UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ________________
Commission file number: 333-49388
CHINA WIRELESS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
NEVADA 91-1966948
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1746 COLE BOULEVARD, SUITE 225, GOLDEN, CO 80401-3210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 303-277-9968
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. __
State issuer's revenues for its most recent fiscal year: $-0-
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $ 3,537,567 as of March 15, 2005
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 47,167,569 as of December 31, 2004
Transitional Small Business Disclosure Format (Check one): Yes ; No X
---- ----
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We caution readers regarding forward looking statements found in this
report and in any other statement made by, or on our behalf, whether or not in
future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could cause
actual results to differ materially from those expressed in any forward-looking
statements made by or on our behalf. We disclaim any obligation to update
forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
CORPORATE BACKGROUND
We were originally incorporated in Nevada on March 8, 1999 under the
name AVL SYS International Inc ("AVL SYS"). On March 9, 2000, AVL SYS changed
its name to I-Track, Inc ("ITI"). Effective September 30, 2001, ITI entered into
an exclusive worldwide distribution agreement with AVL Information Systems Ltd.
("AVL"), an affiliated Canadian public company. Under the agreement, ITI was
licensed to market and distribute all of the products manufactured by AVL. The
exclusive distribution agreement with AVL was cancelled in September 2002 at
which point ITI began to seek another business opportunity. On March 21, 2003,
ITI entered into an "Assignment and Assumption Agreement" with AVL, whereby ITI
distributed to AVL all its assets and AVL assumed all liabilities of ITI.
Accordingly, as of March 21, 2003, ITI entirely ceased its prior business
operations.
On March 22, 2003, ITI acquired all of the issued and outstanding
shares of Strategic Communications Partners, Inc., a Wyoming corporation
("SCP"), pursuant to the terms of a Share Exchange Agreement. A total of
19,000,000 restricted shares of ITI's common stock were issued to the
shareholders of SCP, resulting in the SCP shareholders as a group owning
approximately 88.4% of the outstanding shares of common stock. At this time, SCP
became a wholly owned subsidiary. On March 24, 2003, in connection with our
acquisition of SCP, ITI's name was changed to China Wireless Communications,
Inc.
SCP was incorporated in the State of Wyoming on August 13, 2002.
Through a subsidiary in China, Strategic Communications Partners Limited
("SCPL"), it provided financial, technical, and marketing services in Beijing,
People's Republic of China ("PRC"). SCPL was incorporated in Hong Kong on
December 9, 2002. SCPL's business activities to date consist solely of
supporting the Beijing operations. On March 4, 2003, SCPL set up a wholly owned
enterprise, Beijing In-Touch Information System Co. Ltd. ("In-Touch") in the
PRC. Effective July 31, 2004, SCP was merged into us. SCPL then became a direct
subsidiary of us as a result of the merger.
In-Touch provided broadband data, video and voice communications
services to customers that were not served by existing landline based fiber
networks. During the 4th quarter of 2004, we closed In-Touch due to high
operational expenses incurred and flat sales/revenue generation of the transport
business in 2004. All office leases were terminated and transport equipment
returned to respective vendors. Additionally, all staff and employees were
terminated effective October 1, 2004.
On December 8, 2004, we signed a strategic consulting agreement with
Jiaxin Consulting Group, Inc., a British Columbia corporation ("Jiaxin") to
obtain assistance in financial asset management, financial internal controls,
operational oversight, and business development in China.
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On March 8, 2005, Jiaxin and we signed a strategic agreement to form CJ
Information Technology Company, which will become the vehicle to provide
information technology services in China. We incorporated CJ Information
Technology Company in Nevada on March 10, 2005. As of the date of this report,
we own 51% of CJ Information Technology Company, while Jiaxin owns 49%. These
percentages are likely to change as we raise funding for Tianjin Create IT Co.
Ltd. However, we anticipate that we will continue to own a majority of the
outstanding stock.
CJ Information Technology Company owns 60% of Tianjin Create IT Co.
Ltd., a limited liability company formed in the PRC, in consideration for
funding of $250,000. Tianjin Create Co. owns the other 40% in consideration for
the transfer of its operating assets into the new company. Tianjin Create Co. is
a computer network systems integration and broadband integrator located in
Tianjin City, China. Its customer base includes universities and colleges,
enterprises businesses, and government entities.
INDUSTRY BACKGROUND
With over 60 million users, China has surpassed Japan to become the
world's second largest Internet market. Enterprises have installed high-speed
local area networks to support bandwidth-intensive applications, and the large
monopoly carriers have invested hundreds of millions of dollars in fiber optic
networks to provide massive backbone network capacity.
