Attached files
file | filename |
---|---|
EX-32.2 - TELESTONE TECHNOLOGIES CORP | v179295_ex32-2.htm |
EX-32.1 - TELESTONE TECHNOLOGIES CORP | v179295_ex32-1.htm |
EX-31.1 - TELESTONE TECHNOLOGIES CORP | v179295_ex31-1.htm |
EX-31.2 - TELESTONE TECHNOLOGIES CORP | v179295_ex31-2.htm |
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
fiscal year ended December 31, 2009
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
transition period from __________ to __________
COMMISSION
FILE NUMBER: 001-32503
TELESTONE
TECHNOLOGIES CORPORATION
(Name of
Small Business Issuer Specified in Its Charter)
Delaware
|
84-1111224
|
|
(State
of incorporation)
|
(IRS
Employer Identification Number)
|
Floor 6,
Saiou Plaza, No. 5 Haiying Road, Fengtai Technology
Park,
Beijing, China 100070
(Address
of principal executive offices) (Zip Code)
86-10-8367-0088
(Issuer's
telephone number, including area code)
Securities
registered under Section 12(b) of the Exchange Act:
Common
Stock, $.001 Par Value
|
The
Nasdaq Global Market
|
|
(Title
of Class)
|
(Name
of each exchange on which
registered)
|
Securities
registered under Section 12(g) of the Exchange
Act: none.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do
not check if a smaller
reporting
company)
|
Smaller
reporting
company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):
Yes ¨ No þ
The
aggregate market value of the 6,366,550 shares of voting and non-voting
common equity stock held by non-affiliates of the registrant was $ 25,338,869.00
as of June 30, 2009, the last business day of the registrant’s most recently
completed second fiscal quarter, based on the last sale price of the
registrant’s common stock on such date of $3.98 per share, as reported by The
NASDAQ Stock Market, Inc.
As
of March 29, 2010, there were 10,548,264 shares of common stock of
Telestone Technologies Corporation outstanding.
PART
I
|
3 | ||
ITEM
1. BUSINESS.
|
3 | ||
Corporate
History
|
3 | ||
Current
Business Operations
|
5 | ||
Our
Business Strategies
|
6 | ||
Competitive
Advantages
|
6 | ||
Description
of Products & Services
|
8 | ||
Research
& Development
|
9 | ||
Competition
|
9 | ||
Government
Regulation
|
9 | ||
Intellectual
Property and Proprietary Rights
|
10 | ||
ITEM
1A RISK FACTORS
|
11 | ||
ITEM
1B UNRESOLVED STAFF COMMENTS
|
|||
ITEM
2. PROPERTIES.
|
21 | ||
ITEM
3. LEGAL PROCEEDINGS
|
21 | ||
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
21 | ||
PART
II
|
21 | ||
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
|
21 | ||
ITEM
6 SELECTED FINANCIAL DATA
|
22 | ||
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION.
|
|||
AND
RESULTS OF OPERATION
|
22 | ||
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
29 | ||
|
|||
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
29 | ||
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
30 | ||
ITEM
9A. CONTROLS AND PROCEDURES.
|
30 | ||
ITEM
9B. OTHER INFORMATION.
|
32 | ||
PART
III
|
32 | ||
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
32 | ||
Indemnification
of Officers and Directors
|
|||
Involvement
in Certain Legal Proceedings
|
34 | ||
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
|
34 | ||
Meetings
and Certain Committees of the Board
|
35 | ||
Stockholder
Communications
|
36 | ||
Compensation
of Directors
|
36 | ||
ITEM
11. EXECUTIVE COMPENSATION.
|
36 | ||
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
37 | ||
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
38 | ||
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|
38 | ||
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
39 | ||
SIGNATURES
|
40 |
PART
I
ITEM
1. BUSINESS.
Corporate
History
Unless
otherwise indicated, or unless the context otherwise requires, all references in
this Annual Report to the terms "Company," "Telestone," "we," "our," or "us"
shall mean Telestone Technologies Corporation, a Delaware
corporation.
We were
organized under the laws of the State of Colorado in February 1987 under the
name Shield Enterprises, Inc.
On
January 3, 2002, we entered into an exchange agreement with EliteAgents Mortgage
Services, Inc. (formerly Elite Agents, Inc.) ("Elite"), a licensed mortgage
banker. As a result of the exchange, Elite became our wholly-owned subsidiary,
and we had 80,000,000 shares of common stock outstanding, of which 72,000,000
shares were owned by the former stockholders of Elite and 8,000,000 shares were
owned by our existing stockholders. Elite continued its mortgage banking
activities and other financial services subsequent to the exchange. In addition,
effective May 8, 2002, we formed a wholly-owned subsidiary, Elite Agents Leasing
Services, Inc. ("Leasing"), for the purpose of establishing equipment financing
and leasing operations.
On
September 26, 2003, we and Elite (the "Debtors") each filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the District of New Jersey (the “Court”) (Case Nos.
03-41805 and 03-41806). The two voluntary petitions of the Debtors were
consolidated for administrative purposes only on October 20, 2003. On December
30, 2003, the Bankruptcy Court authorized the Debtors to sell substantially all
of their assets.
On March
24, 2004, the Court authorized the Debtors to sell both designation rights for a
plan of reorganization and 25 million common shares, which were nondilutable
under any capitalization, to Focus Tech Investments, Inc. or its designee
("Focus") for a purchase price of $65,000.00. In addition, 14 creditors agreed
to advance an aggregate of $50,000.00, as a non-recourse claim, under the terms
of convertible promissory notes ("Notes") pursuant to Section 1145 of the
Bankruptcy Code, to the Debtors, to fund fees and expenses of the Debtors' and
related committee's professionals for a plan of reorganization. The Notes were
convertible into a total of 4,000,000 common shares and 1,000,000 warrants
issued pursuant to Section 1145 of the Bankruptcy Code. The transaction was
exempt from the registration requirements of Section 5 of the Securities Act of
1933 as well as state and local law statutes requiring registration for an offer
or sale of a security.
On August
10, 2004, the Court approved the Plan and entered the order entitled "Order
Approving Disclosure Statement and Confirming First Amended Plan of Liquidation
and Authorizing and Directing Certain Actions In Connection Therewith" (the
"Order"). Pursuant to the Plan, all prior operational assets were liquidated and
the proceeds were paid, per the approved claim schedule, to creditors and for
the administration of the estate. Pursuant to the Plan, all of the property of
the Debtor's estate vested in the Plan Trustee, free and clear of all claims,
liens, encumbrances, charges or other interests, and all executory contracts and
unexpired leases were rejected. The Court also placed an injunction against all
entities that may have held, currently hold, or may hold a debt, claim or other
liability or interest against the Debtors, dischargeable upon confirmation of
the Plan, and permanently enjoined any action on account of such debt, claim,
liability, interest or right. The Court further terminated all claims arising or
related to stock, stock options, stock plans for employees, officers and
directors, warrants and convertible provisions within the debt instruments by
creditors. The Court ordered that our common stock be diluted by a reverse stock
split of our issued and outstanding common shares. Under the Order, each share
of our common stock issued and outstanding was reclassified on a one (1) for 822
basis at a $0.001 par value.
The Court
then ordered that we:
|
¨
|
reincorporate
and redomicile from the State of Colorado to the State of
Delaware;
|
|
¨
|
that
the name of the Company be changed to Telestone Technologies
Corporation;
|
|
¨
|
that
the company's board of directors be authorized under the Plan to issue
common stock pursuant to an exchange agreement at the time of closing or
in escrow, in which effective control or majority ownership of the Company
is given to the acquired or acquiring business entity without the need of
stockholder approval; and
|
3
|
¨
|
that
the Board of Directors be authorized to amend the Company's By-Laws and
amend the Company's fiscal year to a date established and set forth in an
exchange agreement without the need of stockholder
approval.
|
Pursuant
to the Order, we reincorporated in the State of Delaware under the name
Telestone Technologies Corporation on August 13, 2004 by filing a Certificate of
Incorporation with the State of Delaware. We are now authorized to issue a total
of 110,000,000 shares with 100,000,000 being shares of common stock with a par
value of $0.001, and 10,000,000 being shares of preferred stock with a par value
of $0.001.
Pursuant
to the Order, we approved the reverse stock split of issued and outstanding
common shares. Under the Order, our issued and outstanding common stock was
reclassified on a one (1) for 822 basis at a par value of $0.001. A Certificate
of Amendment was filed with the Delaware Secretary of State on August 17,
2004.
On August
23, 2004, we completed a share exchange transaction with the stockholders of
Success Million International Limited, a company incorporated under the laws of
Hong Kong ("SMI"). The share exchange was consummated under Delaware law and
pursuant to the terms of that certain Securities Exchange Agreement, dated
effective as of August 23, 2004 (the "Exchange Agreement").
Pursuant
to the Exchange Agreement, we issued 4.1 million shares of our common stock to
the stockholders of SMI, representing approximately 97.6% of our issued and
outstanding common stock, immediately upon the consummation of the exchange
transaction, in exchange for 100% of the outstanding capital stock of SMI.
Immediately after giving effect to the exchange, we had 4,199,917 shares of
common stock outstanding. Pursuant to the exchange, SMI became our wholly-owned
subsidiary. For accounting purposes, the exchange is treated as a reverse
acquisition, as the stockholders of SMI own a majority of the issued and
outstanding shares of our common stock. Due to the issuance of the 4.1 million
shares of our common stock, a change in control occurred on August 23, 2004, the
date of the consummation of the exchange. We now carry on the business of SMI's
wholly-owned subsidiary, Beijing Telestone Technologies Co., Ltd. ("Beijing
Telestone").
On June
17, 2005, Beijing Telestone, with an operational period of 20 years, established
Beijing Telestone Wireless Telecommunication Company Limited ("BTWTC") in
Beijing, the People's Republic of China (the "PRC"). Beijing Telestone controls
BTWTC through contractual arrangements. The registered capital of BTWTC amounts
to RMB10 million (approximately US$1.2 million). BTWTC was established to engage
in the business of wireless telecommunication networking and system
integration.
On July
5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
(“Guolian”) and owners of Guolian entered into a Share Transfer Agreement (the
“Agreement”). Under the Agreement, 100% equity ownership interests in Guolian
and its wholly owned subsidiary, Pan-pacific Telecommunication Company Limited
(“Pan-pacific”), was transferred by all of the owners of Guolian to BTWTC.
Guolian and Pan-pacific were established in Jinan, Shandong Province, the PRC on
February 9, 1999 and October 22, 1999 respectively. The principal business
activities of Guolian and Pan-pacific are design, development, production and
installation and trading of wireless telecommunication coverage system
equipment.
On
October 8, 2007, BTWTC formed a subsidiary named Beijing Telestone
Communication Technology Corp. Ltd (the "Subsidiary") which focuses on
developing and managing Telestone's overseas businesses. The Subsidiary will be
responsible for all of Telestone's international businesses and focuses on the
Company's international expansion efforts. The move is intended to simplify
current command and reporting lines. The Subsidiary will also seek to identify
new opportunities to ensure consistent growth in Telestone's overseas
businesses.
Our
executive offices are those of Beijing Telestone Technologies Co., Ltd. and are
located at Floor 6, Saiou Plaza, No. 5 Haiyang Road, Fengtai Technology Park,
Beijing China 100070. Our telephone number is 86-10-83670088.
4
Business
Operations
We are a
leading access network solutions provider serving the Chinese
market. Since 1997, we have operated in the Chinese market and in
2006, we expanded marketing efforts to Vietnam, Indonesia, Malaysia, Thailand
and India. Since 2007, Beijing Telestone Communication Technology Corp. Ltd was
established as one of our subsidiaries focusing on developing and managing our
overseas businesses. Currently, marketing has expanded to 28 countries in the
world, including the U.S., Vietnam, Mexico, Brazil, Russia, India, The
Philippines, Thailand, Ireland, Ecuador, Mongolia, South Africa, Turkey,
Indonesia, Colombia, Costa Rica, Argentina, Ukraine, Kazakhstan, Singapore,
South Korea, Hong Kong (SAR), Saudi Arabia, New Zealand, Bangladesh, the UAE,
Canada and Iceland. Continuous expansion outside of China is one of our core
strategies. We believe that the quality of our products and services will allow
Telestone to be increasingly competitive internationally.
Our
access network solutions include research and development and application of
access network technology. In addition to our homegrown access network equipment
which includes repeaters, antennas and radio frequency peripherals, we also
offer project design, project management, installation, maintenance and other
after-sales services required by our customers. Our access network solutions are
created to further enhance the coverage of mobile telecommunications networks;
this is done to improve the quality of reception for mobile phone users. The
solutions we provide to the telecommunications industry cover indoor and outdoor
environments, including hotels, residential estates, office buildings, airports,
exhibition centers, underground stations, highways and tunnels. In 2006, having
successfully completed commercial trials and deployment of our 3D solution, a
third generation indoor coverage solution researched and developed by us, we
expanded our services to telecommunication technologies markets, including the
3D solution, which utilizes fiber technology in the radio frequency signal
distribution to transmit high speed data signals, and the PHS system
optimization solution, which transitioned to network optimization phase from
network maintenance phase, to address four major issues of wireless networks:
network coverage, network planning, network capacity and network disturbance.
Our TD-SCDMA repeaters application solutions have flexible network grouping, low
construction cost, and convenient and fast equipment installation and removal.
Our TD-SCDMA repeaters application solutions can be applied in signal coverage
of blind spots such as blocked signal areas, tunnels and temporary meeting
rooms. Because the TD-SCDMA system works in 2GHz frequency bands, it has weak
penetrability compared with the 800MHz and the 900MHz frequency band of the 2G
network. This weak penetrability will cause many blind signal spots and TD-SCDMA
repeaters can be used to cover these blind signal spots. We anticipate that the
TD-SCDMA repeaters application solutions will be marketable in the PRC as the
development of the TD-SCDMA network will be completed in the PRC.
In 2008,
we launched a new generation of wireless distribution system, WFDSTM.
Combining the technologies of wireless telecom and fiber telecom, WFDSTM is an
all-optical network. This system supports all mobile telecom networks and
various other networks, including WLAN, FTTH, telephone networks, and video
surveillance system. In addition, we believe that WFDSTM can be
quickly installed and simply maintained, which realizes for customers the
coverage with comparatively low cost. In 2009, WFDSTM has
further been applied in our business. We have finished 43 WFDSTM
installations to date as of December 31, 2009. And in September 2009, WFDSTM
technology successfully passed all FCC testing procedures. The FCC certification
will not only apply to the U.S. market, but also to Telestone's WFDSTM
products in Central and South America.
We
believe the fact that the Chinese telecom restructuring and the issuance of 3G
licenses in China with an investment in the construction of the 3G system of
approximately $ 70 billion over 2009 to 2011, an average of approximately $23
billion per year, presents an excellent opportunity for our business
development. With our advanced technologies, close relationships with the
telecom operators in China and strong management team, we believe that we will
continue to demonstrate increasingly robust growth in the future.
5
On
January 13, 2010, the State Council issued a directive to accelerate the
integration of telecommunications, TV & radio broadcasting and internet
access networks into one with a 5-year plan and supporting
policies. The meeting further stated that the integration of the
three systems will provide China with a better platform for information sharing
and stimulate the economy. The meeting confirmed that they will support local
companies to meet the directive's integration goals. Dozens of the companies in
the sector trading in the Chinese stock exchanges had trading halts (10% price
moves in one day trading) or significant price appreciations after the
announcement of the directive. Telestone anticipated such policy moves and has
positioned its technologies strategically to benefit such moves— Unification
Network Solution.
Since the
establishment of Telestone in 1997, we have developed business relationships
with both China Mobile Communications Corporation ("China Mobile") and China
Unicom Limited ("China Unicom"), along with China Telecom. China Unicom was our
main customer in 2006, and this business association accounted for approximately
35.65% of total sales in 2006. In 2007, our main customers were China Mobile and
China Unicom, and the revenues from them were 41.92% and 38.69%, respectively.
In 2008, our main customers were also China Mobile and China Unicom, and the revenues from them were 47.32% and
42.34%, respectively. In 2009, our main customers were also China Mobile and
China Unicom, and the revenues from them were 45.40% and 45.48%. Over three
years, our business has grown steadily, and we believe there is a strong
potential for further growth.
Revenues Generated in 2007,
2008 and 2009
2007
|
2008
|
2009
|
||||||||||||||||||||||
$'000
|
%
of
revenue
|
$'000
|
%
of
revenue
|
$'000
|
%
of
revenue
|
|||||||||||||||||||
China
Mobile
|
14,076 | 41.92 | % | 16,719 | 47.32 | % | 32,634 | 45.40 | % | |||||||||||||||
China
Unicom
|
12,993 | 38.69 | % | 14,958 | 42.34 | % | 32,688 | 45.48 | % | |||||||||||||||
China
Netcom
|
1,407 | 4.19 | % | 413 | 1.17 | % | - | - | % | |||||||||||||||
China
Telecom
|
4,101 | 12.21 | % | 2,123 | 6.01 | % | 5,324 | 7.41 | % | |||||||||||||||
Others
|
1,001 | 2.99 | % | 1,116 | 3.16 | % | 1,233 | 1.71 | % | |||||||||||||||
Total
|
33,578 | 35,329 | 71,879 |
We are
committed to the research and development of wireless communication related
technology. Over 90% of our technology is developed in-house at our research and
development center. We employ an experienced and highly trained professional
staff of scientists and engineers that concentrate on the invention and further
advances in wireless communication technology, and we have over 100 R&D
specialists, some industry experts in telecommunications— all have bachelor’s
degree, 40% have master’s degree or above. Since its introduction, our WFDSTM
technology as an innovative product has received recognition in the
telecommunications industry and has won commendations from several
telecommunications carriers.
We have
offices in 26 provinces across the PRC, offering sales, project survey, design,
project management and installation and maintenance services. We believe that
this sales and service strategy enriches our capability to increase our existing
customer base in the PRC and enable us to provide timely response to customers’
inquires as well as technical and maintenance service upon our customers'
request. Our sales efforts are not focused in or dependent upon any particular
regions or provinces of the PRC.
