AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 15, 2005
Registration No. 333-128323
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Commission File Number 000-26559
CHINA MOBILITY SOLUTIONS, INC.
(Name of Small Business Issuer in its charter)
Florida 7374 330-751560
(State or other jurisdiction Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number
#900 - 789 West Pender Street
Vancouver, B.C. Canada V6C 1H2
(604) 632-9638
(Address and telephone number of principal executive offices)
#900 - 789 West Pender Street
Vancouver, B.C. Canada V6C 1H2
(604) 632-9638
(Address of principal place of business)
Copies of all communications to agent for service should
be sent to:
Elliot H. Lutzker, Esq.
Robinson & Cole LLP
885 Third Avenue, Suite 2800
New York, NY 10022-4834
Telephone: (212) 451-2900
Facsimile: (212) 451-2999
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
--------------------------- ---------- -------- -------- ----------------
Common stock, par value,
$.001 per share 9,571,486(2) $0.57 $5,455,747 $642.14
Common stock, par value,
$.001 per share 9,571,486(3) $0.57 $5,455,747 $642.14
Common stock, par value,
$.001 per share 9,571,486(4) $0.57 $5,455,747 $642.14
Common stock, par value,
$.001 per share 7,178,572(5) $0.57 $4,091,786 $481.60
Total 35,893,030 $20,459,027 $2,408.02 (6)
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Securities Act Rule 457(c), based on the last sale price of the Registrant's
common stock of $0.57 on September 9, 2005 on the Over-the-Counter Bulletin
Board.
(2) Represents shares of common stock underlying the Debentures ("Debenture
Shares").
(3) Represents shares of common stock underlying the Class A Warrants ("Warrant
Shares").
(4) Represents shares of common stock underlying the Class B Warrants ("Warrant
Shares").
(5) Represents shares of common stock underlying the placement agent warrants
("Agent Warrant Shares").
(6) The fee was paid with the initial filing of this Registration Statement on
September 14, 2005.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS
THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
-ii-
The information contained in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION - DATED NOVEMBER 15, 2005
CHINA MOBILITY SOLUTIONS, INC.
35,893,030 Shares of Common Stock
This prospectus relates to the resale of 28,714,458 shares of our common stock
which were previously sold by Meyers Associates, L.P., the placement agent
("Placement Agent" or "Meyers"), on a "best efforts, all or none basis" (the
"Offering") on behalf of China Mobility Solutions, Inc. to accredited investors
and institutional investors in a private equity offering, together with
7,178,572 shares of our common stock issuable to Meyers under Placement Agent
Warrants. The shares may be offered in transactions conducted on the
Over-The-Counter Bulletin Board maintained by the NASD ("OTCBB"), in privately
negotiated transactions or through a combination of such methods. The shares may
be sold at prices relating to the prevailing market prices, at privately
negotiated prices or at other prices, which may change from time to time and
from offer to offer. The distribution of the Shares by the selling shareholders
is not subject to any underwriting or other agreement.
Our common stock is currently traded on the OTCBB, under the symbol "CHMS.OB."
On November 10, 2005, the closing price of our common stock, as reported by the
OTCBB, was $0.40 per share.
The shares being offered pursuant to this prospectus involve a high degree of
risk. Persons should not invest unless they can afford to lose their entire
investment. You should carefully read and consider the "Risk Factors" commencing
on page 7 for information that should be considered in determining whether to
purchase any of the shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ____________ __, 2005
You should rely only on the information contained or incorporated by reference
in this prospectus and in any accompanying prospectus supplement. No one has
been authorized to provide you with different information. The shares are not
being offered in any jurisdiction where the offer is not permitted. You should
not assume that the information in this prospectus or any prospectus supplement
is accurate as of any date other than the date on the front of such documents.
Government filings. We are subject to the information reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such,
we file annual, quarterly and special reports, proxy statements and other
documents with the SEC. These reports, proxy statements and other documents may
be inspected and copied at the public reference facilities maintained by the SEC
at 100 F Street, NE, Washington, D.C. 20549. You may also obtain copies of such
material by mail from the public reference facilities of the SEC's Washington,
D.C. offices, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for
further information on their public reference facilities. In addition, the SEC
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding companies, including us, that file
electronically with the SEC. The address of the SEC's web site is
http://www.sec.gov.
TABLE OF CONTENTS Page
INTRODUCTORY COMMENTS........................................................3
SUMMARY......................................................................3
WHERE YOU CAN FIND MORE INFORMATION..........................................6
RISK FACTORS.................................................................6
CHANGES IN ACCOUNTANTS......................................................14
USE OF PROCEEDS.............................................................14
PRICE RANGE OF COMMON STOCK.................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS .................15
BUSINESS....................................................................22
MANAGEMENT..................................................................31
PRINCIPAL STOCKHOLDERS......................................................34
SELLING STOCKHOLDERS........................................................36
DESCRIPTION OF SECURITIES...................................................39
PLAN OF DISTRIBUTION........................................................41
EXPERTS.....................................................................42
LEGAL MATTERS...............................................................42
-2-
INTRODUCTORY COMMENTS
USE OF NAMES
Throughout this prospectus, the terms "we," "us," "our" and "our company" refer
to China Mobility Solutions, Inc. (or "China Mobility" or "CHMS").
FORWARD-LOOKING STATEMENTS
Statements contained in this report include "forward-looking
statements" within the meaning of such term in Section 27A of the Securities Act
of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which could cause actual financial or operating results,
performances or achievements expressed or implied by the forward-looking
statements not to occur or be realized. Forward-looking statements generally are
based on our best estimates of future results, performances or achievements,
based upon current conditions and the most recent results of the companies
involved and their respective industries. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"could," "project," "expect," "believe," "estimate," "anticipate," "intend,"
"continue," "potential," "opportunity" or similar terms, variations of those
terms or the negative of those terms or other variations of those terms or
comparable words or expressions.
Potential risks and uncertainties include, among other things, such
factors as:
o our business strategies and future plans of operations,
o general economic conditions in the United States and elsewhere, as
well as the economic conditions affecting the industries in which we
operate,
o the market acceptance and amount of sales of our products and
services,
o our historical losses,
o the competitive environment within the industries in which we
compete,
o our ability to raise additional capital, currently needed for
expansion,
o the other factors and information discussed in other sections of
this prospectus and in the documents incorporated by reference in
this prospectus.
Persons reading this prospectus should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause actual
results to differ materially from those provided in the forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
SUMMARY
OUR COMPANY
China Mobility Solutions, Inc. ("CHMS" or the "Company") is one of the first
companies to focus on providing mobile solutions to many diverse businesses
throughout the People's Republic of China ("China"). Through its subsidiary
QuickNet Telecommunication Corp. ("QuickNet"), an SMS (short message service)
provider in Beijing, China, the Company is presently focused on its mobile
marketing solutions for enterprises. QuickNet is one of the first companies to
focus on mobile solutions for businesses in China. QuickNet's strategy of
targeting corporate users is aimed at achieving a higher percentage of recurring
revenue and better margins. The Company initially acquired (controlled) 51% of
QuickNet in June 2004 and exercised its option to acquire the remaining 49% by
December 31, 2005. See the "Business" section of this Prospectus for further
information.
CHMS launched its mobile marketing services in July 2003 and became cash flow
positive by the end of 2003. The Company generated about U.S. $4 million of
sales in 2004 and increased its cash position by U.S. $2 million in 2004 to U.S.
$5 million. However, in accordance with U.S. generally accepted accounting
principles (GAAP), all revenue needs to be deferred for 12 months. Therefore,
the Company had operating losses of $242,216 in 2004 and $190,710 in 2003.
Investors should read the Company's financial statements, especially the notes
thereto.
-3-
In January 6, 2003, the Company announced the acquisition of Windsor Education
Academy Inc., a Richmond, British Columbia based school specializing on the
education and training field providing English as a second Language ("ESL") in
British Columbia. The Company's contract with the government to provide ESL
ended on March 31, 2005.
CHMS has an accumulated customer base of 19,000, and has access to a database of
about 500,000 corporate clients. This knowledge was gained from its previous
Chinese Internet technology business.
There are more than 350 million cellular phone customers in China, which already
surpasses the United States with about 170 million cellular phone customers
according to the China Ministry of Information ("MII") and Cellular
Telecommunications & Internet Association. Currently, there are about 1 billion
SMS sent per day in China, which accounts for about one-third of the world
traffic, according to Anbound Information Corporation. With the penetration rate
just above 20%, however, there is still considerable room for growth in the
Chinese mobile market. This data is provided by MII. Pacific Growth Equities of
San Francisco foresees 500 million mobile phone users in China by 2007.
CHMS's first application in mobile marketing is the use of the mobile medium as
a communications and entertainment channel between a brand and an end-user.
Mobile marketing can be used in a wide variety of ways, such as for customer
retention, to raise brand awareness and for advertising purposes. Businesses
that purchase this service will send out messages through the Company's
platform, which has been connected by Chinese mobile carriers to the targeted
customers. All types of mobile phones may be used for this service.
CHMS has a strong management team with successful management record with the
previous development of a profitable internet service company with over 200
employees and 19 offices across the world.
The Company will use four outlets to approach the market for its business
solutions:
o Agencies - We have primarily made sales for our mobile marketing
services via advertising agencies. We have made approximately 91% of
such sales from advertising agencies. These agencies are paid sales
commissions of between 15% and 20% under contracts with the Company.
o Mobile Carriers - In the future, we intend to co-market mobile
carriers' mobile solutions to enterprises and use mobile carriers'
extensive connections and influence to lead to potentially more
clients.
o In-House Sales Staff - The Company has a database of 500,000
enterprises through its previous Internet services. Through direct
mail, advertising, telephone calling and SMS, the in-house sales
staff of approximately 23 persons will contact many of these
companies.
o Sales support offices - The Company plans to set up small sales
support offices across China to enhance local presence, provide
customer support and show responsiveness. Currently, we have offices
in Beijing, Shanghai and Shenzhen.
As discussed under the "Business," section of the Prospectus, the Company will
need to raise a significant amount of additional funds to implement its strategy
of promoting its mobile solutions to businesses throughout China; establishing
sales support offices in key urban centers in China; developing new solutions
that are being demanded by enterprises; and acquiring other mobile companies
that will deliver synergistic benefits. The Company does not have any binding
commitments for such additional capital as of the date of this Prospectus and no
assurances can be given that it will be able to raise any additional capital.
The Company was formed in Florida under the name Placer Technologies, Inc. on
September 9, 1996. The Company changed its name to China Mobility Solutions,
Inc. in June 2004. Up until late 2002, the Company's business was focused on
domain name registration, webhosting, and web design services.
-4-
THE OFFERING
The Offering of 134 units ("Units") was for $2 million on a "best efforts - all
or none basis" with an over-subscription of $1,350,000, all of which was sold.
Each Unit was sold for $25,000, consisting of $25,000 principal amount of senior
convertible debentures (the "Debentures"), and Class A Warrants and Class B
Warrants, to purchase shares of common stock, $0.001 par value (the "Common
Stock") of the Registrant. Each $25,000 Debentures is initially convertible at
$.35 per share for 71,429 shares of Common Stock; matures on August 15, 2006 and
accrues interest at a rate of not less than 6% per annum equal to the sum of 2%
per annum plus the one-month London Inter-Bank Offer Rate (LIBOR). The
Debentures are subject to redemption at 125% of the principal amount plus
accrued interest commencing six months after the effective date (the "Effective
Date") of this registration statement. Each Unit also includes: (i) Class A
Warrants exercisable at $.44 per share to purchase 71,429 shares of Common Stock
for two years from the Effective Date, but no later than February 15, 2008; and
(ii) Class B Warrants exercisable at $.52 per share to purchase 71,429 shares of
Common Stock for three years from the Effective Date, but no later than February
15, 2009. The Class A and Class B Warrants are subject to redemption by the
Company at any time commencing six months and twelve months, respectively, from
the Effective Date, provided the average closing bid price of the Common Stock
equals or exceeds 175% of the respective exercise prices for 20 consecutive
trading days. For additional information, see "Description of Securities" and
"Plan of Distribution" elsewhere in this Prospectus.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the more
detailed audited and unaudited financial statements of China Mobility appearing
elsewhere in this prospectus. This information should be read in conjunction
with such financial statements, including the notes to such financial
statements.
STATEMENT OF OPERATIONS DATA:
9 Months
Ended - - Year Ended -
September 30, ------------ ------------- ---------------- --------------
------------------------------ December 31
2005 2004 2004 2003 2002 2001
----------------------------------------- -------------- --------------- ------------ ------------- ---------------- --------------
Revenue ................................. $ 3,537,237 $ 1,106,380 $ 2,170,766 $ 280,723 $ 0 $ 0
Cost of revenue ......................... 946,636 $ 279,870 473,235 134,340 0 0
Operating expenses ...................... 4,450,278 $ 921,379 1,939,747 337,093 191,269 298,525
Interest income ......................... 60,625 $ 59,846 82,602 15,066 1,272 43,281
Other income (expenses) ................. 20 $ 1,470 (71,001) (58,398) (463,747) 0
Net income (loss) before minority
interest and discontinued
operations .............................. (1,799,032) ($ 114,826) (230,615) (234,042) (653,744) (255,244)
Provision for minority interest ......... (138,469) $ 4,634 (28,157) 26,046 0 0
Gain (loss) from discontinued
operations .............................. 0 ($ 41,654) 3,277,444 (106,281) (254,035) (1,255,659)
Net Gain (loss) ......................... ($ 1,937,501) ($ 151,846) $ 3,018,672 ($ 314,277) ($ 907,779) ($ 1,510,903)
----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net gain (loss) per basic and diluted
shares .................................. ($ 0.11) ($ .01) $ 0.20 ($ 0.02) ($ 0.04) ($ 0.07)
----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding ...................... 16,996,285 14,531,196 14,856,834 13,786,670 24,757,270 21,360,010
----------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
September 30, December 31
2005 2004 2003 2002 2001
----------------------------------------- ------------ ------------ ------------ ------------ ------------
Current assets .......................... $ 8,010,631 $ 5,466,574 $ 5,869,782 $ 3,460,530 $ 3,549,864
Total assets ............................ $ 12,820,140 $ 6,447,030 $ 6,320,612 $ 3,918,160 $ 3,753,612
Current liabilities ..................... $ 8,163,831 $ 2,452,522 $ 5,870,451 $ 3,176,765 $ 3,104,368
Minority interest ....................... $ 0 $ 32,791 $ 38,147 $ 0 $ 0
Total liabilities and minority
interest ................................ $ 8,163,831 $ 2,485,313 $ 5,908,598 $ 3,176,765 $ 3,104,368
Stockholders' equity .................... $ 4,656,309 $ 3,961,717 $ 412,014 $ 741,395 $ 649,244
-5-
WHERE YOU CAN FIND MORE INFORMATION
Our common stock is traded on the OTCBB under the symbol CHMS.OB. Material filed
by us can also be inspected and copied at the offices of the NASD, located at
9509 Key West Avenue, Rockville, MD 20850-3329.
We will distribute annual reports to our stockholders, including financial
statements examined and reported on by independent certified public accountants.
We also will provide you without charge, upon your request, with a copy of any
or all reports, proxy statements and other documents we file with the SEC, as
well as any or all of the documents incorporated by reference in this prospectus
or the registration statement we filed with the SEC registering for resale the
shares of our common stock being offered pursuant to this prospectus, other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference into such documents. Requests for such copies should be directed to
Angela Du, the Company's Chief Executive Officer at China Mobility Solutions,
Inc., #900 - 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2, telephone:
(604) 632-9638; URL: www.chinamobilitysolutions.com.
We have filed a Registration Statement on Form SB-2 with the SEC registering
under the Securities Act the common stock that may be distributed under this
prospectus. This prospectus, which is a part of such registration statement,
does not include all the information contained in the registration statement and
its exhibits. For further information regarding us and our common stock, you
should consult the registration statement and its exhibits.
Statements contained in this prospectus concerning the provisions of any
documents are summaries of those documents, and we refer you to the documents
filed with the SEC for more information. The registration statement and any of
its amendments, including exhibits filed as a part of the registration statement
or an amendment to the registration statement, are available for inspection and
copying as described above.
STATE SUITABILITY STANDARDS
NOTICE TO CALIFORNIA RESIDENTS:
Sales in the state of California are limited to investors with a combined annual
income of $65,000 and a net worth of $250,000 or a minimum net worth of
$500,000, exclusive of homes, furnishings and automobiles or accredited
investors as such term is defined in Rule 501 of Regulation D.
RISK FACTORS
The securities offered hereby are speculative, involve a high degree of risk and
should only be purchased by persons who can afford to lose their entire
investment. Prospective purchasers should carefully consider, among other
things, the following risk factors relating to the business of the Company and
this Offering prior to making any investment. These risk factors are summary in
nature and are not intended to be exhaustive or set forth all the possible risks
and uncertainties that may be associated with purchasing or owning this
investment. You are strongly urged to consult with professional financial
advisors, accountants, and lawyers in evaluating this investment and making an
independent and informed decision about whether or not to invest your money in
this Offering.
-6-
RISKS RELATING TO OUR OPERATIONS
NEED FOR PROCEEDS OF THIS OFFERING AND ADDITIONAL FINANCING.
The proceeds we received from our recent Offering will be used to implement the
business plan described herein under the "Business" section of this Prospectus.
Management can give no assurance the funds so obtained will be sufficient to
fully implement the business plan, or that a full implementation of such
business plan will result in the Company's profitability. If we are unable to
complete another financing, we may have to curtail or suspend our operations,
and you could lose your entire investment in our Company. If additional funds
are raised though the issuance of equity, additional securities may have powers,
designations, preferences or rights senior to our currently outstanding
securities and, in the case of additional equity securities, the ownership of
our existing shareholders will be diluted. No assurances can be given that we
will be able to raise any additional financing. Any inability to obtain required
financing on sufficiently favorable terms could have a material adverse effect
on our business, results of operations and financial condition.
WE HAD PRIOR OPERATING LOSSES AND ARE IMPLEMENTING A NEW BUSINESS PLAN.
The Company had operating losses in 2003 and 2004 and is using the proceeds of
the Offering to implement its business plan. The Company intends to act as a
link between China's major mobile carriers, China Unicom and China Mobile, to
provide mobile solutions for corporate customers so that clients do not have to
develop the technology themselves. The Company plans to offer business solutions
in Office Automation Solutions, Mobile Banking, Mobile Tax Services and Services
for the Police. The Company cannot project with certainty, nor does it make any
representations regarding, the amount of revenue that it will be able to
generate. There is no guarantee that any of these new services will bring profit
to the Company. We might spend substantial resources on new technology and
services without generating any profit.
The Company's proposed operations are subject to all of the risks inherent in
the expansion of an early-stage business enterprise, including
higher-than-expected expenses and uncertain revenues. The likelihood of the
success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the expansion of an early-stage business.
IF WE FAIL TO ESTABLISH OUR MOBILE SOLUTIONS BRAND ON A NATIONAL BASIS WE MAY
NOT BE ABLE TO INCREASE OUR REVENUES SUFFICIENTLY TO REMAIN PROFITABLE.
We must promote and strengthen our brand of mobile solutions to businesses
throughout China particularly because of the highly competitive nature of our
business. If we fail to establish a nationwide brand of our services, we will be
at a competitive disadvantage and may lose the opportunity to obtain, and
thereafter maintain, a sufficient number of customers. The development of a
nationwide network will depend largely on the success of our marketing efforts
and our ability to provide consistent, high quality customer experiences. We
cannot be certain that our promotional activities will be successful, or will
result in increased revenues. If increased revenues are achieved, there can be
no assurance that these revenues will be sufficient to offset the expenditures
incurred in establishing a nationwide network.
WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
UNCERTAINTIES.
We initiated our current business strategy in 2003. As a result of our limited
operating history, our recent growth and our reporting responsibilities as a
public company, we may need to expand operational, financial and administrative
systems and control procedures to enable us to further train and manage our
employees and coordinate the efforts of our accounting, finance, marketing, and
operations departments.
WE WERE RECENTLY REQUIRED TO MAKE CHANGES IN INTERNAL CONTROLS AND PROCEDURES
WHICH COULD REOCCUR.
During the first calendar quarter of 2005, Management of the Company determined
the Company did not have, in certain areas, documented controls and procedures
in a manual for its subsidiary Beijing QuickNet. This determination was made as
Management was preparing financials for review to ensure its Chinese operations
were in compliance with all controls and procedures. The Company was able to
conclude the disclosure controls and procedures were effective for the audit at
December 31, 2004. However, the Company is still working on implementing such
changes to its internal controls and procedures. While it expects to complete
such revisions by December 31, 2005 there can be no assurance it will occur on
schedule. Furthermore, there can be no assurance, however, a material weakness
in disclosure controls and procedures will not reoccur.
-7-
WE WILL LACK BUSINESS DIVERSIFICATION.
As a result of its discontinuance of its domain name registration, web hosting
and web design services, the Company's prospects for success are dependent upon
the future performance of a single business -- mobile marketing. If our future
operations are unprofitable, we will be forced to develop another line of
business and finance our future operations through the sale of assets or sell
equity or debt securities in order to raise additional capital, none of which
may be feasible when needed. Unless we are able to raise additional money, we
will not have the resources to diversify our operations or benefit from the
possible spreading of risks or offsetting of losses. This will adversely offset
our ability to compete against entities that have the resources to consummate
several business combinations or entities operating in multiple industries or
multiple segments of a single industry.
LACK OF RESOURCES TO EXPAND CANADIAN OPERATIONS.
We purchased our Canadian subsidiary in 1997 and has had limited growth to date.
Without additional financing, we would be unable to continue the business goal
of maintaining and expanding our business in Canada. The Company could not renew
its contract because the Canadian government has tightened its budget on English
training for new immigrants. This leads to reduced government funding for
Windsor and this will have negative effects on the revenue of Windsor Education
Academy. There is no assurance that Windsor Education Academy will receive
government funding in the coming years. The Company will continue to look for
further companies in the Canadian market area with the goal of introducing
foreign accredited programs into the China market.
THE DEBENTURES ISSUED IN THE OFFERING ARE UNSECURED AND WE WILL NEED TO SEEK
ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.
The Debentures recently issued in the Offering are unsecured
obligations of the Company. Further, as a company with a new and untested
business plan, we may generate significant financial losses. Our cash resources
are not currently adequate to fund our future operations and there can be no
assurance that we will ever have such resources. This will require us to seek
additional capital, including through the issuance of debt or equity, or through
other financing. If we borrow funds, we likely will be obligated to make
periodic interest or other debt service payments, and the terms of this debt may
impose burdensome restrictions on our ability to operate our business.
Additionally, we are not certain as to our ability to raise additional capital
in the future or under what terms capital would be available. If we are unable
to raise capital when needed, our business will be negatively affected and we
may not be able to repay the Debentures in accordance with their terms or at
all. In such event, the holders of the Debentures will have no recourse other
than as a general unsecured creditor of the Company.
SEASONAL FLUCTUATIONS IN OUR OPERATIONS.
It is a fairly common practice in China for companies to shut down their
operations or operate with nominal operations during the Chinese New Year
holiday. This period of time generally lasts for approximately three weeks.
Therefore, quarterly comparisons are difficult for the March 31 fiscal quarter
when the Company will have only two full months for generating revenue in the
that fiscal quarter.
RISKS RELATED TO CONDUCTING BUSINESS IN CHINA
CHINA'S GOVERNMENTAL AND REGULATORY REFORMS MAY IMPACT OUR ABILITY TO DO
BUSINESS IN CHINA.
