SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K12g3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report: May 28, 2004
XIN NET CORP.
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(Exact name of registrant as specified in its charter)
Florida 0-26559 330-751560
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
Suite 900, 789 West Pender Street, Vancouver, B.C. Canada V6C 1H2
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(New address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 632-9638
Item 1. Changes in Control of Registrant
None.
Item 2. Acquisition or Disposition of Assets
The Company has closed on the Definitive Agreement to acquire 51% of a
SMS provider in China, Beijing Quicknet Telecommunications Corp. Ltd. (Beijing
Quicknet), from non-affiliates.
Xin Net Corp. announced in February 2004 that it had entered into an
acquisition agreement with the shareholders of QuickNet Telecommunication Corp.
("QuickNet"), an enterprise mobile services provider based in Beijing, China.
Under the terms of the acquisition, Xin Net Corp. has issued 6,120,000
shares at a deemed price of US$0.50 per share to the shareholders of QuickNet,
in exchange for 49% of the issued and outstanding shares of QuickNet. In addi-
tion, Xin Net entered into an Agreement with the owners of 2% of Beijing
QuickNet who manage and run Beijing QuickNet to acquire their shares. Xin Net
Corp. also retains an option to acquire the remaining 49% of the QuickNet shares
for US$4 million in cash and/or shares within the first year after the closing
date of the acquisition, or for US$5 million in cash and/or shares within the
second year after the closing date of the acquisition.
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.
Management's view is that being an "early bird" provider of mobile
services to enterprises offers more growth potential than if QuickNet targeted
the highly competitive individual consumer segment.
QuickNet's first application "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 a enabling spontaneous, direct, interactive,
and/or targeted communications, any time, any place to a mobile device user.
Mobile marketing can be used in a 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
China has many millions of mobile phone users. Up to one billion Short
Messages are sent every day.
The Company may conduct R&D on various mobile applications for
enterprises in China and intends to expand revenue and client base by several
sales approaches which might include recruiting sales agents, setting up
branches in major cities, co-marketing with major carriers, increased in-house
sales force, marketing campaigns nationwide, and co-branding with industry
leaders to more corporate clients in various industries.
Item 3. Bankruptcy or Receivership
None.
Item 4. Changes in Registrant's Certifying Accountant
None.
Item 5. Other Events and Regulation FD Disclosure
None.
Item 6. Resignations of Registrant's Directors
None
Item 7. Financial Statements & Exhibits
Financial Statements - Beijing Quicknet Telecommunication
Corporation for period June 5, 2003
through December 31, 2003
Pro Forma Financial Statements haven't
been completed. An amended 8-K will be
filed when they are available.
Exhibits: 10 Acquisition Agreement (previously filed, see
8-K dated February 17, 2004)
10.1 Amendment to the Share Purchase Agreement
(previously filed, see 8-K dated February 19,
2004)
Item 8. Change in Fiscal Year
None.
Item 9. Regulation FD Disclosure
None.
Item 10. Amendments to the Registrant's Code of Ethics, or Waiver of a
Provision of the Code of Ethics
None.
Item 11. Temporary Suspension of Trading Under Registrant's Employee
Benefit Plans
None.
Item 12. Results of Operations and Financial Condition
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 3, 2004
XIN NET CORP.
By: /s/ Xiao-qing Du
--------------------------------
Xiao-qing Du, President
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
Index to the Financial Statements
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Independent Auditors' Report...................................... F-1
Balance Sheet .................................................... F-2
Statement of Operations........................................... F-3
Statement of Changes in Stockholders' Deficiency.................. F-4
Statement of Cash Flows........................................... F-5
Notes to Financial Statements..................................... F-6 - F-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Beijing Quicknet Telecommunication Corporation
We have audited the accompanying balance sheet of Beijing Quicknet
Telecommunication Corporation, a People's Republic of China limited liability
company, (the "Company") as of December 31, 2003, and the related statements of
operations, changes in stockholders' deficiency, and cash flows for period from
June 5, 2003 (date of inception) to December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
2003, and the results of its operations and its cash flows for the period
indicated in conformity with generally accepted accounting principles in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant operating losses
during its first year of business resulting in an accumulated deficit, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding the matters that raise substantial doubt about the
Company's ability to continue as a going concern are also disclosed in Note 2 to
the financial statements. The ability to meet its future financing requirements
and the success of future operations cannot be determined at this time. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Clancy and Co., P.L.L.C.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
April 23, 2004
F-1
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
BALANCE SHEET
DECEMBER 31, 2003
(stated in U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents $ 678,641
Accounts receivable 46,829
Prepaid expenses 8,521
Rental deposits 11,011
Amount due from a director (Note 3) 7,079
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Total current assets 752,081
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Total Assets $ 752,081
==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued liabilities $ 152,989
Deferred revenue 955,726
Sales tax payable 10,916
Amount due to a director (Note 3) 60,500
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Total Current Liabilities 1,180,131
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Commitments and Contingencies (Note 5)
Stockholders' deficiency
Share capital: authorized and registered capital of $121,000 121,000
Accumulated deficit (549,050)
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Total stockholders' deficiency (428,050)
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Total Liabilities and Stockholders' Deficiency $ 752,081
==================
The accompanying notes are an integral part of these financial statements.