Our
Competitive Strengths
We
believe that the following competitive strengths enable us to compete
effectively and to capitalize on the growth opportunities of our
markets:
6
Strong
research and development capability
¨
|
Our
R&D capability is ranked as one of the leaders in technology in the
telecommunications industry in the PRC. We have a dependable engineering
project management system and an experienced engineering team. Our
research and development center is equipped with the latest equipment and
testing facilities which give our research and development personnel the
tools they require to make significant advances into access network
technologies. In addition, we provide our employees with continuing
education administered through internal programs. Our proprietary
WFDSTM
product is one of the leading indoor access network products in China.
Compared with other traditional wireless distribution systems, the
WFDSTM
system has many advantages. Firstly, WFDSTM
adopts fiber to transport signals. Based on the low signal loss
characteristic of fiber, through which signals can transmit long
distances, the main unit (MU) can be placed closer to the signal source
and the remote unit (RU) can be placed closer to
subscribers. Therefore, a micro power signal source can be
used, which reduces interference and noise, purifies the electromagnetic
environment, and expands the coverage area. Secondly, due to the input
port of the MU connecting to the signal combiner, WFDSTM
systems can support multiple signals access and network integration.
WFDSTM
provides all communication services access in 500kHz~3GHz broadband
bandwidth for subscribers. Thirdly, due to the fact that each node of the
system has the same bandwidth and flow characteristics, WFDSTM
provides the same communication services for every subscriber. WFDSTM
systems are also convenient and flexible for implementing expansion and
upgrading of the systems with minimum cost. Our R&D
capabilities are recognized and affirmed by the PRC government and has won
accolades such as the Project Certificate of National-level Torch Program
and the Project Certificate of Nation-level Spark Program. In addition, a
number of our products and systems, several of which have been patented or
are patent pending, have been awarded various science and technology
honors by PRC provincial and municipal governments. We are focused on
increasing our research and development efforts to develop superior and
proprietary technologies.
|
Broad
and diverse market base
¨
|
Our
business covers a wide region. We have 26 branches in most of the
provinces in China and our business covers approximately 28 countries
worldwide.
|
Experienced
marketing staff
¨
|
We
employ a group of experienced telecommunication experts and experienced
and technologically savvy marketing staff in
China.
|
Strong
customer relations
¨
|
We
have maintained long-term relationships with China Unicom, China Mobile,
China Telecom and China Netcom as customers for approximately 13
years.
|
Governmental
support
¨
|
As
a high-tech enterprise with an established track record, our company
enjoys the stimulus plans offered by both China’s industry governmental
authorities and by local authorities, including the Ministry of Science
and Technology, the Ministry of Industry and Information Technology, the
Beijing municipal government and the Administrative Committee of
Z-Park.
|
Business
Outlook
Based
on (i) our performance in 2009, where our revenues increased
over 100% from our 2008 revenues, (ii) our expectation that the
integration of telecommunications, TV & radio broadcasting and internet
access networks in China will start to be implemented in
2010 and (iii) our belief that we have advanced
technology and production capabilities and strong R&D capability,
we currently expect to increase significantly our income for the
year 2010. We expect that the higher percentage of systems installed by
the Company in 2010 will be WFDS systems which command a higher margin, and
therefore, our annual gross margin will be the same as or higher for 2010 than
our annual gross margin for 2009, which is around 42%, even though our gross
margin decreased for the 3rd and 4th quarter of 2009 as a result of the increase
of 2G systems installed. Although there are many
factors, including without limitation, changes in the macro economic
environment in China and the Chinese government policies related to the telecom
industry, that may impact our estimates, we currently expect our revenues
for 2010 to increase by 50% compared to that of 2009. See “Risk Factors”
and “Forward Looking Statements”.
7
Our
Strategies
In order
to maintain our position as one of the leading companies in the PRC’s access
network solutions sector, and expand and diversify our revenue streams, we have
adopted the following strategies:
Continue
to focus on research and development
We plan
to continue to invest in research and development for our key technologies and
our products to enhance our leading position in access network technology and
take full advantage of the PRC’s investment in the 3G networks. We have
dedicated research and development to access network solutions for the continued
development of our business.
Seek
selective acquisitions and strategic investments
In the
domestic market, we intend to maintain strong relationships with Chinese mobile
carriers and potentially make selective acquisitions in major provincial markets
where we do not have leading market share. Our potential targets are companies
that enjoy a leading market position and have strong business networks in their
provincial markets, that have strong production capabilities and companies that
own applicable value-added products whose customer premises network platform
adapts to WFDS. We believe that we will further our penetration of
provincial markets and raise our overall market share through selective
acquisitions and the promotion of new solutions.
Strengthen
international market presence
We plan
to also focus on increasing our presence in markets outside of the PRC. We will
continue to strengthen our presence overseas by leveraging our expertise and
leading access network products and solutions. In the United States, we plan to
seek cooperation with peers that have strong research and development ability,
and develop technology and products that fit the market of the PRC. However, we
also find partners within the integration business and sell our products, as our
products have a significant cost advantage. In developing countries, we only
seek cooperation with local integration partners to deliver our access network
solution technologies, whom we then work with to set up our local products
distribution channels
Description
of Products & Engineering Services
We design
and sell electronic equipment used to provide access network solutions for our
customers. Many of these types of equipment are highly specialized active
microwave components designed to meet the needs of our customers, including
WFDSTM
products, RFPA products, passive components and base station antenna for 2G, 3G,
Broadband access and CATV networks.
In
addition to designing and selling our products, we also provide systems
integration services for our customers. The primary systems integration services
provided to our customers are project design and engineering, specifically, the
development and design of indoor (living quarters, hospital systems, and hotels)
and outdoor (expressways, railways and blind areas) wireless signal
complementary coverage solutions and its applied products. This includes the
design of the required equipment, implementation, project quality evaluation as
well as after-sale maintenance and optimization for system integration products,
constructive products for engineering design projects and wireless network
optimization products.
8
Research
& Development
We
maintain a research and development center where the majority of our products
are designed by our staff of engineers and scientists. Our research and
development center is equipped with the latest equipment and testing facilities
which give our research and development personnel the tools they require to make
significant advances into access network technologies. The center comprises
several professional research departments including our Wire-less Device
Department, Active Parts Department, Antenna & Passive Products Department,
Computer Application Department and Mechanical Structure Department. We seek to
remain at the forefront of current and future technologies, paying close
attention on a constant basis to evolving development trends in domestic and
international technologies. Our R&D capabilities are recognized and
affirmed by the PRC government and has won accolades such as the Project
Certificate of National-level Torch Program and the Project Certificate of
Nation-level Spark Program. In addition, a number of our products and systems,
several of which have been patented or are patent pending, have been awarded
various science and technology honors by PRC provincial and municipal
governments. Currently the research center has one department that is focusing
on technology standards and system solutions and another department that is
focusing on the research and development of fiber and RF equipment. These two
departments work on designing new products to meet the expected increased demand
for 3G wireless products in the PRC.
Competition
Our main
domestic competitors are Guangdong Comba, Wuhan Hongxin and China
GrenTech.
¨
|
Guangdong
Comba is one of the first Chinese domestic telecom manufacturers. The
company is listed on the Hong Kong Stock Exchange under the stock symbol:
2342.HK
|
¨
|
China
GrenTech, formerly Powercom Holdings Limited, was founded in 1999 and is
based in Shenzhen. China GrenTech is listed on the Nasdaq Global Market
under the symbol GRRF.
|
¨
|
Wuhan
Hongxin, originally a state-owned enterprise under the management of Wuhan
Post & Telecom Academy, has a strong technical background and sales
network. Wuhan Hongxin is a large company with a diverse group of products
outside of the wireless coverage
sector.
|
Our
potential international competitors include Powerwave Technologies and Andrew
Corporation. We believe that our overseas competitors are not key threats to
Telestone because they have no competitive advantage with respect to product
costs and are not accustomed to the marketplace of the PRC.
¨
|
Powerwave
Technologies, Inc. is a global provider of end-to-end wireless
infrastructure solutions for use in wireless communications networks. They
offer OEMs (Original Equipment Manufacture), operators and network
providers in the wireless communications industry a portfolio of Antenna
Systems, Base Station Systems and Coverage
Systems.
|
¨
|
Andrew
Corporation is a global designer, manufacturer, and supplier of
communications equipment, services and systems. Andrew products and
expertise are found in communications systems throughout the world,
including wireless and distributed communications, land mobile radio,
cellular and personal communications, broadcast, radar and
navigation.
|
Government
Regulation
The
following is a summary of the principal governmental laws and regulations that
are or may be applicable to our operations in the PRC. The scope and enforcement
of many of the laws and regulations described below are uncertain. We cannot
predict the effect of further developments in the Chinese legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of laws.
9
The
telecommunications industry, including certain access network solution provider
services, is highly regulated in the PRC. Regulations issued or implemented by
the State-owned Assets Supervision and Administration Commission of the State
Council, Ministry of Information Industry of PRC and other relevant government
authorities cover many aspects of telecommunications network operations,
including entry into the telecommunications industry, the scope of permissible
business activities, interconnection and transmission line arrangements, tariff
policy and foreign investment.
The
principal regulations governing the telecommunications services business in the
PRC include:
¨
|
Telecommunications
Regulations (2000), (the “Telecom Regulations”). The Telecom Regulations
categorize all telecommunications businesses in the PRC as either
infrastructure telecommunications businesses or value-added
telecommunications businesses. Under the Telecom Regulations, certain
services are classified as being of a value-added nature and require the
commercial operator of such services to obtain an operating license,
including telecommunication information services, online data processing
and translation processing, call centers and Internet access. The Telecom
Regulations also set forth extensive guidelines with respect to different
aspects of telecommunications operations in the
PRC.
|
¨
|
Regulations
for the Administration of Foreign-Invested Telecommunications Enterprises
(2002), (the “FI Telecom Regulations”). The FI Telecom Regulations set
forth detailed requirements with respect to capitalization, investor
qualifications and application procedures in connection with the
establishment of a foreign-invested telecom
enterprise.
|
¨
|
Foreign
Exchange Controls. The principal regulations governing foreign exchange in
the PRC are the Foreign Exchange Control Regulations (1996) and the
Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations (1996), (“the Foreign Exchange Regulations”). Under the
Foreign Exchange Regulations, Renminbi (“RMB”) is freely convertible into
foreign currency for current account items, including the distribution of
dividends. Conversion of RMB for capital account items, such as direct
investment, loans and security investment, however, is still subject to
the approval of the State Administration of Foreign Exchange (“SAFE”).
Under the Foreign Exchange Regulations, foreign-invested enterprises are
required to open and maintain separate foreign exchange accounts for
capital account items. In addition, foreign-invested enterprises may only
buy, sell and/or remit foreign currencies at those banks authorized to
conduct foreign exchange business after providing valid commercial
documents and, in the case of capital account item transactions, obtaining
approval from SAFE.
|
Intellectual Property and Proprietary
Rights
We rely
primarily on a combination of copyright laws and contractual restrictions to
establish and protect our intellectual property rights. We require our employees
to enter into agreements requiring them to keep confidential all information
relating to our customers, methods, business and trade secrets during and after
their employment with us. Our employees are required to acknowledge and
recognize that all inventions, trade secrets, works of authorship, developments
and other processes, whether or not patentable or copyrightable, made by them
during their employment are our property. They also sign agreements to
substantiate our sole and exclusive right to those works and to transfer any
ownership that they may claim in those works to us.
While we
actively take steps to protect our proprietary rights, including obtaining
patent protection where applicable, such steps may not be adequate to prevent
the infringement or misappropriation of our intellectual property. This is
particularly the case in the PRC where the laws may not protect our proprietary
rights as fully as in the United States. Infringement or misappropriation of our
intellectual property could materially harm our business.
10
We have
registered our corporate logo as a trademark with the Trademark Office of the
PRC. The corporate logo depicts our name in English as well as Mandarin Chinese.
China's trademark law utilizes a "first-to-file" system for obtaining trademark
rights. As a result, the first applicant to file an application for registration
of a mark will preempt all other applicants. Prior use of unregistered marks,
except "well known" marks, is generally not a basis for legal action in the PRC.
We may not be able to successfully defend or claim any legal rights in any
trademarks for which we apply in the future.
Many
parties are actively developing and seeking patent protection for wireless
services-related technologies. We expect these parties to continue to take steps
to protect these technologies, including seeking patent protection. There may be
patents issued or pending that are held by others and that cover significant
parts of our technology, business methods or services. Disputes over rights to
these technologies are likely to arise in the future. We cannot be certain that
our products do not or will not infringe valid patents, copyrights or other
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property
of others.
We have
obtained 13 patent certificates. Currently, 22 of our filed patent applications
are under review, of which 17 have received the notification of acceptance
of the application from the State Intellectual Property Office of the People's
Republic of China. Our company will continue to put great effort towards
protecting our intellectual property rights.
ITEM
1A. RISK FACTORS
CAUTIONARY
STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING INFORMATION AND CERTAIN
IMPORTANT FACTORS
In this
Annual Report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Statements containing the words or
phrases “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should” or similar
expressions identify forward-looking statements, which may appear in documents,
reports, filings with the Securities and Exchange Commission, news releases,
written or oral presentations made by officers or other representatives made by
us to analysts, stockholders, investors, news organizations and others, and
discussions with management and other of our representatives. For such
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. Except as required by law, we do not undertake any obligation to
update or keep current either (i) any forward-looking statement to reflect
events or circumstances arising after the date of such statement, or
(ii) the important factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking
statement.
In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned by us, or results that are reflected from time to time in
any forward-looking statement. Some of these important factors, but not
necessarily all important factors, include the following:
11
Risks
Related to Our Business and Operations
Current
economic conditions may adversely impact demand for our products, reduce access
to credit and cause our customers and others with which we do business to suffer
financial hardship, all of which could adversely impact our business, results of
operations, financial condition and cash flows.
Our
business, financial condition and results of operations have and may continue to
be affected by various economic factors. The worldwide economy is undergoing a
period of slowdown and the future economic environment may continue to be less
favorable than that of recent years. This slowdown has, and could further lead
to, reduced consumer and business spending in the foreseeable future, including
by our customers. Reduced access to credit has and may continue to adversely
affect the ability of consumers to purchase our products and system
solutions. In addition, economic conditions, including decreased access to
credit, may result in financial difficulties leading to restructurings,
bankruptcies, liquidations and other unfavorable events for our customers,
suppliers and other service providers. If such conditions continue or further
deteriorate, our industry, business and results of operations may be severely
impacted.
We
rely on a small number of significant customers.
Our
success depends substantially upon retaining our significant clients, such as
China Unicom and China Mobile. We cannot guarantee that we will be able to
retain long-term relationships or secure renewals of short-term relationships
with our significant clients in the future. If we were to lose such customers,
it is unclear if we would be able to replace them or how long it would take to
do so. Accordingly, our revenues and profitability would be negatively
impacted.
We
have not entered into any long term contracts with our
customers.
All of
our agreements with our customers are for short term projects or sales of
equipment. While we believe that our significant relationships with China Unicom
and China Mobile will likely provide additional sales agreements in the future,
none of our customers are contractually bound to purchase any products or
services from us in the future. If our customers do not continue to
purchase products or services from us in the future, our business, financial
condition and results of operations could be adversely affected.
We depend on a limited number of
suppliers.
We rely
on certain suppliers to provide us various pieces of telecommunications
equipment. If we were to lose our relationship with those suppliers, we may
experience difficulties finding a suitable replacement for our equipment needs,
and our business and operations could be adversely affected.
We face intense
competition.
The
market for access network solutions services is intensely competitive in the
People’s Republic of China. There are numerous other access network service
providers with which we compete for business. There are low barriers to entry
for new competitors in our market and our business may experience a negative
impact as a result of increased competition. In addition, our existing or
potential competitors may in the future achieve greater market acceptance and
gain additional market share, which in turn could reduce our revenues and
operations.
We depend on key personnel for the
success of our business.
Our
business may be severely disrupted if we lose the services of our key executives
and employees or fail to add new senior and middle managers to our management.
Our future success is heavily dependent upon the continued service of our key
executives, particularly Han Daqing, our Chief Executive Officer and President,
Li Hong, our Chief Financial Officer and Yong Shiqin, our Chief Operating
Officer. Our future success is also dependent upon our ability to attract and
retain qualified senior and middle managers to our management team. If one or
more of our current or future key executives and employees are unable or
unwilling to continue in their present positions, we may not be able to easily
replace them, and our business may be severely disrupted. In addition, if any of
these key executives or employees joins a competitor or forms a competing
company, we could lose customers and suppliers and incur additional expenses to
recruit and train personnel. Each of our executive officers has entered into an
employment agreement with us.
12
We also
rely on a number of key technology staff for the operation of our Company. Given
the competitive nature of our industry, the risk of key technology staff leaving
our Company is high and could disrupt our operations.
We
rely on a third party production center.
We
utilize a third party production center for the manufacture of the products we
sell to our customers. Although we are parties to a memorandum of cooperation
regarding such manufacturing arrangement, we cannot be assured that such
cooperation will continue indefinitely. Should we be required to utilize a
different source for our manufactured products our costs could be adversely
affected.
Rapid growth and a rapidly changing
operating environment may strain our limited resources.
We will
need to increase our investment in our technology infrastructure, facilities and
other areas of operations, in particular our product development, in order to
facilitate our growth. If we are unable to manage our growth and expansion
effectively, the quality of our products and services, and in turn, our customer
support, could deteriorate and our business and results of operations may
suffer. Our future success will depend on, among other things, our ability
to:
·
|
continue to develop through our
research and development facilities new technologies acceptable to the PRC
market;
|
·
|
continue training, motivating and
retaining our existing employees and attract and integrate new employees,
including our senior
management;
|
·
|
develop and improve our
operational, financial, accounting and other internal systems and
controls; and
|
·
|
maintain adequate controls and
procedures to ensure that our periodic public disclosure under applicable
laws, including U.S. securities laws, is complete and
accurate.
|
We
may not be able to adequately protect our intellectual property, and we may be
exposed to infringement claims by third parties.
We rely
primarily on a combination of copyright laws and contractual restrictions to
establish and protect our intellectual property rights. Monitoring unauthorized
use of our information services is difficult and costly, and we cannot be
certain that the steps we take will effectively prevent misappropriation of our
technology and content. Our management may determine in the future to register
for copyrights, trademarks or trade secret protection if management determines
that such protection would be beneficial and cost-effective.