Since 1978, the Chinese government has been in a state of evolution and reform.
The reforms have resulted in and are expected to continue to result in
significant economic and social development in China. Many of the reforms are
unprecedented or experimental and may be subject to change or readjustment due
to a variety of political, economic and social factors. Multiple government
bodies are involved in regulating and administrating affairs in the
telecommunications industry, among which the MII, the National Development and
Reform Commission ("NDRC") and the State Asset Supervisory Administrative
Commission ("SASAC") play the leading roles. These government agencies have
broad discretion and authority over all aspects of the telecommunications and
information technology industry in China, including but not limited to, setting
the telecommunications tariff structure, granting carrier licenses and
frequencies, approving equipment and products, granting product licenses,
specifying technological standards as well as appointing carrier executives, all
of which may impact our ability to do business in China.
-8-
While we anticipate that the basic principles underlying the reforms should
remain unchanged, any of the following changes in China's political and economic
conditions and governmental policies could have a substantial impact on our
business:
o the promulgation of new laws and regulations and the interpretation
of those laws and regulations;
o inconsistent enforcement and application of the telecommunications
industry's rules and regulations by the Chinese government between
foreign and domestic companies;
o the restructuring of telecommunications carriers in China;
o the introduction of measures to control inflation or stimulate
growth;
o the introduction of new guidelines for tariffs and service rates,
which affect our ability to competitively price our products and
services;
o changes in the rate or method of taxation;
o the imposition of additional restrictions on currency conversion and
remittances abroad; or
o any actions that limit our ability to develop, manufacture, import
or sell our products in China, or to finance and operate our
business in China.
For example, on November 1, 2004, as a continuation of the restructuring of
telecom carriers relating to the initial public offering of China Netcom in
2004, SASAC decided to swap the senior executives of China Mobile, China Unicom,
China Telecom and China Netcom in an effort to ease competition among carriers.
We are not certain whether there may be additional government interference,
including government imposed mergers or spin-offs of the existing carriers.
In addition to modifying the existing telecommunications regulatory framework,
the Chinese government is currently preparing a draft of a standard, national
telecommunications law (the "Telecommunications Law") to provide a uniform
regulatory framework for the telecommunications industry. We do not yet know the
final nature or scope of the regulations that would be created if the
Telecommunications Law is passed. Accordingly, we cannot predict whether it will
have a positive or negative effect on us or on some or all aspects of our
business.
Under China's current regulatory structure, the communications services that we
offer in China must meet government and industry standards. In addition, a value
added service provider license must be obtained. Without a license, we cannot
provide the current mobile solution services in China. Moreover, we must ensure
that the quality and content of the services will comply with related rules and
regulations. Although we already have this license, it requires an annual
renewal from the related government.
MII and/or other related authorizations might perform spot checks to track and
supervise the quality and content of our services.
CHINA'S CHANGING ECONOMIC ENVIRONMENT MAY IMPACT OUR ABILITY TO DO BUSINESS IN
CHINA.
Since 1978, the Chinese government has been reforming the economic system in
China to increase the emphasis placed on decentralization and the utilization of
market forces in the development of China's economy. These reforms have resulted
in significant economic growth. However, any economic reform policies or
measures in China may from time to time be modified or revised by the Chinese
government. While we may be able to benefit from the effects of some of these
policies, these policies and other measures taken by the Chinese government to
regulate the economy could also have a significant negative impact on economic
conditions in China, which would result in a negative impact on our business.
China's economic environment has been changing as a result of China's entry, in
December of 2001, into the World Trade Organization (the "WTO"). Entry into the
WTO required that China reduce tariffs and eliminate non-tariff barriers,
including quotas, licenses and other restrictions by early 2005, and we cannot
predict the impact of these changes on China's economy. Moreover, although
China's entry into the WTO and the related relaxation of trade restrictions may
lead to increased foreign investment, it may also lead to increased competition
in China's markets from other foreign companies. If China's entry into the WTO
results in increased competition or has a negative impact on China's economy,
our business could suffer. In addition, although China is increasingly according
foreign companies and foreign investment enterprises established in China the
same rights and privileges as Chinese domestic companies as a result of its
admission into the WTO, special laws, administrative rules and regulations
governing foreign companies and foreign investment enterprises in China may
still place foreign companies at a disadvantage in relation to Chinese domestic
companies and may adversely affect our competitive position.
-9-
UNCERTAINTIES WITH RESPECT TO THE CHINESE LEGAL SYSTEM MAY ADVERSELY AFFECT US.
We conduct our business in China primarily through our subsidiary incorporated
in China. Our subsidiary is generally subject to laws and regulations applicable
to foreign investment in China. Accordingly, our business will be affected by
China's developing legal system. Since 1978, many new laws and regulations
covering general economic matters have been promulgated in China, and government
policies and internal rules promulgated by governmental agencies may not be
published in time, or at all. As a result, we may operate our business in
violation of new rules and policies without having any knowledge of their
existence. In addition, there are uncertainties regarding the interpretation and
enforcement of laws, rules and policies in China. The Chinese legal system is
based on written statutes, and prior court decisions have limited precedential
value. Because many laws and regulations are relatively new and the Chinese
legal system is still evolving, the interpretations of many laws, regulations
and rules are not always uniform. Moreover, the relative inexperience of China's
judiciary in many cases creates additional uncertainty as to the outcome of any
litigation, and the interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes. Finally, enforcement
of existing laws or contracts based on existing law may be uncertain and
sporadic, and it may be difficult to obtain swift and equitable enforcement, or
to obtain enforcement of a judgment by a court of another jurisdiction. Any
litigation in China may be protracted and result in substantial costs and
diversion of resources and management's attention.
WE ARE SUBJECT TO RISKS RELATING TO CURRENCY RATE FLUCTUATIONS AND EXCHANGE
CONTROLS.
Because most of our sales are made in China and denominated in Renminbi; as
such, the impact of currency fluctuations of Renminbi thus far has been
insignificant as it is fixed to the U.S. dollar. However, in the future, China
could choose to revalue the Renminbi versus the U.S. dollar, or the
Renminbi-U.S. dollar exchange rate could float, and the Renminbi could
depreciate or appreciate relative to the U.S. dollar. In such event, currency
rate fluctuations could adversely affect our sales and subject as to volatility
in our financial reporting.
OFFERING RISKS
DISCRETION IN USE OF FUNDS.
As of the date hereof, although we intend to launch four mobile business
solutions, we have no fixed commitments nor material restrictions on our use of
the proceeds from the Offering. As such, our management shall have broad
discretion, subject to their fiduciary duties, in the application of the
proceeds from the Offering.
SECURITIES RISKS
OUR EXECUTIVE OFFICERS MAY HAVE THE ABILITY TO CONTROL ALMOST ALL MATTERS OF THE
COMPANY.
Our President and Secretary and their affiliates, beneficially owned
approximately 13% of the issued and outstanding shares of common stock of the
Company (without giving effect to the exercise of the Warrants). Therefore,
management now has significant influence over the election of the Company's
directors and to control the outcome of other issues submitted to stockholders.
This includes their ability to amend the Certificate of Incorporation, approve a
merger or consolidation of the Company with another company or approve the sale
of all or substantially all of the assets of the Company without the agreement
of the shareholders who purchased Units.
-10-
AUTHORIZED SHARE CAPITAL AS AN ANTI-TAKEOVER DEVICE.
At the Company's most recent shareholders meeting on July 28, 2005, Management
obtained approval to increase the number of authorized shares of Common Stock
from 50 million to 500 million shares. The reason for the increase is that
Management does not believe it has sufficient shares for future growth,
including potential acquisitions. However, the Board of Directors will have the
authority to issue such shares without further shareholder approval. This may
have the effect of delaying or preventing a change of control without further
action by shareholders. In addition, as the increase in the Company's authorized
capital will enable the Company to issue a significant number of additional
shares of Common Stock, the Company's Shareholders will be subject to a
significant level of dilution in the future.
IF WE DO NOT KEEP A REGISTRATION STATEMENT CURRENT, YOUR ABILITY TO SELL THE
DEBENTURE SHARES AND WARRANT SHARES WILL BE LIMITED.
We must keep a registration statement such as the one of which this Prospectus
is a part effective with the SEC in order for you to receive registered stock
upon the exercise of your warrants as well as to freely sell the Debenture
Shares and Warrant Shares. We may not be able to maintain a registration
statement in effect throughout the period during which the warrants remain
exercisable. Maintaining an effective registration statement requires
substantial continuing expenses for legal and accounting fees and we cannot
guarantee our ability to keep the registration statement effective.
IF WE DO NOT QUALIFY OUR SECURITIES IN STATES OTHER THAN WHERE THE INITIAL
INVESTORS RESIDE, YOUR RESALE OF ANY SECURITIES YOU ACQUIRE UNDER THIS
PROSPECTUS MAY BE LIMITED.
We offered the units only in the states in which the initial investors of the
Offering resided. We believe that our common stock offered hereby will be
eligible for sale on a secondary market basis in other states based upon
applicable exemptions from that state's registration requirements, subject, in
each case, to the exercise of the broad discretion and powers of the securities
commission or other administrative bodies having jurisdiction in each state and
any changes in statutes and regulations which may occur after the date of this
prospectus. However, the lack of registration in most states and the requirement
of a seller to comply with the requirements of state blue sky laws in order for
the seller to qualify for an applicable secondary market sale exemption, may
cause an adverse effect on the resale price of our securities, as well as the
delay or inability of a holder of our securities to dispose of such securities.
THE CONVERSION OF DEBENTURES AND EXERCISE OF THE WARRANTS MAY HAVE A DILUTIVE
EFFECT ON THE PRICE OF OUR COMMON STOCK.
Since the Company sold the entire $3,350,000 of Units in the Offering, the
purchasers have the right to convert their Debentures into an aggregate of
9,571,486 shares of Common Stock and exercise an aggregate of 19,142,972
Warrants (at an exercise price of $.44 per share for the A Warrant and $.52 per
share for the B Warrant). The conversion or exercise of these securities will
cause dilution to our shareholders and the sale of the underlying Common Stock
(or even the potential of such exercise or sale) may have a depressive effect on
the market price of our securities. Further, to the extent that outstanding
stock options and warrants are exercised, dilution to our shareholders will
occur. Moreover, the terms upon which we will be able to obtain additional
equity capital may be adversely affected, since the holders of the outstanding
options and warrants can be expected to exercise them at a time when we would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to us than the exercise terms provided by the outstanding options and warrants.
-11-
SINCE THE DEBENTURES MAY BE PREPAID AND THE WARRANTS MAY BE REDEEMED BY THE
COMPANY, INVESTORS MAY NOT RECEIVE ALL THE ANTICIPATED BENEFITS FROM PURCHASING
UNITS. FURTHER, THE CONVERSION OF THE DEBENTURES OR EXERCISE OF WARRANTS IN
RESPONSE TO A PREPAYMENT OR REDEMPTION NOTICE COULD CAUSE DILUTION.
The Company, at its option, may prepay the Debentures upon not less than 30 days
nor more than 60 days prior written notice to the Debenture holders at a
prepayment price equal to the principal amount of the Debentures, together with
accrued and unpaid interest commencing 6 months from the Effective Date of this
Registration Statement through the date of prepayment. In addition, in the event
that the closing bid price of our Common Stock is at least 175% of the
respective exercise prices of the Warrants or more for the twenty (20)
consecutive trading days prior to the date of the notice of redemption, the
Company may also redeem the Warrants at a redemption price of $0.001 per Warrant
commencing 6 months and 12 months from the Effective Date of this Registration
Statement with respect to the Class A Warrants and Class B Warrants,
respectively. Holders will be entitled to convert their Debentures or exercise
their Warrants during the period from the date of the notice of prepayment or
redemption until the business day immediately prior to the prepayment or
redemption date. If a holder does not convert its Debentures or exercise the
Warrants during that time period, the applicable security will by prepaid or
redeemed by the Company. Commencing on the date of prepayment or redemption, the
Debentures or Warrants that were not converted or exercised will only represent
the right to receive the Prepayment Price or Redemption Price, as may be
applicable.
In addition, if the Debentures are converted or the Warrants are exercised in
response to a prepayment or redemption notice, then dilution could occur from
the widespread conversion or exercise of the Debentures or Warrants. Further,
this may cause significant downward pressure on the price of our Common Stock as
holders that elect to convert or exercise their securities may be able to resell
the shares of Common Stock issuable upon conversion or exercise of the
Debentures or Warrants in the open market.
DIFFICULTY OF TRADING AND OBTAINING QUOTATIONS FOR COMMON STOCK.
Our Common Stock is currently quoted on the OTCBB under the symbol "CHMS.OB."
Our Common Stock is not actively traded, and the bid and asked prices for our
Common Stock have fluctuated significantly. As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations of the price of, our
securities. This severely limits the liquidity of the Common Stock, and would
likely have a material adverse effect on the market price of the Common Stock
and on our ability to raise additional capital.
PENNY STOCK REGULATION.
Our Common Stock is subject to Rule 15g-9 under the Exchange Act. This rule
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors." For transactions covered by Rule 15g-9, a broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule could affect the ability of broker-dealers to sell our securities and could
affect the ability of purchasers to sell any of our securities in the secondary
market.
RISK FACTORS AFFECTING CHMS'S BUSINESS OPERATIONS.
CONTINUED PRESSURE COULD REDUCE CHMS'S MARGINS AND LIMIT CHMS'S ABILITY TO
MAINTAIN OR INCREASE ITS MARKET SHARE.
Certain competitors of CHMS may have or may obtain significantly greater
financial and marketing resources than CHMS. As a result, CHMS could encounter
increased competition in the future that may increase pricing pressure and limit
its ability to maintain or increase its market share. There is a great deal of
competition in the Company's business, especially to develop alliances with the
two major mobile carriers, China Unicom and China Mobile. Mobile marketing is
quickly growing in popularity. In Asia, eMarketer reports that 39% of mobile
phone users have received SMS messages from advertisers and this figure points
to a strong and growing trend among advertisers to embrace mobile marketing.
Major competitors who currently are focusing on individual markets may spend
more resources in the business section in the future. Since they have more
financial support and broader influence in this market, the Company might be
forced to decrease price, give out more discounts and increase its costs to keep
key employees. This would decrease the Company's profit margin.
-12-
IF WE LOST THE SERVICES OF XIAO-QING (ANGELA) DU, THE COMPANY'S CEO, OR ERNEST
CHEUNG, THE COMPANY'S SECRETARY, WE MIGHT NOT BE ABLE TO EXECUTE OUR CURRENT
BUSINESS IN ACCORDANCE WITH OUR CURRENT PLANS.
Our future success depends significantly on the skills, experience and efforts
of its chief executive officer, Xiao-qing Du, and its Secretary and Director,
Ernest Cheung, and other key personnel. These individuals would be difficult to
replace. Ms. Du and Mr. Cheung have developed, and are engaged in carrying out,
the Company's strategic business plan. The loss of the services of Ms. Du or Mr.
Cheung could seriously harm CHMS's ability to implement its strategy. A failure
to implement the Company's business strategy could result in the cessation of
the Company's operations which would have a material adverse effect on our
Company and on your investment. Ms. Du and Mr. Cheung have employment contracts
that are renewable every year. Under British Columbia law, the Company will be
responsible for severance pay for early termination based on the number of years
of employment with the Company. There is currently no key person life insurance.
IF CHMS IS UNABLE TO ADEQUATELY PROTECT OR ENFORCE ITS RIGHTS TO ITS
INTELLECTUAL PROPERTY, WE MAY LOSE VALUABLE RIGHTS, EXPERIENCE REDUCED MARKET
SHARE, IF ANY, OR INCUR COSTLY LITIGATION TO PROTECT SUCH RIGHTS.
CHMS generally requires its employees, consultants, advisors and collaborators
to execute appropriate confidentiality agreements with it. These agreements
typically provide that all materials and confidential information developed or
made known to the individual during the course of the individual's relationship
with CHMS is to be kept confidential and not disclosed to third parties except
in specific circumstances. These agreements may be breached, and in some
instances, CHMS may not have an appropriate remedy available for breach of the
agreements. Furthermore, CHMS's competitors may independently develop
substantial equivalent proprietary information and techniques, reverse engineer
information and techniques, or otherwise gain access to CHMS's proprietary
technology. In addition, the laws of some foreign countries may not protect
proprietary rights to the same extent as U.S. law. CHMS may be unable to
meaningfully protect its rights in trade secrets, technical know-how and other
non-patented technology.
CHMS does not have any patents. If CHMS employees develop technology while
employed by the Company, CHMS has the title and full right of this technology.
Employees cannot disclose such technology to a third party. However, this
technology is usually not patentable because other competitors may develop it as
well. The first company to develop such technology has a better chance to gain
market share.
CHMS may have to resort to litigation to protect its rights for certain
intellectual property, or to determine their scope, validity or enforceability.
Enforcing or defending CHMS's rights is expensive and may distract management
from its development of the business if not properly managed. Such efforts may
not prove successful. There is always a risk that patents, if issued, may be
subsequently invalidated, either in whole or in part, and this could diminish or
extinguish protection for any technology CHMS may license. Any failure to
enforce or protect CHMS's rights could cause it to lose the ability to exclude
others from using its technology to develop or sell competing products.
CHMS MAY BE SUED BY THIRD PARTIES WHO CLAIM THAT CHMS'S PRODUCT INFRINGES ON
THEIR INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY
AND CHMS MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND. ANY SETTLEMENT OR JUDGMENT
AGAINST US COULD HARM OUR FUTURE PROSPECTS.
CHMS may be exposed to future litigation by third parties based on claims that
its technology, product or activity infringes on the intellectual property
rights of others or that CHMS has misappropriated the trade secrets of others.
This risk is compounded by the fact that the validity and breadth of claims
covered in technology patents in general and the breadth and scope of trade
secret protection involves complex legal and factual questions for which
important legal principles are unresolved. Any litigation or claims against
CHMS, whether or not valid, could result in substantial costs, could place a
significant strain on CHMS's financial and managerial resources, and could harm
CHMS's reputation. In addition, intellectual property litigation or claims could
force CHMS to do one or more of the following:
o Cease selling, incorporating or using any of CHMS's technology
and/or product that incorporates the challenged intellectual
property, which could adversely affect CHMS's revenue;
o Obtain a license from the holder of the infringed intellectual
property right, which may be costly or may not be available on
reasonable terms, if at all; or
o Redesign CHMS's product, which would be costly and time consuming.
-13-
THE MARKET FOR OUR SERVICES IS RAPIDLY CHANGING AND COMPETITIVE. NEW PRODUCTS
MAY BE DEVELOPED BY OTHERS WHICH COULD IMPAIR OUR ABILITY TO DEVELOP, GROW OR
MAINTAIN OUR BUSINESS AND BE COMPETITIVE.
The mobile solutions industry is subject to substantial technological change.
Developments by others may render CHMS's technology and revenues noncompetitive
or obsolete, or it may be unable to keep pace with technological developments or
other market factors. Competition from other companies and others diversifying
into the field expected to increase. Many of these entities have significantly
greater budgets than CHMS does, as well as substantially more marketing,
research and development, financial and managerial resources. These entities
could represent significant competition for CHMS. CHMS our resources are limited
and we may experience technical challenges inherent in developing its
technology. Competitors have developed or are in the process of developing
technologies that are, or in the future may be, the basis for competition.
CHANGES IN ACCOUNTANTS
On December 22, 2004, the Company engaged Moen & Company ("Moen") to
act as the principal accountant to audit China Mobility's financial statements.
Clancy and Co., P.L.L.C. ("Clancy and Co., P.L.L.C.") was the Company's
independent auditor and examined the financial statements of the Company for the
fiscal years ended December 31, 2003 and 2002 and the subsequent interim periods
until December 22, 2004. On that date, the Board of Directors approved the
dismissal of Clancy and Co., P.L.L.C. ("Clancy and Co., P.L.L.C.") as China
Mobility's independent public accountants and the selection of Moen and Company
as their replacement.
Clancy and Co., P.L.L.C.'s reports on the consolidated financial
statements of China Mobility and its subsidiaries for the two most recent fiscal
years ended December 31, 2003 and 2002 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
During China Mobility's two most recent fiscal years ended December 31,
2003 and 2002 and the subsequent interim period through December 22, 2004, there
were no disagreements between China Mobility and Clancy and Co., P.L.L.C. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to Clancy and
Co., P.L.L.C.'s satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their reports on China
Mobility's consolidated financial statements for such years; and there were no
reportable events as described in Item 304(a)(1)(iv) of Regulation S-K. China
Mobility provided Clancy and Co., P.L.L.C. with a copy of the foregoing
disclosures.
During China Mobility's two most recent fiscal years ended December 31,
2003 and 2002 and the subsequent interim periods through December 22, 2004,
China Mobility did not consult with Moen and Company with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
China Mobility's financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
USE OF PROCEEDS
We will not receive proceeds from the resale of Shares offered hereby
by the Selling Shareholders. Any proceeds from the exercise of Warrants will be
used for general corporate purposes.
PRICE RANGE OF COMMON STOCK
China Mobility Common Stock has traded on the OTCBB under the symbol
"CHMS.OB" since July 24, 1998. The following table sets forth the high and low
closing bid prices for the Common Stock, as reported by Pink Sheets, LLC for the
periods indicated below. The following quotations represent prices between
dealers and do not include retail markups, markdowns or commissions. They do not
represent actual transactions and have not been adjusted for stock dividends or
splits.
-14-
2005 HIGH LOW
---- ---- ---
Third Quarter $.68 $.36
Second Quarter $.63 $.38
First Quarter $.59 $.39
2004
Fourth Quarter $.68 $.18
Third Quarter $.65 $.16
Second Quarter $1.01 $.09
First Quarter $.27 $.10
2003
Fourth Quarter $.20 $.09
Third Quarter $.29 $.10
Second Quarter $.29 $.04
First Quarter $.34 $.04
As of November 10, 2005, there were 164 holders of record of our Common
Stock. On November 10, 2005, the closing price of our Common Stock was $0.40 per
share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one that is both important to the portrayal of
the company's financial condition and results and that requires management's
most difficult, subjective or complex judgments. Such judgments are often the
result of a need to make estimates about the effect of matters that are
inherently uncertain.
While China Mobility's significant accounting policies are more fully
described in Footnote 1 to China Mobility's financial statements "Summary of
Significant Accounting Policies" included elsewhere in this prospectus, China
Mobility currently believes the following accounting policies to be critical:
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-owned
subsidiaries as outlined in Note 2. All significant inter-company transactions
and balances have been eliminated on consolidation.
ACCOUNTING METHOD - The Company's financial statements are prepared using the
accrual method of accounting.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK - The Company maintains Renminbi cash balances in
banks of the People's Republic of China and U.S. Dollar cash balances in
Canadian and Hong Kong banks that are not insured. Revenues were derived in
geographic locations outside the United States. The ELSA program of Windsor
accounts for 53% of the total tuition fees and 7.3% of the total revenue of the
Company. The SMS of QuickNet accounts for 86.2% of the total revenue of the
Company.
-15-
CASH AND CASH EQUIVALENTS - Cash equivalents consist of time deposits with
original maturities of three months or less.
INVESTMENTS - The Company determines the appropriate classification of
marketable debt and equity securities at the time of purchase and reevaluates
such designation as of each balance sheet date. All marketable debt securities
are classified as held-to-maturity and are carried at amortized cost, which
approximates fair value.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable
are recorded net of allowances for doubtful accounts and reserves for returns.