The opportunity to provide high-speed wireless broadband for customers
utilizing existing carriers transport as well as broadband radio transport will
now be part of the company's overall strategy to become a premier information
technology provider. We will utilize proven information technology to complete
and meet end users' business objectives as well as increased revenue for the
company. These customers would include commercial business, universities and
government enterprises.
KEY ALLIANCES AND PARTNERSHIPS
On August 15, 2003, we signed a contract with MCI International Ltd.
Co. ("MCI"), which permits us to extend the reach of our information technology
and services in China. This agreement allows China Wireless to provide MCI
International ATM [asynchronous transport mode] services to reach North America,
South Pacific, Asian and European markets to our existing suite of service
offerings. ATM service enables customers to transmit voice, video and data
communications over a single virtual network to and from Europe, North America
and other world-wide locations served by MCI facilities. Domestic and
International services are available to customers within China as well as access
to China by worldwide customers. Our monthly recurring charge is $32,817 for the
China IPL [international private line] circuit with a minimum term of 3 years.
This agreement with MCI provides voice, video and data transport service to our
customers in China, and worldwide connections at MCI international locations. We
are able to offer this service to our customers at prices we determine, which is
generally influenced by market competition.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
Our operations and partnerships are subject to various levels of
government controls and regulations in the PRC. As a result, we may be exposed
to certain risks associated with, among others, the political, economic and
legal environment and foreign currency exchange. Our 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 others. Our management does not believe
these risks to be significant. We cannot assure you, however, that changes in
political and other conditions will not result in any adverse impact.
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EMPLOYEES
As of March 31, 2005, we have 5 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices are located at 1746 Cole Boulevard,
Suite 225, Golden, Colorado, where we lease approximately 800 square feet of
space on a lease expiring in August 2005.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By means of a written consent to action dated September 30, 2004, the
holders of a majority of our outstanding shares approved an amendment to the
Articles of Incorporation to increase the number of authorized shares of common
stock to 250,000,000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was approved for trading on the over-the-counter
bulletin board ("OTCBB") under the symbol "ITRK" on August 7, 2001. On December
2, 2002, the symbol was changed to "ITCK" and there was a 1-for-20 reverse stock
split. On March 28, 2003, the symbol was changed to "CWLC", after we changed our
name to China Wireless Communications, Inc. The following table sets forth the
range of high and low closing bid quotations of our common stock for each fiscal
quarter shown, as adjusted to reflect the reverse stock split:
BID OR TRADE PRICES
2003 FISCAL YEAR HIGH LOW
Quarter Ending 03/31/03....................... $ 0.85 $ 0.70
Quarter Ending 06/30/03....................... $ 0.45 $ 0.41
Quarter Ending 09/30/03....................... $ 0.90 $ 0.75
Quarter Ending 12/31/03....................... $ 0.52 $ 0.45
2004 FISCAL YEAR HIGH LOW
Quarter Ending 03/31/04....................... $ 0.89 $ 0.460
Quarter Ending 06/30/04....................... $ 0.61 $ 0.175
Quarter Ending 09/30/04....................... $ 0.40 $ 0.041
Quarter Ending 12/31/04....................... $ 0.18 $ 0.036
As of December 31, 2004, there were approximately 273 record holders of
our common stock
On March 15, 2005, the closing price for our common stock on the OTCBB
was $0.075.
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The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
During the last three fiscal years, no cash dividends have been
declared on our common stock and we do not anticipate that dividends will be
paid in the foreseeable future.
During 4th quarter 2004 there were no unregistered securities issued.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
On March 22, 2003, I-Track Inc. acquired all of the issued and
outstanding shares of Strategic Communications Partners, Inc., a Wyoming
corporation ("SCP"), pursuant to the terms of a Share Exchange Agreement,
resulting in the shareholders and management of SCP having actual and effective
control of I-Track Inc. On March 24, 2003, I-Track Inc. changed its name to
China Wireless Communications, Inc. to better reflect the business activities of
the company.
We were in the development stages in 2003 and 2004 and continued to
maintain a high cost for operations with very little sales/revenue value to
achieve breakeven. SCP had no revenues in 2002. We began to record revenues in
June 2003. The primary activities during 2003 included: the finalization of our
analysis of the market in Beijing and China for wireless broadband; setting up a
Beijing office with a sales, engineering and administrative staff to market and
support the sale of our high speed wireless broadband services; negotiating
agreements and alliances with its partners to allow In-Touch to sell it services
and value-added products; and the initiation of the construction of its fixed
wireless broadband network system in Beijing.