From time
to time, we may have to resort to litigation to enforce our intellectual
property rights, which could result in substantial costs and diversion of our
resources. In addition, parties may initiate litigation against us for alleged
infringement of their proprietary rights. In the event of a successful claim of
infringement and our failure or inability to develop non-infringing technology,
content or license the infringed or similar technology or content on a timely
basis, our business could suffer. Moreover, even if we are able to license the
infringed or similar technology or content, license fees that we pay to
licensors could be substantial or uneconomical.
13
We have limited business insurance
coverage.
The
insurance industry in the PRC is still at an early stage of development.
Insurance companies in the PRC offer limited business insurance products, and do
not, to our knowledge, offer business liability insurance. As a result, we do
not have any business liability insurance coverage for our operations. Any
business disruption, litigation or natural disaster might result in substantial
costs and diversion of resources.
Risks
Related To Doing Business in China
A downturn in the Chinese economy may
slow down our growth and profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business. Our profitability will decrease if expenditures for wireless services
decrease due to a downturn in the Chinese economy. In addition, increased
penetration of wireless services in the less economically developed central and
western provinces of the PRC will depend on those provinces achieving certain
income levels, so that mobile phones and related services become affordable to a
significant portion of the population.
Government
regulation of the telecommunications industry may become more complex.
Government
regulation of the telecommunications industry is highly complex. New regulations
could increase our costs of doing business and prevent us from efficiently
delivering our services. These regulations may stop or slow down the expansion
of our user base and limit the access to our services.
Our ability to generate revenues
could suffer if the Chinese market for access network solutions services does
not develop as anticipated.
The
wireless services market in the PRC has evolved rapidly over the last four
years, with the introduction of new services, development of consumer
preferences, market entry by new competitors and adaptation of strategies by
existing competitors. We expect each of these trends to continue, and we must
continue to adapt our strategy to successfully compete in our
market.
In
particular, we currently offer a wide range of access network solutions services
for mobile phones using 2G technologies including GSM/CDMA/PHS/WLAN and are
developing access network solutions for 3G mobile phones. There can be no
assurance, however, that any of these 2G or 3G technologies and any services
compatible with them will be accepted by consumers or promoted by the mobile
operators. Accordingly, it is extremely difficult to accurately predict consumer
acceptance and demand for various existing and potential new offerings and
services, and the future size, composition and growth of this
market.
Our ability to compete on a
nationwide scale may be impaired due to state-owned
competitors.
Although
we believe our strongest competitors are other privately held Chinese companies,
we face direct competition with telecommunications companies which are either
state-owned or state-run. In certain circumstances, these state-owned
competitors may receive preferential treatment, particularly in the awarding of
governmental contracts.
14
The
uncertain legal environment in China could limit the legal protections available
to you.
The
Chinese legal system is a civil law system based on written statutes.
Unlike common law systems, it is a system in which precedents set in earlier
legal cases are not generally used. The overall effect of legislation
enacted over the past 20 years has been to enhance the protections afforded to
foreign invested enterprises in China. However, these laws, regulations
and legal requirements are relatively recent and are evolving rapidly and their
interpretation and enforcement involves uncertainties. In addition, the
PRC legal system is based in part on government policies and internal rules
(some of which are not published on a timely basis or at all) that may have a
retroactive effect. As a result, we may not be aware of our violation of
these policies and rules until some time after the violation. These
uncertainties could limit the legal protections available to foreign investors,
such as the right of foreign invested enterprises to hold licenses and permits
such as requisite business licenses. In addition, all of our executive
officers and our directors are residents of China, and substantially all the
assets of these persons are located outside the U.S. As a result, it
could be difficult for investors to effect service of process in the U.S.,
or to enforce a judgment obtained in the U.S. against us or any of these
persons.
Changes
in the PRC’s political and economic policies could harm our
business.
The
economy of the PRC has historically been a planned economy subject to
governmental plans and quotas and has, in certain aspects, been transitioning to
a more market-oriented economy. Although we believe that the economic reform and
the macroeconomic measures adopted by the Chinese government have had a positive
effect on the economic development of the PRC, we cannot predict the future
direction of these economic reforms or the effects these measures may have
on our business, financial position or results of operations. In addition,
the Chinese economy differs from the economies of most countries belonging to
the Organization for Economic Cooperation and Development (the “OECD”). These
differences include:
·
|
Economic
structure;
|
|
|
·
|
Level
of government involvement in the
economy;
|
·
|
Level
of development;
|
·
|
Level
of capital reinvestment;
|
·
|
Control
of foreign exchange;
|
·
|
Methods
of allocating resources; and
|
·
|
Balance
of payments position.
|
As a
result of these differences, our business may not develop in the same way or at
the same rate as might be expected if the Chinese economy were similar to those
of the OECD member countries.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Because
almost all of our future revenues may be in the form of RMB, any future
restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside the PRC or to
make dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for
current account transactions, significant restrictions still remain, including
primarily, the restriction that foreign invested enterprises may only buy, sell
or remit foreign currencies, after providing valid commercial documents, at
those banks authorized to conduct foreign exchange business. In addition,
conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in the PRC, and companies are
required to open and maintain separate foreign exchange accounts for capital
account items. We cannot be certain that the Chinese regulatory authorities will
not impose more stringent restrictions on the convertibility of the RMB,
especially with respect to foreign exchange transactions.
15
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China
only recently has permitted provincial and local economic autonomy and private
economic activities. Chinese government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of these jurisdictions may impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures and efforts on our part to ensure our compliance with
such regulations or interpretations. Accordingly, government actions in the
future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties.
Future
inflation in China may inhibit our ability to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. While inflation has been more moderate since 1995, high
inflation may in the future cause Chinese government to impose controls on
credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby harm the market for our products.
Cessation
of the preferential rate of income tax may have an adverse impact on our net
income.
China
passed a new PRC Enterprise Income Tax Law and its implementing rules, both of
which became effective on January 1, 2008. The PRC Enterprise Income Tax
Law (“EIT Law”) reduces the statutory rate of enterprise income tax from
33% to 25%, and permits companies established before March 16, 2007 to
continue to enjoy their existing tax incentives, adjusted by certain
transitional phase-out rules. Administrative regulations shall gradually become
subject to the New EIT Law rate over a five-year transition period starting from
the date of effectiveness of the New EIT Law. However, certain qualifying
high-technology enterprises may still benefit from a preferential tax rate of
15% if they are enterprises in certain State-supported high-tech industries to
be later specified by the government. As a result, if Telestone’s PRC
subsidiaries qualify as “high-technology enterprises,” they will continue to
benefit from the preferential tax rate of 15%, subject to transitional rules
implemented from January 1, 2008. Otherwise, the applicable tax rate of its
PRC subsidiaries may gradually increase to the unified tax rate of 25% by
January 1, 2013 under the New EIT Law and the Implementing Rules. If its
PRC subsidiaries cease to qualify as “high-technology enterprises”, Telestone’s
financial condition and results of operations could be materially and adversely
affected.
A
new Chinese law may impact our ability to make acquisitions of Chinese
businesses.
On August
8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce, the
State Assets Supervision and Administration Commission (“SASAC”), the State
Administration for Taxation, the State Administration for Industry and Commerce,
the China Securities Regulatory Commission (“CSRC”), and the State
Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New
M&A Rule”), which became effective on September 8, 2006. The New M&A
Rule purports, among other things, to require offshore special purpose vehicles,
or SPVs, formed after the effective date, for overseas listing purposes, through
acquisitions of PRC domestic companies and controlled by PRC companies or
individuals, to obtain the approval of the CSRC prior to publicly listing their
securities on an overseas stock exchange.
16
The
Company intends to make acquisitions of Chinese businesses in the future. There
are uncertainties regarding the interpretation and application of current or
future PRC laws and regulations, including the New M&A Rule and there
uncertainties could make it difficult or impossible to make acquisitions of
Chinese businesses in the future.
The
fluctuation of the Renminbi may materially and adversely affect your
investment.
The value of the Renminbi against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things, changes in the
PRC’s political and economic conditions. Any significant revaluation of the
Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. For example, to the extent that we need to convert U.S.
dollars we receive from this offering of our common stock into Renminbi for
our operations, appreciation of the Renminbi against the U.S. dollar could have
a material adverse effect on our business, financial condition and results of
operations.
Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our common shares or
for other business purposes and the U.S. dollar appreciates against the
Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. Any significant devaluation of Renminbi may reduce our operation costs
in U.S. dollars but may also reduce our earnings in U.S. dollars. In addition,
the depreciation of significant U.S. dollar denominated assets could result in a
charge to our income statement and a reduction in the value of these
assets.
Since 1994 the PRC has pegged the value of the Renminbi to
the U.S. dollar. We do not believe that this policy has had a material effect on
our business. There can be no assurance that Renminbi will not be subject to
devaluation. We may not be able to hedge effectively against Renminbi
devaluation, so there can be no assurance that future movements in the exchange
rate of Renminbi and other currencies will not have an adverse effect on our
financial condition.
In addition, there can be no assurance that we will be able
to obtain sufficient foreign exchange to pay dividends or satisfy other foreign
exchange requirements in the future.
Any
recurrence of severe acute respiratory syndrome, (“SARS”), or another widespread
public health problem, could adversely affect our business and results of
operations.
A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, and in Beijing where our operations are
headquartered, could have a negative effect on our operations. Our operations
may be impacted by a number of health-related factors, including the
following:
·
|
Quarantines or closures of some
of our offices which would severely disrupt our
operations;
|
·
|
The sickness or death of our key
officers and employees; and
|
·
|
A general slowdown in the Chinese
economy.
|
Any of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our business and results of operations.
You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited. All of our
subsidiaries are incorporated in non-U.S. jurisdictions, we conduct
substantially all of our operations in China, and all of our officers reside
outside the United States.
We
conduct substantially all of our operations in China through our wholly owned
subsidiaries in China. All of our officers reside outside the United States and
some or all of the assets of those persons are located outside of the United
States. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in China in the event that you
believe that your rights have been infringed under the securities laws or
otherwise. Even if you are successful in bringing an action of this kind, the
laws of the PRC may render you unable to enforce a judgment against our assets
or the assets of our directors and officers. As a result of all of the above,
our public stockholders may have more difficulty in protecting their interests
through actions against our management, directors or major stockholders than
would stockholders of a corporation doing business entirely within the United
States.
17
Risks
Related To Our Shares
The
market price for our common stock is volatile.
The
market price for our common stock is highly volatile and subject to wide
fluctuations in response to factors including the following:
·
|
Actual or anticipated
fluctuations in our quarterly operating
results;
|
·
|
Announcements of new products and
services by us or our
competitors;
|
·
|
Changes in financial estimates by
securities analysts;
|
·
|
Changes in the economic
performance or market valuations of other companies providing similar
products and services;
|
·
|
Announcements by our
competitors of significant acquisitions, strategic partnerships, joint
ventures or capital
commitments;
|
|
|
·
|
Additions or departures of
key personnel;
|
·
|
Potential
litigation;
|
·
|
Conditions in the mobile
phone market; or
|
·
|
Weak
liquidity.
|
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.
The value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi. For example, to the extent that we need to convert U.S.
dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position and the
price of our common stock may be adversely affected. Conversely, if we decide to
convert our Renminbi into U.S. dollars for the purpose of declaring dividends on
our ordinary shares or for other business purposes and the U.S. dollar
appreciates against the Renminbi, the U.S. dollar equivalent of our earnings
from our subsidiaries in the PRC would be reduced.
Stockholders
could experience substantial dilution.
We may
issue additional shares of our capital stock to raise additional cash for
working capital or for other purposes. If we issue additional shares of our
capital stock, our stockholders will experience dilution in their respective
percentage ownership in the company and may experience dilution in the value of
their shares.
18
We
have no present intention to pay dividends.
We have
never paid dividends or made other cash distributions on our common stock, and
do not expect to declare or pay any dividends in the foreseeable future. We
intend to retain future earnings, if any, for working capital and to finance
current operations and expansion of our business.
A
large portion of our common stock is controlled by a small number of
stockholders.
A large
portion of our common stock is held by a small number of stockholders. As of
March 29, 2010, our directors and officers collectively owned approximately
30.62% of the company’s outstanding common stock. As a result, these
stockholders are able to influence the outcome of stockholder votes on various
matters, including the election of directors and extraordinary corporate
transactions including business combinations. This concentration of ownership
could have the effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to obtain control of
us, which in turn could have a material and adverse effect on the market price
of the common stock or prevent our stockholders from realizing a premium over
the market prices for their shares of common stock. In addition, the
occurrence of sales of a large number of shares of our common stock, or the
perception that these sales could occur, may affect our stock price and could
impair our ability to obtain capital through an offering of equity securities.
Furthermore, the current ratios of ownership of our common stock reduce the
public float and liquidity of our common stock which can in turn affect the
market price of our common stock.
There
is no assurance of an established public trading market, which would adversely
affect the ability of investors in our company to sell their securities in the
public markets.
Although
our common stock trades on the NASDAQ’s automated quotation system (the “NASDAQ
Stock Market”), a regular trading market for the securities may not be sustained
in the future. Market prices for our common stock will be influenced by a number
of factors, including:
·
|
the
issuance of new equity securities;
|
·
|
changes
in interest rates;
|
·
|
competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
|
·
|
variations
in quarterly operating results;
|
·
|
change
in financial estimates by securities
analysts;
|
·
|
the
depth and liquidity of the market for our common
stock;
|
·
|
investor
perceptions of our company and the technologies industries generally;
and
|
general
economic and other national
conditions.
|
The
limited prior public market and trading market may cause volatility in the
market price of our common stock.
Our common stock is currently traded on the NASDAQ under
the symbol “TSTC.” The quotation of our common stock on the NASDAQ does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility. In the
absence of an active trading market:
19
·
|
investors may have difficulty
buying and selling or obtaining market
quotations;
|
·
|
market visibility for our common
stock may be limited; and
|
·
|
a lack of visibility for our
common stock may have a depressive effect on the market for our common
stock.
|
We
do not anticipate paying dividends on our common stock.
We
have never paid dividends on our common stock and do not anticipate paying
dividends in the foreseeable future. Our directors intend to follow a policy of
retaining all of our earnings, if any, to finance the development and expansion
of our business.
Broker-dealer
requirements may affect trading and liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as
amended, and Rule 15g-2 promulgated thereunder by the SEC require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor’s account.
Potential investors in our common stock are urged to obtain
and read such disclosure carefully before purchasing any shares that are deemed
to be “penny stock.” Moreover, Rule 15g-9 requires broker-dealers in penny
stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for holders of our common stock to
resell their shares to third parties or to otherwise dispose of them in the
market or otherwise.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.
From time to time, certain of our stockholders may be
eligible to sell all or some of their shares of common stock by means of
ordinary brokerage transactions in the open market pursuant to Rule 144,
promulgated under the Securities Act (“Rule 144”), subject to certain
limitations. The SEC has recently adopted amendments to Rule 144 which became
effective on February 15, 2008. Under these amendments, a person who has
beneficially owned restricted shares of our common stock or warrants for at
least six months would be entitled to sell their securities provided that
(i) such person is not deemed to have been one of our affiliates at the
time of, or at any time during the three months preceding, a sale and
(ii) we are subject to the Exchange Act periodic reporting requirements for
at least three months before the sale.
Persons who have beneficially owned restricted shares of
our common stock or warrants for at least six months but who are our affiliates
at the time of, or at any time during the three months preceding, a sale, would
be subject to additional restrictions, by which such person would be entitled to
sell within any three-month period only a number of securities that does not
exceed the greater of either of the following:
20
·
|
1% of the total number of
securities of the same class then outstanding;
or
|
·
|
the average weekly trading volume
of such securities during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the
sale;
|
provided,
in each case, that we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Such
sales both by affiliates and by non-affiliates must also comply with the manner
of sale, current public information and notice provisions of Rule
144.
ITEM 2.
|
PROPERTIES
|
We
currently occupy 46 offices, including one branch office in which we maintain
certain ownership rights. The balance of our office space is leased by us under
lease arrangements we deem to be satisfactory. In addition we lease 48 buildings
used by us as warehouses and dormitories in the PRC and one building as our
research and development center. We lease our headquarters, located at Floor 6
and Floor 5, Saiou Plaza, No. 5 Haiying Road, Fengtai Technology Park, Beijing,
PRC 100070, for $237,881 per year, pursuant to an operating lease that expires
in June 2011.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
None
ITEM
4.
|
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.
|
Our
current report on Form 8-K filed with the SEC on November 24, 2009 is
incorporated by reference herein in its entirety.
PART
II
ITEM
5.
|
MARKET FOR COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES.
|
The
shares of our common stock are currently traded on the NASDAQ Global Market
under the trading symbol “TSTC”. The shares of our common stock were traded on
the American Stock Exchange from May 2005 to September 2006. In late September
2006, we were transferred from AMEX and our shares of common stock began trading
on the NASDAQ Capital Market.
On
January 30, 2007 the NASDAQ Stock Market approved Telestone’s transfer from its
NASDAQ Capital Market listing to a NASDAQ Global Market listing. Our shares of
common stock continue to trade under the trading symbol “TSTC”.
Holders.
As of March 29, 2010, we had 227 holders of shares of common stock of
record.
The
following table sets forth the quarterly average high and low bid prices per
share for the common stock for the past two years:
21
Common
Stock
|
||||||||
Fiscal
Year Ended December 31, 2008
|
High
|
Low
|
||||||
First
Quarter
|
$
|
6.61
|
$
|
4.00
|
||||
Second
Quarter
|
$
|
5.10
|
$
|
3.22
|
||||
Third
Quarter
|
$
|
4.25
|
$
|
1.00
|
||||
Fourth
Quarter
|
$
|
2.87
|
$
|
0.63
|
Common
Stock
|
||||||||
Fiscal
Year Ended December 31, 2009
|
High
|
Low
|
||||||
First
Quarter
|
$
|
2.38
|
$
|
0.92
|
||||
Second
Quarter
|
$
|
4.60
|
$
|
1.43
|
||||
Third
Quarter
|
$
|
7.25
|
$
|
3.66
|
||||
Fourth
Quarter
|
$
|
21.67
|
$
|
6.71
|
Such
quotations are without retail mark-ups, mark-downs or commissions, and may not
represent actual transactions and have not been adjusted for stock dividends or
splits.
Dividends.
We have never declared or paid any cash dividends or distributions on our common
stock. We currently intend to retain our future earnings to support operations
and to finance future growth and expansion and, therefore, do not anticipate
paying any cash dividends on our common stock in the foreseeable
future.
Transfer Agent
and Registrar. Our transfer agent is Corporate Stock Transfer, located at
3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. Their
telephone number is (303) 282-4800.