F-2
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 5, 2003 TO DECMEBER 31, 2003
(stated in U.S. Dollars)
Revenues $ 221,312
Costs of revenues 250,926
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Gross margin (29,614)
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Operating expenses
Advertising and promotion 128,260
Building management fee 6,195
Rental expenses 80,592
Salaries and welfare 286,549
Other operating expenses 18,258
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Total operating expenses 519,854
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Loss from operations (549,468)
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Other income 418
Provision for income taxes (Note 4) -
-----------------
Net loss $ (549,050)
=================
The accompanying notes are an integral part of these financial statements.
F-3
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE PERIOD FROM JUNE 5, 2003 TO DECEMBER 31, 2003
(stated in U.S. Dollars)
Share Accumulated
Capital Deficit Total
----------------------------------------
Issue of share capital $ 121,000 - $ 121,000
Loss for the period from June 5, 2003
to December 31, 2003 - (549,050) (549,050)
----------------------------------------
Balance, December 31, 2003 $ 121,000 $ (549,050) $ (428,050)
========================================
The accompanying notes are an integral part of these financial statements.
F-4
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 5, 2003 TO DECEMBER 31, 2003
(stated in U.S. Dollars)
Cash flows from operating activities
Net loss $ (549,050)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Changes in assets and liabilities
(Increase) decrease in accounts receivable (46,829)
(Increase) decrease in prepaid expenses (8,521)
(Increase) decrease in security deposits (11,011)
Increase (decrease) in accounts payable and accrued liabilities 152,989
Increase (decrease) in sales tax payable 10,916
Increase (decrease) in deferred revenue 955,726
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Net cash flows provided by operating activities 504,220
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Cash flows from investing activities -
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Cash flows from financing activities
------------------------------------
Proceeds from issuance of share capital 121,000
Amount due from a director (7,079)
Amount due to a director 60,500
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Net cash flows provided by financing activities 174,421
------------------
Increase in cash and cash equivalents 678,641
Cash and cash equivalents, beginning of period -
------------------
------------------
Cash and cash equivalents, end of period $ 678,641
==================
Cash paid for interest and income taxes -
The accompanying notes are an integral part of these financial statements.
F-5
BEIJING QUICKNET TELECOMMUNICATION CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1-DESCRIPTION OF BUSINESS / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Description of Business
Beijing Quicknet Telecommunication Corporation was incorporated on June 5, 2003,
in Beijing, the People's Republic of China ("PRC") as a limited liability
company with an authorized and paid up capital of $121,000 (RMB 1,000,000)
bearing registration number 1102272573948 (1-1). The Company is licensed to
carry on business in the areas of scientific and technological development;
technical transfer; technical training; technical consultancy (excluding agency
work); trading in textile goods, clothing, building material, decoration
material, hardware, electrical equipment, food packaging, computer hardware,
software and ancillary equipment and telecommunications equipment (excluding
satellite launching and retrieval equipment). The Company's license expires on
June 4, 2023. The Company is further licensed by the Beijing Tele-Communication
Authority to carry on business in the area of Value-Added Telecommunication
Business for the period from August 19, 2003 to August 18, 2008.
The Company currently develops software for mobile/wireless communication, in
particular, that for Short Message Services.
Summary of Significant Accounting Policies
Accounting method - The Company's financial statements have been prepared using
the accrual method of accounting.
Use of estimates - The preparation of financial statements in conformity with
U.S. 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. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management.
Actual results could differ from those estimates.
Foreign currency translations - The functional currency of the Company's
operations is Chinese Renminbi and the reporting currency is U.S. dollars. The
assets and liabilities of the Company are translated into U.S. dollars at
current exchange rates, and revenues and expenses are translated at average
exchange rates for the period presented. Resulting 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.
Cash and cash equivalents - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Concentration of credit risk - The Company maintains cash balances in banks of
the PRC that are not insured. The Company's sales are derived from the
geographic market of the PRC. Approximately 97% of the Company's revenues are
derived from two customers.
Revenue recognition - Service revenue mainly includes wireless short messaging.