During the 4th quarter of 2004, we closed In-Touch due to high
operational expenses incurred and flat sales/revenue generation of the transport
business in 2004. All office leases were terminated and transport equipment
returned to respective vendors. Additionally, all staff and employees were
terminated effective October 1, 2004.
We are now in the process of changing our business direction from the
management of a wireless broadband network to the development of technology
integration and IP services in China. We decided to utilize the services of
Jiaxin Consulting Group, which has extensive experience in business development
and asset management in China. We formed CJ Information Technology Company on
March 10, 2005, which will be the vehicle through which we manage all of our
assets and operations in China. CJ Information Technology Company in turn formed
a foreign joint venture called Tianjin Create IT Co. Ltd.
Through Tianjin Create IT Co. Ltd., we are a provider of information
technology and IP services to customers in China in conjunction with Tianjin
Create Co. Through our partner Tianjin Create Co. we are able to provide
engineering and IP service support for existing and future IP customers in
China. In addition, we will be able to offer a broad base of information
technologies from IP security, wireless broadband, Wi-Fi, to "last mile"
transport connections.
GOING CONCERN
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of us as a going concern. We incurred
a net loss for the year ended December 31, 2004 of $4,029,162, and at December
31, 2004 had an accumulated deficit of $8,580,228 and a working capital deficit
of $444,215. These conditions raise substantial doubt as to our ability to
continue as a going concern. These consolidated financial
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statements do not include any adjustments that might result from the outcome of
this uncertainty. These consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
We are currently developing strategic partnerships with firms in the
United States, Canada, and Asia to raise capital for the purpose of acquiring
firms in the PRC engaged in information technology integration, providing IP
services, technology consulting and manufacturing of related technology
products. Our ability to continue as a going concern is dependent upon the
successful implementation of a business plan and ultimately achieving profitable
operations. However, there is no assurance that we will be able to raise the
necessary capital to execute our business strategy. Our inability to raise the
required capital or implement our business strategy successfully could adversely
impact our business and prospects.
CRITICAL ACCOUNTING POLICIES AND 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 of America. 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 disclosures of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the rates of
exchange on the dates of transactions. Monetary assets and liabilities
denominated in foreign currencies at year-end are translated at the approximate
rates ruling at the balance sheet date. Non-monetary assets and liabilities are
translated at the rates of exchange prevailing at the time the asset or
liability was acquired. Exchange gains and losses are recorded in the statement
of operations.
CHINESE TAX HOLIDAY
To date, all of our revenues have been generated in the PRC by
In-Touch. Being a high tech enterprise, In-Touch is exempted from the PRC
enterprise income tax from 2003 to 2005, followed by a 50% reduction for the
next three years.
RESULTS OF OPERATIONS
In December of 2004, we closed In-Touch in Beijing. The decision to
discontinue these operations was due to higher than expected operating costs,
the inability to acquire the necessary infrastructure, and increased
competition. Revenues from our operations had been generated by In-Touch. Due to
the closing of In-Touch, our statements of operations do not reflect any
revenues. Instead, our statements reflect losses from discontinued operations of
$1,019,213 and $1,193,794 for the 2004 and 2003 fiscal years, respectively.
Operating expenses for the year ended December 31, 2004 were $3,106,942 as
compared to $2,325,604 for the year ended December 31, 2003. Net losses for the
years ended December 31, 2004 and 2003 were $4,029,162 and $3,536,067,
respectively. Operational expenses for year ended December 31, 2004 included
$3,106,942 relating to issuance of stock for compensation.
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In the 3rd Quarter 2004, we began to evaluate the continued high cost
versus revenue generation. Our management team came to the conclusion that
efforts must be made to reduce operational costs and focus the sales efforts to
services that brought immediate value to the network. However, we did not have
the funding resources to continue to invest into the Beijing In-Touch operations
unless the revenues increased significantly. We re-evaluated the assets and
capability of In-Touch to continue as a profitable and value-added business.
Therefore, late in the 3rd Quarter 2004, it was deemed imperative that we seek
an alternative plan to recover the business and regain shareholder confidence in
the company.