Securities
Authorized for Issuance Under Equity Compensation Plans. As of the fiscal
year ended December 31, 2009, we have no shares of our common stock or preferred
stock that are issued under compensation plans approved by our security
holders.
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Not
required.
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following is management's discussion and analysis of certain significant factors
which have affected our financial position and operating results during the
periods included in the accompanying consolidated financial statements, as well
as information relating to the plans of our current management. This report
includes forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents we file with the SEC from time
to time, which could cause actual results or outcomes to differ materially from
those projected. Undue reliance should not be place on these forward-looking
statements which speak only as of the date hereof. We undertake no obligation to
update these forward-looking statements.
22
The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Annual Report on Form
10-K.
Overview
We are a
leading access network solutions provider serving the Chinese
market. Since 1997, we have operated in the Chinese market and in
2006, we expanded marketing efforts to Vietnam, Indonesia, Malaysia, Thailand
and India. Since 2007, Beijing Telestone Communication Technology Corp. Ltd was
established as one of our subsidiaries focusing on developing and managing our
overseas businesses. Currently, marketing has expanded to 28 countries in the
world, including the U.S., Vietnam, Mexico, Brazil, Russia, India, The
Philippines, Thailand, Ireland, Ecuador, Mongolia, South Africa, Turkey,
Indonesia, Colombia, Costa Rica, Argentina, Ukraine, Kazakhstan, Singapore,
South Korea, Hong Kong (SAR), Saudi Arabia, New Zealand, Bangladesh, the UAE,
Canada and Iceland. Continuous expansion outside of China is one of our core
strategies. We believe that the quality of our products and services will allow
Telestone to be increasingly competitive internationally. Our access network
solutions business comprises research, development and application of access
network technology. In addition to sales of our internally designed wireless
communication equipment, including repeaters, antennas and radio frequency
accessories, we also provide project design, project management, installation,
maintenance and other after-sales services in accordance with our customers'
requirements. Since the establishment of Telestone in 1997, we have gradually
developed business relationships with China Mobile, China Unicom, China Telecom
(the“Big 3”), which currently are our main customers. During 2009, we saw a
significant improvement in revenue from sales of our products and services to
China Mobile, China Unicom and China Telecom. Furthermore, consolidate
relationships with the Big 3 by providing technically advanced products and
infrastructure solutions for 3G upgrade. Meanwhile, we improved our business
relationships with wireless system equipment vendors within China.
In
2009, our benchmark technology WFDS has further been applied in our business. We
have finished 43 WFDS installations as of December 31, 2009. This 3G technology
provides higher margins than the old 2G RFPA technology, which has more
competition due to its maturity and wider applications in the market place.
Internationally WFDS technology passed the U.S. FCC certification in September
2009. This has cleared the last hurdle for the Company to apply this advanced
technology in North and South American markets. Due to its superior performance,
substantial cost savings to carriers, easy installation and minimal intrusion to
property owners, as well as its low-power low-radiation environment-friendly
characteristics, we expect that our WFDS technology will expand our market
share.
In 2009,
due to the high technology content in our business and continued efforts in
developing our market leading technologies, we have been receiving many awards,
certifications and top ratings in advanced technology development
by China’s local and central government agencies and organizations,
which promote technology development in the national and local markets. Most
recently BTWTC has been certified as a “High and New Technology Enterprise” by
the Beijing Municipal Government. In addition, our trademark has been recognized
as a well-known trademark of Beijing by local Industry and Commerce
Bureau. In addition, we have won the title of A-Rated Good Credit
enterprise which entitles us to credits guaranteed by Beijing Z-Park Sci-tech
Guarantee Co. funded by the Chinese government.
23
SIGNIFICANT
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe critical accounting policies as disclosed
in our Annual Report on Form 10-K for the year ended December 31, 2008
reflect the more significant judgments and estimates used in preparation of our
financial statements. We believe there have been no material changes to our
critical accounting policies and estimates for the year ended December 31,
2009 compared to those discussed in our Annual Report on Form 10-K for the year
ended December 31, 2008.
Results
of Operation
Our
operating results are presented on a consolidated basis for the fiscal year
ended December 31, 2009, as compared to the fiscal year ended December 31,
2008.
For the
year ended December 31, 2008 and 2009, a tabular summary of results of
operations is as follows:
Item
|
2008
|
2009
|
Comparisons
|
|||||||||||||||||||||
$'000
|
% of revenue
|
$'000
|
% of revenue
|
$'000
|
%
|
|||||||||||||||||||
Revenue
|
35,329 | 71,879 | 36,550 | 103.46 | % | |||||||||||||||||||
Equipment
and services costs
|
17,133 | 48.50 | % | 41,402 | 57.60 | % | 24,269 | 141.65 | % | |||||||||||||||
Gross
profit
|
18,196 | 51.50 | % | 30,477 | 42.40 | % | 12,281 | 67.49 | % | |||||||||||||||
Sales
and marketing expenses
|
4,620 | 13.08 | % | 10,607 | 14.76 | % | 5,987 | 129.59 | % | |||||||||||||||
General
and administrative expenses
|
3,810 | 10.78 | % | 1,999 | 2.78 | % | -1,811 | -47.53 | % | |||||||||||||||
Research
and development expenses
|
527 | 1.49 | % | 1,768 | 2.46 | % | 1,241 | 235.48 | % | |||||||||||||||
Depreciation
and Amortization
|
295 | 0.84 | % | 326 | 0.45 | % | 31 | 10.51 | % | |||||||||||||||
Interest
expenses
|
298 | 0.84 | % | 290 | 0.40 | % | -8 | -2.68 | % | |||||||||||||||
Other
income, net
|
177 | 0.50 | % | 405 | 0.56 | % | 228 | 128.81 | % | |||||||||||||||
Net
Income before income tax
|
8,823 | 24.97 | % | 15,892 | 22.11 | % | 7,069 | 80.12 | % | |||||||||||||||
Income
tax
|
1,774 | 5.02 | % | 3,354 | 4.67 | % | 1,580 | 89.06 | % | |||||||||||||||
Net
income
|
7,049 | 19.95 | % | 12,538 | 17.44 | % | 5,489 | 77.87 | % |
We derive
our revenues primarily from capital expenditures made by the PRC’s
telecommunications carriers. Our operating revenues are composed of sales of
wireless equipment and service sales that include system integration,
engineering services, technical support, wireless network optimization and
network maintenance.
Our
consolidated net income increased by 77.87% to $12,538,000 for the year ended
December 31, 2009, as compared to the prior fiscal year of 2008. This increase
is attributable to an increase in revenue of 103.46% in fiscal year 2009 as
compared to fiscal year 2008. For the year ended December 31, 2009, our net
income before income tax increased by 80.12% to $15,892,000, as compared to
$8,823,000 in 2008.
24
For the
years ended December 31, 2008 and 2009, a tabular summary of our revenue is as
follows:
2008
|
2009
|
Growth
|
||||||||||||||||||||||
$'000
|
% of revenue
|
$'000
|
% of revenue
|
$'000
|
%
|
|||||||||||||||||||
Product
sales
|
17,132 | 48.89 | % | 30,162 | 41.96 | % | 13,030 | 76.06 | % | |||||||||||||||
Service
sales
|
18,197 | 51.51 | % | 41,717 | 58.04 | % | 23,520 | 129.25 | % | |||||||||||||||
Total
|
35,329 | 71,879 | 36,550 | 103.46 | % |
Our
revenue for the year ended December 31, 2009 was $71,879,000, representing an
increase of approximately 103.46% from the prior year of 2008. Product sales for
the year ended December 31, 2009 were $30,162,000, representing an increase of
76.06% from the prior year of 2008. Service sales for the year ended December
31, 2009 was $41,717,000, representing an increase of 129.25% from the prior
year of 2008. The increase in our product sales is primarily due to the telecom
carriers increasing their investments in 3G fixed assets. We benefited from
ongoing transition from 2G to 3G technologies, with more opportunities for our
equipment sales.
During
the year ended December 31,2009, our service sales increased significantly
resulting from telecommunications operators in China implementing 2G reformation
and 3G construction on a wide scale. We utilized this business
opportunity to obtain more service projects.
2008
|
2009
|
Growth
|
||||||||||||||||||||||
$’000 |
%
of revenue
|
$’000 |
% of revenue
|
$ | ’000 |
%
|
||||||||||||||||||
China
Mobile
|
16,719 | 47.32 | % | 32,634 | 45.40 | % | 15,915 | 95.19 | % | |||||||||||||||
China
Unicom
|
14,958 | 42.34 | % | 32,688 | 45.48 | % | 17,730 | 118.53 | % | |||||||||||||||
China
Telecom
|
2,123 | 6.01 | % | 5,324 | 7.41 | % | 3,201 | 150.78 | % | |||||||||||||||
Others
|
1,116 | 3.16 | % | 1,233 | 1.71 | % | 117 | 10.48 | % | |||||||||||||||
China
Netcom
|
413 | 1.17 | % | - | - | -413 | -100 | % | ||||||||||||||||
Total
|
35,329 | 71,879 | 36,550 |
Revenues
from the wireless telecom carriers were the Company’s major source of revenue
during the year ended December 31, 2009, and the majority of such
revenues were generated from China Mobile and China Unicom.
For the
year ended December 31, 2009, our revenues generated from China Mobile accounted
for 45.40% of our total revenue in 2009, representing an increase of 95.19%
compared to that of last year. The increased revenue from China Mobile were
mainly attributable to the fact that we won several large integrated service
bids from the third phase of China Mobile's TD-SCDMA construction in
Chongqing City, Shandong Province and other provinces.
Our
revenue generated from China Unicom accounted for 45.48% of total revenue in
2009, representing an increase of 118.53% compared to that of 2008. We won
several centralized bids for the sale of equipment to China Unicom.
Our
revenue generated from China Telecom accounted for 7.41% of our total revenue in
2009, representing an increase of 150.78% compared to that of 2008. The
increased revenues from China Telecom were mainly attributable to China
Telecom’s increasing investments in the 3G sector. China Telecom is a late comer
in China’s wireless telecommunications industry. It is traditionally a fixed
line telecommunication service provider. However, it is expanding into the
wireless market with its own standards and large investments.
Sales to
overseas and other customers accounted for 1.71% of total revenue in 2009,
representing an increase of 10.48% compared to that of 2008.
25
Gross profit.
Our gross profit on product sales and service sales was $30,477,000 in
2009, representing an increase of 67.49% as compared to $18,196,000 in
2008.
For the
years ended December 31, 2008 and 2009, a tabular summary of the condensed
statement of operations is presented below:
2008
|
2009
|
Growth
|
|||||||||||||
$’000
|
% of revenue
|
$'000
|
% of revenue
|
$'000
|
%
|
||||||||||
Revenue
|
35,329
|
71,879
|
36,550
|
103.46
|
% | ||||||||||
Equipment
and services costs
|
17,133
|
48.50
|
% |
41,402
|
57.60
|
% |
24,269
|
141.65
|
% | ||||||
Gross
profit
|
18,196
|
51.50
|
% |
30,477
|
42.40
|
% |
12,281
|
67.49
|
% |
During
2009, our gross profit increased due to an increase in revenues.
Gross profit
margin. Our gross profit margin on product and service sales was 42.40%
in 2009, as compared to 51.50% in 2008. Our gross margin decreased as compared
with the prior year of 2008 due to the increase of costs of equipment and
services than revenue. Price was depressed due to centralized purchase by
telecommunication operators and the rapid growth in the
telecommunication market generated fierce competition. Therefore, costs of
construction works increased accordingly
Net income.
Our consolidated net income increased by 77.87% to $12,538,000 for the
year ended December 31, 2009, as compared to 2008. This increase is
attributable to an increase in revenue of 103.46% in 2009. For the year ended
December 31, 2009, our net income before income tax increased by 80.12% to
$15,892,000, compared to $8,823,000 in 2008.
Equipment and
service costs. Equipment and service costs were approximately $41,402,000
or 57.60% of revenue for the year ended December 31, 2009, as compared to
$17,133,000, or 48.50% of revenue for 2008. For the year ended December 31,
2009, our equipment and services costs increased by 141.65%, compared to
2008.
Sales and
Marketing expenses. Sales and marketing expenses were approximately
$10,607,000 or 14.76% of our revenue for the year ended December 31, 2009 and
were $4,620,000, or 13.08% of our revenue for the year ended December 31, 2008.
The increase in sales and marketing expenses is due to our increase in
sales.
General and
Administrative expenses. General and administrative expenses were
$1,999,000 or 2.78% of our revenue for the year ended December 31, 2009, as
compared to $3,810,000 or 10.78% of revenue for 2008. Through our budgetary
control practices in 2009, we reduced our general and administrative
expenses.
Research and
Development expenses.
Research and development expenses were $1,768,000 or 2.46% of revenues
for the year ended December 31, 2009, as compared to $527,000, or 1.49% of
revenues in 2008. The main reason for this increase is that we focused on
R&D to keep our industry leadership position and high margins. Thus, we
increased our investments in R&D activities in order to finished
approximately fifteen research and development projects in 2009.
26
Liquidity
and Capital Resources
We
generally finance our operations from cash flow generated internally and from
bank loans. As of December 31, 2009, we had current assets of $112,440,000.
Current assets comprised inventories of $4,442,000, accounts receivable of
$89,005,000, prepayments of $1,223,000, other current assets of $4,574,000, due
from related parties of $1,963,000, and cash and cash equivalents of
$11,233,000. Current liabilities comprised accounts payable of $15,678,000,
customer deposits for sales of equipment of $1,582,000, tax payables of
$7,132,000, short-term loan $5,850,000 due to related parties of $4,947,000 and
other payables and accruals of $16,473,000.
Our net
cash inflow from operating activities was $865,000 for the year ended December
31, 2009. At December 31, 2009, cash and cash equivalents were $11,233,000.
Current assets were $112,440,000 and current liabilities were $51,662,000,
reflecting a current ratio (current assets/current liabilities) of
2.18:1.
Our
trading terms with our customers are mainly on credit. The credit period is
generally less than one year. The accounts receivable turnover period for the
year ended December 31, 2009 was 358 days compared to 553 days for the year
ended December 31, 2008. Inventory turnover period for the year ended December
31, 2009 was 114 days, compared to 278 days in 2008.
Our
account receivables in terms of days of sales has decreased substantially
despite the large increase in revenue in the year ended December 31,
2009 as compared to the year of 2008. The primary reason for the
reduction in our account receivables turnover days is that a large portion
of the account receivables that was put on hold due to the restructuring of the
access network industry in China has been received as the carriers completed
their reorganizations and resumed normal payments.
We
experienced a longer accounts receivable turnover period than some of our
competitors, due to traditionally long payment periods from China’s
state-controlled telecom carriers. Telestone continues to believe that all of
our outstanding accounts receivables will be paid as our major customers,
China Mobile, China Unicom, and China Telecom, are state owned and we have not
experienced any significant bad debts from them in the past.
Our
inventory turnover period decreased for the year ended December 31, 2009 as
compared to the year ended December 31, 2008 due to internal improvements
in our inventory control measures.
As of
December 31, 2009, our cash and bank balances are mainly denominated in RMB and
United States dollars while our bank borrowings are mainly denominated in RMB.
Our revenue, expenses, assets and liabilities are mainly denominated in RMB and
United States dollars. Recently, the exchange rate fluctuations in the PRC have
led to an appreciation of currency. This may result in certain exchange
risks.
Capital structure
and solvency. We have cash and cash equivalents in the amount of
$11,233,000 for the year ended December 31, 2009. As of December 31, 2009, our
total assets were $116,740,000 and our total liabilities were $51,662,000,
reflecting a gearing ratio of 79.38%. Our gearing ratio, calculated as total
liabilities over equity, was 79.38% and 66.96% as of December 31, 2009 and 2008,
respectively. The increase in our gearing ratio is due to the increase in
accounts payable and bank financing.
Asset utilization
and efficiency. As of December 31, 2009, our total assets were
$116,740,000 and our operating revenue was $71,879,000 for the year ended
December 31,2009, reflecting a total asset turnover of 61.57%.
Accounts
Receivable
As of
December 31, 2009, our accounts receivables were $89,005,000 as compared to
$62,136,000 for the year ended December 31, 2008.
27
The
credit period is generally for a period of six to nine months. Accounts
receivable are stated at the amount billed to customers. Accounts receivables
are presented net of an allowance for doubtful accounts. Our estimate of
allowance for doubtful account is based on a variety of factors, including
historical collection experiences, existing economic conditions and a review of
the current status of the receivable. For the year ended December 31, 2009 and
2008, allowance for doubtful accounts were $6,174,000 and $5,776,000
respectively. Our long credit period is because our major customers are the
three major players in China telecom market (“China Mobile”, “China Unicom” and
“China Telecom”). Due to their monopoly in China’s telecom market, we are at a
disadvantage in negotiations regarding payments/credit period.
We have
made attempts to adequately address accounts receivable turn-over problems and
have made efforts to shorten the collection period. As a result, accounts
receivable turnover days have been shortened to 358 days.
The
Company paid particular attention to lowering the turnover period of our
accounts receivable balances and have taken the following measures:
(1) The
provincial branch managers and the headquarters district managers are in charge
of the collection of the account receivables, which form an important element of
their performance evaluation.
(2) The
Company keeps in touch with the management and the key department (such as the
financial department and the planning department) of the carriers in
headquarters as well as the provincial branches to monitor the collection of the
account receivables.
(3) Our
business strategy is to encourage sales to the branches of China Mobile, China
Telecom, China Unicom who have good payment records such as Shandong Unicom,
Tianjin Unicom, and Beijing Unicom. We believe these measures will optimize the
structure of our account receivables and minimize our financial risks in the
future.
Major
Milestones of 2009
The U.S. Federal Communications
Commission Approved WFDSTM
Technology—the
WFDSTM system
had a successful debut at the April 2009 CTIA trade show in Las Vegas. After the
trade show, Telestone assembled a team for the sole purpose of completing
the FCC certification process for the system's equipment. In September 2009,
Telestone's proprietary WFDSTM
technology, which provides for indoor multi-services access networks,
successfully passed all FCC testing procedures. The FCC certification license
will not only apply to the U.S. market, but also to Telestone's WFDSTM
products in Central and South America. Coupled with successful installations for
this new fiber-optic equipment in China, we believe that this approval is
a significant milestone in the Company's efforts to gain market share in North
and South American markets.