In the normal course of business, the Company extends credit to customers that
satisfy predefined credit criteria. The Company is required to estimate the
collectability of its receivables. Reserves for returns are based on historical
return rates and sales patterns. Allowances for doubtful accounts are
established through the evaluation of accounts receivable agings and prior
collection experience to estimate the ultimate realization of these receivables.
PROPERTY AND EQUIPMENT - Property and equipment, stated at cost, is depreciated
under the straight-line method over their estimated useful lives, ranging from
three to seven years.
GOODWILL - Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets (tangible and intangible) acquired.
Goodwill acquired has to be evaluated for impairment at the beginning of year
2002 and on an annual basis going forward according to Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
The standard requires a two-step process to be performed to analyze whether or
not goodwill has been impaired. Step one requires that the fair value be
compared to book value. If the fair value is higher than the book value, no
impairment is indicated and there is no need to perform the second step of the
process. If the fair value is lower than the book value, step two must be
evaluated. Step two requires a hypothetical purchase price allocation analysis
to be done to reflect a current book value of goodwill. The current value is
then compared to the carrying value of goodwill. If the current fair value is
lower than the carrying value, an impairment must be recorded. Annually, the
goodwill is tested for impairment in the fourth quarter.
LONG-LIVED ASSETS - The Company records impairment losses on long-lived assets
used in operation when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount.
REVENUE RECOGNITION - The Company's revenues for 2004 consisted of revenues from
SMS, education and training services. In accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," the Company
recognizes revenue when the following criteria are met: persuasive evidence that
an arrangement exists; delivery has occurred or services have been rendered; the
price to the customer is fixed or determinable; and collectability is reasonably
assured. If all of the above criteria have been met, revenues are principally
recognized upon shipment of products or when services have been rendered.
Revenues derived from SMS, education and training is recognized as the services
are performed. Amounts received from customers in advance of revenue recognition
are deferred and classified on the balance sheet as "deferred revenue."
The Company's revenues for 2003, which are included in discontinued operations,
consisted of revenues from commercial printing. Revenues derived from commercial
printing are recognized when the job has been completed and is delivered to the
customer.
COST RECOGNITION - Cost of service includes direct costs to produce products and
provide services.
DEFERRED REVENUE AND DEFERRED COST - Deferred revenue for 2004 consists
primarily of SMS, education and training revenue received prior to the services
being performed.
Deferred revenue for 2003, which is included as a component of "Liabilities to
be disposed of" consists of prepaid domain name registration fees. End users
receive certain elements of the Company's revenues over a period of time. As a
result, the Company's revenue recognized represents the fair value of these
elements over the product's life cycle. Deferred cost for 2003, which is
included as a component of "Assets to be disposed of" consists of amounts paid
to various registrars for domain name registration fees and are deferred on the
same basis as revenue.
-16-
CAPITALIZED SOFTWARE COSTS - The Company accounts for the development cost of
software intended for sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." SFAS No. 86 requires product development
costs to be charged to expense as incurred until technological feasibility is
attained. Technological feasibility is attained when the Company's software has
completed system testing and has been determined viable for its intended use.
Accordingly, the Company did not capitalize any development costs during the
period. Total costs expensed during the periods presented were approximately
$55,577 for 2004 and $250,000 for 2003.
ADVERTISING COSTS - Advertising costs are expensed as incurred. Total
advertising costs charged to operations amounted to $538,949 for 2004 and
$16,822 for 2003. Total advertising costs included in discontinued operations
amounted to $2,193 for 2004 and $155,075 for 2003.
INCOME TAXES - The Company accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income
tax assets and liabilities are computed for differences between the financial
statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary, to reduce
deferred income tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATIONS - The assets and liabilities of the Company's
foreign operations are generally translated into U.S. dollars at current
exchange rates, and revenues and expenses are translated at average exchange
rates for the year. Resulting foreign currency translation adjustments are
reflected as a separate component of stockholders' equity. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency, except those transactions which
operate as a hedge of an identifiable foreign currency commitment or as a hedge
of a foreign currency investment position, are included in the results of
operations as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For certain of the Company's financial
instruments, including cash and cash equivalents, prepaid expenses and other
current assets, accounts payable and other accrued liabilities, and deferred
revenues, the carrying amounts approximate fair value due to their short
maturities.
BUSINESS SEGMENT INFORMATION - The Company discloses information about its
reportable segments in accordance with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company's reportable segments are
geographic areas. The accounting policies of the operating segments are the same
as those for the Company.
EARNINGS PER SHARE - Basic earnings or loss per share are based on the weighted
average number of common shares outstanding. Diluted earnings or loss per share
is based on the weighted average number of common shares outstanding and
dilutive common stock equivalents. Basic earnings/loss per share is computed by
dividing income/loss (numerator) applicable to common stockholders by the
weighted average number of common shares outstanding (denominator) for the
period. All earnings or loss per share amounts in the financial statements are
basic earnings or loss per share, as defined by SFAS No. 128, "Earnings Per
Share." Diluted earnings or loss per share does not differ materially from basic
earnings or loss per share for all periods presented. Convertible securities
that could potentially dilute basic earnings per share in the future such as
options and warrants are not included in the computation of diluted earnings per
share because to do so would be antidilutive. All per share and per share
information are adjusted retroactively to reflect stock splits and changes in
par value.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation
cost for stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. SFAS No.123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method of accounting as
described above, and has adopted the disclosure requirements of SFAS No. 123. In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting
for Stock-Based Compensation". This statement amends Statement No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 amends APB Opinion No. 28 "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. The Company adopts the disclosure provisions and the amendment to
APB No. 28 effective for interim periods beginning after December 15, 2002.
-17-
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued the following pronouncements, none of which are expected to have
a significant affect on the financial statements:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to record
liabilities for costs associated with exit or disposal activities to be
recognized only when the liability is incurred instead of at the date of
commitment to an exit or disposal activity. Adoption of this standard is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company has concluded the implementation of this standard does not
have any impact on the financial position and results of operations of the
Company.
In October 2002, the FASB issued SFAS No. 147 - "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9," which applies to the acquisition of all or part of a
financial institution, except for a transaction between two or more mutual
enterprises. SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is effective for
acquisitions for which the date of acquisition is on or after October 1, 2002,
and is not applicable to the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting
for Stock-Based Compensation". This statement amends Statement No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 amends APB Opinion No. 28 "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. The Company will adopt the disclosure provisions and the amendment
to APB No. 28 are effective for interim periods beginning after December 15,
2002.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables". EITF No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and rights to use assets.
The provisions of EITF No. 00-21 will apply to revenue arrangements entered into
in the fiscal periods beginning after June 15, 2003. The Company completed the
evaluation of EITF No. 00-21 in 2004. The Company has concluded the
implementation of EITF No. 00-21 does not have any impact on the financial
position and results of operations of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51". FIN46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN46 is effective for all
new interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN46 must be applied for the first interim or annual period beginning after
June 15, 2003. Management is currently evaluating the effect that the adoption
of FIN46 will have on its results of operations and financial condition.
Adequate disclosure has been made for all off balance sheet arrangements that it
is reasonably possible to consolidate under FIN46.
-18-
The American Institute of Certified Public Accountants has issued an exposure
draft SOP "Accounting for Certain Costs and Activities Related to Property,
Plant and Equipment ("PP&E")". This proposed SOP applies to all non-government
entities that acquire, construct or replace tangible property, plant and
equipment including lessors and lessees. A significant element of the SOP
requires that entities use component accounting retroactively for all PP&E
assets to the extent future component replacement will be capitalized. At
adoption, entities would have to option to apply component accounting
retroactively for all PP&E assets, to the extent applicable, or to apply
component accounting as an entity incurs capitalizable costs that replace all or
a portion of PP&E. The Company cannot evaluate the ultimate impact of this
exposure draft until it becomes final.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004, COMPARED TO THE YEAR ENDED DECEMBER 31,
2003:
Revenues. The Company achieved revenues of $2,170,766 in 2004 in contrast to
$280,723 in 2003 in the form of net sales of mobile marketing services and
tuition fees from its subsidiaries: QuickNet and Windsor. The Gross profit in
2004 is $1,697,531 compared to $146,383 in 2003. A significant contributor to
the increase in revenues and gross profit is the acquisition of QuickNet in June
2004. All mobile communications service is provided on a subscription basis. All
customers have to pay in advance a deposit for a one-year service to be
provided.
Operating Expenses. The Company incurred operating expenses of $1,939,747 in
2004 compared to operating expenses of $337,093 in 2003 due to the acquisition
of QuickNet. Salaries and advertising accounts for over 65% of operating
expenses. The Company has invested in the Link Group, Inc. on December 20, 2001
and January 18, 2002. As of December 31, 2004, the Link Group, Inc.'s financial
statements were not sufficiently timely for the Company to apply the equity
method and Link Group, Inc.'s shares ceased trading over nine months. Therefore,
the Company recorded an impairment of $172,250 on these shares.
Loss from continuing operations. Loss from continuing operations for 2004 was
($258,772) compared to the 2003 operating loss of ($207,996). The Company
recorded an impairment on Link Group, Inc.'s shares for $172,250.
Net Income. Net Income available to Common Stockholders is $3,018,672 in the
contrast to a Net Loss of $314,277 in 2003. This is caused by extraordinary gain
on disposal of internet-related operations of $3,319,098 (China DNS).
Earnings per share. Earnings per share is $0.20 in 2004 compared to a loss per
share of ($0.02) in 2003. Positive earnings per share were attributable to the
extraordinary gain. Operating earnings in 2004 were negative at ($.016) per
share compared to a loss of ($.02) per share in 2003.
FOR THE QUARTER ENDED SEPTEMBER 30, 2005 AS COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 2004.
Revenues. The Company had revenues of $1,243,428 in the third quarter of 2005
compared to $983,465 in the third quarter of 2004 in the form of net sales of
Mobile marketing services (Quicknet) of $1,190,328 and education courses
(Windsor) of $53,100. The Company incurred operating expenses of $2,762,580 in
the third quarter of 2005 compared to operating expenses of $709,908 in the
third quarter of 2004. The Company had an operating loss of $1,904,300 in the
third quarter of 2005, and a net loss of $1,886,229 compared to an operating
income of $22,060 and a net income of $52,359 in the third quarter in 2004.
Business Segments
During the quarter, the Company had revenues in two segments:
Mobile marketing services $1,190,328
Windsor - ESL Education $ 53,100
-19-
The cost of revenue in each segment was:
Mobile marketing services $368,552
Windsor $ 16,596
The gross profit from each of the business segments was:
Mobile $821,776
Windsor $ 36,504
-----------
$858,280
Note: Quicknet is the operating subsidiary in China which provides mobile
solutions such as mobile marketing services by cell phone advertisement to
enterprises in China. On September 30, 2005, the Company acquired the remaining
49% of Quicknet through exercising its option under the original acquisition
agreement.
Net Income/Loss per share: The per share loss for the third quarter of 2005 was
$0.11, and the per share earnings for the third quarter of 2004 was $0.00
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 COMPARED TO THE SAME PERIOD
ENDED SEPTEMBER 30, 2004.
The Company had revenues of U.S$3,537,237 in the period ended September 30,
2005, compared to U.S.$1,106,380 in the same period in 2004. The Company had a
cost of revenue of $946,636 in the period in 2005 compared to $279,870 in the
same period in 2004. The revenue has been deferred into 12 months period which
is the service period according to the US GAAP. The Company incurred expenses of
$4,450,278 in the nine month period in 2005 and $921,379 in expenses in the
period in 2004. The expenses in the nine month period in 2005 includes
US$1,052,863 of intrinsic value of the conversion feature of the convertible
debenture, a 10% sales commission equal to $335,000, a 3% non-accountable
expense allowance of $100,500 which is related to a convertible debenture
completed on Aug.15, 2005 and US$126,000 stock-based compensation. Net cash
provided by operating activities is US$1,791,120 in the nine-month period in
2005 compared to US$306,567 in the same period in 2004. The operating (loss) in
the periods in 2005 and 2004 were ($1,859,677) and ($94,869) respectively, after
interest income of $60,625 and $59,846 in 2005 and 2004, respectively, and
adjustment for minority interests (in QuickNet in 2005), the Company had a loss
from continuing operation in the period in 2005 of ($1,937,501) and in 2004 of
($151,846). The net loss per share was $0.11 in the period in 2005 compared to
($0.01) in the period in 2004.
The Company expects the trend of losses to continue at about the same rate in
the succeeding periods.
BUSINESS SEGMENT REVENUE
During the nine month period in 2005, the Company had revenues in two segments:
Mobile marketing services $3,376,829
Windsor - ESL Education $ 160,408
The gross profit from each of the business segments was:
Mobile marketing services $2,473,807
Windsor - ESL Education $ 116,794
CHANGES IN FINANCIAL CONDITION:
At the end of the third quarter of 2005, Company had assets of $12,820,140
compared to $6,447,030 at year-end 2004. The current assets totaled $8,010,631
at the end of the third quarter of 2005 compared to $5,466,574 at 2004 year-end.
Total current liabilities at the end of the third quarter of 2005 were
$8,163,831 compared to $2,452,522 at 2004 year-end. At September 30, 2005 the
Company had $ 7,634,523 in cash compared to $5,380,622 at year-end 2004.
-20-
NEED FOR ADDITIONAL FINANCING:
The Company believes it has sufficient capital to meet its short-term cash
needs, including the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934. However, if losses occur it
may have to seek loans or equity placements to cover longer term cash needs to
continue operations and expansion.
No commitments to provide additional funds have been made by management or other
stockholders. Accordingly, there can be no assurance that any additional funds
will be available to the Company to allow it to cover operations expenses.
If future revenue declines, or operations are unprofitable, it will be forced to
develop another line of business, or to finance its operations through the sale
of assets it has, or enter into the sale of stock for additional capital, none
of which may be feasible when needed. The Company has no specific management
ability, or financial resources or plans to enter any other business as of this
date.
From the aspect of whether it can continue toward the business goal of
maintaining and expanding the businesses in Canada and grow the new business of
mobile marketing services in China, it may use all of its available capital
without generating a profit.
The effects of inflation have not had a material impact on its operation, nor is
it expected to in the immediate future.
MARKET RISK:
The Company does not hold any derivatives or investments that are subject to
market risk. The carrying values of any financial instruments, approximate fair
value as of those dates because of the relatively short-term maturity of these
instruments which eliminates any potential market risk associated with such
instruments.
FUTURE TRENDS:
For the Education Services side, we have operated for over two years now, the
competition is very fierce in the market. The Canadian government has tightened
its budget on English training for new immigrants, which lead to a termination
of government funding for Windsor, and this change had negative effects to the
revenue of Windsor Education Academy.
The Company has experienced growth in revenues in its Quicknet services, and it
anticipates future growth in revenues although China must always be viewed as a
highly competitive market where profitability may be difficult to achieve or
sustain.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash capital of $7,634,523 at the quarter ended September 30,
2005. The Company has no other capital resources other than the ability to use
its common stock to achieve additional capital raising. Other than cash capital,
its other assets would be illiquid.
At the quarter ended September 30, 2005 it had $8,010,631 in current assets and
current liabilities of $8,163,831.
The cash capital at the end of the period of $7,634,523 will be used to fund
continuing operations.
Net cash flows provided by operating activities increased to $1,791,120 for the
quarter ended September 30, 2005.
-21-
BUSINESS
GENERAL
China Mobility Solutions, Inc. ("CHMS" or the "Company") is one of the first
companies to focus on providing mobile solutions to many diverse businesses
throughout the People's Republic of China ("China"). Through its subsidiary
QuickNet Telecommunication Corp. ("QuickNet"), an SMS (short message service)
provider in Beijing, China, the Company is presently focused on its mobile
marketing solutions for enterprises. QuickNet is one of the first companies to
focus on mobile solutions for businesses in China. QuickNet's strategy of
targeting corporate users is aimed at achieving a higher percentage of recurring
revenue and better margins.
China Mobility announced in June 2004 that it had closed an acquisition
agreement with the shareholders of QuickNet, a mobile enterprise services
provider based in Beijing, China. The Company initially acquired (controlled)
51% of QuickNet in 2004 as a vehicle to expand its growing SMS business in
China. Under the terms of the acquisition, China Mobility issued 2,040,000
shares at a deemed price of US$1.50 per share to the shareholders of QuickNet,
in exchange for 51% of the issued and outstanding shares of QuickNet. This
included 49% purchased directly and 2% held by the CEO of QuickNet, a Chinese
citizen who gave the Company an option to acquire such shares for $100 and a
proxy to vote the shares. The Company has not yet received the Chinese
regulatory approval to transfer the remaining 2% interest. The Company also
retained an option to acquire the remaining QuickNet shares and on August 3,
2005, the Company announced that it had exercised this option to purchase the
remaining 49% of QuickNet for $4,000,000. The purchase will be made in two cash
installments, with $2,000,000 which was paid by September 30, 2005, and the
remaining $2,000,000 to be paid by the end of December 2005.
QuickNet is one of the first companies to focus on mobile solutions for
businesses in China. QuickNet's strategy of targeting corporate users is aimed
at achieving a higher percentage of recurring revenue and better margins.
The management of QuickNet consists of entrepreneurs with proven technical and
management skills who have been involved in developing the national standards of
billing and access systems for telecom service providers in China servicing
China Unicom and China Mobile.
QuickNet is one of a limited number of telecom VAS (value-added services)
companies in China to obtain licenses for national SMS access numbers from
mobile carriers China Unicom (9111) and China Mobile (1111), enabling it to
offer its VAS services nationwide.
The Company has developed a highly advanced mobile technology platform, with
advanced database management, customer relationship management (CRM) and message
auditing functionality.
QuickNet launched its mobile enterprise services in July 2003 and quickly became
cash flow positive by the end of 2003. The Company generated about US $4 million
of sales in 2004.
China Mobility Solutions developed a database of over 500,000 corporate clients
while operating its previous Chinese Internet technology business. With the
acquisition of QuickNet, the Company will now be able to offer new mobile
enterprise services to these clients.
China Mobility Solutions is currently seeking up to US$12 million of funding to
be used for the following: promoting its mobile solutions to businesses
nationwide; establishing sales support offices in key urban centers in China;
developing new solutions that are being demanded by enterprises; and acquiring
other mobile companies that will deliver synergistic benefits.
INTRODUCTION TO TELECOM VALUE-ADDED SERVICES (VAS)
DEFINITION OF SMS
The Short Message Service (SMS) is the ability to send and receive text messages
to and from mobile telephones on digital GSM and CDMA networks. The text can
comprise of words or numbers or an alphanumeric combination.
-22-
Ring tones, pictures and logos can also be sent. Each short message is up to 160
characters in length when Latin alphabets are used and 70 characters in length
when non-Latin alphabets such as Arabic and Chinese are used.
If the receiver's phone is powered off or out of range, messages are stored in
the network and are delivered at the next opportunity.
BENEFITS OF SMS
SMS is fast, as the receiver is able to read the message seconds after it is
being sent.
SMS is inexpensive, as the cost to the sender is typically very low (i.e., under
US$0.05 per message) and the receiver does not pay for basic SMS services.
SMS is convenient, as it is sent to cell phones, which are owned by a larger
percentage of the population than PCs and are more readily accessible than PCs,
especially in China and the developing world.
SMS facilitates the sharing of different types of information. One of the most
popular applications is the sharing of personal messages between friends. Also
frequently sent are news, share prices, sports scores, weather, flight
information, games, and test results.
THE MOBILE MARKET IN CHINA
The Chinese economy has been among the fastest growing in the world for the past
several years. China's economy withstood the effect of SARS and grew 9.1% in
2003. Growth matches that level in 2004 as well:
Not surprisingly then, China has one of the largest and fastest-growing telecom
markets in the world, with the mobile phone sector in particular having become
the world's biggest.
TELECOMMUNICATION INDUSTRY STATISTICS
AS OF YEAR END 2003
-------------------------------------------------------------------------------
BENCHMARK MEASURE
-------------------------------------------------------------------------------
Telecom Revenue US$59 billion
-------------------------------------------------------------------------------
Completed Investments in Telecom Infrastructure US$27 billion
-------------------------------------------------------------------------------
Fixed Line Telephone Subscribers 263 million
-------------------------------------------------------------------------------
Mobile Phone Subscribers 269 million
-------------------------------------------------------------------------------
Average New Mobile Phone Subscribers Per Month 5 million
-------------------------------------------------------------------------------
GSM Subscribers 252 million
-------------------------------------------------------------------------------
CDMA Subscribers 17 million
-------------------------------------------------------------------------------
Internet Subscribers 78 million
-------------------------------------------------------------------------------
Fixed Line Telephone Penetration Rate 20.3%
-------------------------------------------------------------------------------
Mobile Phone Penetration Rate 20.9%
-------------------------------------------------------------------------------
Total SMS Sent in 2003 220 billion
-------------------------------------------------------------------------------
There are more than 300 million cellular phone customers in China according to
the Ministry of Information Industry. This represents 23 cell phones for every
100 people in China. As many as nine million new users have registered in a
single month.
-23-
With the penetration rate just above 20% however, there is still considerable
room for growth in the Chinese mobile market. Pacific Growth Equities of San
Francisco foresees 500 million mobile phone users in China by 2007.
Short Messaging Service is a phenomenon in Asia. According to state released
figures, Chinese SMS usage accounts for 1/3rd of the world's traffic. MII
figures show that China's 260 million mobile phone users sent a total of 220
billion SMS messages in 2003 to drive this booming "thumb economy."
Growth has continued into 2004, as Chinese sent just under 15.7 billion short
messages through their mobile phones during January, a rise of 91% over the same
period last year. Chinese mobile phone users were estimated to have sent 10
billion SMS greetings during the seven-day Lunar New Year holiday alone, Xinhua
news agency said. That is equal to 7.7 messages for each of the country's 1.3
billion people.
Total SMS revenues in China grew by 75% in 2003 to US$248 million. SMS revenue
growth in China is projected by Pacific Growth Equities of San Francisco to be
60% in 2004.
As an example, China Mobile Ltd.'s (China Mobile Communications Corp's listed
arm in Hong Kong) revenue from its SMS business in 2003 surged 134% from the
previous year.
SMS has become a revenue generator for Internet Service Providers and Internet
Content Providers, who received a total of US$333 million from SMS in 2003. That
figure, according to the Xinhua News Agency, is expected to reach US$533 million
in 2004.
CHINA MOBILITY SOLUTIONS' TARGET MARKET MOBILE SOLUTIONS FOR BUSINESS
Management's view is that being an "early bird" provider of mobile services to
enterprises offers more growth potential than if China Mobility Solutions
targeted the highly competitive consumer mobile market.
Management's view is that existing VAS providers have not yet concentrated on
the business user market because of the following reasons: a) They lack
operational experience at generating revenue from enterprises; b) They do not
possess the required technology; c) They lack the ability to easily access
business customer information (China Mobility Solutions has a proprietary
database of 500,000 enterprises)
In China, as in Europe, much of the focus has been on SMS for individual or
consumer use. It was natural that companies such as Sohu and Sina that started
out as Internet portals would eventually offer SMS only to its mass-market base.
Increasingly, however, providing mobile solutions for businesses is seen as a
potentially more lucrative and less saturated market. One only has to look to
Western Europe a leading indicator of what will soon be happening in China's
mobile market.
The mobile business market is set to increase to more than 80 million workers in
Western Europe, penetrating close to 50% of the workforce by 2007. The research,
conducted in February of 2003 by the independent analysts IDC, reveals the
thriving acceptance of mobile solutions across Europe by businesses as they seek
to boost productivity and profitability, while improving customer service.
