salary upon retirement. QXTI
contributed to a state sponsored retirement plan approximately 15% of the basic
salary of its employees up to June 30, 1998 and approximately 24% of the basic
salary of its employees thereafter, and has no further obligations for the
actual pension payments or post-retirement benefits beyond the annual
contributions. The state sponsored retirement plan is responsible for the entire
pension obligations payable to all employees. QXTI's contributions for the years
ended December 31, 1997, 1998 and 1999 were approximately Rmb11,000, Rmb49,000
and Rmb69,000, respectively.
23. COMMITMENTS
----------------
a. Capital commitments
-------------------
As of December 31, 1999, the Group has outstanding capital commitments
amounting to approximately Rmb808,000 for purchases of machinery and
equipment.
b. Operating lease commitments
---------------------------
The Group has various operating lease agreements for factory premises,
which extend through December 2001. Rental expenses for the years ended
December 31, 1997, 1998 and 1999 were approximately Rmb2,966,000,
Rmb3,139,000 and Rmb3,233,000, respectively. Future minimum rental payments
as of December 31, 1999, under agreements classified as operating leases
with non-cancelable terms in excess of one year, are as follows:
Rmb'000 US$'000
------- -------
Payable during the following period
- Within one year 190 23
- Over one year but not exceeding two years 5,315 642
------- -------
5,505 665
======= =======
24. CONTINGENT LIABILITIES
---------------------------
As of December 31, 1999, QXTI had provided a corporate guarantee to an unrelated
company for bank borrowings of approximately HK$1,200,000 (equivalent to
approximately Rmb1,279,000). No guarantee fee was received by QXTI on such a
guarantee and the unrelated company did not receive preferential treatment on
cost of borrowing of such loan.
-26-
<PAGE>
25. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-----------------------------------------------------
a. Non-cash transaction
--------------------
For the years ended December 31, 1997, 1998 and 1999, imputed interest on
shareholders' loans of approximately Rmb765,000, Rmb648,000 and Rmb575,000,
respectively, were recorded as shareholders' contribution and credited to
the additional paid-in capital.
For the year ended December 31, 1999, the fair value of Underwriter
Warrants amounted to approximately Rmb7,937,000 has been recognized as
stock issuance costs, and the fair value of stock options granted to
external consultants amounted to approximately Rmb4,628,000 and
Rmb4,464,000, respectively, has been recognized as operating expense and
deferred compensation cost.
b. Interest (paid) received
------------------------
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Interest paid, including amount
capitalized as construction-in-progress (2,625) (5,219) (5,846) (706)
Interest received 54 287 1,981 239
======= ======= ======= =======
</TABLE>
26. BANKING FACILITIES
-----------------------
As of December 31, 1999, the Group had banking facilities of approximately
Rmb113,045,000 for loans and trade financing. Unused facilities as of December
31, 1999 amounted to approximately Rmb9,775,000. These banking facilities were
secured by:
a. the Group's bank deposits of approximately Rmb33,367,000;
b. the Group's land with carrying amount of approximately Rmb36,529,000 and
the Group's machinery and equipment with net book value of approximately
Rmb7,615,000;
c. bank deposits of Mr. Rui Lin Wu, a director of the Company, amounted to
approximately Rmb15,991,000;
d. land, machinery and equipment of a related company;
e. a personal guarantee provided by Mr. Rui Lin Wu; and
f. a corporate guarantee provided by a related company.