In the 4th Quarter 2004, the management team began discussions with
Jiaxin and Tianjin, China to assist in gaining entry into the new markets such
as universities, brokerage firms, various China government agencies and
commercial business enterprises utilizing information technologies. Jiaxin
provided consulting services to re-evaluate our efforts to maintain our broad
technology base with clients in China, as well as provide business development.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had current assets of $4,789 as compared to
$227,734 at December 31, 2003, and current liabilities of $449,004 at December
31, 2004, resulting in a working capital deficit of $444,215, as compared to a
deficit of $693,179 at December 31, 2003.
For the year ended December 31, 2004, we used $1,066,583 of cash for
our operating activities, while financing activities, which consisted of
proceeds from the issuance of our common stock, provided cash of $645,130. A
decrease in pledged deposits and the discontinuation of operations also provided
cash of $422,436. In comparison, during 2003, we used $1,138,054 of cash for
operating activities and $381,468 for investing activities, which consisted
primarily of the acquisition of property, plant and equipment, which cash of
$1,325,752 was provided by financing activities. Financing activities consisted
of sales of our common stock and borrowing.
PLAN OF OPERATION
We have recently focused our efforts in becoming a premier information
technology company. We believe that the information technology business is
beginning to develop quickly in China and that we can be a major player in its
development.
Our original efforts to provide design and construction of fixed
wireless broadband network systems will be part of the overall information
technology strategies being executed. However, we plan to broaden our scope to
become a systems integration company that will provide a broad base of
information technologies to our clients. These technologies include engineering
design, implementation, Wi-Fi, broadband wireless, systems integration, IP
securities, data storage, voice/video/data telecommunications services and
managed services.
By partnering with Tianjin Create Co. and utilizing the services of
Jiaxin, we plan to build upon their existing business and experience. We believe
that we will have a better chance to succeed through this route rather than
starting a new business "from scratch."
The appointment of a new Chief Operating Officer to oversee the
operations in China will be announced shortly. We plan to increase our staffing
levels in China only as required or as the business growth demands such action.
ITEM 7. FINANCIAL STATEMENTS.
See pages beginning with page F-1.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective February 19, 2003, we engaged The Rehmann Group ("Rehmann")
as our principal accountant (such engagement was approved by our then board of
directors). Edwards, Melton, Ellis, Koshiw & Company, P. C. ("Edwards") was our
principal accountant preceding Rehmann. Edwards resigned effective December 19,
2002 as our independent accountant because it informed us that it was no longer
going to be conducting audits of public companies.
Prior to our engagement of Rehmann, we had not consulted with Rehmann
as to the application of accounting principles to any specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
our financial statements, and no written or oral advice was provided that was an
important factor considered by us in reaching a decision as to an accounting,
auditing or financial reporting issue.
On April 15, 2003, we dismissed Rehmann as our independent accountants,
due primarily to the transaction with SCP. Our management recommended the change
in independent accountants, and our board of directors approved the change. In
March 2003, Moores Rowland was engaged to be our international accounting firm
(such engagement was approved by our then board of directors). Previously, in
January 2003, SCP engaged Moores Rowland as our principal accountant.
Prior to our engagement of Moores Rowland, we had not consulted with
Moores Rowland as to the application of accounting principles to any specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on our financial statements, and no written or oral advice was
provided that was an important factor considered by us in reaching a decision as
to an accounting, auditing or financial reporting issue.
Rehmann's reports on the financial statements for the fiscal year ended
December 31, 2002 did not contain an adverse opinion, or a disclaimer of
opinion, or was qualified as to audit scope or accounting principles. However,
the unqualified opinion included an explanatory paragraph regarding our ability
to continue as a going concern. Furthermore, during the most year ended December
31, 2002 and through April 15, 2003, there were no disagreements with Rehmann on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope and procedures, which disagreements, if not resolved to the
satisfaction of Rehmann, would have caused that firm to make reference to the
subject matter of such disagreements in connection with its reports.
On October 1, 2003, Moores Rowland merged with Mazars and is now
practicing under the name of Moores Rowland Mazars.
On January 11, 2005, Moores Rowland Mazars resigned as our independent
public accountants. Our board of directors approved the resignation of Moores
Rowland Mazars. Moores Rowland Mazars had audited our consolidated balance sheet
as of December 31, 2003 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 2003 and for
the period from August 13, 2002 (inception) to December 31, 2002 and the amounts
included in the consolidated cumulative period from August 13, 2002 (inception)
through December 31, 2003.
The audit report of Moores Rowland Mazars on the financial statements
as of December 31, 2003 and for the year ended December 31, 2003 and for the
period from August 13, 2002 (inception) to December 31, 2002 did not contain any
adverse opinion or disclaimer of opinion, or was modified as to audit scope,
accounting principles or uncertainty, except for a going concern opinion
expressing substantial doubt about our ability to continue as a going concern.