Among the key findings of the research were the following:
o Mobile workers in Western Europe will increase from 70 to 80 million users (50
per cent of workforce) by 2007, with mobile tasks becoming more mission-critical
in nature
-24-
o Small and medium-sized companies using mobile data solutions in Western
Europe will increase from 2% to 20% by 2007.
o The prerequisites for true mobile working are now in place with the
necessary networks, devices, security levels and partnerships.
Businesses should therefore consider mobile initiatives immediately in
order to reap benefits.
Pyramid Research of Cambridge, Massachusetts has found that focus among
operators in countries where SMS is already prevalent is evolving from the
consumer segment to the business segment. Reasons for this shift include:
o A maturing consumer market
o Wireless data growth, as "businesses are now waking up to the cost
savings associated with mobile data such as increased employee
productivity, improved customer response times and improved business
processes as a result of speedier information access.
o Enterprise customers deliver higher Average Revenue Per Subscriber
("ARPS") and more stable churn than individual users.
o Enterprise users are, on balance, earlier adopters and larger spenders
on new technology.
Pyramid argues that mobile operators should capitalize on the opportunities in
the Small and Medium Enterprises ("SME") market by aggregating the best-of-breed
expertise of third party solution providers.
China Mobility Solutions has established relationships with China Unicom and
China's other mobile operators and is perfectly positioned to take advantage of
the increasing need and demand for mobile business solutions.
CHINA MOBILITY SOLUTIONS' FIRST APPLICATION:
MOBILE MARKETING
Mobile marketing is the use of the mobile medium as a communications and
entertainment channel between a brand and an end-user. Mobile marketing is the
only personal channel enabling spontaneous, direct, interactive and/or targeted
communications, any time, any place. Mobile marketing can be used in a wide
variety of ways:
o For customer acquisition
o For customer retention
o For loyalty building
o As a sales promotion tool
o To support product launches
o To raise brand awareness
o For internal communications
o As a redemption / coupon tool
o For direct marketing
o As an effective business to business communications vehicle
o As an additional revenue stream
o To be able to offer time / location specific offers
o As a channel for delivering ring tones and logos
-25-
Mobile marketing is growing in popularity. In Asia, eMarketer reports that 39%
of mobile phone users have received SMS messages from advertisers, 36% in Europe
and only 8% in the U.S. These figures point to a strong and growing trend among
advertisers to embrace mobile marketing in different parts of the world and for
consumers to be fairly receptive to it.
A study by Jupiter Research confirmed the effectiveness of SMS advertising. SMS
has shown to be more than twice as effective as direct mail. An average SMS
campaign generates a 15% response rate, compared with less than half that amount
for direct mail. The survey also found that 94% of all advertising text messages
are read. Furthermore, 23% are forwarded or shown to other users. As a result an
average of 8% reply to the text message and 6% visit a Web site mentioned in the
text.
Some consumers will tolerate ads and some will not. The issue of spam is one
that is being addressed in the U.K. and the U.S. by the Mobile Marketing
Association and by the MII in China. "All disturbing SMS should be eradicated to
help standardize the market and ensure the healthy development of the industry,"
said Chen Jinqiao, director of the Chinese Academy of Telecommunications
Research under the Ministry of Information Industry (MII).
By keeping messages small, by providing a benefit to the receiver, and by
sending to companies that are already in China Mobility Solution's database, the
Company is avoiding the perception that the messages it sends for its clients
are "spam". Recent research conducted by the Wireless Internet Panel in Europe
indicates that consumers' first reaction is to reject SMS advertising. However
64% of the same respondents changed their attitude if the SMS advertisements
offered the candidate some benefit (e.g., provides information, inform receivers
of promotions). The best way for marketers to distance themselves from spam,
according to the Mobile Marketing Association, is to give consumers choice,
control, constraint and confidentiality while insuring that they only receive
relevant information.
The Management of China Mobility Solutions is drawing upon successful examples
of SMS advertising in other countries to make its offerings in China more
valuable to its clients and well received by mobile phone users.
-26-
Some examples of positive SMS campaigns include:
o In London, successful trials were held of a location based taxi-hailing
service using GPS and mobile triangulation technologies. The solution included
voice taxi hailing plus SMS customer recruitment, driver and customer CRM.
o Since launching its mobile marketing services July 2004, the Company has
served over 17,000 customers and had collected about US$4 million in sales from
customers in 2004.
CHINA MOBILITY SOLUTIONS' NEW MARKET-READY SOLUTIONS
China Mobility Solutions is working in cooperation with China's major mobile
carriers, China Unicom and China Mobile, to provide mobile solutions for
corporate customers.
Chinese companies in many different industries have a need for mobility
services. Only telecom VAS providers have access to mobile carrier networks, so
most of the 30 million enterprises in China could not be able to access mobile
carriers networks, thus creating a demand for a "hub" that China Mobility
Solutions has already built for Chinese companies. Rather than creating their
own platforms to access the carriers' networks (and thus the country's cellular
population), the companies will be able to access China Mobility Solutions'
platform for a fee. China Mobility Solutions will act as the link between the
companies and the carriers.
The Company's platform has been developed using the C programming language to
facilitate high speed, create a more stable system, secure intellectual rights
protection, and provide complicated functions. The platform can be connected to
using WAP or GPRS on digital GSM and CDMA networks. The platform is compatible
with the carriers' networks, as it supports all bands - GSM, CDMA, GPRS and
future 3G.
The following diagram illustrates the architecture of our platform:
CHINA MOBILITY SOLUTIONS' PLATFORM ARCHITECTURE
|----------------|
| MEs' Servers |
| |
|----------------|
||
||
\/
|----------------------------|
| China Mobility Solutions' |
| Platform |
|----------------------------|
|| /\
|| ||
\/ ||
|----------------------------|
| Mobile Carrier |
| WAP, GPRS, SMS |
|----------------------------|
|| /\
|| ||
\/ ||
|----------------------------|
| End Users |
| WAP, GPRS, SMS |
|----------------------------|
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China Mobility Solutions' platform is aimed at providing a solution for clients
to access their staff, customers, suppliers and partners to obtain information
from their mobile phones without having to develop the technology themselves.
The end users can load, edit, delete, read and share corporate information.
The Company's technical team has successfully completed the technology to offer
business solutions in four additional areas as well. These are:
o Office Automation Solutions
o Mobile Banking
o Mobile Tax Services
o SMS-based Services for Police
China Mobility Solutions will receive annual fees for providing corporate
clients with access to its technology/hub and for providing a certain amount of
airtime. The mobile carrier will bill users a traffic fee for each SMS sent over
its network.
The sending of clients' information will generate significant SMS traffic over
the mobile phone networks. As a result, China Mobility Solutions will become
increasingly important to the mobile carriers in China.
Descriptions of each type of service offering are below:
OFFICE AUTOMATION SOLUTIONS
--------------------------------------------------------------------------------
Status: Market Ready
--------------------------------------------------------------------------------
Costs to Launch: 4 million RMB (US$480,000) for fixed assets and
marketing
Steps to Launch: Raise funds, approach companies through agents
Target Market: Small, medium and large businesses
Fee Per Year to Client: 5,000 RMB (US$600)
--------------------------------------------------------------------------------
Our office automation solutions will benefit clients in the areas of CRM, sales
force management, communications and inventory. It is the next mobile business
solution to be rolled out and will be given significantly higher emphasis in
terms of resources allocated than the other three solutions given its higher
projected revenues.
Our technology will facilitate the sending of messages and notices to employees
and customers.
Managers will be able to approve checks and other enquiries that are submitted
by employees via their cell phones.
Managers and salespeople will be able to check inventories and arrange
deliveries via SMS.
Companies will be able to send out service information, accept customer
enquiries and reply to customer questions via SMS.
MOBILE BANKING
--------------------------------------------------------------------------------
Status: Market Ready
--------------------------------------------------------------------------------
Costs to Launch: 1.5 million RMB (US$180,000) for fixed assets and
marketing
Steps to Launch: Raise funds, approach banks through agents
Target Market: Customers of banks
Fee Per Year to Client: 3,000 RMB (US$360)
--------------------------------------------------------------------------------
-28-
Our mobile solutions will allow customers of bank to check their account
information, make transactions and be informed of new services.
Information that can be accessible via SMS includes account balances, recent
transactions, interest rates and exchange rates.
Customers will be able to transfer funds between their bank accounts, make bill
payments and report lost or stolen cards.
Business customers of checks will be able to certify checks through their mobile
phones.
SMS-BASED SERVICES FOR POLICE
--------------------------------------------------------------------------------
Status: Market Ready
--------------------------------------------------------------------------------
Costs to Launch: 1.25 million RMB (U$150,000) for fixed assets and
marketing
Steps to Launch: Raise funds, approach police departments
Target Market: Police Departments
Fee Per Year to Client: 5,000 RMB (US$600)
--------------------------------------------------------------------------------
There are several functions that police stations will be able to perform through
their cell phones once they implement our solution.
For example, the departments will be able to provide information on fines and
fine payments, and deliver traffic information.
The mobile solution of the Company will also be beneficial for force management,
specifically through location-based tracking and monitoring of officers and
police cars.
The solution provided to the police stations will also include the base
components of our Office Automation package.
MOBILE TAX SERVICES
--------------------------------------------------------------------------------
Status: Market Ready
--------------------------------------------------------------------------------
Costs to Launch: 1.25 million RMB (U$150,000) for fixed assets and
marketing
Steps to Launch: Raise funds, approach tax offices
Target Market: Tax Offices
Fee Per Year to Client: 2,000 RMB (US$240)
--------------------------------------------------------------------------------
This solution will be similar to our Office Automation package, but will be
tailored to government tax offices.
Tax offices will be able to provide and manage messages to staff and to tax
filers.
Customer support will be a key function enhanced by our solution, as the offices
will be able to send out notices about filing deadlines and respond to people's
enquiries.
Tax officers will be able to submit and access tax reports by cell phone, even
when away from their offices.
-29-
SALES APPROACH
The Company will use four outlets to approach the market for its business
solutions:
AGENTS
Xin Hai, a previous subsidiary of China Mobility, received its ISP license in
1997 and by 2003 was generating US$7 million in annual sales from domain name
registration and web hosting, making it one of the largest companies in China in
that space. Xin Hai utilized over 8,000 agents in marketing its services to
business users. China Mobility will employ a similar strategy and will draw upon
its existing relationships with these agents to quickly build up an extensive
nationwide sales network for its mobile solutions. This approach has already
proven to be successful in the SMS market; as to date we have primarily made
sales for our mobile marketing services via advertising agencies.
MOBILE CARRIERS
The Company has negotiated an agreement with China Unicom to co-market its
mobile solutions to enterprises. Similar agreements are being discussed with the
other mobile carriers.
Because of its extensive connections and influence, leads introduced by China
Unicom are expected to be especially helpful to the Company when approaching the
police, banks and tax office segments. It is anticipated that we will secure
meetings with the regional heads of such organizations, after being introduced
by China Unicom, and that these regional heads would then adopt our solutions
throughout its organization.
IN-HOUSE SALES STAFF
China Mobility Solutions has access to the database of 500,000 enterprises in
China to which our previous subsidiary, Xin Hai, had previously provided
web-based services. Through direct mail, advertising, telephone calling and SMS,
the expanding in-house sales staff will contact many of these companies. These
companies are all potential customers of China Mobility Solutions and because we
have demographic details on these companies, we will be able to use this
information to provide targeted campaigns for our mobile marketing clients. The
database also provides us with an opportunity for sales leads nationwide, as the
500,000 enterprises are distributed geographically as follows:
SALES SUPPORT OFFICES
As it did with Xin Hai, management of China Mobility plans to set up small sales
support offices across China, to enhance local presence, customer support and
responsiveness.
GROWTH BY ACQUISITIONS
China Mobility plans to grow organically but also to grow by acquiring other
Chinese mobile companies that will complement the services offered by us.
Management has already initiated preliminary review of several companies that
would deliver significant synergies, revenue and profits if acquired by China
Mobility. These include:
A "little smart" phone operator in Tannin. Two out of every three new fixed-line
subscribers in China are Little Smart users. Little Smart users pay about
one-fourth of what regular cellular subscribers do for calls allowing people on
lower incomes to get a wireless service. A Little Smart handset looks like a
cell phone and, for the most part, works like a cell phone: users can make calls
and send text messages just as they can with a standard cell phone. Technically,
however, Little Smart is a limited-mobility extension of the fixed-line phone
network. The only functional difference from cellular phones is that Little
Smart users can't roam beyond their home cities. The biggest operator for little
smart phone is China Net Com which just went public in Hong Kong and US this
year. With the funding China Net Com raised from these two markets, there will
be a even stronger growth in little smart phone market.
-30-
LEGAL PROCEEDINGS
On February 7, 2005, China Mobility was sued by Sino-I Technology
Limited for $88,270 for breach of warranty and a claim under a guarantee. Our
lawyer has submitted a Notice of Motion to the plaintiff's lawyer on March 7,
2005 and is seeking an extension of the response date. The Company intends to
vigorously defend the suit.
No director, officer or affiliate of China Mobility and no owner of
record or beneficial owner of more than 5% of the securities of the Company, or
any associate of any such director, officer or security holder is a party
adverse to the Company or has a material interest adverse to it in reference to
pending litigation.
EMPLOYEES
Strategic matters and critical decisions are handled by Company
directors and executive officers: Xiao-qing Du and Ernest Cheung. Day-to-day
management is delegated to Xiao-qing (Angela) Du partly in China and partly in
Canada and Xin Wei in China. Wei is an employee of the wholly-owned subsidiary,
Infornet Investment Corp. Xin Wei, the CEO of QuickNet, occupies the position of
President of the Chinese subsidiary on strategies, planning, business
development.
At November 1, 2005, QuickNet had approximately 119 employees, in
technical support, sales and marketing, research and development and
administrative personnel. The actual number of employees changed during the year
and will change according to the expansion of the Company in the future.
At November 1, 2005, Windsor had six employees, consisting of teachers
and administrative personnel. The key to success is the ability to attract
students either publicly or privately funded. The number of employees will
change as the student body changes and there is no collectively bargaining unit
at the academy.
PROPERTIES
China Mobility currently maintains a leased office at: #900- 789
West Pender Street, Vancouver, B.C. Canada V6C 1H2 (telephone number is
1-604-632-9638). It also has a leased an office, as part of the joint venture,
in Beijing at Room 1858, New Century Office Tower, No. 6, Southern Road Capital
Gym, Beijing 100044, China. Windsor Academy currently rents spaces at 7900
Alderbridge Way, Unit 100, Richmond, BC, Canada. The Company currently owns no
other real estate and owns computers and office equipment valued at $13,438.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following are the existing executive officers, directors and
director-nominees and their respective ages and positions as of the date hereof:
NAMES AGES POSITION
--------------------------- --------------- ----------------------------------
Xiao-qing (Angela) Du 36 President and Director
Ernest Cheung 54 Director and Secretary
Greg Ye 36 Director
The following is a brief account of the business experience during
the past five years of each of the Company directors and executive officers,
including principal occupations and employment during that period and the name
and principal business of any corporation or other organization in which such
occupation and employment were carried on.
-31-
XIAO-QING (ANGELA) DU, President and Director, age 36. She has been
President and Director of our company from 1997 to 1999 and from 2002 to date.
She received a Bachelor of Science in International Finance in 1992 from East
China Normal University. She received a Master of Science in Finance and
Security Management in 1996 from the University of Saskatchewan Canada. She was
Business Manager of China Machinery & Equipment I/E Corp. (CMEC) from 1992 to
1994. She has also been the President of Infornet Investment Corp., the
Company's wholly owned subsidiary in Canada since 1997.
ERNEST CHEUNG, Secretary and Director, age 54, has been Secretary of
the Company since May 1998. He received a B.A. in Math in 1973 from University
of Waterloo Ontario. He received an MBA in Finance and Marketing from Queen's
University, Ontario in 1975. From 1991 to 1993 he was Vice President of Midland
Walwyn Capital, Inc. of Toronto, Canada, now known as Merrill Lynch Canada. From
1992 until 1995 he served as Vice President and Director of Tele Pacific
International Communications Corp. He has also served as President for Richco
Investors, Inc. since 1995. He has been a director of the Company since 1996. He
is currently a Director of Agro International Holdings, Inc. since 1997, Spur
Ventures, Inc. since 1997, Richco Investors, Inc. since 1995 and Drucker
Industries, Inc. since 1997. In 2000, he became President and a Director of
China NetTV Holdings, Inc. In 2002, he became a Director of The Link Group, Inc.
(Formerly World Envirotech, Inc.).
Mr. Cheung is or has been an officer or director in the following public
companies: Agro International Holdings Inc., China NetTV Holdings Inc., Drucker,
Inc., ITI World Investment Group Inc., NetNation Communications Inc., Richco
Investors Inc., Spur Ventures Inc., The Link Group Inc., and China Mobility
Solutions, Inc.
GREG YE, Director, age 36, brings 12 years of management, consulting
and investment experience in a broad range of business and technology
disciplines. He is currently in charge of developing and implementing corporate
strategies as Group Director of Strategic Marketing for Cadence Design Systems
Inc, the world's 9th largest software company, listed on both the NYSE and
NASDAQ. Previously, he worked for Cisco Systems as a market development manager
and PricewaterhouseCoopers, where he spent six years advising high-tech
companies based in the U.S. and Asia. He co-founded a Silicon Valley based
incubator for high-tech companies in China in 1999 and serves as an advisor for
several other U.S. high-tech start-up companies. Mr. Ye received his MBA from
Harvard Business School and his BSEE from Shanghai Jiao Tong University, China.
He is a Certified Public Accountant and a Certified Management Accountant.
Board of Directors Committees and Meetings
The Board of Directors does not have a nominating committee. Therefore, the
selection of persons or election to the Board of Directors was neither
independently made nor negotiated at arm's length.
Compensation Committee. The Company established a Compensation Committee on
October 5, 1999, which consists of the Company's three directors, Angela Du,
Ernest Cheung and Greg Ye. The Compensation Committee is responsible for
reviewing general policy matters relating to compensation and benefits of
directors and officers, determining the total compensation of its officers and
directors.
Audit Committee. On August 31, 1999, the Board of Directors established an Audit
Committee, which consists of three directors, Angela Du, Ernest Cheung and Gary
Ye. The Audit Committee will be charged with recommending the engagement of
independent accountants to audit Company financial statements, discussing the
scope and results of the audit with the independent accountants, reviewing the
functions of Company management and independent accountants pertaining to its
financial statements and performing other related duties and functions as are
deemed appropriate by the Audit Committee and the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires our directors,
officers and persons who beneficially own more than 10% of the shares of our
common stock (each, a "Reporting Person") to file reports of ownership and
changes of ownership with the SEC. Copies of all filed reports are required to
be furnished to China Mobility pursuant to the Exchange Act. Based solely upon a
review of the forms and amendments thereto furnished to China Mobility during
the year ended December 31, 2004, we believe that each Reporting Person complied
with all applicable filing requirements during such fiscal year.
-32-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Options - In 2004, the Company's directors were granted 495,000 options to
purchase shares at $0.30. All of the options are outstanding as of December 31,
2004. Angela Du received 330,000 options and Ernest Cheung received 165,000
options.
Warrants - Richco Investors Inc., of which Ernest Cheung is an officer and
director, has 1,085,000 "A" warrants to purchase shares of common stock and has
1,085,000 "B" warrants to purchase shares of common stock. The Company's former
President has 80,000 "A" warrants to purchase shares of common stock and has
80,000 "B" warrants to purchase shares of common stock. Another entity
controlled by one of the directors of this Company has 190,000 "A" warrants and
190,000 "B" warrants. All of the warrants were outstanding as of December 31,
2004, and subsequently expired.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of the President (the Chief
Executive Officer) and the Secretary for the year ended December 31, 2004, the
year ended December 31, 2003, and the year ended December 31, 2002.
Long-Term Compensation
----------------------------------------
Restricted Shares
Stock Underlying Other Annual
Name Year Salary ($) Bonus($) Awards Options Compensation($)
---------------------------------------- ------------- ------------ ----------- ----------- ------------- --------------
Xiao-qing Du 2004 0 0 0 0 330,000(2)
President, Chief Executive Officer 2003 0 0 0 0 0
2002 $4,809 0 0 0 0
Ernest Cheung 2004 0 0 0 0 165,000(2)
Secretary(1) 2003 0 0 0 0 0
2002 0 0 0 0 $24,000
Officers as a group 2004 0 0 0 0 495,000
2003 0 0 0 0 0
2002 $4,809 0 0 0 $24,000
-------------
(1) Ernest Cheung received 16,667 options to buy 16,667 shares at $3.90 per
share, plus Richco Investors, Inc. of which Mr. Cheung is an officer and
director, and Mr. Tsakok is an officer and director, received 128,333 units for
services in structuring the private placement. Mr. Tsakok has resigned as an
officer and Director of the Company.
(2) Options at $.30 per share expiring August 1, 2007.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
No stock options were granted to the named Executive Officers during 2004.
-33-
2006 NON-QUALIFIED STOCK COMPENSATION PLAN
The Company has adopted the 2006 China Mobility Solutions, Inc.
Non-Qualified Stock Compensation Plan ("the 2006 Plan") in order to advance the
best interests of the Company by providing eligible individuals who have a
substantial responsibility for its management and growth with additional
incentive and by increasing their proprietary interest in the success of the
Company, thereby encouraging them to maintain their relationships with the
Company. The 2006 Plan provides for the grant of stock options to purchase
shares of Common Stock to our directors, officers, employees, consultants, and
advisors and those of our subsidiaries. The 2006 Plan which is administered by
our Board of Directors, authorizes the issuance of a maximum of 4,000,000 shares
of Common Stock, which may be authorized and unissued shares or treasury shares.
The stock options granted under the 2006 Plan shall be non-qualified stock
options ("NQSO's"). If any award under the 2006 Plan terminates, expires
unexercised, or is cancelled, the shares of Common Stock that would otherwise
have been issuable pursuant thereto will be available for issuance pursuant to
the grant of new awards. The 2006 Plan will terminate on November 2, 2015.
2005 STOCK OPTION PLAN
The Company has adopted the 2005 China Mobility Solutions, Inc. Stock
Option Plan ("the 2005 Plan") in order to promote the interests of the
Corporation by providing eligible individuals who are responsible for the
management, growth and financial success of the Company or who otherwise render
valuable services to the Company with the opportunity to acquire a proprietary
interest, or increase their proprietary interest, in the Company and thereby
encourage them to remain in the service of the Company. The 2005 Plan provides
for the grant of stock options to purchase shares of Common Stock to our
directors, officers, employees, consultants and independent contractors and
those of our subsidiaries. The 2005 Plan which is administered by our Board of
Directors, authorizes the issuance of a maximum of 3,500,000 shares of Common
Stock, which may be authorized and unissued shares or treasury shares. The stock
options granted under the 2005 Plan shall be either incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code ("ISO's"), or
non-qualified stock options ("NQSO's"). If any award under the 2005 Plan
terminates, expires unexercised, or is cancelled, the shares of Common Stock
that would otherwise have been issuable pursuant thereto will be available for
issuance pursuant to the grant of new awards. The 2005 Plan will terminate on
May 5, 2015.
On September 2, 2005, the Company issued 3,090,000 shares of the
Company's common stock, $0.001 par value per share, (the "Shares"), to nine
individuals, including Yanli Jia, Aixiang Li, Jing Li, Xiao Liu, Kun Wang, Kun
Wei, Sheung Wai Yim, Fan Zhang, and Yongfu Zhu, upon exercise of the options
granted pursuant to the 2005 Stock Option Plan.