-27-
<PAGE>
27. RELATED PARTY TRANSACTIONS
-------------------------------
Name and relationship of related parties:
<TABLE>
<CAPTION>
Name of related parties Existing relationship with the Company
----------------------------------------------- ------------------------------------------
<S> <C>
Mr. Zhi Jian Wu Li The major shareholder
Mr. Rui Lin Wu Director and father of Mr. Zhi Jian Wu Li
Mr. Zhi Yang Wu Director and brother of Mr. Zhi Jian Wu Li
Ms. Mei Lian Li Director and wife of Mr. Zhi Yang Wu
Mr. Zhi Zhong Wu Brother of Mr. Zhi Jian Wu Li
Ms. Qing Li Wife of Mr. Rui Lin Wu
Wu Holdings Limited Intermediate holding company
Ben Xing Telecommunication Component Limited Common director
Jia Xing Electronics Supplies Company Limited Common director
Qiao Xing Commercial Limited Common director
Qiao Xing Electronics Holdings Company Limited Common director
Qiao Xing Group Limited Common directors
Qiao Xing International Company Common director
Qiao Xing Investment Limited Common director
Qiao Xing Properties Limited Common directors
Rui Xing Electronic Development Company Limited Common director
</TABLE>
Summary of related party transactions is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Recovery of general and administrative expenses
from
- Ben Xing Telecommunication Component Limited 12 - - -
- Jia Xing Electronic Supplier Company Limited - - 79 9
- Qiao Xing Properties Limited 1,787 1,317 1,734 210
- Rui Xing Electronic Development Company Limited 100 178 208 25
Interest paid to
- Rui Xing Electronics Development Company Limited 803 1,002 201 24
- Ms. Mei Lian Li - 43 51 6
Purchases from
- Ben Xing Telecommunication Component Limited 5,232 4,761 - -
- Jia Xing Electronic Suppliers Company Limited - - 31,301 3,782
- Qiao Xing Commercial Company - 7,162 - -
- Qiao Xing International Company 12,481 987 12 1
- Qiao Xing Properties Limited 26,419 24,145 25,666 3,101
- Rui Xing Electronic Development Company Limited 12,325 6,352 6,693 809
======= ======= ======= =======
</TABLE>
-28-
<PAGE>
27. RELATED PARTY TRANSACTIONS (Cont'd)
-------------------------------
Summary of related party balances is as follows:
1998 1999
------- -------------------
Rmb'000 Rmb'000 US$'000
Due from
- Mr. Rui Lin Wu 9 - -
- Mr. Zhi Yang Wu 877 - -
- Mr. Zhi Jian Wu Li 2 - -
- Ms. Mei Lian Li 391 - -
- Qiao Xing Group Limited 6,648 437 54
- Qiao Xing Investment Limited 1,195 194 24
- Wu Holdings Limited 193 193 22
------- ------- ------
9,315 824 100
======= ======= ======
Due to
- Mr. Zhi Zhong Wu 950 1,006 122
- Ms. Qing Li 705 705 85
- Mr. Rui Lin Wu - 637 77
- Mr. Zhi Jian Wu Li - 55 7
- Mr. Zhi Yang Wu - 91 11
- Qiao Xing Electronics Holdings
Company Limited - 841 101
- Rui Xing Electronic Development
Company Limited 959 - -
------- ------- ------
2,614 3,335 403
======= ======= ======
Except for the balance with Rui Xing Electronic Development Company Limited, all
other balances with the shareholder, directors and related parties were
unsecured, non-interest bearing and without pre-determined repayment terms.
The outstanding balance due to Rui Xing Electronic Development Company Limited
during the year was unsecured, bore interest at approximately 26% (1998 - 26%)
per annum and without pre-determined repayment terms.
The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and Qiao Xing Group Limited on behalf of Qiao Xing Telecommunication
Industry Company Limited, whereas a rental agreement in Hong Kong was entered
into by Qiao Xing Electronics Holdings Company Limited on behalf of Qiao Xing
Universal Telephone Company Limited.
The Group's banking facilities were secured by, among others, pledges over
certain land, machinery and equipment owned by a related company, a corporate
guarantee provided by a related company, bank deposits and a personal guarantee
provided by Mr. Rui Lin Wu, a director.
-29-
<PAGE>
28. SEGMENT ANALYSIS
---------------------
a. Net sales
---------
Sales comprised:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Sales of telecommunication products 382,511 349,764 382,273 46,168
Machinery rental 1,423 1,420 1,360 164
------- ------- ------- -------
383,934 351,184 383,633 46,332
======= ======= ======= =======
</TABLE>
All of the Group's sales were made to customers in Mainland China.
b. Operating profit *
------------------
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ---------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Sales of telecommunication products 54,466 65,108 78,358 9,463
Machinery rental 1,423 1,420 1,360 164
------- ------- ------- -------
55,889 66,528 79,718 9,627
======= ======= ======= =======
</TABLE>
* Operating profit represents gross profit less selling, general and
administrative expenses.
c. Assets
------
Substantially all of the Group's assets are located in Mainland China.