During the two most recent fiscal period/year ended December 31, 2003
and the subsequent interim period through January 11, 2005, there were no
disagreements with Moores Rowland Mazars on any matter of
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accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Moores Rowland
Mazars, would have caused it to make reference to the subject matter of the
disagreement in connection with its report. There were no other "reportable
events" as that term is described in Item 304(a)(1)(iv) of Regulation S-B
occurring within our two most recent fiscal period/year ended December 31, 2003
and the subsequent interim period ended January 11, 2005.
On February 1, 2005, we engaged Bongiovanni & Associates, P.A.,
Charlotte, North Carolina, as our principal accountant to audit our financial
statements for the year ending December 31, 2004. Our board of directors
approved the engagement of Bongiovanni & Associates, P.A.
Prior to the engagement of Bongiovanni & Associates, P.A., we had not
consulted Bongiovanni & Associates, P.A. as to the application of accounting
principles to any specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on our financial statements, and no written
or oral advice was provided that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer / Chief Financial Officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures as
defined in Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934
as of December 31, 2004. Based on his evaluation, our Chief Executive Officer /
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures were effective as of the date of the
evaluation.
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the preceding paragraph.
ITEM 8B. OTHER INFORMATION.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Our executive officers and directors are:
NAME AGE POSITION
Pedro E. Racelis III 54 Interim President, Chief Executive Officer and Director
Allan Rabinoff 58 Chairman of the Board of Directors
Henry Zaks 61 Director
Michael Bowden 55 Vice President Operations and Director
Brad Woods 45 Director
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Vacancies in our board are filled by the board itself. Set forth below
are brief descriptions of the recent employment and business experience of our
executive officers and directors.
PETE RACELIS, INTERIM PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Racelis has been our Interim President, Chief Executive Officer,
and a director since June 2004. A veteran of direct sales and management in
multi-national companies for more than 21 years, Pete has extensive experience
with telecommunications, operations, management and organizational skills. Prior
to joining the company in October 2002, Mr. Racelis sold hardware and software
solutions to telecommunications carriers, financial institutions, and commercial
businesses both nationally and internationally in North America. Mr. Racelis has
held executive level positions as Vice President/GM at Winstar Wireless
(1995-1997), Director of Sales at Amati Corporation (1997-1998), and Vice
President at Stox.com (1998 - 2001), in the past five years before joining China
Wireless.
ALLAN RABINOFF, CHAIRMAN OF THE BOARD OF DIRECTORS
Dr. Allan Rabinoff has been a principal in Intelligent Network
Communications, LLC and IP2IP, LLC, since November 2001. Dr. Rabinoff also
served as a corporate advisor to Helvstar S.A., a Swiss investment holding
company, with focused investments in manufacturing and distribution companies in
Europe, the US, and Asia. Dr. Rabinoff's role was to evaluate technology
commercialization and investment opportunities, make recommendations to the
board of directors, and assist companies in structuring a possible relationship
with Helvstar. Based on his recommendation, Helvstar concluded and implemented a
multi-million dollar technology commercialization deal in 1999. Previously, Dr.
Rabinoff had accepted the responsibilities of Director for First Star Ventures
Inc., a Nevada corporation, which provided executive consulting services to
companies seeking private equity funding or assistance with mergers and
acquisitions. Throughout his business career he has focused on maximizing
opportunities in a rapidly changing business environment He has been a director
since February 2004.
HENRY ZAKS, DIRECTOR
Mr. Zaks has been a director since October 2003. He has been the
President of Zaks-Shane, LTD., a Wisconsin-based organization that specializes
in marketing business-to-business solutions to both corporations and small
companies. He has over 30 years as a sales professional, and is renowned as an
insurance marketing expert. He became a director on October 9, 2003.
MICHAEL A. BOWDEN, VICE PRESIDENT OPERATIONS AND DIRECTOR
Mr. Bowden has been our Vice President of Technology Operations since
February 2003 and a director since January 2005. He has over 25 years of
telecommunications experience in both highly technical and major account sales
environments. His experience includes supporting complex projects ranging from
$100K to $58M in annual revenue. He provided telecommunications consulting
services from August 2002 to February 2003. From December 2000 to August 2002,
he was a senior sales engineer for Net.com, a Denver, Colorado, company that
provided telecommunications equipment to carriers. Mr. Bowden was a technical
support manager for Qwest Communications International Inc. (formerly US West
Communications), Denver, Colorado, from October 1998 to December 2000.