EMPLOYMENT AGREEMENTS
Ms. Du and Mr. Cheung have employment contracts that are renewable every year.
Under British Columbia law, the Company will be responsible for severance pay
for early termination based on the number of years of employment with the
Company. There is no key person life insurance.
Additionally, no amounts are accrued for the deferred compensation as China
Mobility has had no pre-tax profits.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to our common stock,
par value $0.001 per share, owned on September 12, 2005 by each person who
beneficially owns more than five percent (5%) of our outstanding 20,011,793
shares of common stock, by each of our executive officers and directors and by
all of our executive officers and directors as a group.
-34-
----------------------------------------------------------------------------------------------------
TOTAL NUMBER OF
SECURITIES OWNED PERCENT OF CLASS
NAME OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIALLY (1)
----------------------------------------------------------------------------------------------------
Angela Du (Director)*(3)(8)(9) Common Shares 1,250,000 6.2%
----------------------------------------------------------------------------------------------------
Richco Investors, Inc.*(2) Common Shares 1,137,999 5.7%
----------------------------------------------------------------------------------------------------
Ernest Cheung (Secretary and Common Shares 1,446,333 7.2%
Director)*(2)(4)(6)(7)(8)(10)
----------------------------------------------------------------------------------------------------
Maurice Tsakok (Director)* Common Shares 1,225,333 6.1%
(2)(5)(7)(8)
----------------------------------------------------------------------------------------------------
QuickNet Partners(9) Common Shares 2,040,000 10.2%
#1859 New Century Office Tower
Beijing China
----------------------------------------------------------------------------------------------------
Zeth Zhang Common Shares 1,333,333 6.7%
14-F Hutchison House
10 Harcourt Road, Hong Kong
----------------------------------------------------------------------------------------------------
Grace Ding Common Shares 1,333,333 6.7%
14-143 Dahongmen Street
Fengtai District, Beijing, China
----------------------------------------------------------------------------------------------------
Jerry Wang Common Shares 1,400,000 7.0%
17-2-101 New Zhongxili
East District, Beijing, China
----------------------------------------------------------------------------------------------------
Susan Wen Common Shares 1,528,000 7.6%
502-16 No. 3 Street
Zhongguancun, Haidian District
Beijing, China
----------------------------------------------------------------------------------------------------
Total number of shares owned by Common Shares 2,696,333 13.5%
directors and executive officers
as a group(2 persons) (10)
----------------------------------------------------------------------------------------------------
--------------------
* Except as otherwise noted, the mailing address of each person shown is
c/o China Mobility Solutions, #900 - 789 West Pender Street, Vancouver,
B.C. Canada V6C 1H2
(1) Except as otherwise noted in the footnotes to this table, the named
person owns directly and exercises sole voting and investment power
over the shares listed as beneficially owned by such person. Includes
any securities that such person has the right to acquire within sixty
days pursuant to options, warrants, conversion privileges or other
rights.
(2) Messrs. Cheung and Tsakok are officers, directors and beneficial owners
of Richco Investors Inc. For purposes of this table, the 1,137,999
shares owned by Richco are deemed owned by Mr. Cheung and Mr. Tsakok,
beneficially and individually.
(3) As an officer Ms. Du received 330,000 options in 2004.
(4) Ernest Cheung has 16,667 options to purchase shares at $3.90 and
165,000 options exercisable at $.30 per share.
(5) Maurice Tsakok has 87,333 options to purchase shares at $3.90 per
share.
(6) Ernest Cheung is President of Development Fund II of Nova Scotia, Inc.
which owns 63,333 common shares.
(7) Includes all shares of Richco Investors, Inc., Ernest Cheung, Maurice
Tsakok, and Development Fund II of Nova Scotia since there is common
control.
(8) Assumes exercise of all warrants and options within 60 days pursuant to
Rule 13(d)(3)(d)(i).
(9) QuickNet Partners owns 2,040,000 common shares for the acquisition.
(10) XiaoQing Du owns 330,000 options at the exercise price of $0.30; Ernest
Cheung owns 165,000 options at the exercise price of $0.30.
-35-
SELLING STOCKHOLDERS
An aggregate of 35,893,030 shares of Common Stock may be offered for
resale and sold pursuant to this prospectus by the selling shareholders. The
shares are to be offered by and for the respective accounts of the selling
shareholders. We have agreed to register all of the shares under the Securities
Act for resale by the selling shareholders and to pay all of the expenses in
connection with such registration and sale of the shares, other than
underwriting discounts and selling commissions and the fees and expenses of
counsel and other advisors to the selling shareholders. We will not receive any
proceeds from the sale of the shares by the selling shareholders.
o We issued an aggregate of 28,714,458 shares of our Common Stock to
37 investors in our Offering which shares are being offered hereby
for resale. The Offering of 134 units ("Units") was sold at $25,000
per Unit or an aggregate of $3,350,000 and net proceeds of
approximately $2,866,000. Each Unit consists of $25,000 principal
amount of Debentures, and Class A Warrants and Class B warrants. The
Debentures are initially convertible at $.35 per share for 71,429
shares of Common Stock; mature on August 15, 2006 and accrue
interest at a rate of not less than 6% per annum. Each Unit also
includes: (i) Class A Warrants exercisable at $.44 per share to
purchase 71,429 shares of Common Stock for two years from the
Effective Date, but no later than February 15, 2008; and (ii) Class
B Warrants exercisable at $.52 per share to purchase 71,429 shares
of Common Stock for three years from the Effective Date, but no
later than February 15, 2006. For additional information, see
"Description of Securities" and "Plan of Distribution" elsewhere in
this Prospectus.
o In connection with the Offering, we issued warrants to purchase
7,178,572 shares of Common Stock to the placement agent, and its
assignees including selected dealers ("Placement Agent Warrant
Shares").
Information with respect to the selling shareholders and the shares of
our common stock held by them and those shares being offered for resale pursuant
to this prospectus is set forth in the following table. None of the selling
shareholders has had any material relationship with us within the past three
years, except as noted above or in the notes to the following table.
Amount and Nature of
Beneficial Ownership After
the Sale of the
Number of Number of Shares Being Offered
Shares Owned Shares Being Percentage(1)
Selling Shareholder Prior to Sale Offered for Sale Before After
-------------------------------------------------------------------------------------------------
Alpha Capital AG (18) 3,000,000 3,000,000(3) 13.0% -
Robert Baron 128,574 128,574(4) * -
Robert Bauers 214,287 214,287(5) 1.1% -
Brookshire Securities (19) 325,000 325,000(2) 1.6% -
Michael Capozzi 214,287 214,287(5) 1.1% -
Lewis G. Cole 214,287 214,287(5) 1.1% -
Thomas Dupont 428,574 428,574(6) 2.1% -
John E. and Georgianna Gimbel 214,287 214,287(5) 1.1% -
Andreas Gubser 214,287 214,287(5) 1.1% -
Michael Hamblett 7,500 7,500(2) * -
Philip J. Hempleman 2,142,858 2,142,858(7) 9.7% -
Fiona Holland 214,287 214,287(5) 1.1% -
Richard N. Houlding 214,287 214,287(5) 1.1% -
Iroquois Master Fund LTD (20) 3,214,287 3,214,287(8) 13.8% -
-36-
Amount and Nature of
Beneficial Ownership After
the Sale of the
Number of Number of Shares Being Offered
Shares Owned Shares Being Percentage(1)
Selling Shareholder Prior to Sale Offered for Sale Before After
-------------------------------------------------------------------------------------------------
Robert Jackson 107,145 107,145 (9) * -
Louis Jaffe 428,574 428,574 (6) 2.1% -
George Jarskey 214,287 214,287 (5) 1.1% -
Francis William Johnson 214,287 214,287 (5) 1.1% -
Kinder Investments, L.P. (21) 1,500,000 1,500,000 (10) 7.0% -
Michael J. Maloney 214,287 214,287 (5) 1.1% -
Frank Mantek 214,287 214,287 (5) 1.1% -
Management Solutions
International, Inc. (22) 350,000 350,000 (2) 1.7% -
Meridian Ventures, LLC (23) 525,000 525,000 (2) 2.6% -
Meyers Associates, LP (24) 5,963,572 5,963,572 (2) 23.0% -
Karen Lynne Miller 214,287 214,287 (5) 1.1% -
Dr. Gerald Millstein 107,145 107,145 (9) * -
Richard Molinsky 214,287 214,287 (5) 1.1% -
Donald Mudd 1,285,716 1,285,716 (11) 6.0% -
Nite Capital LP (25) 1,285,716 1,285,716 (11) 6.0% -
Omicron Master Trust (26) 771,429 771,429 (12) 3.7% -
Wayne and Bonnie Pensenstadler 642,858 642,858 (13) 3.1% -
Norman Rothstein 171,429 171,429 (14) * -
The Rubin Family
Irrevocable Trust (27) 428,574 428,574 (6) 2.1% -
SCG Capital, LLC (28) 428,574 428,574 (6) 2.1% -
Cira A. Lim, John L. Smith 214,287 214,287 (5) 1.1% -
Southridge Partners LP (29) 4,285,716 4,285,716 (15) 17.6% -
Anthony Spatacco 3,750 3,750 (2) * -
Starboard Capital (30) 3,750 3,750 (2) * -
Michael F. Stone 1,285,716 1,285,716 (11) 6.0% -
Robert I. Strougo 107,145 107,145 (9) * -
Rodney E. and Donna R. Suggs 2,571,429 2,571,429 (16) 11.4% -
Peter Wakeham 214,287 214,287 (5) 1.1% -
David Ward 107,145 107,145 (9) * -
Dr. Ferdinand Weisbrod 857,145 857,145 (17) 4.1% -
Dean Whitla 214,287 214,287 (5) 1.1% -
-37-
* Less than 1% of the issued and outstanding shares
(1) As of November 10, 2005, we had 20,011,793 shares of Common Stock
issued and unless otherwise indicated, each person has sole disposition
and voting power with respect to the shares indicated. For purposes of
this table, a person or group of persons is: (a) deemed to have
"beneficial ownership" of any shares as of a given date which such
person has the right to acquire within 60 days after such date and (b)
assumed to have sold all shares registered hereby in this offering. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security
which such person or persons has the right to acquire within 60 days
after such date is deemed to be outstanding for the purpose of
computing the percentage ownership of such person or persons, but is
not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) These are Placement Agent Warrant Shares.
(3) These include 1,000,000 shares issuable upon conversion of the
Debentures, 1,000,000 shares issuable upon exercise of the Class A
Warrants and 1,000,000 shares is suable upon exercise of the Class B
Warrants.
(4) These include 42,858 shares issuable upon conversion of the Debentures,
42,858 shares issuable upon exercise of the Class A Warrants and 42,858
shares issuable upon exercise of the Class B Warrants.
(5) These include 71,429 shares issuable upon conversion of the Debentures,
71,429 shares issuable upon exercise of the Class A Warrants and 71,429
shares issuable upon exercise of the Class B Warrants.
(6) These include 142,858 shares issuable upon conversion of the
Debentures, 142,858 shares issuable upon exercise of the Class A
Warrants and 142,858 shares issuable upon exercise of the Class B
Warrants.
(7) These include 714,286 shares issuable upon conversion of the
Debentures, 714,286 shares issuable upon exercise of the Class A
Warrants and 714,286 shares issuable upon exercise of the Class B
Warrants.
(8) These include 1,071,429 shares issuable upon conversion of the
Debentures, 1,071,429 shares issuable upon exercise of the Class A
Warrants and 1,071,429 shares issuable upon exercise of the Class B
Warrants.
(9) These include 35,715 shares issuable upon conversion of the Debentures,
35,715 shares issuable upon exercise of the Class A Warrants and 35,715
shares issuable upon exercise of the Class B Warrants.
(10) These include 500,000 shares issuable upon conversion of the
Debentures, 500,000 shares issuable upon exercise of the Class A
Warrants and 500,000 shares issuable upon exercise of the Class B
Warrants.
(11) These include 428,572 shares issuable upon conversion of the
Debentures, 428,572 shares issuable upon exercise of the Class A
Warrants and 428,572 shares issuable upon exercise of the Class B
Warrants.
(12) These include 257,143 shares issuable upon conversion of the
Debentures, 257,143 shares issuable upon exercise of the Class A
Warrants and 257,143 shares issuable upon exercise of the Class B
Warrants.
(13) These include 214,286 shares issuable upon conversion of the
Debentures, 214,286 shares issuable upon exercise of the Class A
Warrants and 214,286 shares issuable upon exercise of the Class B
Warrants.
(14) These include 57,143 shares issuable upon conversion of the Debentures,
57,143 shares issuable upon exercise of the Class A Warrants and 57,143
shares issuable upon exercise of the Class B Warrants.
(15) These include 1,428,572 shares issuable upon conversion of the
Debentures, 1,428,572 shares issuable upon exercise of the Class A
Warrants and 1,428,572 shares issuable upon exercise of the Class B
Warrants.
(16) These include 857,143 shares issuable upon conversion of the
Debentures, 857,143 shares issuable upon exercise of the Class A
Warrants and 857,143 shares issuable upon exercise of the Class B
Warrants.
(17) These include 285,715 shares issuable upon conversion of the
Debentures, 285,715 shares issuable upon exercise of the Class A
Warrants and 285,715 shares issuable upon exercise of the Class B
Warrants.
(18) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Konrad Ackerman, Director.
(19) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Timothy Roggiero, President.
(20) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Joshua Silverman, Authorized Signatory.
(21) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Dov Perlysky, Managing Member of G.P.
(22) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Michael Sid, President.
-38-
(23) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Shahid Khan, President.
(24) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Bruce Meyers, President.
(25) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Keith A. Goodman, Manager of the General Partner.
(26) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Bruce Bernstein, Managing Partner.
(27) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Marjorie Rubin, Trustee.
(28) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Steven Geduld.
(29) Voting and disposition power with respect to the Shares offered hereby
for resale is held by Henry Sargent, Portfolio Manager.
(30) Voting and disposition power with respect to the Shares offered hereby
for resale is held by James Dotzam, Managing Principal.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 500,000,000 shares of Common Stock,
par value $.001 per share. As of November 10, 2005, there were 20,011,793 shares
of Common Stock issued and outstanding held by 164 shareholders of record.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. Holders of shares
of Common Stock are not entitled to cumulative voting rights. The favorable vote
of a plurality of the votes of the shares of Common Stock is necessary to elect
the directors of the Company. To take all other actions, a majority of the votes
of the shares of Common Stock outstanding is necessary. The holders of Common
Stock are entitled to receive ratably such dividends when, as and if declared by
the Board of Directors out of funds legally available therefore. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock, when issued in
exchange for the consideration set forth herein, will be, validly issued, fully
paid and non-assessable.
WARRANTS
The following discussion is subject to the terms and conditions of the
Class A and Class B Warrant, copies of which are incorporated by reference
hereto.
TERMS. For each Unit issued in the Offering, the Company also issued
Class A Warrants and Class B Warrants to purchase such number of shares of
Common Stock determined by dividing the purchase price per Unit of $25,000 by
the $.35 per share Conversion Price of the Debentures, or 71,429 shares per
Unit. Each Class A Warrant entitles the holder to purchase one share of Common
Stock at any time after issuance at an exercise price per Class A Warrant of
$.44 per share. The Class A Warrants shall expire on the second anniversary of
the Effective Date of this Registration Statement, but not later than February
15, 2008 and be subject to other terms and conditions described below. Each
Class B Warrant entitles the holder to purchase one share of Common Stock at any
time after issuance at an exercise price of $.52 per share. The Class B Warrants
shall expire on the third anniversary of the Effective Date of this Registration
Statement, but not later than February 15, 2009 and be subject to other terms
and conditions described below. The Class A Warrants and the Class B Warrants
are sometimes collectively referred to herein as the "Warrants". The actual
number of securities underlying the Units will be determined on the Closing Date
based on the Average Closing Price. The Warrants may be exercised in whole or in
part, at any time and from time to time during the Exercise Period. Warrants may
be exercise for cash or pursuant to a "cashless exercise" right. Unless
exercised, the Warrants will automatically expire at the end of the Exercise
Period, subject to earlier termination by reason of redemption.
-39-
ANTI-DILUTION PROVISIONS. The Exercise Price of the Warrants shall be
subject to adjustment from time to time in the event of any by any stock split,
reverse stock split, stock dividend, distributions, recapitalization,
reorganization, reclassification or similar events. In addition, if at any time
prior to the expiration dates of the Warrants, the Company issues or sells any
shares of Common Stock or any equity or equity equivalent securities
(collectively, "Common Stock Equivalents") for a per share consideration less
than the Exercise Price on the date of such issuance or sale (a "Dilutive
Issuance"), then the Exercise Price shall be adjusted so as to equal the value
of the consideration received or receivable by the Company (on a per share
basis) for the additional shares of Common Stock or Common Stock Equivalents so
issued.
REDEMPTION. The Class A Warrants and Class B Warrants will be subject
to redemption by the Company at $.001 per Warrant, on not less than 30 days'
prior written notice to the holders of the Warrants at any time commencing 6
months and 12 months, respectively, after the Effective Date of this
Registration Statement allowing the resale of the Warrant Shares has been
declared effective by the Securities and Exchange Commission and is in effect
prior to the date of the notice of redemption and remains in effect; provided
(i) the average closing bid quotation or last sales price of the Common Stock,
as applicable, has been at least 175% of the respective Exercise Prices per
share for a period of 20 consecutive trading days ending not more than 15 days
prior to the date on which the Company gives notice of redemption. The Warrants
will be exercisable until 5:00 p.m. on the day immediately preceding the date
fixed for redemption.
DIVIDENDS
To date, the Company has not declared or paid any dividends on its
Common Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, any dividend
restrictions or prohibitions under outstanding loan agreements, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings for
use in the Company's business operations.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our Common Stock, and the warrant agent for the
Warrants is Holladay Stock Transfer, Inc., 2939 N. 67th Place, Scottsdale, AZ
85251.
SEC POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
the above provisions, or otherwise, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act, and is unenforceable.
CERTAIN MARKET INFORMATION
Our Common Stock is listed on the OTCBB. There is no listing for the
Debentures or the Warrants. However, there has been limited trading, to date, of
our Common Stock. An OTCBB listing does not guarantee that an active trading
market for our securities will develop. You will likely not be able to sell your
securities if an active trading market for our securities does not develop.
Further, we can give no assurance that such a market could be sustained if a
trading market for our securities were to develop, nor that our securities could
be resold at their original offering price or at any other price. Any market for
our securities on the OTCBB will very likely be a limited one and, in all
likelihood, be highly volatile. Although we intend to apply for a listing on
Nasdaq or an exchange, when qualified, there is no assurance we will obtain such
a listing. In any event, if our securities trade at a low price, many brokerage
firms may choose not to engage in market making activities or effect
transactions in our securities. Accordingly, purchasers of our securities may
have difficulties in reselling them and many banks may not grant loans using our
securities as collateral.
-40-
Federal regulations governing "penny stocks" could have a detrimental
effect on holders of our securities. Our securities are subject to the SEC rules
that impose special sales practice requirements upon broker-dealers that sell
such securities to parties other than established customers or accredited
investors. For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of purchasers of our securities to
buy or sell in any market that may develop. In addition, the SEC has adopted a
number of rules to regulate "penny stocks." Because our securities currently
constitute a "penny stock" within the meaning of these rules, the rules would
apply to us and our securities. The rules may further affect the ability of
owners of our securities to sell their securities in any market that may develop
for them.
EQUITY COMPENSATION PLAN INFORMATION
See "Executive Compensation - 2006 Non-Qualified Stock Compensation
Plan and 2005 Stock Option Plan" described above.
PLAN OF DISTRIBUTION
The Shares being offered for resale pursuant to this prospectus may be
sold by the selling shareholders for their respective own accounts. The selling
shareholders will pay or assume brokerage commissions or other charges and
expenses incurred in the sale of the Shares. The distribution of the Shares by
the selling shareholders is not subject to any underwriting or other agreement.
Each selling shareholder must use a broker-dealer which is registered in the
state in which the selling shareholder seeks to sell their Shares.
The Shares may be sold or transferred for value by the selling
shareholders, in one or more transactions, on the OTCBB, in privately negotiated
transactions or in a combination of such methods. The Shares may be sold or
transferred at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at prices otherwise negotiated. The selling
shareholders may effect such transactions by selling or transferring the Shares
to or through brokers and/or dealers, and such brokers or dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the selling shareholders and/or the purchasers/transferees of the Shares
for whom such brokers or dealers may act as agent. Such broker or dealer
compensation may be less than or in excess of customary commissions. However,
the maximum compensation to be received by any NASD member or independent broker
dealer will not be greater than eight (8%) percent of the gross proceeds of any
sale. The selling shareholders and any broker or dealer that participate in the
distribution of the shares may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, and any commissions received by them and
any profit on the resale of the Shares sold by them may be deemed to be
underwriting discounts and commissions under the Securities Act and under the
NASD Corporate Financing Rules.
Upon our being notified by a selling shareholder that any material
arrangement has been entered into with a broker or dealer for the sale of shares
through a secondary distribution, or a purchase by a broker or dealer, a
supplemental prospectus will be filed, if required, pursuant to Rule 424(b)
under the Securities Act, disclosing:
o the name of each of such selling shareholder and the participating
brokers and/or dealers,
o the number of shares involved,
o the price at which such shares are being sold,
o the commissions paid or the discounts or concessions allowed to such
brokers and/or dealers,
o where applicable, that such brokers and/or dealers did not conduct any
investigation to verify the information set out or incorporated by
reference in the prospectus, as supplemented, and
o other facts material to the transaction.
Any of the shares of our common stock being offered for sale pursuant
to this prospectus that qualify for sale pursuant to Rule 144 promulgated under
the Securities Act may be sold under Rule 144 rather than pursuant to this
prospectus.
-41-
Other than as a selling stockholder, Meyers, an NASD member firm, will
not participate under this resale prospectus and distribution. Meyers was,
however, granted an irrevocable right of first refusal pursuant to the Placement
Agency Agreement between Meyers and the Company dated as of June 30, 2005. The
right of first refusal covers this offering for all future public offerings or
private financings (whether debt or equity) to purchase for Meyers account or to
sell for the account of the Company. It does not include commercial bank
financing arrangements entered into by the Company.
There can be no assurance that the selling shareholders will sell or
transfer any of the Shares being offered pursuant to this prospectus.
EXPERTS
On December 22, 2004, the Company engaged Moen and Company, Canadian
Chartered Accountants, to act as the principal accountants to audit China
Mobility's financial statements and consolidated financial statements as at
December 31, 2004, and for the fiscal year ended December 31, 2004. Clancy and
Co., P.L.L.C. was the Company's independent auditor and examined the financial
statements of the Company for the fiscal years ended December 31, 2003 and 2002
and the subsequent interim periods through December 22, 2004.
LEGAL MATTERS
The validity of the Shares of Common Stock offered in this Offering will be
passed upon by Michael A. Littman, Attorney at Law, 7609 Ralston Road, Arvada,
CO 80002. Robinson & Cole LLP, 885 Third Avenue, Suite 2800, New York, NY 10022,
has represented the Company on all other matters in this Offering.
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH
DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY IN ANY JURISDICTION WHERE SUCH OFFER, OR SALE IS
NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR ANY SALE OF THESE SHARES.