Beijing Municipal Enterprise
Technology Center Approved Telestone Technologies Corporation in 2009.
Telestone was selected as the 12th group
of the Beijing Municipal Enterprise Technology Center. In March 2009, Telestone
entered into the selection. After over three months of selection,
Telestone obtained approval with other 53 other enterprises. In recent
years, in order to promote the independent innovation and long-term development,
Telestone continued to invest investing in proprietary research
an development. We believe that being certified by the
Beijing Municipal Enterprise Technology Center is an approval of Telestone’s
technology innovation capability and also approval of Telestone as an
enterprise in a leadership position in the telecommunications
industry.
In July
of 2009, Telestones won bids from the third stage construction of China
Mobile’s TD-SCDMA. We believe that this further support Telestone's leading
position in providing indoor coverage systems and indoor distribution system
integration programs.
Off-Balance Sheet
Arrangements
We do not
currently have any off-balance sheet arrangements.
28
Contingent Liabilities. We
recognize our revenue upon the completion of contracts and have made full tax
provision in accordance with relevant national and local laws and regulations of
the PRC. A contract is considered completed upon completion of all essential
contract work and when installation has been accepted by the customer. It is the
common practice in the PRC that invoices are not issued to customers until
payments are received. We follow the practice of reporting our revenue for PRC
tax purposes when invoices are issued. All unbilled revenue will become taxable
when invoices are issued. Despite the fact that we have made full tax provision
in the financial statements, we may be subject to surcharge and penalty for the
deferred reporting of tax obligations. The Board of Directors considers it is
unlikely that the tax surcharge and penalty will be imposed.
Remuneration
Policies
We offer
competitive remuneration schemes to our employees based on industry practices as
well as the employees and our performance.
ITEM
7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK.
|
Not
required.
ITEM
8.
|
FINANCIAL
STATEMENTS.
|
Telestone
Technologies Corporation
Index
to Consolidated Financial Statements
Page
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
||
Consolidated
Statements of Operations and other comprehensive income
|
F-2
|
||
Consolidated
Balance Sheets
|
F-3
|
||
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-4
|
||
Consolidated
Statements of Cash Flows
|
F-5
|
||
Notes
to Consolidated Financial Statements
|
F-6
– F-22
|
29
Telestone
Technologies Corporation
Report
of Independent Registered Public Accounting Firm
To the
Audit Committee, Stockholders and Board of Directors
Telestone
Technologies Corporation
We have
audited the accompanying consolidated balance sheets of Telestone Technologies
Corporation and its subsidiaries (the “Company”) as of December 31, 2009 and
2008, and the related consolidated statements of operations and other
comprehensive income, changes in stockholders' equity and cash flows for each of
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the years then ended in conformity with accounting principles generally
accepted in the United States of America.
Mazars
CPA Limited
Certified
Public Accountants
Hong
Kong
Date:
March 31, 2010
F-1
Telestone
Technologies Corporation
Consolidated
Statements of Operations and Other Comprehensive Income
Years
ended December 31, 2009 and 2008
Years ended December 31,
|
|||||||||||
2009
|
2008
|
||||||||||
Note
|
US$’000
|
|
US$’000
|
||||||||
Operating
revenues:
|
|||||||||||
Net
sales of equipment
|
30,162 | 17,132 | |||||||||
Service
income
|
41,717 | 18,197 | |||||||||
Total
operating revenues
|
71,879 | 35,329 | |||||||||
Cost
of operating revenues:
|
|||||||||||
Cost
of net sales
|
19,697 | 10,415 | |||||||||
Cost
of service
|
21,705 | 6,718 | |||||||||
Total
cost of operating revenues
|
41,402 | 17,133 | |||||||||
Gross
income
|
30,477 | 18,196 | |||||||||
Operating
expenses:
|
|||||||||||
Sales
and marketing
|
10,607 | 4,620 | |||||||||
General
and administrative
|
1,999 | 3,810 | |||||||||
Research
and development
|
1,768 | 527 | |||||||||
Depreciation
and amortization
|
326 | 295 | |||||||||
Total
operating expenses
|
14,700 | 9,252 | |||||||||
Operating
income
|
15,777 | 8,944 | |||||||||
Interest
expense
|
(290 | ) | (298 | ) | |||||||
Other
income, net
|
405 | 177 | |||||||||
Income
before income taxes
|
15,892 | 8,823 | |||||||||
Income
taxes
|
10
|
(3,354 | ) | (1,774 | ) | ||||||
Net
income
|
12,538 | 7,049 | |||||||||
Other
comprehensive income
|
|||||||||||
Foreign
currency translation adjustment
|
109 | 2,556 | |||||||||
Comprehensive
income
|
12,647 | 9,605 | |||||||||
Earnings
per share:
|
3
|
||||||||||
Weighted
average number of common stock outstanding
|
|||||||||||
Basic
|
10,404,550 | 10,404,550 | |||||||||
Dilutive
effect of warrants
|
- | 31,578 | |||||||||
Diluted
|
10,404,550 | 10,436,128 | |||||||||
Net
income per share of common stock
|
US$
|
US$
|
|||||||||
Basic
|
1.21 | 0.68 | |||||||||
Diluted
|
1.21 | 0.68 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
Telestone
Technologies Corporation
Consolidated
Balance Sheets
As of
December 31, 2009 and 2008
As of December 31,
|
|||||||||||
2009
|
2008
|
||||||||||
Note
|
US$’000
|
|
US$’000
|
||||||||
Current
assets:
|
|||||||||||
Cash
and cash equivalents
|
11,233 | 7,866 | |||||||||
Accounts
receivable, net of allowance
|
5
|
89,005 | 62,136 | ||||||||
Due
from related parties
|
14
|
1,963 | 1,826 | ||||||||
Inventories,
net of allowance
|
9
|
4,442 | 7,843 | ||||||||
Prepayment
|
1,223 | 2,347 | |||||||||
Other
current assets
|
4,574 | 1,352 | |||||||||
Total
current assets
|
112,440 | 83,370 | |||||||||
Goodwill
|
7
|
3,119 | 3,119 | ||||||||
Property,
plant and equipment, net
|
6
|
1,181 | 1,050 | ||||||||
4,300 | 4,169 | ||||||||||
Total
assets
|
116,740 | 87,539 | |||||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||||||
Current
liabilities:
|
|||||||||||
Short-term
bank loans
|
8,
14
|
5,850 | 2,918 | ||||||||
Accounts
payable – Trade
|
15,678 | 11,776 | |||||||||
Customer
deposits for sales of equipment
|
1,582 | 739 | |||||||||
Due
to related parties
|
14
|
4,947 | 1,673 | ||||||||
Income
tax payable
|
7,132 | 6,805 | |||||||||
Accrued
expenses and other accrued liabilities
|
16,473 | 11,197 | |||||||||
Total
current liabilities
|
51,662 | 35,108 | |||||||||
Commitments
and contingencies
|
15
|
||||||||||
Stockholders’
equity:
|
|||||||||||
Preferred
stock, US$0.001 par value, 10,000,000 shares authorized, no shares
issued
|
|||||||||||
Common
stock and paid-in-capital, US$0.001 par value: Authorized
- 100,000,000 shares as of December 31, 2009 and 2008
|
|||||||||||
Issued
and outstanding – 10,404,550 shares as of December
31, 2009 and 2008
|
12
|
11 | 11 | ||||||||
Additional
paid-in capital
|
18,989 | 18,989 | |||||||||
Dedicated
reserves
|
13
|
4,807 | 3,787 | ||||||||
Other
comprehensive income
|
5,682 | 5,573 | |||||||||
Retained
earnings
|
35,589 | 24,071 | |||||||||
Total
stockholders’ equity
|
65,078 | 52,431 | |||||||||
Total
liabilities and stockholders’ equity
|
116,740 | 87,539 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
Telestone
Technologies Corporation
Consolidated
Statements of Changes in Stockholders' Equity
Years
ended December 31, 2009 and 2008
Common stock issued
|
Additional
|
Other
compre-
|
||||||||||||||||||||||||||
Number
of shares
|
Amount
|
paid-in
capital
|
Dedicated
reserves
|
hensive
income
|
Retained
earnings
|
Total
|
||||||||||||||||||||||
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
US$’000
|
|||||||||||||||||||||||
Balance
at January 1, 2008
|
10,404,550 | 11 | 18,989 | 3,199 | 3,017 | 17,610 | 42,826 | |||||||||||||||||||||
Net
income
|
- | - | - | - | - | 7,049 | 7,049 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 2,556 | - | 2,556 | |||||||||||||||||||||
Transfer
to dedicated reserves
|
- | - | - | 588 | - | (588 | ) | - | ||||||||||||||||||||
Balance
at December 31, 2008
|
10,404,550 | 11 | 18,989 | 3,787 | 5,573 | 24,071 | 52,431 | |||||||||||||||||||||
Balance
at January 1, 2009
|
10,404,550 | 11 | 18,989 | 3,787 | 5,573 | 24,071 | 52,431 | |||||||||||||||||||||
Net
income
|
- | - | - | - | - | 12,538 | 12,538 | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | 109 | - | 109 | |||||||||||||||||||||
Transfer
to dedicated reserves
|
- | - | - | 1,020 | - | (1,020 | ) | - | ||||||||||||||||||||
Balance
at December 31, 2009
|
10,404,550 | 11 | 18,989 | 4,807 | 5,682 | 35,589 | 65,078 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
Telestone
Technologies Corporation
Consolidated
Statements of Cash Flows
Years
ended December 31, 2009 and 2008
Years ended December 31,
|
||||||||||
Note
|
2009
|
2008
|
||||||||
US$’000
|
US$’000
|
|||||||||
Cash
flows from operating activities
|
||||||||||
Net
income
|
12,538 | 7,049 | ||||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
Depreciation and
amortization
|
326 | 295 | ||||||||
Allowance for doubtful
accounts
|
408 | 1,341 | ||||||||
Allowance for
inventories
|
436 | - | ||||||||
Profit on disposal of property,
plant and equipment, net
|
- | (14 | ) | |||||||
Changes
in assets and liabilities:
|
||||||||||
Accounts
receivable
|
(27,123 | ) | (15,654 | ) | ||||||
Inventories
|
2,978 | 731 | ||||||||
Due from related
parties
|
(133 | ) | 88 | |||||||
Prepayment
|
1,128 | (1,116 | ) | |||||||
Other current
assets
|
(3,213 | ) | 71 | |||||||
Accounts
payable
|
3,866 | 3,706 | ||||||||
Due to related
parties
|
3,264 | (813 | ) | |||||||
Customer deposits for sales of
equipment
|
840 | 467 | ||||||||
Income tax
payable
|
310 | 1,772 | ||||||||
Accrued expenses and other
accrued liabilities
|
5,240 | 3,544 | ||||||||
Net
cash provided by operating activities
|
865 | 1,467 | ||||||||
Cash
flows from investing activities
|
||||||||||
Purchase
of property, plant and equipment
|
(414 | ) | (169 | ) | ||||||
Proceeds
from disposal of property, plant and equipment
|
- | 61 | ||||||||
Net
cash used in investing activities
|
(414 | ) | (108 | ) | ||||||
Cash
flows from financing activities
|
||||||||||
Proceeds
from short-term bank loans
|
5,850 | 2,918 | ||||||||
Repayment
of short-term bank loans
|
(2,953 | ) | (2,189 | ) | ||||||
Net
cash provided by financing activities
|
2,897 | 666 | ||||||||
Net
increase in cash and cash equivalents
|
3,348 | 2,025 | ||||||||
Cash
and cash equivalents, beginning of year
|
7,866 | 5,473 | ||||||||
Effect
on exchange rate changes
|
19 | 368 | ||||||||
Cash
and cash equivalents, end of year
|
11,233 | 7,866 | ||||||||
Supplemental
disclosure of cash flow information
|
||||||||||
Interest
received
|
32 | 42 | ||||||||
Interest
paid
|
(150 | ) | (220 | ) | ||||||
Income
tax paid
|
(3,010 | ) | (56 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Telestone
Technologies Corporation (“TSTC”), formerly known as Milestone Capital, Inc.,
was organized under the laws of the State of Colorado in February 1987 under the
name Shield Enterprises, Inc. In August 2004, TSTC reincorporated in
the State of Delaware under the name Telestone Technologies
Corporation.
Success
Million International Limited (“SMI”), a company established in the Hong Kong
Special Administrative Region of the People’s Republic of China (the “PRC”) on
August 23, 2004, is a wholly owned subsidiary of TSTC and had no business
operations since incorporation. Beijing Telestone Technology Company Limited
(“Beijing Telestone”), a wholly-owned subsidiary of SMI established in Beijing,
the PRC with an operating period until April 12, 2024, is engaged in the
business of design, development, installation and trading of wireless
telecommunication coverage system equipment.
Beijing
Telestone Wireless Telecommunication Company Limited (“BTWTC”)(note), a
company established in Beijing, the PRC with tenure of 20 years from June 17,
2005 to June 16, 2025 for provision of wireless telecommunication networking and
system integration services, is owned by certain key management personnel of the
Company (the “Owners”). Contractual agreements have been entered into
between the Owners and Beijing Telestone so as to give effect that Beijing
Telestone is the beneficial owner of BTWTC. Beijing Telestone does not hold the
ownership interests in BTWTC directly because Beijing Telestone is considered as
a foreign entity under the PRC laws. Due to the restrictions on foreign
ownership to provide and engage in certain wireless telecommunication networking
services in the PRC, Beijing Telestone, through loans to the Owners, established
BTWTC with a view to conduct such operations without violating the relevant PRC
rules and regulations. As a result of the above contractual
arrangement, Beijing Telestone has obtained control and interest over
BTWTC. Beijing Telestone is considered as the primary beneficiary of
BTWTC and therefore BTWTC is considered as a variable interest entity (“VIE”) of
Beijing Telestone so that the financial statements of BTWTC are consolidated
into the financial statements of Beijing Telestone for all periods presented in
accordance with ASC Topic 810 – Consolidation (ASC
810).
On July
5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
(“Guolian”)(note) and
owners of Guolian entered into a Share Transfer Agreement (the “Agreement”).
Under the Agreement, 100% equity ownership interests in Guolian and its wholly
owned subsidiary, Pan-pacific Telecommunication Company Limited
(“Pan-pacific”)(note),
had been transferred by the owners of Guolian to BTWTC. Guolian and Pan-pacific
were established in Jinan, Shandong Province, the PRC on February 9, 1999 and
October 22, 1999 respectively. The principal business activities of Guolian and
Pan-pacific are design, development, production and installation and trading of
wireless telecommunication coverage system equipment.
On
October 8, 2007, BTWTC has established a wholly-owned subsidiary company,
Beijing Telestone Communication Technology Corporation Limited (“BTCTC”)(note),
with operating period of 20 years until October 7, 2027. The principal activity
of BTCTC is developing and managing the business operation of the Company
outside the PRC.
In this
report, TSTC, SMI, Beijing Telestone, BTWTC, Guolian, Pan-pacific and BTCTC are
collectively referred to as the “Company”.
Note:
|
These
are direct translation of name in Chinese for identification purpose only
and are not the official name in
English.
|
F-6
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Principles
|
The
consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United
States of America (“USGAAP”).
|
Basis
of consolidation
|
The
consolidated financial statements include the accounts of TSTC, its
subsidiaries and a VIE. The results of the subsidiaries
acquired or disposed of during the year are consolidated from the
effective dates of acquisition or to the effective dates of disposal,
respectively.
|
All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
Revenue
recognition
Net sales
of equipment represent the invoiced value of goods, net of value-added tax
(“VAT”) and returns. The Company generally recognizes product revenue
when persuasive evidence of an arrangement exists, delivery occurs, the fee is
fixed or determinable, and collectibility is probable. Service
revenue is recognized when the service is performed and accepted by the
customer. The Company has a policy of including handling costs incurred for
finished goods, which are not significant, in the sales and marketing
expenses.
The
Company provides installation services for certain sales of equipment under
fixed-price contracts. Revenues from these fixed-price service
contracts are recognized on the completed-contract method. Under the
completed-contract method, revenue and costs of individual contracts are
included in operations in the year during which they are
completed. Losses expected to be incurred on contracts in progress
are recognized in the period such losses are determined. This method
is used because the contract is completed within a short period of time, and the
financial position and results of operations do not vary significantly from
those that would result from using the percentage-of-completion
method. A contract is considered completed upon completion of all
essential contract work and the installation has been accepted by the
customer.
Income
taxes
Income
tax expense is computed based on pre-tax income included in the consolidated
statement of operations. Income taxes have been provided, using the liability
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and tax bases assets and liabilities and their reported
amounts. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets or
liabilities in the consolidated financial statements.
Research
and development
All costs
of research and development activities are expensed as
incurred.
F-7
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Inventories
All
inventories are stated at the lower of weighted average cost or market.
Potential losses from obsolete and slow-moving inventories are provided for when
identified.
Goodwill
Goodwill
on acquisition of businesses, being the excess of the cost of the acquisition
over the Company’s share of the fair value of the identifiable assets,
liabilities and contingent liabilities, is recognized as a separate asset.
Goodwill is carried at cost less accumulated impairment losses, which is tested
for impairment annually or more frequently if events or changes in circumstances
indicate that the carrying value may be impaired. Goodwill is allocated to
cash-generating units for the purpose of impairment test and determination of
gain or loss on disposal. An impairment loss on goodwill is not
reversed.
Property,
plant and equipment
Property,
plant and equipment are stated at original cost less accumulated depreciation
and amortization.
The cost
of an asset comprises its purchase price and any directly attributable costs of
bringing the asset to its present working condition and location for its
intended use. Expenditures incurred after the assets have been put
into operation, such as repairs and maintenance, overhaul and minor renewals and
betterments, are normally charged to operating expenses in the period in which
they are incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to be obtained from the use of the assets, the
expenditure is capitalized.
When
assets are sold or retired, their costs and accumulated depreciation are
eliminated from the consolidated financial statements and any gain or loss
resulting from their disposal is recognized in the year of disposition as an
element of other income, net.
Depreciation
is provided to write off the cost of property, plant and equipment using the
straight-line method at rates based on their estimated useful lives from the
date on which they become fully operational and after taking into account their
estimated residual values.