-30-
<PAGE>
28. SEGMENT ANALYSIS (Cont'd)
---------------------
d. Major customers
---------------
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
1997 1998 1999
---- ---- ----
Zuo Hui Jin 17% 16% 13%
Hang Guo You 3% 4% 7%
Tian Liang Wu 9% 8% 6%
Si Lu Wu 7% 9% 5%
Chaozhou Yong Jie Electric
Appliance Trading Company 9% 4% 4%
Fujian Jinjiang An Hai Hong Fa
Department Store Company 9% 4% 2%
==== ==== ====
e. Major suppliers
---------------
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
1997 1998 1999
---- ---- ----
Jia Xing Electronic Supplies
Company Limited 11% 10% 12%
Qiao Xing Properties Limited 9% 8% 9%
==== ==== ====
29. OPERATING RISKS
--------------------
a. Country risk
------------
As substantially all of the Group's operations are conducted in Mainland
China, the Group is subject to special considerations and significant risks
not typically associated with companies operating in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The Group's results may be adversely affected by changes in the political
and social conditions in Mainland China, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
In addition, substantially all of the Company's revenue is denominated in
Renminbi ("Rmb") which must be converted into other currencies before
remittance outside Mainland China. Both the conversion of Renminbi into
foreign currencies and the remittance of foreign currencies abroad require
approvals of the Mainland Chinese government.
-31-
<PAGE>
29. OPERATING RISKS (Cont'd)
--------------------
b. Dependence on strategic relationship
-----------------------------------
The Group conducts its manufacturing and trading operations through its
joint venture established between the Group and a Mainland Chinese party.
Any deterioration of this strategic relationship may have an adverse effect
on the operations of the Group.
c. Concentration of credit risk
----------------------------
Concentration of accounts receivable as of December 31, 1998 and 1999 is as
follows:
1998 1999
---------- ----------
Five largest accounts receivable 37% 29%
========== ==========
The Group performs ongoing credit evaluations of each customer's financial
condition. It maintains reserves for potential credit losses and such
losses in the aggregate have not exceeded management's projections.
30. OTHER SUPPLEMENTARY INFORMATION
------------------------------------
The following items were included in the consolidated statements of operations:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -----------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Depreciation of property, machinery and
equipment 7,940 8,836 9,794 1,182
Allowance for doubtful accounts 1,068 4,584 3,833 463
Allowance for obsolete and slow-moving
inventories 772 1,067 3,158 381
Interest expense for
- bank loans 1,355 2,987 4,585 554
- loan from a related party 803 1,045 252 30
- other loans 467 421 165 20
- long-term payable - 766 844 102
- shareholders' loans (imputed interest) 765 648 575 69
------------- ------------- ------------ -------------
3,390 5,867 6,421 775
Less: amount capitalized as
construction-in-progress - (766) (844) (102)
------------- ------------- ------------ -------------
Total amount of interest recognized as
expense 3,390 5,101 5,577 673
Advertising expenses 11,405 7,910 13,260 1,602
Research and development expenditures 657 902 562 68
Repairs and maintenance expenses 320 184 1,503 181
Interest income from bank deposits (54) (287) (1,981) (239)
============= ============= ============ =============
</TABLE>
-32-
<PAGE>
31. SUBSEQUENT EVENTS
----------------------
In January 2000, the Company entered into a placing arrangement with certain
private institutional investors ("the Investors"), under which 833,334 shares of
common stock has been issued and fully paid-up at a purchase price of US$12.00
each, with issue proceeds totaling US$10,000,000 (equivalent to approximately
Rmb82,800,000).
In connection with this placing arrangement, 360,000 and 300,000 stock purchase
warrants were granted to the Investors and external consultants, respectively,
at an exercise price of US$46.96 per share, exercisable during a five-year
period commencing from February 2000.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QIAO XING UNIVERSAL TELEPHONE, INC.
(Registrant)
Date: July 14, 2000 By: /s/ Rui Lin Wu
----------------- --------------
Rui Lin Wu
Chairman