-42-
CHINA MOBILITY SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004 (Unaudited) ..................................................................F-1
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2005 and 2004 (Unaudited) .......................................F-2
Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 2005 and December 31, 2004 (Unaudited) ...............................................F-3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (Unaudited) ............................................................F-4
Consolidated Statements of Deficit for the three months and nine months
ended September 30, 2005 and 2004 (Unaudited) ......................................................F-5
Notes to Consolidated Financial Statements, September 30, 2005 (Unaudited) ......................F-6 to F-11
Report of Independent Registered Public Accounting Firm ................................................F-12
Consolidated Balance Sheets as of December 31, 2004 and 2003 ...........................................F-13
Consolidated Statements of Operations
for the years ended December 31, 2004 and 2003 ....................................................F-14
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 2004 and 2003 ....................................................F-15
Consolidated Statements of Cash Flows
for the years ended December 31, 2004 and 2003 ....................................................F-16
Notes to Consolidated Financial Statements, December 31, 2005 .....................................F17 to F28
-43-
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(Unaudited)
================================================================================
STATED IN U.S. DOLLARS 2005 2004
--------------- --------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 7,634,523 $ 5,380,622
Accounts receivable 6,204 34,560
Prepaid Expenses and Other Current Assets 348,373 33,070
Amount due from related parties 21,531 18,322
--------------- --------------
TOTAL CURRENT ASSETS 8,010,631 5,466,574
INVESTMENT 1 1
PROPERTY AND EQUIPMENT, NET (NOTE 3) 6,988 6,549
GOODWILL 4,802,520 973,906
--------------- --------------
TOTAL ASSETS $ 12,820,140 $ 6,447,030
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 2,338,873 $ 340,824
Deferred Revenue 2,474,458 2,111,698
Convertible Debentures (Note 5) 3,350,000 -
Amount due to related parties 500 -
--------------- --------------
TOTAL CURRENT LIABILITIES 8,163,831 2,452,522
MINORITY INTEREST - 32,791
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common Stock : $0.001 Par Value
Authorized : 50,000,000
Issued and Outstanding : 20,011,670
(2004: 15,826,670) 20,012 15,827
Additional Paid In Capital (Note 7) 11,551,356 8,770,378
Subscription Receivable (140,000) -
Accumulated Deficit (6,578,457) (4,640,956)
Accumulated Other Comprehensive Loss (196,602) (183,532)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 4,656,309 3,961,717
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,820,140 $ 6,447,030
=============== ==============
(The accompanying notes are an integral part of these
consolidated financial statements)
F-1
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
STATED IN U.S. DOLLARS 2005 2004 2005 2004
-------------- -------------- --------------- --------------
REVENUE
Mobile marketing services $ 1,190,328 $ 888,082 $ 3,376,829 $ 888,082
Tuition fee 53,100 95,383 160,408 218,298
-------------- -------------- --------------- --------------
1,243,428 983,465 3,537,237 1,106,380
COST OF REVENUE
Mobile marketing services 368,552 236,229 903,022 236,229
Tuition fee 16,596 15,268 43,614 43,641
-------------- -------------- --------------- --------------
385,148 251,497 946,636 279,870
GROSS PROFIT 858,280 731,968 2,590,601 826,510
EXPENSES
Advertising and promotion 253,970 273,696 663,402 280,471
Commission 359,500 - 359,500 -
Consulting and professional 186,736 17,463 214,421 56,800
Depreciation 765 2,255 1,933 3,890
Foreign exchange gain (97,536) (17,219) (92,942) (8,801)
General and administrative 198,827 1,682 255,718 59,761
Investor relations 87,825 - 175,650 -
Interest 24,412 - 24,414 -
Interest - intrinsic value of the
conversion feature of the
convertible debentures (Note 7) 1,052,863 - 1,052,863 -
Rent 224,421 124,499 554,370 150,060
Salaries, wages and sub-contract 344,797 307,532 1,034,949 379,198
Stock-based compensation 126,000 - 126,000 -
Website development - - 80,000 -
-------------- -------------- --------------- --------------
2,762,580 709,908 4,450,278 921,379
OPERATING INCOME (LOSS) (1,904,300) 22,060 (1,859,677) (94,869)
OTHER INCOME AND EXPENSES
Interest income 24,211 30,290 60,625 59,846
Other income 1 9 20 1,470
Equity loss - - - (81,273)
-------------- -------------- --------------- --------------
24,212 30,299 60,645 (19,957)
INCOME (LOSS) BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS (1,880,088) 52,359 (1,799,032) (114,826)
MINORITY INTEREST (6,141) - (138,469) 4,634
-------------- -------------- --------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,886,229) 52,359 (1,937,501) (110,192)
DISCONTINUED OPERATIONS
Loss from discontinued business press
operations - - - (41,654)
-------------- -------------- --------------- --------------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS $ (1,886,229) $ 52,359 $ (1,937,501) $ (151,846)
============== ============== =============== ==============
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Earnings (loss) from continuing
operations $ (0.11) $ 0.00 $ (0.11) $ (0.01)
Earnings (loss) from discontinued
operations 0.00 0.00 0.00 (0.00)
-------------- -------------- --------------- --------------
Total basic and diluted $ (0.11) $ 0.00 $ (0.11) $ (0.01)
============== ============== =============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic and diluted 17,929,279 15,826,670 16,996,285 14,531,196
============== ============== =============== ==============
(The accompanying notes are an integral part of these
consolidated financial statements)
F-2
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(Unaudited)
================================================================================
ACCUMULATED
STOCK ADDITIONAL OTHER
STATED IN U.S. COMMON AMOUNT AT PAID IN SUBSCRIPTION ACCUMULATED COMPREHENSIVE
DOLLARS SHARES PAR VALUE CAPITAL RECEIVABLE DEFICIT LOSS TOTAL
----------- ---------- -------------- --------------- --------------- ---------------- --------------
Balance,
December 31,
2003 41,360,010 $ 41,360 $ 8,194,045 $ - $ (7,659,628) $ (163,763) $ 412,014
Issuance of
common stock for
acquisition of
Quicknet on
June 23, 2004 6,120,000 6,120 544,680 550,800
Reverse stock
split 3:1 on
June 24, 2004 (31,653,340) (31,653) 31,653 -
Net income for
the year ended
December 31, 2004 3,018,672 3,018,672
Foreign currency
translation
adjustments (19,769) (19,769)
----------- ---------- -------------- --------------- --------------- ---------------- --------------
Balance,
December 31, 2004 15,826,670 $ 15,827 $ 8,770,378 $ (4,640,956) $ (183,532) $ 3,961,717
Issuance of common
stock for cash on
exercised of
stock options on
February 24,
2005 @$0.30 495,000 495 148,005 148,500
Issuance of
common stock for
services rendered 600,000 600 350,700 351,300
Issuance of
common stock for
cash on exercised
of stock options
on September
1, 2005 @$0.40 500,000 500 199,500 200,000
Issuance of common
stock for cash on
exercised of stock
options on
September 1,
2005 @$0.35 2,590,000 2,590 903,910 906,500
Stock-based
compensation 126,000 126,000
Subscription
receivable upon
the exercise of
stock options
on September
1, 2005 @$0.35 (140,000) (140,000)
Intrinsic value
of the conversion
feature of the
convertible
debentures 1,052,863 1,052,863
Net loss for
the nine months
ended September 30,
2005 (1,937,501) (1,937,501)
Foreign currency
translation
adjustments (13,070) (13,070)
----------- ---------- -------------- --------------- --------------- ---------------- --------------
Balance,
September 30, 2005 20,011,670 $ 20,012 $ 11,551,356 $ (140,000) $ (6,578,457) $ (196,602) $ 4,656,309
=========== ========== ============== =============== =============== ================ ==============
(The accompanying notes are an integral part of these
consolidated financial statements)
F-3
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
================================================================================
STATED IN U.S. DOLLARS 2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,937,501) $ (151,846)
Less: loss from discontinued operations - 41,654
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 1,933 3,890
Stock-based compensation 126,000 -
Interest - intrinsic value of the conversion feature of the
convertible debentures 1,052,863 -
Translation adjustments (13,070) (5,600)
Minority interest 138,469 (4,634)
Non-cash operating expenses 191,650 -
Equity loss - 81,273
Changes in assets and liabilities
(Increase)Decrease in accounts receivable 28,356 139,688
(Increase)Decrease in prepaid expenses and other current assets (139,680) 10,509
Increase in amount due from (to) related parties (2,709) (102,416)
Decrease in accounts payable 1,982,049 (155,851)
Increase in deferred revenue 362,760 311,974
Increase in liabilities to be disposed of - 137,926
------------- -------------
Net cash provided by (used in) operating activities 1,791,120 306,567
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash transferred in from acquisition of Quicknet - 1,477,355
Purchases of remaining interest of Quicknet (4,000,000) -
Purchases of property and equipment (2,346) (1,727)
------------- -------------
Net cash flows provided by investing activities (4,002,346) 1,475,628
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash 1,115,000 -
Issuance of convertible debentures for cash 3,350,000 -
------------- -------------
Net cash flows provided by financing activities 4,465,000 -
------------- -------------
Effect of exchange rate changes on cash 127 (1,052)
Net cash provided by continuing operations 2,253,901 1,781,143
Net cash provided by (used in) discontinued operations - (10,656)
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,253,901 1,770,487
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,380,622 3,303,677
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,634,523 $ 5,074,164
============= =============
Supplemental Information :
Cash paid for :
Interest $ 2 $ -
Income taxes - -
Non-cash investment :
Issuance of 2,040,000 common shares for the acquisition of Quicknet $ - $ 1,224,000
Issuance of 600,000 common shares for services rendered 351,300 -
(The accompanying notes are an integral part of these
consolidated financial statements)
F-4
CHINA MOBILITY SOLUTIONS, INC. AND SUBSIDIARIES
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(Unaudited)
================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
STATED IN U.S. DOLLARS 2005 2004 2005 2004
-------------- -------------- -------------- --------------
DEFICIT, BEGINNING OF PERIOD $ (4,692,228) $ (7,863,833) $ (4,640,956) $ (7,659,628)
Net Income (Loss) Available to
Common Stockholders (1,886,229) 52,359 (1,937,501) (151,846)
-------------- -------------- -------------- --------------
DEFICIT, END OF PERIOD $ (6,578,457) $ (7,811,474) $ (6,578,457) $ (7,811,474)
============== ============== ============== ==============
F-5
CHINA MOBILITY SOLUTIONS, INC.
(PREVIOUSLY KNOWN AS XIN NET CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (UNAUDITED )
================================================================================
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America.
However, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted or condensed pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). In the opinion of management,
all adjustments of a normal recurring nature necessary for a fair presentation
have been included. The results for interim periods are not necessarily
indicative of results for the entire year. These condensed consolidated
financial statements and accompanying notes should be read in conjunction with
the Company's annual consolidated financial statements and the notes thereto for
the fiscal year ended December 31, 2004 included in its Annual Report on Form
10-KSB.
The unaudited condensed consolidated financial statements include China Mobility
Solutions, Inc. and its subsidiaries. All inter-company transactions and
accounts have been eliminated.
Certain items have been reclassified to conform to the current period
presentation. There is no effect on total results of operations or stockholders'
equity.
2. SIGNIFICANT ACCOUNTING POLICIES
(i) Accounting for convertible securities with beneficial conversion features
According to Emerging Issue Task Force ("EITF") Issue 98-5, the beneficial
conversion features embedded in convertible securities should be valued at the
issue date. Embedded beneficial conversion features should be recognized and
measured as follows:
(a) Allocate a portion of the proceeds equal to the intrinsic value of the
embedded beneficial conversion feature to additional paid-in-capital. The
intrinsic value is calculated as the difference between the conversion price and
the fair value of the common stock or other securities into which the security
can be converted at the date when the investors have committed to purchase the
convertible securities based on the terms specified, multiplied by the number of
shares into which the security can be converted.
(b) If the intrinsic value of the beneficial conversion feature is greater than
the proceeds from the sale of the convertible instrument, the discount assigned
to the beneficial conversion feature should not exceed the amount of the
proceeds allocated to the convertible instruments. A discount, if any, is
amortized beginning on the security's issuance date to the earliest conversion
date.
3. PROPERTY AND EQUIPMENT
September 30, December 31,
2005 2004
------------- ------------
Equipment $ 26,964 $ 24,832
Library 9,554 9,554
Furniture 10,187 9,975
------------- ------------
Total 46,705 44,361
Less : Accumlated depreciation (39,717) (37,812)
------------- ------------
Net book figures $ 6,988 $ 6,549
============= ============
The depreciation expenses charged to continuing operations for the three-month
and nine-month periods ended September 30, 2005 were $765 and $1,933
respectively.
F-6
4. ACQUISITION OF THE REMAINING 49% OWNERSHIP OF BEIJING QUICKNET
TELECOMMUNICATION CORP. LTD. ("QUICKNET")
On September 30, 2005, the Company acquired the remaining 49% of Quicknet
through exercising its option under the original acquisition agreement. The
Company paid US$2,000,000 on September 30, 2005 and will pay another
US$2,000,000 by December 31, 2005, which is included as part of the accounts
payable as of September 30, 2005.
The value assigned to assets and liabilities acquired can be summarized as
follows:
Cash and short term investments $ 1,356,834
Accounts receivables 1,626
Goodwill 3,973,646
Accounts payables and accrued liabilities (134,452)
Unearned revenue (1,197,654)
Cash paid and payable $ 4,000,000
============
5. CONVERTIBLE DEBENTURES
On August 15, 2005, the Company completed an offering of 134 units ("Units")
$3,350,000. Each Unit was sold for $25,000, consisting of $25,000 principal
amount of senior convertible debentures (the "Debentures"), and one Series "A"
Warrant and one Series "B" Warrant. The Debentures are initially convertible at
$0.35 per share for 71,429 shares of common stock of the Company; maturing on
August 15, 2006 and accruing interest at a rate of not less than 6% per annum
equal to the sum of 2% per annum plus the one-month London Inter-Bank Offer Rate
(LIBOR). The Debentures are subject to redemption at 125% of the principal
amount plus accrued interest commencing six months after the effective date (the
"Effective Date") of the registration statement. The registration statement has
not been approved by the regulatory authority.
Each Unit also includes: (i) Series "A" Warrants exercisable at $0.44 per share
to purchase 71,429 shares of Common Stock of the Company for two years from the
Effective Date, but no later than February 15, 2008; and (ii) Series "B"
Warrants exercisable at $0.52 per share to purchase 71,429 shares of Common
Stock for three years from the Effective Date, but no later than February 15,
2009. The Series "A" and Series "B" Warrants are subject to redemption by the
Company at $0.001 per Warrant at any time commencing six months and twelve
months, respectively, from the Effective Date, provided the average closing bid
price of the common stock of the Company equals or exceeds 175% of the
respective exercise prices for 20 consecutive trading days.
The Company incurred $335,000 as the 10% sales commission of the aggregate
purchase price, $100,500 as the 3% non-accountable expenses of the placement
agent, $16,750 for the placement agent's out-of-pocket expenses and $120,609 for
legal fees. All of them have been recorded as expenses for the current quarter.
As of September 30, 2005, interest payable of $24,416 has been recorded as part
of the accounts payable.
6. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share are computed by dividing net earnings (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common stockholders by the weighted-average
number of common shares outstanding during the period increased to include the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued.
The following table sets forth the computations of shares and net loss used in
the calculation of basic and diluted loss per share for the three-month and
nine-month periods ended September 30, 2005 and 2004:
F-7
The effect of outstanding options and warrants was not included as the effect
would be antidilutive.
On June 24, 2004, the Company carried out a 3 for 1 reverse stock-split. Figures
of prior periods have been retroactively restated to reflect the effect of the
reverse stock-split.
7. SHARE CAPITAL
During the quarter ended June 30, 2005, the Company issued 600,000 shares of its
common stock at a fair value of $351,300 to a company for one year of investor
relations services until March 2006. As of September 30, 2005, $175,650 was
recorded as prepaid expenses and $175,650 was recorded as investor relations
expense.
During the quarter ended September 30, 2005, the Company increased its
authorized share capital from 50,000,000 to 500,000,000 shares of common stock
with a par value of $0.001 per share.
Conversion Feature of the convertible debenture
According to EITF 98-5, the intrinsic value of the conversion feature of the
convertible debenture is $1,052,863. The whole amount has been recorded as
interest expenses in the statement of operations as the debentures are
convertible at any time during the specified periods and an increase in
additional paid-in-capital on balance sheet.
F-8
8. SHARE PURCHASE WARRANTS
5,884,990 warrants expired during the nine-month period ended September 30,
2005.
During the quarter ended September 30, 2005, the Company issued 134 Series "A"
Warrants. Each Series "A" Warrant entitles the holder to purchase 71,429 shares
of common stock of the Company at $0.44 per share for two years from the
Effective Date, but no later than February 15, 2008. The Company also issued 134
Series "B" Warrants. Each Series "B" Warrant entitles the holder to purchase
71,429 shares of common stock of the Company at $0.52 per share for three years
from the Effective Date, but no later than February 15, 2009. The Series "A" and
"B" Warrants are subject to redemption by the Company at $0.001 per Warrant at
any time commencing six months and twelve months, respectively, from the
Effective Date, provided the average closing bid price of the common stock of
the Company equals or exceeds 175% of the respective exercise prices for 20
consecutive trading days.
As of September 30, 2005, 10 warrants were outstanding which entitle the holders
to purchase a common share of the Company at $2.25 each on or before March 31,
2006. 134 Series "A" warrants were outstanding which entitle the holders to
purchase 71,429 common shares of the Company at $0.44 each within two years from
the Effective Date but no later than February 15, 2008. 134 Series "B" warrants
were outstanding which entitle the holders to purchase 71,429 common shares of
the Company at $0.52 each within three years from the Effective Date but no
later than February 15, 2009.
9. STOCK OPTIONS
On February 24, 2005, 495,000 stock options at $0.30 each were exercised.
On September 1, 2005, the Company granted 3,090,000 stock options to consultants
and employees with an exercise price of $0.35 each and $0.40 each for 2,590,000
and 500,000 stock options, respectively, expiring on September 1, 2015. These
stock options were all exercised on the date of grant.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost for stock options
is recognized for stock options awards granted at or above fair market value.
Had compensation expense for the Company's stock-based compensation plans been
determined under FAS No. 123, based on the fair market value at the grant dates,
the Company's pro forma net loss and pro forma net loss per share would have
been reflected as follows at September 30:
The fair values of the options grant during the nine-month period ended
September 30, 2005, were from $0.13 to $0.14 each and were estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumption used for those options granted during the nine-month
period ended September 30, 2005: dividend yield of 0%, expected volatility of
132%, risk-free interest rate of 2.78%, and an expected life of 1 year.
F-9
Options outstanding at September 30, 2005 were 660,000 with option price of
$0.30 each. No options were canceled or forfeited during the nine-month period
ended September 30, 2005. The weighted average remaining contractual life is
1.81 years.
10. RELATED PARTY TRANSACTIONS
During the three-month and nine-month periods ended September 30, 2005, the
Company paid $9,182 and $19,571 to a director and an officer as wages and
benefits.
As of September 30, 2005, the Company has an amount of $21,531 due from a
company with a common director without interest or specific terms of repayment.
As of September 30, 2005, the Company has an amount of $500 due to a director of
the Company for expenses advanced on behalf of the Company. The amount is
non-interest bearing and is repayable on demand.
11. SEGMENT AND GEOGRAPHIC DATA
The Company's reportable segments are geographic areas and two operating
segments, the latter comprised of mobile communication and ESL education.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes corporate related
items, and, as it relates to segment profit (loss), income and expenses not
allocated to reportable segments.
A. By geographic areas China Canada Other Total
------------ ------------- -------------- ---------------
Three months ended September 30, 2005
-------------------------------------
Revenue from continuing operations $ 1,190,328 $ 53,100 $ - $ 1,243,428
Operating income (loss) 89,897 465 (1,994,662) (1,904,300)
Total assets 9,984,876 128,825 2,706,439 12,820,140
Depreciation - 765 - 765
Interest income 24,202 9 - 24,211
Income from discontinued operations - - - -
Investment in equity method investee - - 1 1
Three months ended September 30, 2004
-------------------------------------
Revenue from continuing operations $ 888,082 $ 95,383 $ - $ 983,465
Operating income (loss) (35,478) 68,768 (11,230) 22,060
Total assets 9,214,140 145,885 172,468 9,532,493
Depreciation 1,419 794 42 2,255
Interest income 30,282 8 - 30,290
Income from discontinued operations - - - -
Investment in equity method investee - - 172,251 172,251
Nine months ended September 30, 2004
------------------------------------
Revenue from continuing operations $ 218,298 $ 888,082 $ - $ 1,106,380
Operating loss (17,354) (34,781) (42,734) (94,869)
Total assets 145,885 9,214,140 172,468 9,532,493
Nine months ended September 30, 2003
------------------------------------
Revenue from continuing operations $ 221,323 $ - $ - $ 221,323
Operating loss (50,334) 66 (79,461) (129,729)
Total assets 176,499 5,956,305 479,094 6,611,898
F-10
Mobile ESL
B. By operating segments communications education Other Total
-------------- ------------- -------------- ---------------
For the three months ended September 30, 2005
---------------------------------------------
Revenue from external customers $ 1,190,328 $ 53,100 $ - $ 1,243,428
Intersegment revenue - - - -
Interest revenue 5,310 9 18,892 24,211
Interest expense - - 1,077,275 1,077,275
Depreciation - 569 196 765
Segment operation profit (loss) 7,221 7,697 (1,919,218) (1,904,300)
Segment assets 2,772,366 111,022 9,936,752 12,820,140
For the three months ended September 30, 2004
---------------------------------------------
Revenue from external customers $ 888,082 $ 95,383 $ - $ 983,465
Intersegment revenue - - - -
Interest revenue 6,711 4 23,575 30,290
Interest expense - - - -
Depreciation 1,419 746 90 2,255
Segment operation profit (loss) (34,078) 38,032 18,106 22,060
Segment assets 1,887,804 124,528 7,520,161 9,532,493
F-11
MOEN AND COMPANY
CHARTERED ACCOUNTANTS
MEMBER: SECURITIES COMMISSION BUILDING
Canadian Institute of Chartered Accountants PO BOX 10129, PACIFIC CENTRE
Institute of Chartered Accountants of British Columbia SUITE 1400 - 701 WEST GEORGIA STREET
Institute of Management Accountants (USA) (From 1965) VANCOUVER, BRITISH COLUMBIA
CANADA V7Y 1C6
REGISTERED WITH:
Public Company Accounting Oversight Board (USA) (PCAOB)
Canadian Public Accountability Board (CPAB) TELEPHONE: (604) 662-8899
Canada - British Columbia Public Practice Licence FAX: (604) 662-8809
EMAIL: moenca@telus.net
------------------------------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of
China Mobility Solutions, Inc.
We have audited the accompanying consolidated balance sheet of China Mobility
Solutions, Inc. as of December 31, 2004, and the related consolidated statements
of operations, retained earnings(deficit), cash flows and stockholders' equity
for the year ended December 31, 2004. 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 audit. The consolidated
financial statements of China Mobility Solutions, Inc. as of December 31, 2003
were audited by other auditors whose report, dated April 23, 2004, expressed an
unqualified opinion on those statements, except for an additional paragraph
concerning going concern disclosure.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluation the overall
financial statement presentation. We believe that our audit provides 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 China Mobility
Solutions, Inc. as of December 31, 2004, and the results of its operations and
its cash flows for the year then ended in conformity with U.S. generally
accepted accounting principles.