Accounting
for the impairment of long-lived assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Cash
equivalents
The
Company considers short-term, highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-8
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Foreign
currency translation and other comprehensive income
|
All
major subsidiaries of the Company consider Renminbi as their functional
currency as a substantial portion of their business activities is based in
Renminbi. However, the Company has chosen the United States
dollar as its reporting currency.
|
Transactions
in currencies other than the functional currency during the year are translated
into the functional currency at the applicable rates of exchange prevailing at
the time of the transactions. Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into
the functional currency at the applicable rates of exchange in effect at the
balance sheet date. Exchange gains and losses are recorded in the
consolidated statements of operations.
For
translation of financial statements into the reporting currency, assets and
liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments, when
material, resulting from this process are recorded in accumulated other
comprehensive income within stockholders’ equity.
Comprehensive
income
|
ASC
Topic 220, Comprehensive
Income, requires the presentation of comprehensive income, in
addition to the existing statements of
operations. Comprehensive income is defined as the change in
equity during the year from transactions and other events, excluding the
changes resulting from investments by owners and distributions to
owners.
|
Use
of estimates
|
The
preparation of the consolidated financial statements in conformity with
USGAAP requires the Company’s management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reported
periods. Actual amounts could differ from those
estimates. Estimates are used for, but not limited to, the
accounting for certain items such as allowance for doubtful accounts,
depreciation and amortization, impairment, inventory allowance, taxes and
contingencies.
|
Operating
leases
Leases
where substantially all the rewards and risks of ownership of assets remain with
the leasing company are accounted for as operating leases. Rental payables under
operating leases are recognized as expenses on the straight-line basis over the
lease term.
Allowance
for doubtful accounts
Accounts
receivable are stated at the amount billed to customers. The Company
recognizes an allowance for doubtful accounts to ensure trade and other
receivables are not overstated due to uncollectibility. The Company’s estimate
is based on a variety of factors, including historical collection experience,
existing economic conditions and a review of the current status of the
receivable. Accounts receivable are presented net of an allowance for doubtful
accounts of US$6,174,000 and US$5,776,000 as of December 31, 2009 and 2008
respectively.
F-9
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Related
parties
|
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence
over the other party in making financial and operating
decisions. Parties are also considered to be related if they
are subject to common control or common significant
influence.
|
Fair
Value of Financial Instruments
SFAS No.
107, Disclosures about Fair Value of Financial Instruments, included in the
Codification as ASC 825, Financial Instruments, requires that the Company
discloses estimated fair values of financial instruments. The carrying amounts
reported in the balance sheets for current assets and current liabilities
qualifying as financial instruments are a reasonable estimate of fair
value.
Fair
value measurements
The
Company adopted ASC Topic 820 – Fair Value Measurements and
Disclosures (ASC 820.) The adoption of ASC 820 did not have a
material impact on our consolidated financial statements. ASC 820 establishes a
three-tier fair value hierarchy to prioritize the inputs used in measuring fair
value. The hierarchy gives the highest priority to quoted prices in
active markets (Level 1) and the lowest priority to unobservable inputs (Level
3). The three levels are defined as follows:
|
Level
1:
|
Observable
inputs, such as unadjusted quoted market prices in active markets for the
identical asset or liabilities.
|
|
Level
2:
|
Inputs
that are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the full term
of the financial instrument.
|
|
Level
3:
|
Unobservable
inputs reflecting the entity’s own assumptions in measuring the asset or
liability at fair value.
|
The
Company’s financial instruments consist principally of cash deposits, accounts
and other receivables, accounts payable, accrued liabilities, and short-term
bank loans that generally approximate their fair values based on the short-term
maturity of these instruments.
Recent
accounting pronouncements
In
May 2009, the FASB issued guidance, currently included in ASC Topic 855,
Subsequent Events,
which established general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or available to be issued (formerly SFAS No. 165, Subsequent Events). This
guidance requires disclosure of the date through which subsequent events have
been evaluated, as well as whether that is the date the financial statements
were issued or the date the financial statements were available to be issued.
The provisions of this guidance were effective for interim or annual financial
periods ending after June 15, 2009. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial position and
results of operations.
F-10
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements (Continued)
In
June 2009, the FASB issued an accounting standard, currently included in
ASC Topic 105, Generally
Accepted Accounting Principles (“ASC 105”), which established only two
levels of GAAP, authoritative and nonauthoritative (formerly SFAS No. 168,
The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting
Principles — a replacement of FASB Statement No. 162 ). The FASB ASC
became the only source of authoritative nongovernmental GAAP, except for
rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other nongrandfathered,
non-SEC accounting literature not included in the ASC will become
nonauthoritative. ASC 105 was effective for financial statements issued in
interim or annual reporting periods ending after September 15, 2009.
The ASC was not intended to change or alter existing GAAP, consequently the
adoption of ASC 105 did not have a material impact on the Company’s consolidated
financial statements.
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging
Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses the
accounting for multiple-deliverable arrangements to enable vendors to account
for products or services separately rather than as a combined unit and modifies
the manner in which the transaction consideration is allocated across the
separately identified deliverables. ASU 2009-13 significantly expands the
disclosures requirements for multiple-deliverable revenue arrangements.
ASU 2009-13 will be effective for the first annual reporting period beginning on
or after June 15, 2010, and may be applied retrospectively for all periods
presented or prospectively to arrangements entered into or materially modified
after the adoption date. Early adoption is permitted, provided that the
guidance is retroactively applied to the beginning of the year of adoption. The
Company is currently evaluating the impact this update will have on its
consolidated financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB
Accounting Standards Codification for the issuance of FASB Statement No. 166,
Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The amendments
in this Accounting Standards Update improve financial reporting by eliminating
the exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
F-11
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements (Continued)
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this
Update clarify that the stock portion of a distribution to shareholders that
allows them to elect to receive cash or stock with a potential limitation on the
total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected in EPS prospectively and is not
a stock dividend for purposes of applying Topics 505 and 260 (Equity and
Earnings Per Share). The amendments in this update are effective for
interim and annual periods ending on or after December 15, 2009, and should be
applied on a retrospective basis. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary. Under this guidance, an
entity is required to deconsolidate a subsidiary when the entity ceases to have
a controlling financial interest in the subsidiary. Upon deconsolidation
of a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company is currently evaluating the
impact this update will have on its consolidated financial
statements.
F-12
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
Recent
accounting pronouncements (Continued)
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10
that requires new disclosure as follows: 1) Transfers in and out of Levels
1 and 2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in Level 3
fair value measurements. In the reconciliation for fair value measurements
using significant unobservable inputs (Level 3), a reporting entity should
present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net
number). This update provides amendments to Subtopic 820-10 that
clarify existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. A class is often a subset of assets or
liabilities within a line item in the statement of financial position. A
reporting entity needs to use judgment in determining the appropriate classes of
assets and liabilities. 2) Disclosures about inputs and valuation
techniques. A reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements. Those disclosures are required for fair
value measurements that fall in either Level 2 or Level 3. The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The Company is currently evaluating the
impact this update will have on its consolidated financial
statements.
3.
|
EARNINGS
PER SHARE
|
The
Company reports earnings per share in accordance with ASC Topic 260 – Earnings Per Share (ASC 260).
ASC 260 requires presentation of basic and diluted earnings per share in
conjunction with the disclosure of the methodology used in computing such
earnings per share.
Basic
earnings per share is computed based upon the weighted average number of shares
of common stock outstanding during each period.
Diluted
earnings per share is computed based on net income for the periods presented
attributable to shareholders on the weighted average number of common stock
outstanding during the periods presented, adjusted for the effect of the
dilutive common stock equivalents outstanding during the periods presented. The
dilutive effect of warrants to purchase common stock which were outstanding
during the year ended December 31, 2008 is reflected in diluted earnings per
share by application of the treasury stock method. Since the warrants
outstanding as of December 31, 2009 are anti-dilutive, there is no dilutive
effect of warrants in the calculation of diluted earnings per share for the year
ended December 31, 2009.
F-13
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
4.
|
OPERATING
RISKS
|
|
(a)
|
Concentration
of major customers and suppliers
|
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Major
customers with revenues of more than 10% of
the Company’s sales
|
||||||||
Sales
to major customers
|
65,322 | 31,677 | ||||||
Percentage
of sales
|
90 | % | 90 | % | ||||
Number
|
2 | 2 | ||||||
Major
suppliers with purchases of more than 10% of
the Company’s purchases
|
||||||||
Purchases
from major suppliers
|
2,950 | 2,921 | ||||||
Percentage
of purchases
|
18 | % | 27 | % | ||||
Number
|
1 | 1 |
Accounts
receivable related to the Company’s major customers comprised 91% and 96% of all
account receivables as of December 31, 2009 and 2008 respectively.
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counter parties failed to perform as contracted. Concentrations of
credit risk (whether on or off balance sheet) that arise from financial economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The major
concentrations of credit risk arise from the Company’s accounts receivable. Even
though the Company has major concentrations, it does not consider itself exposed
to significant risk with regards to the related receivables.
|
(b)
|
Country
risks
|
The
Company may also be exposed to the risks as a result of its principal operation
being primarily in the PRC. These include risks associated with, among others,
the political, economic and legal environmental and foreign currency exchange.
The Company’s results may be adversely affected by change in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation, among other things.
The Company’s management does not believe these risks to be significant. There
can be no assurance, however, those changes in political and other conditions
will not result in any adverse impact.
(c)
|
Cash
and time deposits
|
The
Company mainly maintains its cash balances with various banks located in the
PRC. In common with local practice, such amounts are not insured or otherwise
protected should the financial institutions be unable to meet their liabilities.
There has been no history of credit losses. There are neither material
commitment fees nor compensating balance requirements for any outstanding loans
of the Company.
F-14
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
5.
|
ACCOUNTS
RECEIVABLE
|
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Completed
contracts
|
89,835 | 65,454 | ||||||
Retentions
|
5,344 | 2,458 | ||||||
95,179 | 67,912 | |||||||
Allowance
for doubtful accounts
|
(6,174 | ) | (5,776 | ) | ||||
89,005 | 62,136 |
Of the
retentions balance as of December 31, 2009 and 2008, approximately US$903,000
and US$368,000 respectively are expected to be collected after one
year.
6.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property, plant and equipment is
summarized as follows:
As of December 31,
|
|||||||||||
Estimated useful life
|
2009
|
2008
|
|||||||||
(in years)
|
US$’000
|
US$’000
|
|||||||||
Buildings
|
30
|
312 | 311 | ||||||||
Leasehold
improvement
|
5
|
87 | 86 | ||||||||
Plant
and machinery
|
5
|
734 | 599 | ||||||||
Office
equipment
|
5
|
1,087 | 934 | ||||||||
Motor
vehicles
|
5
|
667 | 500 | ||||||||
2,887 | 2,430 | ||||||||||
Accumulated
depreciation
|
(1,706 | ) | (1,380 | ) | |||||||
1,181 | 1,050 |
7.
|
GOODWILL
|
Goodwill
acquired in connection with the acquisition of Guolian and Pan-pacific by BTWTC
on July 5, 2008 represented the excess of the purchase cost over the fair value
of identifiable net assets acquired at acquisition date. Goodwill is tested at
least annually for impairment in accordance with ASC Topic 350, Intangibles – Goodwill and
Other.
F-15
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
8.
|
SHORT-TERM
BANK LOANS
|
As of
December 31, 2009, a bank loan of RMB15 million, equivalent to approximately
US$2.19 million, bears interests to be charged quarterly at 20% above the
standard short term borrowing rate as stipulated by the People’s Bank of China
on the date of the first withdrawal and is wholly repayable within one year. The
loan is secured by guarantees provided by Mr. Han Daqing (“Mr. Han”), a director
of TSTC and a third party guaranty company. The remaining bank loans
of RMB25 million, equivalent to approximately US$3.66 million, bear interest to
be charged annually at the standard short term borrowing rate as stipulated by
the People’s Bank of China on the date of the first withdrawal and are wholly
repayable within one year. The loans are secured by guarantee provided by a
third party guaranty company. The guarantee provided by the independent guaranty
company is secured by the followings:
|
(a)
|
Accounts
receivable of the Company with an aggregate carrying value as of December
31, 2009 of RMB40 million, equivalent to approximately US$5.86
million;
|
|
(b)
|
Motor
vehicles of the Company with an aggregate carrying value as of December
31, 2009 of RMB1.4 million, equivalent to approximately US$0.2
million;
|
|
(c)
|
Personal
guarantee provided by Mr. Han; and
|
|
(d)
|
Personal
real estate property and securities of the Company held by Mr.
Han.
|
As of
December 31, 2009, all the bank loans were secured by guarantees provided by Mr.
Han and a third party guaranty company, interest-bearing at 7.47% per annum and
wholly repayable within one year.
9.
|
INVENTORIES
|
Inventories consisted of the followings:
|
As of December 31,
|
|||||||
2009
|
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
Raw
materials
|
1 | 5 | ||||||
Finished
goods and parts
|
4,877 | 7,838 | ||||||
4,878 | 7,843 | |||||||
Provision
for slow-moving and obsolete items
|
(436 | ) | - | |||||
4,442 | 7,843 |
F-16
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
10.
|
INCOME
TAXES
|
Current
Tax Position
TSTC and
its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which each entity is
domiciled.
TSTC had
net operating losses carry-forward for income tax reporting purposes that might
be offset against future taxable income. These net operating losses
carry-forward are severely limited when TSTC experiences a change in
control. Therefore, following the re-capitalization in August 2005,
the amount available to offset future taxable income is limited. No tax benefit
has been reported in the financial statements, because TSTC believes that it is
more likely than not that the carry-forward will finally expire and therefore
cannot be used. Accordingly, the potential tax benefits of the losses
carry-forward are offset by a valuation allowance of the same
amount.
No
provision for withholding or United States federal or state income taxes or tax
benefits on the undistributed earnings and/or losses of the Company's
subsidiaries has been made as the earnings of these subsidiaries, in the opinion
of the management, will be reinvested indefinitely.
The
Company’s income is principally generated in the PRC by Beijing Telestone,
BTWTC, BTCTC, Guolian and Pan-pacific. Effective January 1, 2008, these entities
are all subject to the New Enterprise Income Tax Law (“NEITL”) in the PRC,
details of which are as follows:
The NEITL
had unified the enterprise income tax as three applicable rates as
follows:
Unified
EIT rate
|
25%
|
Small
scale / low profit enterprises
|
20%
|
High
/ new technology enterprise (“Hi-tech enterprises”)
|
15%
|
Since
Beijing Telestone is registered as a wholly-owned foreign investment enterprise
(“WOFE”), Beijing Telestone was subject to tax laws applicable to WOFE in the
PRC so that it was fully exempt from the PRC enterprise income tax of 24% for
the two years commencing in the year 2004, followed by a 50% reduction in the
next three years to 2008. Beijing Telestone is qualified as a Hi-tech
enterprise under the NEITL so it enjoyed the preferential tax rate of 15% under
the NEITL for a three-year period commencing from the year 2009.
Since
BTWTC is qualified as a Hi-tech enterprise under the NEITL, it enjoyed the
preferential tax rate of 15% under the NEITL for a three-year period commencing
from the year 2009. All other entities including BTCTC, Guolian and Pan-pacific
were subject to the unified tax rate of 25% in the years ended December 31, 2009
and 2008.
F-17
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
10.
|
INCOME
TAXES (CONTINUED)
|
Current
Tax Position (Continued)
Income
tax expenses have been provided at the following rates on the respective
subsidiaries’ estimated assessable income arising from PRC during the periods
presented.
2009
|
2008
|
|||||||
%
|
%
|
|||||||
Beijing
Telestone
|
15 | 12 | ||||||
BTWTC
|
15 | 25 | ||||||
BTCTC
|
25 | 25 | ||||||
Guolian
|
25 | 25 | ||||||
Pan-pacific
|
25 | 25 |
|
(a)
|
Income
tax expenses are comprised of the
following:
|
2009
|
|
2008
|
||||||
US$’000
|
US$’000
|
|||||||
Current
tax
|
||||||||
United
States
|
- | - | ||||||
PRC
|
3,354 | 1,774 | ||||||
3,354 | 1,774 |
|
(b)
|
Reconciliation
from the expected statutory tax rate in PRC of 25% (2008: 25%) is as
follows:
|
2009
|
2008
|
|||||||
%
|
%
|
|||||||
Statutory
rate – PRC
|
25.0 | 25.0 | ||||||
Difference
in tax rate of subsidiary of the Company
|
(14.1 | ) | (0.9 | ) | ||||
Tax
exemption
|
- | (11.8 | ) | |||||
Non-deductible
items
|
4.3 | 6.7 | ||||||
Others
|
5.9 | 1.1 | ||||||
Effective
tax rate
|
21.1 | 20.1 |
F-18
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
10.
|
INCOME
TAXES (CONTINUED)
|
Uncertain
Tax Position
Under FIN
48 (ASC 740), the Company must recognize the tax benefit from an uncertain
position only if it is more-likely-than-not the tax position will be sustained
on examination by the taxing authority, based on the technical merits of the
position. The tax benefits recognized in the financial statements attributable
to such position are measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon the ultimate resolution of the
position.
By
adoption of FIN 48 (ASC 740), the Company has analyzed its filing positions
in all of the federal, state and foreign jurisdictions where it is required to
file income tax returns. As of December 31, 2009 and 2008, the Company has
identified the jurisdictions in the United States and PRC as “major” tax
jurisdictions, as defined, in which it is required to file income tax returns.
Based on the evaluations noted above, the Company has concluded that there are
no significant uncertain tax positions requiring recognition in its consolidated
financial statements.
Based on
a review of tax positions for all open years and contingencies as set out in
note 15(b) to the consolidated financial statements, no reserves for uncertain
income tax positions have been recorded pursuant to FIN 48 (ASC 740) during the
years ended December 31, 2009 and 2008, and the Company does not anticipate that
it is reasonably possible that any material increase or decrease in its
unrecognized tax benefits will occur within twelve months.
Except
for those as disclosed in note 15(b) to the consolidated financial statements,
as of December 31, 2009 and 2008, the Company had no unrecognized tax benefits
or accruals for the potential payment or interest and penalties. The Company’s
policy is to record interest and penalties in this connection as a component of
the provision for income tax expense. For the years ended December 31, 2009 and
2008, no interest or penalties were recorded.
11.
|
SEGMENT
INFORMATION
|
During
the years ended December 31, 2009 and 2008, all revenues of the Company are from
its network installation and optimization services, and trading of wireless
telecommunication. No financial information by business segment is
presented.