Revenue is recognized over the contract period for which the service is being
performed, provided that no significant obligations remain and collection of the
receivables is reasonably assured.
F-6
Allowance for doubtful accounts- The Company presents accounts receivable, net
of allowances for doubtful accounts, to ensure accounts receivable are not
overstated due to uncollectibility. The allowances are calculated based on
detailed review of certain individual customer accounts, historical rates and an
estimation of the overall economic conditions affecting the Company's customer
base. The Company reviews a customer's credit history before extending credit.
If the financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. These financial statements do not include any allowance for doubtful
accounts.
Cost recognition - Cost of service includes direct costs to produce products and
provide services. Telecommunication costs have note been accrued as such costs
have so far been waived by the telecommunication operator.
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 period presented were approximately
$250,000.
Advertising costs - Advertising costs are expensed as incurred and amounted to
$128,260.
Income taxes - The Company accounts for income taxes under the liability method
determined based on the difference between the financial statements and tax
bases of assets and liabilities, using enacted tax rates in effect for the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary, to reduce deferred income tax assets to the amount
expected to be realized.
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.
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 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'
deficiency.
Fair value of financial instruments - For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, prepaid
expenses, rental deposits, amounts due from/to directors, accounts payable and
accrued liabilities, and deferred revenue, the carrying amounts approximate fair
value due to their short maturities.
Recent accounting pronouncements - The Financial Accounting Standards Board
issued the following new accounting pronouncements during 2003:
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 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. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. FIN 46 does not have any impact on the financial position or results of
operations of the Company.
F-7
In April 2003, the FASB issued SFAS No. 149, "Accounting for Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is generally effective for
contracts entered into or modified after June 30, 2003, and all provisions
should be applied prospectively. This statement does not affect the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. This statement does
not affect the Company.
NOTE 2 - GOING CONCERN
----------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained operating losses
in its first year of business resulting in an accumulated deficit. In view of
these matters, realization of a major portion of the assets in the accompanying
balance sheet is dependent upon the continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements, and the success of its future operations.
To meet these objectives, the Company plans to seek additional equity and
expects to raise funds through private or public equity investment in order to
support existing operations and expand the range and scope of its business.
There is no assurance that such additional funds will be available for the
Company on acceptable terms, if at all. Management believes that actions
presently taken to revise the Company's operating and financial requirements
provide the opportunity for the Company to continue as a going concern. The
Company's ability to achieve these objectives cannot be determined at this time
NOTE 3 - RELATED PARTY TRANSACTIONS
-----------------------------------
The amounts due from / to a director are unsecured, non-interest bearing and
with no fixed terms of repayment.
NOTE 4 - INCOME TAXES
---------------------
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 provision of PRC income tax is calculated based on the statutory rate of 33%
in accordance with the relevant PRC income tax rules and regulations for the
period presented. A full valuation allowance has been made against the Company's
deferred tax asset because it is not expected to be realized in the foreseeable
future.
The difference between income taxes at statutory rates and the amount presented
in the financial statements is a result of the following:
F-9
Income tax benefit at statutory rate $ (181,000)
Change in the valuation allowance
181,000
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Net deferred tax asset $ -
=================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
Operating leases
The Company leases office space and equipment under various noncancelable
operating leases, which expire through 2004. Rent expense charged to operations
was $80,592. Future minimum rental commitments under noncancelable leases for
2004 are approximately $95,000.
NOTE 6 - SUBSEQUENT EVENTS
--------------------------
In February 2004, the Company entered into a definitive agreement with Xin Net
Corp., a U.S. public company that trades on the over-the-counter bulletin board,
headquartered in Vancouver, B.C., to acquire a 51% equity interest from the
shareholders of the Company for a price of $3,060,000 in the form of issuing
6,120,000 shares of common stock of Xin Net Corp. at a deemed price of $0.50 per
share. In order to comply with current Chinese law, Xin Net Corp. will acquire
49% immediately upon closing and will retain the right to acquire the remaining
2% as soon as it is able to obtain Government approval or achieve a legal
structure (under Chinese law) which allows control of the 2% (thereby
aggregating 51%). Xin Net Corp. has an option to acquire the remaining 49%
equity interest in the Company within the first year from the closing date for
$4,000,000. Xin Net Corp. has another option to acquire the remaining 49% equity
interest in the Company within the second year from the closing date for
$5,000,000. As a general rule, Xin Net Corp. can pay these amounts by 50% in
shares of the common stock of Xin Net Corp. and 50% in cash. The final
percentage of shares versus cash can be negotiated between both parties. As of
the date of issuance of these financial statements, the transaction has not been
consummated.
F-9