"MOEN AND COMPANY"
Vancouver, British Columbia, Canada
Chartered Accountants
April 6, 2005
"INDEPENDENT ACCOUNTANTS AND AUDITORS"
F-12
CHINA MOBILITY SOLUTIONS, INC.
(formerly Xin Net Corp.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
Stated in U.S. dollars
2004 2003
---------- ------------
(Audited) (Audited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 5,380,622 $ 3,303,591
Accounts receivable, net of allowance of $nil (2003: $58,678) 34,560 1,107
Prepaid Expenses and Other Current Assets 33,070 31,246
Amount due from related parties 18,322 -
Assets to be disposed of - 2,533,838
----------- -----------
TOTAL CURRENT ASSETS 5,466,574 5,869,782
----------- -----------
INVESTMENT (NOTE 4) 1 253,524
PROPERTY AND EQUIPMENT, NET (NOTE 5) 6,549 9,870
GOODWILL 973,906 187,436
----------- -----------
TOTAL ASSETS $ 6,447,030 $ 6,320,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Other Accrued Liabilities $ 340,824 $ 141,542
Deferred Revenue 2,111,698 28,354
Liabilities to be disposed of - 3,284,355
Security deposit from Sino-i.com Ltd. - 2,416,200
----------- -----------
TOTAL CURRENT LIABILITIES 2,452,522 5,870,451
----------- -----------
MINORITY INTEREST 32,791 38,147
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock : $0.001 Par Value
Authorized : 50,000,000 common shares
Issued and Outstanding : 15,826,670 common shares (2003: 13,786,670)
Par Value 15,827 13,787
Additional Paid In Capital 8,770,378 8,221,618
Accumulated Deficit (4,640,956) (7,659,628)
Accumulated Other Comprehensive Loss (183,532) (163,763)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,961,717 412,014
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,447,030 $ 6,320,612
=========== ===========
(The accompanying notes are an integral part of these financial statements)
F-13
CHINA MOBILITY SOLUTIONS, INC.
(formerly Xin Net Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Stated in U.S. dollars
2004 2003
------------ ------------
(Audited) (Audited)
Revenue
Mobile marketing services $ 1,871,96 $ -
Tuition fee 298,806 280,723
------------ ------------
TOTAL REVENUE 2,170,766 280,723
------------ ------------
COST OF REVENUE
Mobile marketing services 412,222 -
Tuition fees 61,013 134,340
------------ ------------
473,235 134,340
------------ ------------
GROSS PROFIT 1,697,531 146,383
------------ ------------
EXPENSES
Advertising and promotion 541,142 16,048
Consulting and professional 116,784 118,052
Depreciation 2,071 7,394
Foreign exchange loss (gain) (24,029) (14,032)
General and administrative 110,116 58,219
Rent 296,920 68,966
Salaries, wages and sub-contract 724,493 82,446
Impairment on marketable securities 172,250 -
------------ ------------
TOTAL EXPENSES 1,939,747 337,093
------------ ------------
OPERATING LOSS (242,216) (190,710)
OTHER INCOME AND EXPENSES
Interest income 82,602 15,066
Other income 10,272 7,678
Equity loss in undistributed earnings of investee company (81,273) (66,076)
------------ ------------
11,601 (43,332)
------------ ------------
LOSS BEFORE MINORITY INTEREST AND
DISCONTINUED OPERATIONS (230,615) (234,042)
MINORITY INTEREST (28,157) 26,046
------------ ------------
LOSS FROM CONTINUING OPERATIONS (258,772) (207,996)
------------ ------------
DISCONTINUED OPERATIONS
Loss from Assets held for sale - (322,987)
Gain on disposal of ISP operations - 206,653
Gain on disposal of internet-related operations (Note 6) 3,319,098 -
Loss on disposal of business press operations (Note 7) (41,292) -
Income (loss) from discontinued operations (Note 7) (362) 10,053
------------ ------------
3,277,444 (106,281)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 3,018,672 $ (314,277)
============ ============
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Earnings (loss) from continuing operations $ (0.02) $ (0.01)
Earnings (loss) from discontinued operations 0.22 (0.01)
------------ ------------
Total basic and diluted $ 0.20 $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted 14,856,834 13,786,670
============ ============
(The accompanying notes are an integral part of these financial statements)
F-14
CHINA MOBILITY SOLUTIONS, INC.
(FORMERLY XIN NET CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
STATED IN U.S. DOLLARS
CAPITAL STOCK
--------------------------------------- ACCUMULATED
ADDITIONAL OTHER
COMMON PAID IN ACCUMULATED COMPREHENSIVE
SHARES PAR VALUE CAPITAL TOTAL DEFICIT LOSS
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 41,360,010 $ 41,360 $8,194,045 $8,235,405 $ (7,345,351) $ (148,659)
Net loss for year ended December 31, 2003 (314,277)
Foreign Currency Translation Adjustments (15,104)
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 41,360,010 $ 41,360 $8,194,045 $8,235,405 $(7,659,628) $ (163,763)
Issuance of common stock for
acquisition of Quicknet on June 23, 2004 6,120,000 6,120 544,680 550,800
Reverse stock split 3:1 on June 24, 2004 (31,653,340) (31,653) 31,653 -
Net income for year ended December 31, 2004 3,018,672
Foreign Currency Translation Adjustments (19,769)
----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 15,826,670 $ 15,827 $8,770,378 $8,786,205 $ (4,640,956) $ (183,532)
==================================================================================================================================
TOTAL
--------------------------------------------------------------
Balance, December 31, 2002 $ 741,395
Net loss for year ended December 31, 2003 (314,277)
Foreign Currency Translation Adjustments (15,104)
--------------------------------------------------------------
Balance, December 31, 2003 $ 412,014
Issuance of common stock for
acquisition of Quicknet on June 23, 2004 550,800
Reverse stock split 3:1 on June 24, 2004 -
Net income for year ended December 31, 2004 3,018,672
Foreign Currency Translation Adjustments (19,769)
--------------------------------------------------------------
Balance, December 31, 2004 $ 3,961,717
==============================================================
(The accompanying notes are an integral part of these financial statements)
F-15
CHINA MOBILITY SOLUTIONS, INC.
(FORMERLY XIN NET CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
STATED IN U.S. DOLLARS
2004 2003
----------- -----------
(AUDITED) (AUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,018,672 $ (314,277)
Less: loss from assets held for sale - 322,987
Less: loss from discontinued operations 362 (10,053)
Adjustments to reconcile net loss to net cash
Provided by (Used in) operating activities
Depreciation and amortization 2,071 7,394
Foreign Currency Translation adjustments (19,769) (15,104)
Minority interest 28,157 (26,046)
Impairment on marketable securities 172,250 -
Gain on disposal of ISP operations - (206,653)
Gain on disposal of internet-related operations (3,319,098) -
Loss on disposal of business press operations 41,292 -
Equity loss of The Link Group, Inc. 81,273 66,076
Changes in assets and liabilities
(Increase) Decrease in accounts receivable 57,107 (1,107)
(Increase) Decrease in prepaid expenses and other current assets 9,174 (8,824)
Increase in amount due from related parties (18,322) -
Increase (Decrease) in accounts payable (75,848) 32,498
Increase (Decrease) in deferred revenue 468,649 (9,371)
Increase in security deposits - 2,416,200
----------- -----------
Net cash provided by operating activities 445,970 2,253,720
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (10,661)
Reduction in investment - 1,266
Cash acquired from acquisition of Quicknet 1,477,355 -
----------- -----------
Net cash flows provided by (used in) investing activities 1,477,355 (9,395)
----------- -----------
Effect of exchange rate changes on cash 694 -
NET CASH PROVIDED BY CONTINUING OPERATIONS 1,924,019 2,244,325
NET CASH PROVIDED BY ASSETS HELD FOR SALE 152,381 98,751
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 631 3,382
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,077,031 2,346,458
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,303,591 957,133
CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,380,622 $ 3,303,591
=========== ===========
Supplemental Information :
Cash paid for :
Interest $ 69 $ 6,565
Income taxes - 10,978
Non-cash investment :
Issuance of 6,120,000 common shares for the acquisition of Quicknet $ 550,800 $ -
(The accompanying notes are an integral part of these financial statements)
F-16
CHINA MOBILITY SOLUTIONS, INC.
(FORMERLY XIN NET CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
China Mobility Solutions, Inc. ("the Company"), previously known as Xin Net
Corp., was incorporated under the laws of the State of Florida on September 12,
1996, with an authorized capital of 50,000,000 shares of $0.001 par value common
stock. The Company's principal business activities include providing
mobile/wireless communication; in particular, Short Message Services ("SMS") and
education and training courses for foreign students.
Prior to June 2003, the Company provided internet-related services, including
domain name registration, web-hosting and other value-added services, such as
e-commerce and advertising in several major cities in the Peoples Republic of
China ("PRC"). Due to the lack of funding and high competition in the market,
the Company signed an agreement to sell its internet-related services in the PRC
(see Note 6 for details).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned and majority-owned
subsidiaries as outlined in Note 2. All significant inter-company transactions
and balances have been eliminated on consolidation.
Accounting method - The Company's financial statements are prepared using the
accrual method of accounting.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of credit risk - The Company maintains Renminbi cash balances in
banks of the People's Republic of China and U.S. Dollar cash balances in
Canadian and Hong Kong banks, that are not insured. Revenues were derived in
geographic locations outside the United States. The ELSA program of Windsor
accounts for 53% of the total tuition fees and 7.3% of the total revenue of the
Company. The SMS of Quicknet accounts for 86.2% of the total revenue of the
Company.
Cash and cash equivalents - Cash equivalents consists of time deposits with
original maturities of three months or less.
Investments - The Company determines the appropriate classification of
marketable debt and equity securities at the time of purchase and reevaluates
such designation as of each balance sheet date. All marketable debt securities
are classified as held-to-maturity and are carried at amortized cost, which
approximates fair value.
Accounts receivable and allowance for doubtful accounts - Accounts receivable
are recorded net of allowances for doubtful accounts and reserves for returns.
In the normal course of business, the Company extends credit to customers that
satisfy predefined credit criteria. The Company is required to estimate the
collectability of its receivables. Reserves for returns are based on historical
return rates and sales patterns. Allowances for doubtful accounts are
established through the evaluation of accounts receivable agings and prior
collection experience to estimate the ultimate realization of these receivables.
Property and equipment - Property and equipment, stated at cost, is depreciated
under the straight-line method over their estimated useful lives, ranging from
three to seven years.
F-17
Goodwill - Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets (tangible and intangible) acquired.
Goodwill acquired has to be evaluated for impairment at the beginning of year
2002 and on an annual basis going forward according to Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
The standard requires a two-step process to be performed to analyze whether or
not goodwill has been impaired. Step one requires that the fair value be
compared to book value. If the fair value is higher than the book value, no
impairment is indicated and there is no need to perform the second step of the
process. If the fair value is lower than the book value, step two must be
evaluated. Step two requires a hypothetical purchase price allocation analysis
to be done to reflect a current book value of goodwill. The current value is
then compared to the carrying value of goodwill. If the current fair value is
lower than the carrying value, an impairment must be recorded. Annually, the
goodwill is tested for impairment in the fourth quarter.
Long-lived assets - The Company records impairment losses on long-lived assets
used in operation when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount.
Revenue recognition - The Company's revenues for 2004 consisted of revenues from
SMS, education and training services. In accordance with S.E.C. Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," the Company
recognizes revenue when the following criteria are met: persuasive evidence that
an arrangement exists; delivery has occurred or services have been rendered; the
price to the customer is fixed or determinable; and collectability is reasonably
assured. If all of the above criteria have been met, revenues are principally
recognized upon shipment of products or when services have been rendered.
Revenues derived from SMS, education and training is recognized as the services
are performed. Amounts received from customers in advance of revenue recognition
are deferred and classified on the balance sheet as "deferred revenue."
The Company's revenues for 2003, which are included in discontinued operations,
consisted of revenues from commercial printing. Revenues derived from commercial
printing are recognized when the job has been completed and is delivered to the
customer.
Cost recognition - Cost of service includes direct costs to produce products and
provide services.
Deferred revenue and deferred cost - Deferred revenue for 2004 consists
primarily of SMS, education and training revenue received prior to the services
being performed.
Deferred revenue for 2003, which is included as a component of "Liabilities to
be disposed of" consists of prepaid domain name registration fees. End users
receive certain elements of the Company's revenues over a period of time. As a
result, the Company's revenue recognized represents the fair value of these
elements over the product's life cycle. Deferred cost for 2003, which is
included as a component of "Assets to be disposed of" consists of amounts paid
to various registrars for domain name registration fees and are deferred on the
same basis as revenue.
Capitalized software costs - The Company accounts for the development cost of
software intended for sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." SFAS No. 86 requires product development
costs to be charged to expense as incurred until technological feasibility is
attained. Technological feasibility is attained when the Company's software has
completed system testing and has been determined viable for its intended use.
Accordingly, the Company did not capitalize any development costs during the
period. Total costs expensed during the periods presented were approximately
$55,577 for 2004 and $250,000 for 2003.
Advertising costs - Advertising costs are expensed as incurred. Total
advertising costs charged to operations amounted to $538,949 for 2004 and
$16,822 for 2003. Total advertising costs included in discontinued operations
amounted to $2,193 for 2004 and $155,075 for 2003.
F-18
Income taxes - The Company accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income
tax assets and liabilities are computed for differences between the financial
statements and tax bases of assets and liabilities that will result in taxable
or deductible amounts in the future, based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary, to reduce
deferred income tax assets to the amount expected to be realized.
Foreign currency translations - The assets and liabilities of the Company's
foreign operations are generally translated into U.S. dollars at current
exchange rates, and revenues and expenses are translated at average exchange
rates for the year. Resulting foreign currency translation adjustments are
reflected as a separate component of stockholders' equity. Transaction gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency, except those transactions which
operate as a hedge of an identifiable foreign currency commitment or as a hedge
of a foreign currency investment position, are included in the results of
operations as incurred.
Fair value of financial instruments - For certain of the Company's financial
instruments, including cash and cash equivalents, prepaid expenses and other
current assets, accounts payable and other accrued liabilities, and deferred
revenues, the carrying amounts approximate fair value due to their short
maturities.
Business segment information - The Company discloses information about its
reportable segments in accordance with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company's reportable segments are
geographic areas. The accounting policies of the operating segments are the same
as those for the Company.
Earnings per share - Basic earnings or loss per share are based on the weighted
average number of common shares outstanding. Diluted earnings or loss per share
is based on the weighted average number of common shares outstanding and
dilutive common stock equivalents. Basic earnings/loss per share is computed by
dividing income/loss (numerator) applicable to common stockholders by the
weighted average number of common shares outstanding (denominator) for the
period. All earnings or loss per share amounts in the financial statements are
basic earnings or loss per share, as defined by SFAS No. 128, "Earnings Per
Share." Diluted earnings or loss per share does not differ materially from basic
earnings or loss per share for all periods presented. Convertible securities
that could potentially dilute basic earnings per share in the future such as
options and warrants are not included in the computation of diluted earnings per
share because to do so would be antidilutive. All per share and per share
information are adjusted retroactively to reflect stock splits and changes in
par value.
Stock-based compensation - The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation
cost for stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. SFAS No.123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method of accounting as
described above, and has adopted the disclosure requirements of SFAS No. 123. In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting
for Stock-Based Compensation". This statement amends Statement No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 amends APB Opinion No. 28 "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. The Company adopts the disclosure provisions and the amendment to
APB No. 28 effective for interim periods beginning after December 15, 2002.
Had compensation expense for the Company's stock-based compensation plans been
determined under FAS No. 123, based on the fair market value at the grant dates,
the Company's pro forma net loss and pro forma net loss per share would have
been reflected as follows at December 31:
F-19
2004 2003
----------- -----------
Net income (loss)
As reported $ 3,018,672 $ (314,277)
Stock-based employee compensation cost, net of tax (267,300) (122,758)
----------- -----------
Pro-forma $ 2,751,372 $ (437,035)
=========== ===========
Loss per share
As reported $ 0.20 $ (0.02)
=========== ===========
Pro-forma $ 0.19 $ (0.03)
=========== ===========
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with weighted average assumptions for
grants as follows:
Risk free interest rate 3.65%
Expected life of options in years 1 to 3 years
Expected volatility 184%
Dividend per share $0.00
Comprehensive income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. The Company
includes items of other comprehensive loss by their nature, such as foreign
currency translation adjustments, in a financial statement and displays the
accumulated balance of other comprehensive loss separately from accumulated
deficit in the equity section of the balance sheet. The Company discloses total
comprehensive loss, its components and accumulated balances on its statement of
stockholders' equity.
Capital structure - The Company discloses its capital structure in accordance
with SFAS No. 129, "Disclosure of Information about Capital Structure," which
established standards for disclosing information about an entity's capital
structure.
Related party transactions - A related party is generally defined as (i) any
person that holds 10% or more of the Company's securities and their immediate
families, (ii) the Company's management, (iii) someone that directly or
indirectly controls, is controlled by or is under common control with the
Company, or (iv) anyone who can significantly influence the financial and
operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between
related parties. (See Note 12)
Fair value of financial instruments - For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, prepaid
expenses, amount due from related parties, accounts payable and accrued
liabilities, and deferred revenue, the carrying amounts approximate fair value
due to their short maturities.
Reclassification of Prior Period - Certain prior period amounts have been
reclassified to conform to the current year presentation. These changes had no
effect on previously reported results of operations or total stockholders'
equity.
Recent Accounting Pronouncements - The Financial Accounting Standards issued the
following pronouncements during 2004, none of which are expected to have a
significant affect on the financial statements:
In March 2004, the EITF reached final consensus on EITF 03-6 which provides
additional guidance to determine whether a security is a participating security
and therefore subject to the two-class method under SFAS 128. The guidance in
EITF 03-6 clarifies the notion of what constitutes a participating security, and
is effective for fiscal periods (interim or annual) beginning after March 31,
2004. EITF 03-06 provides guidance in applying the two-class method of
calculating earnings per share for companies that have issued securities other
than common stock that contractually entitle the holder to participate in any
dividends declared and earnings of the company. The opinion defines what
constitutes a participating security and how to apply the two-class method of
calculating earnings per share to those securities. In addition, the consensus
in EITF 03-6 nullifies the guidance in EITF Topic No. D-95, "Effect of
Participating Convertible Securities on the Computation of Basic Earnings Per
Share", and requires the use of the two-class method to compute basic EPS by
companies with participating convertible securities. The adoption did not have
an impact on our calculation of earnings per share.
F-20
In April 2004, the EITF reached consensus on EITF Issue No. 03-6, "Participating
Securities and the Two Class Method under FASB Statement No. 128" ("EITF 03-6").
EITF 03-6 addresses a number of questions regarding the computation of earnings
per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in the dividends and earnings of
the company when, and if, it declares dividends on its common stock. EITF 03-6
also provides further guidance in applying the two-class method of calculating
earnings per share, clarifying what constitutes a participating security and how
to apply the two-class method of computing earnings per share once it is
determined that a security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-6 is effective for fiscal
periods beginning after March 31, 2004 and requires retroactive restatement of
prior earning per share amounts. This statement does not affect the Company.
In June 2004, the FASB issued EITF Issue No. 02-14, "Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other Than Common Stock."
EITF Issue No. 02-14 addresses whether the equity method of accounting applies
when an investor does not have an investment in voting common stock of an
investee but exercises significant influence through other means. EITF Issue No.
02-14 states that an investor should only apply the equity method of accounting
when it has investments in either common stock or in-substance common stock of a
corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. The
accounting provisions of EITF Issue No. 02-14 are effective for the reporting
period beginning after September 15, 2004. The Company is in the process of
determining the effect, if any, of the adoption of EITF Issue No. 02-14 will
have on the Company's financial position, results of operations, or cash flows.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after November 23, 2004. The
Company does not believe the adoption of SFAS No. 151 will have a material
impact on our financial position, results of operations or cash flows.
In December 2004, the FASB issued a revision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123R). SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. SFAS 123R establishes
standards for the accounting for transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. SFAS 123R does not change the accounting guidance for
share-based payment transactions with parties other than employees provided in
SFAS 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." SFAS 123R is effective for interim
reporting period that begins after June 15, 2005. The Company is in the process
of determining the effect of the adoption of SFAS 123R will have on its
financial position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,"
which discusses the accounting and reporting of real estate timesharing
transactions. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005, and restatement of previously issued
financial statements is not permitted. This statement does not affect the
Company.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29." The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged and provided an exception to the basic measurement
principle (fair value) for exchanges of similar productive assets. That
exception required that some nonmonetary exchanges, although commercially
substantive, be recorded on a carryover basis. This Statement eliminates the
exception to fair value for exchanges of similar productive assets and replaces
it with a general exception for exchange transactions that do not have
commercial substance--that is, transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. The provisions of
this Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005, applied prospectively. This statement
does not affect the Company.
F-21
NOTE 2 - SUBSIDIARIES
The Company's wholly-owned subsidiaries are as follows:
(1) Infornet Investment Limited (a Hong Kong corporation) ("Infornet
HK") is a telecommunication and management network company
providing financial resources and expertise in telecommunication
projects. This subsidiary was originally incorporated as Micro
Express Limited and was acquired at no cost. The name was
changed to Infornet Investment Limited on July 18, 1997.
(2) Infornet Investment Corp., (a Canadian corporation) ("Infornet
Canada") is engaged in a similar line of business as that of the
Company. The Company issued 5,000,000 shares of common stock to
acquire this subsidiary for a total value of $65, representing
organizational costs and filing fees.
(3) Xinbiz (HK) Limited (a Hong Kong corporation) ("Xinbiz Ltd.")
and Xinbiz Corp. (a British Virgin Islands corporation) ("Xinbiz
Corp."). Both subsidiaries were inactive during 2004 and 2003.
(4) Windsor Education Academy Inc., (a Canadian Corporation)
("Windsor") is engaged in providing English as a secondary
language ("ESL") training program to foreign students.
(5) Beijing Quicknet Telecommunication Corporation (a People's
Republic of China ("PRC") corporation) ("Quicknet"). Quicknet is
engaged in the development of software for mobile/wireless
communication, in particular, that for Short Message Services
("SMS") (See Note 3).
NOTE 3 - ACQUISITION OF QUICKNET
On June 23, 2004, the Company completed the acquisition of a 49% equity interest
from the shareholders of a short message system ("SMS") provider, Beijing
Quicknet Telecommunication Corp. Ltd. ("Quicknet"), located in Beijing, China,
through the issuance 6,120,000 at a deemed price of $0.50 per share (2,040,000
post-reverse split at a market price of $0.27 per share for a total of $550,800)
shares of common stock of the Company. Due to the restrictions on foreign
ownership of telecommunication companies in China, 2% of the equity interest of
Quicknet is held by the management of Quicknet with Chinese citizenship and this
2% interest will be transferred back to the Company when the China government
removes the restrictions. The Company has gained 51% control of QuickNet through
a voting arrangement. The Company has an option to acquire the remaining 49%
equity interest in Quicknet within the first year from the closing date for
$4,000,000. The Company has another option to acquire this remaining 49% equity
interest in Quicknet within the second year from the closing date for
$5,000,000. As a general rule, the Company can pay these amounts by 50% in
shares of the common stock of the Company and 50% in cash. The final percentage
of shares versus cash can be negotiated between both parties.
Quicknet's financial information is incorporated into the consolidation of the
Company effective June 30, 2004, as the transactions that occurred between the
period from June 23, 2004 to June 30, 2004 were immaterial.