As the
Company operates mainly in the PRC and over 98% of its revenue and operating
income during the years ended December 31, 2009 and 2008 are from the PRC, no
geographical analysis is presented.
12.
|
COMMON
STOCK
|
As of
December 31, 2009 and 2008, the authorized capital of TSTC is 110,000,000 shares
within which 100,000,000 being shares of common stock with a par value of
$0.001, and 10,000,000 being shares of preferred stock with a par value of
$0.001.
TSTC had
10,404,550 of outstanding common stock as of December 31, 2009 and
2008.
TSTC had
177,403 and 192,403 outstanding warrants as of December 31, 2009 and 2008
respectively. During the year ended December 31, 2008, 15,000
warrants expired. The 177,403 outstanding warrants as of December 31,
2009 are exercisable over a 4-year period to year 2011 at a per share exercise
price of US$11.6.
F-19
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
13.
|
DISTRIBUTION
OF INCOME
|
The
Company's income is substantially contributed by Beijing Telestone, a company
registered in the PRC. Income of Beijing Telestone is
distributable to its stockholders after transfer to dedicated reserves as
required under its articles of association and relevant PRC rules and
regulations.
Prior to
the re-organization to a WOFIE, dedicated reserves of Beijing Telestone include
a statutory surplus reserve and a statutory public welfare fund. In
accordance with the relevant PRC Companies Law and rules and regulations, it was
required to transfer amounts equal to at least 10% and 5% of its after-tax
income to the statutory surplus reserve and statutory public welfare fund,
respectively.
The
statutory surplus reserve can only be utilized to offset prior years' losses or
for capitalization as paid-in capital, whereas the statutory public welfare fund
shall be utilized for collective staff welfare benefits such as building staff
quarters or housing. No distribution of the remaining reserves shall be made
other than on liquidation of Beijing Telestone.
Since
Beijing Telestone has registered as a WOFIE, in accordance with its Articles of
Association and the relevant PRC regulations, it is required to appropriate to a
general reserve fund an amount not less than 10% of the amount of after-tax
income and a staff welfare and bonus fund an amount to be determined by the
directors.
The
general reserve fund can be used to make good losses in previous
years. The staff welfare and bonus fund, which is to be used for the
welfare of the staff and workers of the subsidiary, is of a capital
nature.
14.
|
RELATED
PARTY TRANSACTIONS
|
Summary
of related party transactions
As of December 31,
|
|||||||||||
Note
|
2009
|
2008
|
|||||||||
US$’000
|
US$’000
|
||||||||||
Due
from related parties
|
|||||||||||
Other
employees
|
a | 536 | 430 | ||||||||
Ex-stockholders
of SMI
|
b
|
1,427 | 1,396 | ||||||||
1,963 | 1,826 | ||||||||||
Due
to related parties
|
|||||||||||
Directors
|
a
|
3,475 | 200 | ||||||||
Ex-stockholders
of Beijing Telestone
|
b
|
1,472 | 1,473 | ||||||||
4,947 | 1,673 | ||||||||||
Guarantor
of short-term bank loans
|
|||||||||||
A
director
|
8
|
5,850 | 2,918 |
F-20
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
14.
|
RELATED
PARTY TRANSACTIONS (CONTINUED)
|
Note:
|
(a)
|
The
amounts due from/to directors and employees represent unsecured advances
made to those parties from time to time. These amounts are
interest free and repayable on
demand.
|
|
(b)
|
The
amounts due to ex-stockholders of Beijing Telestone represented the
consideration arising from the consummation of the business combination.
The ex-stockholders of SMI had represented that they had fully settled the
amount with the ex-stockholders of Beijing Telestone and also undertaken
to fully indemnify SMI against any claims from the ex-stockholders of
Beijing Telestone (the “Undertaking”). However, an ex-stockholder of
Beijing Telestone has initiated lawsuit against SMI alleging that the
consideration amount has not been settled. The court hearing commenced on
May 10, 2006 and finalized on December 19, 2006. Verdict has been issued
by the Second Intermediate People’s Court of Beijing (“北京市第二中級人民法院”)
and announced that SMI and Beijing Telestone are not required to
compensate the ex-stockholder of SMI. On 23 October 23, 2008,
another verdict was issued by the High People’s Court of Beijing (“北京市高級人民法院”)
to announce that the verdict from Second Intermediate People’s Court of
Beijing was kept and SMI was not require to compensate the ex-shareholder.
The movement of the balances represented exchange
re-alignment.
|
15.
|
COMMITMENTS
AND CONTINGENCIES
|
|
a)
|
Operating
lease expense
|
The
Company leases certain staff quarters and office premises under non-cancelable
operating leases. Rental expenses under operating leases for the
years ended December 31, 2009 and 2008 were US$684,000 and US$592,000
respectively.
The
following table summarizes the approximate future minimum rental payments under
non-cancelable operating leases in effect as of December 31, 2009 and
2008:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
US$’000
|
US$’000
|
|||||||
2009
|
- | 310 | ||||||
2010
|
463 | 96 | ||||||
2011
|
11 | - | ||||||
Total
|
474 | 406 |
F-21
Telestone
Technologies Corporation
Notes
to Consolidated Financial Statements
Years
ended December 31, 2009 and 2008
15.
|
COMMITMENTS
AND CONTINGENCIES (CONTINUED)
|
|
b)
|
Contingencies
|
The
Company recognizes its revenue upon the completion of contract and has made full
tax provision in accordance with relevant national and local laws and
regulations of the PRC. A contract is considered as completed upon
completion of all essential contract work and the installation has been accepted
by the customer. It is the common practice in the PRC that invoices are not
issued to customers until payments are received. The Company follows the
practice of reporting its revenue for PRC tax purposes when invoices are issued.
All unbilled revenue will become taxable when invoices are issued. For PRC tax
reporting purpose, PRC subsidiaries of the Company recognized revenue on an
“invoice basis” instead of when goods are delivered and services are rendered.
This is not in strict compliance with the relevant laws and
regulations. Accordingly, despite the fact that the PRC subsidiaries
of the Company had made full tax provision in the financial statements, these
PRC subsidiaries may be subject to penalties for the deferred reporting of tax
obligations. The exact amount of penalties cannot be estimated with any
reasonable degree of certainty. The board of directors considers it
is more-likely-than-not that the tax penalties will not be imposed.
16.
|
STOCK
OPTION PLAN
|
On June
27, 2005, a Stock Option Plan was approved at the 2005 annual meeting of
stockholders. The purpose of the Plan is to promote the growth and general
prosperity of the Company by permitting the Company to grant options to purchase
common stock and restricted stock of the Company to key employees, non-employee
directors, and advisors. The Plan is designed to help the Company and
its subsidiaries and affiliates attract and retain superior personnel for
positions of substantial responsibility and to provide key employees,
non-employee directors, and advisors with an additional incentive to contribute
to the success of the Company.
No
options have been granted to any parties during the years ended December 31,
2009 and 2008 and as of the date of these financial statements.
17.
|
SUBSEQUENT
EVENT REVIEW
|
The
Company has evaluated subsequent events up to March 31, 2010 which is the date
that these consolidated financial statements were approved and authorized for
issue by the Board of Directors.
F-22
Telestone
Technologies Corporation
Index
to Consolidated Financial Statements
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Statements of Operations and other comprehensive income
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-4
|
Consolidated
Statements of Cash Flows
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
– F-22
|
F-23
Audited
Consolidated Financial Statements
Telestone
Technologies Corporation
Years
ended December 31, 2009 and 2008
F-24
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
During
the Company’s fiscal years ended December 31, 2008 and 2007 and through July 8,
2009, the Company engaged Mazars CPA Limited previously as the independent
registered public accounting firm prior the engagement of QC CPA Group, LLC on
July 9, 2009 through January 14, 2010. QC CPA Group, LLC performed the interim
reviews of the Company’s financial statements for the period ended June 30, 2009
and September 30, 2009. QC CPA Group, LLC resigned on January 14, 2010 and
the Company engaged Mazars CPA Limited as the Company’s new independent
registered public accounting firm on January 18, 2010 to audit the Company’s
financial statements for the year ended December 31, 2009. There were no
disagreements with accountants on accounting and financial
disclosure.
ITEM 9A.
|
CONTROLS AND
PROCEDURES.
|
(a)
MANAGEMENT’S REPORT ON DISCLOSURE CONTROLS AND PROCEDURES
Our
management is responsible for establishing and maintaining adequate disclosure
controls and procedures, as defined in Exchange Act Rules 13a-15(e) and
15d-15(e).We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Such controls and procedures, by their nature, can provide only
reasonable assurance regarding management’s control objectives.
Our chief
executive officer and chief financial officer, after assessment of the Company's
disclosure controls and procedures and internal control over financial
reporting, concluded that, as of December 31, 2009, our disclosure controls and
procedures were not effective due to the control weaknesses and control
deficiencies in our internal control over financial reporting described
below.
(b)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and
15d-15(f). Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies and
procedures may deteriorate.
Under the
supervision, and with the participation, of our Chief Executive Officer and our
Chief Financial Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting based on criteria established in the
framework in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This assessment has
identified five control deficiencies in our internal control over financial
reporting that constitute material weaknesses, as defined in the standards
established by the U.S. Public Company Accounting Oversight Board, that could
result in more than a remote likelihood that a material misstatement in our
annual or interim financial statements would not be prevented or detected on a
timely basis by our internal controls.
Our chief
executive officer and chief financial officer, after assessment of the Company's
disclosure controls and procedures and internal control over financial
reporting, concluded that, as of December 31, 2009, our internal control over
financial reporting were not effective due to the control weaknesses and control
deficiencies in our internal control over financial reporting described
below:
30
1. Our
internal audit team is currently understaffed. In addition, the scope and
effectiveness of the internal audit function have yet to be developed. Theses
deficiencies result that the examinations of the operation flow and management
function are not periodical, adequate and perfect.
Remediation
Initiative
First, we
plan to continue to complete and optimize our internal audit team so that the
effectiveness and efficiency of their internal audit function can be developed.
Furthermore, as one of important works for internal audit team, they should
inspect the finance status, operation flow and management function
periodically.
Second,
we intend to develop internal audit function’s policies and
procedures.
2.
Currently, not all of our financial and accounting staff are
knowledgeable of U.S. GAAP accounting rules in order to support the ongoing
expansion of our Company’s organizational structure and financial reporting
requirements. Specifically, certain positions in our accounting and finance
departments in the subsidiaries level were staffed with individuals
who are mainly dealing with PRC financial reporting do not
currently have adequate knowledge, skills and training under U.S.
GAAP.
Remediation
Initiative
We have
recently expanded our internal accounting staff and intend to continue this
effort in the future. In particular, we are seeking accountants experienced in
several key areas of accounting, including persons with experience in Chinese
and U.S. GAAP, U.S. GAAP consolidation requirements, and SEC financial reporting
requirements. In addition, we plan to employ consultant to assist our financial
and accounting work and allocate additional resources to train our existing
accounting staff.
3. The
financial department has internal control policies and procedures. However, they
are not integrated.
Remediation
Initiative
We intend
to develop financial management policies. Our financial department plans to
comply efficient inspecting system, record the problem and execute reporting
access. Furthermore, we intend to develop the employee training program
continually.
4. There
is a lack of clear policies and procedures to punish irregularity, such as
disobey manner principles, policies of the company and department. These
policies should make all kinds of policy standards definite, procedures and
exact person etc, and make a report in the certain scope.
Remediation
Initiative
Our
Administrative Department will formulate the punished regulations and measures,
including punishing process, content and scale. We are planning to appoint a
department which will be in charge of investigating, punishing and announcing
the employees’ activities of irregularity.
5. At
present, there is a whistle blower channel via manager’s email and telephone,
but no formal whistle blower policy (including channel, responsible department,
confidential policy, monitoring policy, etc.).
31
Remediation
Initiative
We intend
to establish a formal whistle blower program and inform all staff through
efficient ways. The ways include confidential policy to ensure the person not to
be retaliated, direct and indirect reporting channel, feedback policy, recording
policy, saving policy, handbook and internal website. To appoint adequate
managers to collect the information and monitor the procedure, report to the
board and audit committee periodically about significant activities of
irregularity.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report repot was not subject to attestation
by the Company’s registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit the Company to provide
only management’s report in this Annual Report.
(c) Changes in Internal Controls over
Financial Reporting
During
the fourth quarter of the year ended December 31, 2009, there was no change in
our internal controls over financial reporting that has materially affected, or
that is reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B.
|
OTHER
INFORMATION.
|
None.
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
|
Set forth
below is certain information concerning each of the directors and executive
officers of the Company as of March 29, 2010:
Name
|
Age
|
Position Held
|
||
Han
Daqing
|
45
|
Director,
President & CEO, Chairman of the Board
|
||
Li
Hong
|
40
|
Chief
Financial Officer
|
||
Yong
Shiqin,
|
46
|
Chief
Operation Officer
|
||
Zhu
Lian(1)(2)(3)
|
53
|
Director
|
||
Chen
Xuefeng(1)(2)(3)
|
47
|
Director
|
||
Pan
Guobin
|
46
|
Director
|
||
Cheng
Guanghui(1)(2)(3)
|
66
|
Director
|
(1) Member of
Audit Committee
(2) Member of
Compensation Committee
(3) Member of
Nominations and Corporate Governance Committee
32
Han Daqing has served as
President, Chairman of our Board of Directors and a member of our Board of
Directors since August 23, 2004. Mr. Han has served as a member of the Board of
Directors of Telestone since its inception in October, 1997 and as Chief
Executive Officer since January, 2002. Prior to assuming his Chief Executive
Officer duties with Telestone, from 1996 to 2002, Mr. Han was the Chief
Representative of the Beijing Office of Allgon Systems AB, an international
telecommunications conglomerate. Mr. Han holds a Bachelors degree in Computer
Engineering and a Masters degree in Digital Communication Engineering, both from
the Xidian University of Electronic Science & Technology. In addition, Mr.
Han holds a Masters of Business Administration from CITY University. We believe
Mr.Han, the founder of the Company, has the most extensive
knowledge in Telecom industry and management experience within the Company,
which qualifies him for the CEO and Chairman position.
Li Hong has served as Chief
Financial Officer since May 15, 2009. Ms. Li brings over 13 years of
senior management experience in accounting, auditing, financial analysis and
reporting for both public and private companies in China. She worked as an
accounting manager with the Company since June 2008. From January
2002 to June 2008, Ms. Li served as the Chief Financial Officer at
Beijing Suburb Telecommunication Industry Co., Ltd., where she played a leading
role in the company’s management, accounting and audit control. She was also
responsible for the company’s tax reporting. She holds a Master's degree in
Accounting from Central University of Finance and Economics, China and a
Bachelor’s degree in Accounting from Hefei Economics and Technology University,
China.
Yong Shiqin, has served as Chief
Operating Officer since October 2009. Mr. Yong Shiqin brings 24 years of
IT application working experience and 14 years of senior management experience.
Before joining Telestone in December 2008, Mr. Yong served as the consultant of
Beijing Tongyuehui Consulting Co. Ltd from July 2006 to December 2008. Mr. Yong
served as the general manager at Beijing Resoft Computer System Engineering Co.
Ltd, Resoft IT Co.Ltd and Beijing Zhaobo Software Co. Ltd successively from June
1996 to July 2006. Mr. Yong holds a Master’s degree in artificial
intelligence expert systems from Northern Jiaotong University, China and a
Bachelor’s degree in Computer Application from Xidian University,
China.
Zhu Lian has served as a
member of our Board of Directors since August 23, 2004. Mr. Zhu is a director
and the Deputy General Manager of Tianjin-Golik-The First Steel Wire Rope Co.,
Ltd., where he is responsible for finance and accounting functions. Prior to
taking that position, Mr. Zhu was the Chief Financial Officer of various large
public companies including Sparkice E-Commerce Ltd. (2001-2002); Beijing
Sanitary Ware, Ltd. (2000-2001); and Eagle Brand Holding Ltd. (2000). Mr. Zhu
holds a Bachelors degree in Mechanics and a Masters degree in Mechanics from
Tsing Hua University. In addition, Mr. Zhu holds a Masters of Business
Administration from the University of Illinois-Chicago and a Masters Degree in
Accounting from the University of Illinois-Chicago. We believe that Mr. Zhu has
the background of business administration and extensive experience in finance
and accounting, which qualifies him for this position.
Chen Xuefeng has served as a
member of our Board of Directors since December 15, 2004. Mr. Chen graduated
from Xi'an Electric Science University, Computer Science Division. After
graduation, Mr. Chen joined Shanxi Business Administration University as an
assistant professor. In 1992, Mr. Chen founded XI'an Sun Technologies
Development Co. Ltd. and has served as a director of that company since its
inception. Under his supervision and direction, Xi'an Sun Technologies
Development Co., Ltd. has added six more computer parts and components chain
stores. Mr. Chen is responsible for the development of marketing strategies and
the establishment of sales networks. We believe that Mr. Chen has experience in
retail, marketing, sales strategies planning and new product development, which
qualifies him for the director position.
Pan Guobin has served as a
member of our Board of Director of since December 28, 2009. Mr. Pan Guobin
brings 24 years of IT working experience and 19 years of senior management
experience to the Company. From August 2007 to the present, Mr. Pan served as
the vice president of the Company. In addition, since July 2009, Mr. Pan also
served as the CEO and general manager of Beijing Telestone Wireless
Telecommunication Company Limited, our subsidiary. From November 2001
to August 2007, Mr. Pan served as the manager of Tianjin Branch and
Northeast District Branch of the Company. From August 1985 to October 2001, Mr.
Pan worked as the engineer and then served as the product manager at Tianjin 754
Factory. Mr. Pan holds a Bachelor’s degree in Computer Application from Xidian
University, China. We believe that Mr. Pan has many years of
management experience which qualifies him for the director
position.
33
Cheng Guanghui has served as a
member of our Board of Directors since September 21, 2007. Currently, Mr. Cheng
is Director of China Quality Management Association for Electronics Industry.
From 1998 to 2004, Mr. Cheng worked as Director of The General Office of
Ministry of Information Industry of the People’s Republic of China. From 1993 to
1998, Mr. Cheng was Director of The General Office of Ministry of Electronics
Industry of the People’s Republic of China. Mr. Cheng holds a Bachelors Degree
from Tsinghua University. We believe that Mr. Cheng’ s background of
telecom industry and working experience qualifies him for the director
position.