The value assigned to assets and liabilities acquired can be summarized as
follows:
Cash and short term investments $ 1,477,355
Accounts receivables 90,560
Prepaid expenses 10,998
Fixed assets, net 14,930
Goodwill 846,782
Accounts payables and accrued liabilities (275,130)
Unearned revenue (1,614,695)
------------
Fair value of consideration issued - 2,040,000 common shares @ $0.27 per share $ 550,800
============
The following pro forma information is based on the assumption that the
acquisition took place as of beginning of the period (January 1, 2004), with
comparative information for the immediately preceding period as though the
acquisition had been completed at the beginning of that period:
F-22
2004 2003
------------ ----------
Net sales $ 3,191,010 $ 502,035
============ ==========
Net income (loss) $ 3,258,277 $ (594,293)
============ ==========
Basic and diluted earnings (loss) per share $ 0.22 $ (0.04)
============ ==========
NOTE 4 - INVESTMENT IN THE LINK GROUP, INC. ("LINK")
Pursuant to a Share Exchange Agreement dated December 20, 2001, the Company paid
$200,000 cash for 3,882,700 shares of The Link Group, Inc. ("Link").
Pursuant to a Subscription Agreement dated January 18, 2002, the Company paid
$600,300 in a private placement of Link for 14,500,000 (pre-reverse one for four
split) common shares at $0.0414 per share, as well as 10,875,000 special
warrants convertible into 10,875,000 post-reverse one for four split common
shares on or before January 31, 2004 at no additional consideration. The Company
exercised the 10,875,000 special warrants on March 12, 2002. An option to
purchase an additional 7,500,000 post-reverse one for four split common shares
at $0.04 per share, or $300,000, until February 15, 2002, was also granted to
the Company, which was not exercised.
By an agreement dated January 21, 2002, Link agreed to purchase all of the
outstanding shares of Protectserve Pacific Ltd. ("PSP") through the issuance of
37,500,000 (post-reverse one for four split) common shares. Link has the right
to buy back its shares at $0.001 per share from these individuals if PSP's after
tax profit is less than Hong Kong $9 million dollars ("HKD") for the twelve
months ending December 31, 2002. The buy back formula is for every HKD $333,333
that PSP falls short of the HKD $9 million after tax profit, Link can buy back
one million (post-reverse one for four split) common shares from these
individuals.
On February 18, 2002, the shareholders of Link approved the reverse split of the
issued and outstanding common shares of Link at the ratio of one for four,
thereby making the Company's total Link shares held equal to 15,370,675 shares,
representing 28.8% of the total issued and outstanding shares of Link. On
October 14, 2002, Link cancelled 8,300,000 outstanding common shares as part of
the consideration of the disposition of its subsidiary company and thereafter
the Company's holding in Link correspondingly increases to 34.1%. On March 28,
2003, Link issued 3,000,000 common shares and cancelled 14,000,000 common shares
and thereafter the Company's holding in Link correspondingly changed to 24.8%.
On August 5, 2003, Link cancelled 22,200,000 shares pursuant to a repurchase
agreement and thereafter the Company's holding in Link correspondingly increased
to 38.6%. On October 17, 2003, Link issued 36,000,000 shares for the acquisition
of New Unicorn Holdings Ltd. and thereafter the Company's holding in Link
correspondingly decreased to 20.26%.
The Company accounts for its investment in Link on the equity basis, which is
carried at cost, adjusted for the Company's proportionate share of their
undistributed earnings or losses. As of December 31, 2004, the investee
company's financial statements were not sufficiently timely for the Company to
apply the equity method currently and Link's shares were ceased trading over
nine months. Therefore, the Management of the Company recorded an impairment of
$172,250 on these shares and left a nominal value of $1 for this investment to
Link.
2004 2003
---------- ----------
Original cost of 15,370,675 shares of The Link Group, Inc. $ 800,300 $ 800,300
Equity in undistributed earnings of investee company (628,049) (628,049)
---------- ----------
Investment - at equity 172,251 $ 172,251
==========
Impairment on marketable securities (172,250)
----------
$ 1
==========
F-23
NOTE 5 - PROPERTY AND EQUIPMENT
December 31,
--------------------
2004 2003
Equipment $ 24,832 $ 24,832
Library 9,554 9,554
Furniture 9,975 9,975
--------- ---------
Total 44,361 44,361
Less : Accumlated depreciation (37,812) (34,491)
--------- ---------
Net book value $ 6,549 $ 9,870
========= =========
Depreciation charged to continuing operations amounted to $2,071 for 2004 and
$7,394 for 2003. Depreciation included in discontinued operations amounted to
$397 for 2003 and $746 for 2003.
NOTE 6 - DISCONTINUED OPERATIONS - INTERNET-RELATED SERVICES
On February 26, 2003, the Company entered into an agreement to sell the
internet-related services provided in China to a subsidiary company of
Sino-i.com Ltd., the latter a company listed on the Hong Kong Stock Exchange,
for total consideration of RMB 20 million (approximately US$2,415,800). The
transaction is subject to shareholders approval. Pursuant to Florida law, the
Company was required to obtain shareholder approval for the sale of all or
substantially all of the assets for a Florida corporation. However, if the
assets do not represent all or substantially all of the business, the Board of
directors can approve it without shareholder approval, which it did by written
consent. Because there has been no operations or cash flows consolidated in the
financial statements since 2001, the Company has eliminated this component from
its ongoing operations and it does not have any significant continuing
involvement in the operations of the component.
The gain on disposal of the internet-related business, together with the related
assets and liabilities disposed of, is as follows:
Sales proceeds $ 2,415,800
Less : Current assets (1,992,665)
Capital assets (442,820)
Current liabilities 3,338,783
-----------
Gain on disposal of internet-related business $ 3,319,098
===========
The results of the discontinued internet-related services for year 2004 and 2003
are as follows:
2004 2003
Revenue $ - $ 2,372,554
Operating costs - (2,695,541)
------- -----------
Net profit (loss) $ - $ (322,987)
======= ============
F-24
NOTE 7 - DISPOSAL OF DAWA BUSINESS GROUP INC. ("DAWA")
On June 30, 2004, the Company entered into a Share Exchange Agreement (the "2004
Share Exchange Agreement") with Windsor Education Academy Inc. ("Windsor"), Dawa
Business Group Inc. ("Dawa") and 1041571 B.C. Ltd. ("1041571") whereby the
Company exchanged 102 shares, or 51%, of the issued and outstanding common stock
of Dawa to 1041571 in consideration for 98 shares, or 49%, of the issued and
outstanding common stock of Windsor.
The Company first acquired the 102 shares of common stock of Dawa pursuant to a
prior Share Exchange Agreement, dated July 3, 2003, (the "2003 Share Exchange
Agreement") between the Company, Windsor, Dawa and 1041571 whereby the Company
exchanged 98 shares, or 49%, of the issued and outstanding common stock of
Windsor to 1041571 in consideration for 102 shares, or 51%, of the issued and
outstanding common stock of Dawa. Prior to the 2003 Share Exchange Agreement,
Windsor was a wholly owned subsidiary of the Company.
At the close of the 2004 Share Exchange Agreement, the Company became the
beneficial owner of all of the issued and outstanding stock of Windsor and the
Company ceased to own any of the common stock of Dawa. The 2004 Share Exchange
Agreement did not involve any cash consideration.
The loss on disposal of Dawa, together with the related assets and liabilities
disposed of, is as follows:
Sales proceeds $ 26,862
Less : Current assets (61,987)
Fixed assets (1,617)
Goodwill (60,312)
Other assets (145)
Current liabilities 55,907
---------
Loss on disposal of Dawa $ (41,292)
=========
The result of Dawa operations for the six months ended June 30, 2004 and the pro
forma results of operations for the six months ended June 30, 2003, which are
shown for comparison purposes assuming the Company acquired Dawa as of January
1, 2003, are as follows:
2004 2003
-------- --------
Revenue $ 213,205 $ 149,338
Operating costs (213,567) (146,149)
---------- ----------
Net profit (loss) $ (362) $ 3,189
========== ==========
NOTE 8 - INCOME TAXES
There are no current or deferred tax expenses for the years ended December 31,
2004 and 2003, due to the Company's loss position. The Company has fully
reserved for any benefits of these losses. The deferred tax consequences of
temporary differences in reporting items for financial statement and income tax
purposes are recognized, as appropriate. Realization of the future tax benefits
related to the deferred tax assets is dependent on many factors, including the
Company's ability to generate taxable income within the net operating loss
carryforward period. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes. The
income tax effect of temporary differences comprising the deferred tax assets
and deferred tax liabilities on the accompanying consolidated balance sheets is
a result of the following:
2004 2003
---------- ----------
Deferred tax assets $ 512,349 $ 424,366
Valuation allowance $ (512,349) (424,366)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
F-25
The net change in the valuation allowance are principally the result of net
operating loss carryforwards. The Company has available net operating loss
carryforwards of approximately $1,506,909 for tax purposes to offset future
taxable income, which expire through 2024. All of the net operating loss
carryforwards were generated by the parent company. The Company does not file a
consolidated tax return because all of its subsidiaries are foreign
corporations. Pursuant to the Tax Reform Act of 1986, annual utilization of the
Company's net operating loss carryforwards may be limited if a cumulative change
in ownership of more than 50% is deemed to occur within any three-year period.
A reconciliation between the statutory federal income tax rate and the effective
income rate of income tax expense for the years ended December 31, 2004 and 2003
is as follows:
2004 2003
----- -----
Statutory federal income tax rate -34.0% -34.0%
Valuation allowance 34.0% 34.0%
----- -----
Effective income tax rate 0.0% 0.0%
===== =====
NOTE 9 - SEGMENTS AND GEOGRAPHIC DATA
The Company's reportable segments are geographic areas and two operating
segments, the latter comprised of mobile communication and ESL education.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes corporate related
items, and, as it relates to segment profit (loss), income and expense not
allocated to reportable segments.
A. BY GEOGRAPHIC AREAS CHINA CANADA OTHER TOTAL
----------- ----------- ---------- -----------
FOR THE YEAR ENDED DECEMBER 31, 2004
------------------------------------
Revenue from continuing operations $ 1,871,960 $ 298,806 $ - $ 2,170,766
Operating profit (loss) 55,906 (22,060) (276,062) (242,216)
Total assets 6,362,416 75,925 8,689 6,447,030
Depreciation - 1,906 165 2,071
Interest income 82,588 14 - 82,602
Gain from discontinued operations 3,277,444 - - 3,277,444
Equity loss in undistributed earnings of investee company - - (81,273) (81,273)
Investment in equity method investee - - 1 1
FOR THE YEAR ENDED DECEMBER 31, 2003
-------------------------------------
Revenue from continuing operations $ - $ 280,723 $ - $ 280,723
Operating profit (loss) (2,395) (110,325) (77,990) (190,710)
Total assets 5,675,109 151,474 494,029 6,320,612
Depreciation - 6,680 714 7,394
Interest income 15,049 12 5 15,066
Loss from discontinued operations (106,281) - - (106,281)
Equity loss in undistributed earnings of investee company - - (66,076) (66,076)
Investment in equity method investee - - 253,524 253,524
F-26
B. BY OPERATING SEGMENTS Mobile ESL
communications education Other Total
-------------- --------- --------- -----------
FOR THE YEAR ENDED DECEMBER 31, 2004
--------------------------------------
Revenue from external customers $ 1,871,960 $ 298,806 $ - $ 2,170,766
Intersegment revenue - - - -
Interest revenue 82,588 14 - 82,602
Interest expense - - 69 69
Depreciation - 1,710 361 2,071
Segment operation profit (loss) 57,964 (11,230) (288,950) (242,216)
Segment assets 6,351,943 73,823 21,264 6,447,030
FOR THE YEAR ENDED DECEMBER 31, 2003
--------------------------------------
Revenue from external customers $ - $ 280,723 $ - $ 280,723
Intersegment revenue - - - -
Interest revenue - 12 15,054 15,066
Interest expense - - 6,565 6,565
Depreciation - 6,451 943 7,394
Segment operation profit (loss) - (63,208) (127,502) (190,710)
Segment assets - 46,439 6,274,173 6,320,612
NOTE 10 - COMMON STOCK, STOCK OPTIONS AND WARRANTS
Common Stock
On June 24, 2004, the Company carried out a 3 for 1 reverse stock-split. Figures
of prior periods have been retroactively restated to reflect the effect of the
reverse stock-split.
Stock Options
The Company granted 2,136,000 incentive stock options on November 12, 1999 to
certain directors, officers, employees and consultants of the Company who
contributed services to the Company. These stock options were expired on
November 12, 2004. On July 23, 2004, the Company granted incentive stock options
for 1,155,000 shares at a price of $0.30 per share exercisable up to August 1,
2007, to five directors. All the options were vested immediately. (See Note 12)
Options outstanding at December 31, 2004 were 1,155,000 with option price of
$0.30. No options were canceled, forfeited, or exercised during 2004. 2,136,000
stock options with an exercise price of $1.30 were expired during the year. The
weighted average exercise price of the options outstanding and exercisable is
$0.30 and the weighted average remaining contractual life is 2.6 years.
Warrants
On April 1, 2003, the Company extended its outstanding 5,884,990 (1,961,663
post-reverse split) Series "A" Share Purchase Warrants as follows:
(i) the exercise price of the Series "A" Share Purchase Warrants is adjusted to
$0.50 ($1.50 post-reverse split) each and their term is extended to March
31, 2005: (Subsequently expired)
(ii) upon exercise of one Series "A" Share Purchase Warrants at $0.50 ($1.50
post-reverse split), the holder will receive one common share of the
company and one Series "B" Share Purchase Warrant; and
(iii)the exercise price of the Series "B" Share Purchase Warrants isadjusted to
$0.75 ($2.25 post-reverse split) each and their term is extended to March
31, 2006;
(iv) upon exercise of one Series "B" Share Purchase Warrant at $0.75 ($2.25
post-reverse split), the holder will receive one common share of the
Company.
As of December 31, 2004, there were 5,884,990 and 10 Series "A" and Series "B"
warrants outstanding respectively.
F-27
NOTE 11 - COMMITMENTS
Operating leases - The Company leases office space under various operating
leases expiring through May 2005. Total rent expense charged to operations
during 2004 and 2003 was $155,734 and $74,196, respectively. Future minimum
rental commitments are (approximately) as follows: (2005: $123,624)
NOTE 12 - RELATED PARTY TRANSACTIONS
Options - The Company's five directors were granted 1,155,000 options to
purchase shares at $0.30. All of the options are outstanding as of December 31,
2004.
Warrants - Richco Investors Inc. has 1,085,000 "A" warrants to purchase shares
of common stock and has 1,085,000 "B" warrants to purchase shares of common
stock. The Company's former President has 80,000 "A" warrants to purchase shares
of common stock and has 80,000 "B" warrants to purchase shares of common stock.
Another entity controlled by one of the directors of this Company has 190,000
"A" warrants and 190,000 "B" warrants. All of the warrants are outstanding as of
December 31, 2004, and subsequently expired (see Note 10).
F-28
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The following statutes and by-law provisions are the only statutes,
charter provisions, by-laws, contracts or other arrangements known to the
Registrant that insure or indemnify a controlling person, director or officer of
the registrant in any manner against liability which he or she may incur in his
or her capacity as such.
Article V of the Registrant's Amended Articles of Incorporation
provides that: the directors shall be protected from personal liability to the
fullest extent permitted by law.
Article VII of the Registrant's by-laws provides that:
Section 1. Right to Indemnification. The Corporation hereby indemnifies each
person (including the heirs, executors, administrators, or estate of such
person) who is or was a director or officer of the Corporation to the fullest
extent permitted or authorized by current or future legislation or judicial or
administrative decision against all fines, liabilities, costs and expenses,
including attorneys' fees, arising out of his or her status as a director,
officer, agent, employee or representative. The foregoing right of
indemnification shall not be exclusive of other rights to which those seeking an
indemnification may be entitled. The Corporation may maintain insurance, at its
expense, to protect itself and all officers and directors against fines,
liabilities, costs and expenses, whether or not the Corporation would have the
legal power to indemnify them directly against such liability.
Section 2. Advances. Costs, charges and expenses (including attorneys' fees)
incurred by a person referred to in Section 1 of this Article in defending a
civil or criminal proceeding shall be paid by the Corporation in advance of the
final disposition thereof upon receipt of an undertaking to repay all amounts
advanced if it is ultimately determined that the person is not entitled to be
indemnified by the Corporation as authorized by this Article, and upon
satisfaction of other conditions required by current or future legislation.
Section 3. Savings Clause. If this Article or any portion of it is invalidated
on any ground by a court of competent jurisdiction, the Corporation nevertheless
indemnifies each person described in Section 1 of this Article to the fullest
extent permitted by all portions of this Article that have not been invalidated
and to the fullest extent permitted by law.
Florida General Corporation Law, Section 607.0850 provides that:
(1) A corporation shall have power to indemnify any person who was or is a party
to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise against
liability incurred in connection with such proceeding, including any appeal
thereof, if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any proceeding by
judgment, order, settlement, or conviction or upon a plea of nolo contendere or
its equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation or, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
(2) A corporation shall have power to indemnify any person, who was or is a
party to any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding to
conclusion, actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable unless, and only to the extent
that, the court in which such proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
II-1
(3) To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits or otherwise in defense of any proceeding
referred to in subsection (1) or subsection (2), or in defense of any claim,
issue, or matter therein, he or she shall be indemnified against expenses
actually and reasonably incurred by him or her in connection therewith.
(4) Any indemnification under subsection (1) or subsection (2), unless pursuant
to a determination by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee, or agent is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in subsection (1) or
subsection (2). Such determination shall be made:
(a) By the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such proceeding;
(b) If such a quorum is not obtainable or, even if obtainable, by majority vote
of a committee duly designated by the board of directors (in which directors who
are parties may participate) consisting solely of two or more directors not at
the time parties to the proceeding;
(c) By independent legal counsel:
1. Selected by the board of directors prescribed in paragraph (a) or the
committee prescribed in paragraph (b); or
2. If a quorum of the directors cannot be obtained for paragraph (a) and the
committee cannot be designated under paragraph (b), selected by majority vote of
the full board of directors (in which directors who are parties may
participate); or
(d) By the shareholders by a majority vote of a quorum consisting of
shareholders who were not parties to such proceeding or, if no such quorum is
obtainable, by a majority vote of shareholders who were not parties to such
proceeding.
(5) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of permissibility
is made by independent legal counsel, persons specified by paragraph (4)(c)
shall evaluate the reasonableness of expenses and may authorize indemnification.
(6) Expenses incurred by an officer or director in defending a civil or criminal
proceeding may be paid by the corporation in advance of the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if he or she is ultimately found not to be
entitled to indemnification by the corporation pursuant to this section.
Expenses incurred by other employees and agents may be paid in advance upon such
terms or conditions that the board of directors deems appropriate.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
SEC registration fee........................................ $ 2,475.11
NASD registration fee....................................... $ 2,602.90
Printing expenses........................................... $15,000.00
Legal fees.................................................. $25,000.00
Accounting fees............................................. $ 2,500.00
Miscellaneous............................................... $ 421.99
-----------
Total....................................................... $48,000.00
----------
* Estimated
II-2
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Except as described herein, there were no other sales of unregistered
securities during the last three years.
On September 2, 2005, the Company issued 3,090,000 shares of the
Company's common stock, $0.001 par value per share, (the "Shares"), to nine
employees, including Yanli Jia, Aixiang Li, Jing Li, Xiao Liu, Kun Wang, Kun
Wei, Sheung Wai Yim, Fan Zhang, and Yongfu Zhu, upon exercise of the options
granted pursuant to the 2005 Stock Option Plan. These Shares were subsequently
registered on a Form S-8 Registration Statement filed by the Company on October
12, 2005.
As of August 15, 2005, we sold 134 Units or 28,714,458 shares of the
Company's Common Stock, par value $0.001 (the "Shares") and raised $3,350,000 in
a private placement of our securities on a "best efforts - all or none basis."
We received net proceeds of approximately $2,866,000, after deducting fees
payable to the placement agent and expenses of the Offering. These fees included
a 10% sales commission equal to $335,000, a 3% non-accountable expense allowance
of $100,500 (less $25,000 that was already paid as a non-refundable advance), as
well as other transaction and legal expenses. The Shares were purchased solely
by accredited institutional and individual investors without registration under
the Securities Act, or state securities laws, in reliance on the exemptions
provided by Sections 4(2) and 4(6) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder and in reliance on similar exemptions under
applicable state laws.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation, as amended(1)
3.2 Amended By-Laws(2)
4.1 Form of Debenture(3)
4.2 Form of Class A Warrant(3)
4.3 Form of Class B Warrant(3)
4.4 2005 Stock Option Plan (4)
4.5 Form of Stock Option Agreement (4)
*5.1 Opinion of Michael A. Littman, Esq.
5.2 Opinion of Stone, Rosenblatt & CHA (4)
10.1 Debenture Purchase and Warrant Agreement(3)
10.2 Business Plan(5)
10.3 Share Exchange Agreement(6)
10.4 Assets Transfer Agreement(7)
10.5 Option Written Notice(8)
10.6 Legal Letter(8)
10.7 Share Purchase Agreement, as amended(8)
21.1 Subsidiaries(9)
*23.1 Consent of Robinson & Cole LLP.
*23.2 Consent of Michael A. Littman, Esq. (included in Exhibit 5.1)
*23.3 Consent of Moen & Company.
* filed with this amendment to this Registration Statement
II-3
(1) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed August 26, 2005, file #000-26559.
(2) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed August 13, 2001, file #000-26559.
(3) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed on August 18, 2005, file #000-26559.
(4) Incorporated herein by reference from Exhibit to Registration Statement on
Form S-8 filed on May 5, 2005, file #000-26559.
(5) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed on June 30, 2005, file #000-26559.
(6) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed on October 4, 2001, file #000-26559.
(7) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed on July 12, 2001, file #000-26559.
(8) Incorporated herein by reference from Exhibit to Current Report on Form 8-K
filed on August 5, 2005, file #000-26559.
(9) Incorporated herein by reference from Exhibit to Annual Report on Form
10-KSB filed on May 5, 2005, file #000-26559.
II-4
ITEM 28. UNDERTAKINGS.
The registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement;
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
Director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Act as part of this registration statement as of the time the
Commission declared it effective.
(6) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Amendment No. 1 to its
registration statement to be signed on its behalf by the undersigned, in
Vancouver, British Columbia, Canada on November 14, 2005.
CHINA MOBILITY SOLUTIONS, INC.
By: /s/ Angela Du
--------------------------------------
Angela Du, Chief Executive Officer
In accordance with the requirements of the Securities Act, this registration
statement was signed by the following persons in the capacities and on the dates
stated.
Signature Title Date
--------- ----- ----
/s/ Angela Du
------------------------------------ Chairman of the Board and Chief Executive November 14, 2005
Angela Du Officer (Principal Executive Officer and
Principal Accounting Officer)
/s/ Ernest Cheung
------------------------------------ Secretary, Director (Principal Financial Officer) November 14, 2005
Ernest Cheung
/s/ Greg Ye
------------------------------------ Director November 14, 2005
Greg Ye
II-6
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
5.1 Opinion of Michael A. Littman, Esq.
23.1 Consent of Robinson & Cole LLP
23.2 Consent of Michael A. Littman, Esq.
(included in Exhibit 5.1)
23.3 Consent of Moen & Company.
II-7