We do not
currently have a Lead Independent Director.
Each of
the directors named above will serve until our next Annual Meeting of
Stockholders or until their successors are duly elected and has qualified.
Directors will be elected for one-year terms at the Annual Meeting of
Stockholders. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement, of which none currently exists or is
contemplated. There is no arrangement or understanding between any of our
directors or officers and any other person pursuant to which any director or
officer was or is to be selected as a director or officer, and there is no
arrangement, plan or understanding as to whether non-management stockholders
will exercise their voting rights to continue to elect the current directors to
our Board of Directors. There are also no arrangements, agreements or
understandings between non-management stockholders that may directly or
indirectly participate in or influence the management of our
affairs.
There are
no agreements or understandings for any officer or director to resign at the
request of another person, and none of the officers or directors are acting on
behalf of, or will act at the direction of, any other person.
Involvement
in Certain Legal Proceedings
During
the past ten years, no present or former director, executive officer or person
nominated to become a director or an executive officer of our
Company:
1) Was a
general partner or executive officer of any business against which any
bankruptcy petition was filed, either at the time of the bankruptcy or two years
prior to that time;
2) Was
convicted in a criminal proceeding or named subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
3) Was
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; or
4) Was
found by a court of competent jurisdiction (in a civil action), the SEC or the
Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities and Exchange Act of 1934 requires our executive officers
and directors and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC initial statements of beneficial
ownership on Form 3, reports of changes in ownership on Form 4 and annual
reports concerning their ownership on Form 5. Executive officers, directors and
greater than 10% stockholders are required by the SEC regulations to furnish us
with copies of all Section 16(a) reports they file.
34
To the
best of our knowledge, during the fiscal year ended December 31, 2009, all
required forms have been timely filed.
CODE OF
ETHICS
In
December 2004, the Company’s Board of Directors adopted a Code of Ethics. For a
copy of the Code of Ethics, please write to: Assistant Secretary to the Board,
Telestone Technologies Corporation, Floor 6, Saiou Plaza, No. 5
Haiying Road, Fengtai Technology Park, Beijing, China 100070.
Meetings
and Certain Committees of the Board
The Board
of Directors held 5 meetings during the fiscal year ended December 31, 2009. All
current directors attended at least 75% of the meetings of the Board of
Directors and Board Committees of which they are members. We have an Audit
Committee, a Compensation Committee and a Nominating and Corporate Governance
Committee.
AUDIT
COMMITTEE. The Audit Committee is currently comprised of Zhu Lian, Chen Xuefeng
and Cheng Guanghui, each of whom are “independent” as defined by the Nasdaq
Stock Exchange listing standards. Zhu Lian is the designated financial expert.
The Audit Committee is directly responsible for the appointment, retention,
compensation and oversight of the work of any registered public accounting firm
employed by the Company (including resolution of disagreements between
management and the accounting firm regarding financial reporting) for the
purpose of preparing or issuing an audit report or related work or performing
other audit, review or other services. Any such registered public accounting
firm must report directly to the Audit Committee. The Audit Committee has the
ultimate authority and responsibility to evaluate and, where appropriate,
replace the registered public accounting firm. The Audit Committee met one time
during the fiscal year ended December 31, 2009 and 100% members of the Committee
attended the meeting.
COMPENSATION
COMMITTEE. The Compensation Committee is responsible for the administration of
all salary, bonus and incentive compensation plans for our officers and key
employees. The members of the Compensation Committee are Chen Xuefeng, Zhu Lian
and Cheng Guanghui, all of whom are “independent” directors as defined by the
Nasdaq Stock Exchange listing standards. The Compensation Committee held one
meeting during the year ended December 31, 2009 and 100% members attended the
meeting.
NOMINATING
AND CORPORATE GOVERNANCE COMMITTEE. The Nominating and Corporate Governance
Committee is responsible for preparing a list of candidates to fill the expiring
terms of directors serving on our Board of Directors. The committee submits the
list of candidates to the Board of Directors who determines which candidates
will be nominated to serve on the Board of Directors. The names of nominees are
then submitted for election at our Annual Meeting of Stockholders. The committee
also submits to the entire Board of Directors, a list of nominees to fill any
interim vacancies on the Board of Directors resulting from the departure of a
member of the Board of Directors for any reason prior to the expiration of his
term. In recommending nominees to the Board of Directors, the committee keeps in
mind the functions of this body. The committee considers various criteria,
including the ability of the individual to meet the Nasdaq Stock Market
“independence” requirements, general business experience, general financial
experience, knowledge of the Company’s industry (including past industry
experience), education, and demonstrated character and judgment. The committee
will consider director nominees recommended by a stockholder if the stockholder
mails timely notice to the Secretary of the Company at its principal offices,
which notice includes (i) the name, age and business address of such nominee,
(ii) the principal occupation of such nominee, (iii) a brief statement as to
such nominee’s qualifications, (iv) a statement that such nominee consents to
his or her nomination and will serve as a director if elected, (v) whether such
nominee meets the definition of an “independent” director under the rules of the
Nasdaq Stock Market listing standards and (vi) the name, address, class and
number of shares of capital stock of the Company held by the nominating
stockholder. Any person nominated by a stockholder for election to the Board of
Directors will be evaluated based on the same criteria as all other nominees.
The committee also oversees our adherence to our corporate governance standards.
The members of the committee are Chen Xuefeng, Zhu Lian and Cheng
Guanghui. The committee held one meeting during the fiscal year ended
December 31, 2009 and 100% members attended the meeting.
35
Stockholder
Communications
The Board
of Directors welcomes communications from our stockholders and maintains a
process for stockholders to communicate with the Board of Directors.
Stockholders who wish to communicate with the Board of Directors may send a
letter addressed to the Chairman of the Board of Directors of Telestone
Technologies Corporation, Floor 6, Saiou Plaza, No. 5 Haiying Road, Fengtai
Technology Park, Beijing, China. The mailing envelope must contain a clear
notation indicating that the enclosed letter is a “Stockholder-Board
Communication.” All such letters should identify the author as a security
holder. All such letters will be reviewed by the Chairman of the Board of
Directors and submitted to the entire Board of Directors no later than the next
regularly scheduled Board of Directors meeting.
We
currently have no policy with respect to director attendance at annual
meetings.
Compensation
of Directors
The
independent directors were separately compensated for their services in the
amount of $5,000 except Zhu Lian who was paid $10,000 during the year ended
December 31, 2009.
ITEM
11.
|
EXECUTIVE
COMPENSATION.
|
The
Company had no officers or directors whose total annual salary and bonus during
each of 2008 and 2009 exceeded $100,000. Mr. Han, our Chief Executive Officer
and Principal Executive Officer, earned a salary and bonus of $50,000 and
$30,000, during the fiscal years ended December 31, 2008 and 2009,
respectively.
Summary
Compensation Table
Name and Principal
Underlying Positions
|
Year
|
Salary
|
Bonus
|
Option
Awards
|
Stock
Awards
|
All Other
Compensation
|
Total
|
|||||||||||||||||||
Han
Daqing - President &
|
||||||||||||||||||||||||||
CEO
|
2009
|
$ | 50,000 | $ | 30,000 | — | — | — | $ | 80,000 | ||||||||||||||||
2008
|
$ | 50,000 | $ | 30,000 | $ | 80,000 | ||||||||||||||||||||
Li
Hong - Chief Financial Officer
|
2009
|
$ | 25,000 | $ | 10,000 | — | — | $ | 35,000 | |||||||||||||||||
2008
|
$ | 25,000 | $ | 10,000 | $ | 35,000 |
Outstanding
Equity Awards at Fiscal Year-End
On June
27, 2005, a Stock Option Plan (the “Plan”) was approved at our 2005 Annual
Meeting of Stockholders. The purpose of the Plan is to promote the growth and
general prosperity of the Company by permitting the Company to grant options to
purchase common stock and restricted stock of the Company to key employees,
independent directors, and advisors. The Plan is designed to help the Company
and its subsidiaries and affiliates attract and retain superior personnel for
positions of substantial responsibility and to provide key employees,
independent directors, and advisors with an additional incentive to contribute
to the success of the Company. As of December 31, 2009, there were no
outstanding equity awards to the named executive officers requiring tabular
disclosure under this Item.
36
Director Compensation
Table
DIRECTOR
COMPENSATION FOR 2009
Name
|
Fees
Earned
or Paid
in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
||||||||||
Zhu
Lian
|
$
|
10,000
|
|
|
|
|
|
$
|
10,000
|
||||||||
Chen
Xuefeng
|
$
|
5,000
|
$
|
5,000
|
|||||||||||||
Cheng
Guanghui
|
$
|
5,000
|
$
|
5,000
|
|||||||||||||
Lian Renguang* | $ |
5,000
|
$
|
5,000
|
* Lian Renguang resigned on December 28, 2009
Our
director compensation consists of cash only. Each director was paid an annual
retainer of $5,000. An additional $5,000 was paid to Mr. Zhu Lian who is also
the chairman of the Audit Committee.
Retirement,
Post-Termination and Change in Control
We have
no retirement, pension, or profit-sharing programs for the benefit of directors,
officers or other employees, nor do we have post-termination or change in
control arrangements with directors, officer or other employees, but our Board
of Directors may recommend adoption of one or more such programs in the
future.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|
The
following table sets forth certain information as of March 29, 2010 relating to
the beneficial ownership (as defined by the rules of the SEC) of shares of
common stock by (i) each person who owns beneficially more than 5% of the
outstanding shares of our common stock, (ii) each of our directors, (iii) each
of our executive officers as of March 29, 2010, and (iv) all of our executive
officers and directors as a group.
Amount
and Nature of
Beneficial
Ownership(1)
|
||||||||
Name
of Beneficial Owner
|
Number
of Shares (2)
|
Percent
of
Voting
Stock (3)
|
||||||
Han
Daqing
|
3,230,000 | 30.62 | % | |||||
Li
Hong
|
0 | * | ||||||
Zhu
Lian
|
0 | * | ||||||
Chen
Xuefeng
|
0 | * | ||||||
Cheng
Guanghui
|
0 | * | ||||||
Pan
Guobin
|
0 | * | ||||||
Directors
and executive officers as a group (6 persons)
|
3,230,000 | 30.62 | % |
37
* Less
than 1%
(1)
|
As
of March 29, 2010, there were 10,548,264 shares of
common stock outstanding. Each person named above has sole
investment and voting power with respect to all shares of the common stock
shown as beneficially owned by the person, except as otherwise indicated
below.
|
(2)
|
Under
applicable rules promulgated by the SEC pursuant to the Exchange Act, a
person is deemed the “beneficial owner” of a security with regard to which
the person, directly or indirectly, has or shares (a) the voting power,
which includes the power to vote or direct the voting of the security, or
(b) the investment power, which includes the power to dispose or direct
the disposition of the security, in each case irrespective of the person’s
economic interest in the security. Under these SEC rules, a person is
deemed to beneficially own securities which the person has the right to
acquire within 60 days through (x) the exercise of any option or warrant
or (y) the conversion of another
security.
|
(3)
|
In
determining the percent of common stock owned by a person (a) the
numerator is the number of shares of common stock beneficially owned by
the person, including shares the beneficial ownership of which may be
acquired within 60 days upon the exercise of options or warrants or
conversion of convertible securities, and (b) the denominator is the total
of (i) the 10,548,264 shares of common stock outstanding as of March 29, 2010 and
(ii) any shares of common stock which the person has the right to acquire
within 60 days upon the exercise of options or warrants or conversion of
convertible securities. Neither the numerator nor the denominator includes
shares which may be issued upon the exercise of any other options or
warrants or the conversion of any other convertible
securities.
|
(4)
|
The
address for the owners and management is : Floor 6, Saiou
Plaza, No. 5 Haiying Road, Fengtai TechnologyPark, Beijing, China
100070
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
On May
12, 2009, the CEO and Chairman of the Board of the Company Mr Han Daqing
guaranteed for Beijing Telestone to get a short-term loan of approximately
US$5.85 million from Bank of Beijing.
Please see also Note 8 to our financial statements.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
During
the Company’s fiscal years ended December 31, 2008 and 2007 and through July 8,
2009, the Company engaged Mazars CPA Limited previously as the independent
registered public accounting firm prior the engagement of QC CPA Group, LLC on
July 9, 2009 through January 14, 2010. QC CPA Group, LLC performed the interim
reviews of the Company’s financial statements for the period ended June 30, 2009
and September 30, 2009. QC CPA Group, LLC resigned on January 14, 2010 and
the Company engaged Mazars CPA Limited as the Company’s new independent
registered public accounting firm on January 18, 2010 to audit the Company’s
financial statements for the year ended December 31, 2009.
Audit Fees. The aggregate fees
billed by Mazars CPA Limited, Certified Public Accountants for professional
services rendered for the audit of the Company’s financial statements for the
fiscal year ended December 31, 2008 was $114,000 and for fiscal year ended
December 31, 2009 was $ 107,000. The aggregate fees billed by QC CPA Group,
LLC for professional services rendered for the quarterly reviews of the
Company's financial statements for the three-months ended June 30, 2009 and
September 30, 2009 were $20,000.
Audit-Related Fees. There were
no fees for assurance and related services by Mazars CPA Limited, Certified
Public Accountants for the fiscal years ended December 31, 2008 and
2009.
Tax Fees. There were no fees
for tax compliance, tax advice or tax planning services by Mazars CPA Limited,
Certified Public Accountants for the fiscal years ended December 31, 2008 and
December 31, 2009.
All Other Fees. There were no
other fees for either audit-related or non-audit services billed by Mazars CPA
Limited, Certified Public Accountants for the fiscal years ended December 31,
2008 and December 31, 2009.
38
ITEM 15.
|
EXHIBITS
|
Statements
filed as part of this Report:
Exhibits
The
following documents are filed as exhibits herewith or incorporated by reference
to exhibits previously filed with the SEC:
Exhibit
Number
|
Description of Exhibit
|
|
2
|
Agreement
Concerning the Exchange of Securities by and among Milestone Capital, Inc.
and EliteAgents, Inc., dated January 2, 2002 (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K dated January 19,
2002).
|
|
3.1
|
Articles
of Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Company’s Form 10-KSB for the year ended December 31,
1998).
|
|
3.1.1
|
Certificate
of Amendment dated August 13, 2004, implementing the reverse merger
pursuant to the Bankruptcy Court Order Approving Disclosure Statement and
Confirming First Amended Plan of Liquidation and filed with the Secretary
of State of the State of Delaware on the 17th
day of August, 2004 (incorporated by reference to Exhibit 3.1.1 to the
Company’s Form 10-KSB for the year ended December 31,
2003).
|
|
3.1.2
|
Certificate
of Incorporation dated August 13, 2004, reincorporating under the name of
Telestone Technologies Corporation and filed with the Secretary of State
of the State of Delaware on the 13th
day of August, 2004 (incorporated by reference to Exhibit 3.1.2 to the
Company’s Form 10-KSB for the year ended December 31,
2003).
|
|
3.1.3
|
Bylaws
of the Company, adopted on the 18th
day of August, 2004 (incorporated by reference to Exhibit 3.1.3 to the
Company’s Form 10-KSB for the year ended December 31,
2003).
|
|
3.2
|
Articles
of Amendment to the Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.2 to the Company’s Form 10-KSB for the year
ended December 31, 1998).
|
|
3.3
|
Bylaws
of the Company (incorporated by reference to Exhibit 3.3 to the Company’s
Form 10-KSB for the year ended December 31, 1998).
|
|
10.1
|
Warehouse
Loan and Security Agreement by and among EliteAgents, Inc. and The
Provident Bank, dated May 30, 2001 (incorporated by reference to Exhibit
10.1 to the Company’s Form 10-KSB for the year ended December 31,
2001).
|
|
10.2
|
Lease
Agreement by and among Ralph L. Brass & Company and EliteAgents, Inc.
for the property located at 39 Plymouth Street, Fairfield New Jersey,
dated March 4, 2000 (incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-KSB for the year ended December 31,
2001).
|
|
10.3
|
Share
Transfer Agreement, dated as of July 5, 2007 by and among Shandong Guolian
Telecommunication Technology Limited Company, the transferors listed
therein and Beijing Telestone Wireless Telecommunication Company Ltd
(incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed
on July 11, 2007.
|
|
10.3
|
Milestone
Capital, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.3
to the Company’s Form 10-KSB for the year ended December 31,
2001).
|
39
Exhibit
Number
|
Description of Exhibit
|
|
14.1
|
Code
of Ethics, dated December 2004 (incorporated by reference to Exhibit 14.1
to the Company’s Form 10-KSB for the year ended December 31,
2004).
|
|
21.1
|
Subsidiaries
of the Company (incorporated by reference to Exhibit 21.1 to the Company’s
Form 10-KSB/A for the year ended December 31, 2007 filed on October 21,
2008).
|
|
*31.1
|
Statement
of Chief Executive Officer Furnished Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350.
|
|
*31.2
|
Statement
of Chief Financial Officer Furnished Pursuant To Section 302 Of The
Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350.
|
|
*32.1
|
Statement
of Chief Executive Officer Furnished Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section 1350.
|
|
*32.2
|
Statement
of Chief Financial Officer Furnished Pursuant To Section 906 Of The
Sarbanes-Oxley Act Of 2002, 18 U.S.C. Section
1350.
|
*Filed
herewith.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELESTONE
TECHNOLOGIES CORPORATION
|
||
Date:
March 31, 2010
|
||
By:
|
/s/
Han Daqing
|
|
Han
Daqing
|
||
Director,
Chief Executive Officer,
President
and Chairman of the
Board
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature
|
Title
|
Date
|
||
/s/ Han Daqing
|
Chief
Executive Officer
|
March
31, 2010
|
||
Han
Daqing
|
(Principal
Executive Officer)
|
|||
/s/ Li Hong
|
Chief
Financial Officer
|
March
31, 2010
|
||
Li
Hong
|
(Principal
Financial and Accounting Officer)
|
|||
/s/ Chen Xuefeng
|
Director,
|
March
31, 2010
|
||
Chen
Xuefeng
|
||||
/s/ Zhu Lian
|
Director
|
March
31, 2010
|
||
Zhu
Lian
|
40
/s/ Cheng Guanghui
|
Director
|
March
31, 2010
|
||
Cheng
Guanghui
|
||||
/s/ Pan Guobin
|
Director
|
March
31, 2010
|
||
Pan
Guobin
|
41