BRAD WOODS, DIRECTOR
Mr. Brad Woods was previously served as our Interim President & CEO
from August 2003 to June 2004, and chief financial officer, secretary, and
treasurer from March 2003 to June 2004. He has been a director since March 2003.
He is a member of Breckenridge Capital Consulting Group, LLC. He has extensive
experience in international investments, acquisitions, taxation, and computer
applications with both public and
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private companies. Mr. Woods has also worked for Arthur Andersen & Co., where he
executed projects for and on behalf of clients in the oil and gas, financial
services, leasing, lodging, retail and light manufacturing industries. His
experience includes practicing before the Securities and Exchange Commission,
both with existing public companies and initial public offerings. He has also
served as an advisor to numerous companies. Mr. Woods is a CPA in Colorado.
CONFLICTS OF INTEREST
Our officers and directors are, so long as they are our officers or
directors, subject to the restriction that all opportunities contemplated by our
plan of operation which come to their attention, either in the performance of
their duties or in any other manner, will be considered opportunities of, and be
made available to us and the companies that they are affiliated with on an equal
basis. A breach of this requirement will be a breach of the fiduciary duties of
the officer or director. If we or the companies with which the officers and
directors are affiliated both desire to take advantage of an opportunity, then
said officers and directors would abstain from negotiating and voting upon the
opportunity. However, all directors may still individually take advantage of
opportunities if we should decline to do so. Except as set forth above, we have
not adopted any other conflict of interest policy with respect to such
transactions.
COMMITTEES
In fiscal 2004 the board of directors did not have a standing audit,
nominating, or compensation committees, rather the entire board of directors
acted in such capacity.
CODE OF ETHICS
We have not yet adopted a code of ethics. We intend to do so in the
near future.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
As our common stock is not registered under the Securities Exchange Act
of 1934, we are not subject to Section 16(a) of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information the remuneration of our
chief executive officers and our four most highly compensated executive officers
who earned in excess of $100,000 per annum during any part of our last three
fiscal years:
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($)
-----------------------------------------------------------------------------------------------------------------------
Peter Racelis 2004 111,134 -0- -0- 64,000 800,000 -0- -0-
Vice President
(1)
--------------------------------------------------------------------------------------------------------------------------
Brad A.Woods 2004 40,000 -0- -0- -0- -0- -0- -0-
Interim 2003 153,305 15,750 -0- -0- 300,000 -0- -0-
President
(2)
--------------------------------------------------------------------------------------------------------------------------
11
-----------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL FISCAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION($) ($) SARS (#) ($) TION($)
-----------------------------------------------------------------------------------------------------------------------
Philip Allen 2003 32,434 75,000 -0- -0- -0- -0- -0-
Former CEO
(3)
--------------------------------------------------------------------------------------------------------------------------
Peter Fisher 2003 150,000 -0- -0- -0- -0- -0- -0-
Former 2002 -0- -0- -0- -0- -0- -0- -0-
Director
(4)
--------------------------------------------------------------------------------------------------------------------------
Tyler Fisher 2003 108,000 -0- -0- -0- -0- -0- -0-
Former Director
(4)
--------------------------------------------------------------------------------------------------------------------------
--------------------
(1) Mr. Racelis become the Interim President in June 2004.
(2) Mr. Woods became Chief Financial Officer in March 2003 and became the
Interim President in August 2003. He served in both positions until
June 2004.
(3) Mr. Allen served as CEO from March 2003 to August 2003.
(4) Peter Fisher and Tyler Fisher resigned as Officers effective March 23,
2003. Peter Fisher had been the president since April 2000. By
resolution dated March 17, 2003, in conjunction with the Share Exchange
Agreement with SCP, our board of directors approved compensation of
$150,000 and $508,000 to Peter Fisher and Tyler Fisher, respectively,
retroactive to December 31, 2002. Such compensation was paid by issuing
764,624 and 1,050,529 shares of our common stock.
There have been no grants stock appreciation rights, benefits under
long-term incentive plans or other forms of compensation involving our officers,
through December 31, 2004.
We reimburse our officers and directors for reasonable expenses
incurred during the course of their performance. We have not paid our outside
directors fees for their services. However, we propose to pay them in the
future.
EMPLOYMENT AGREEMENTS
On June 2, 2004, Brad Woods was removed as President & CEO. The Board
offered a severance package to Brad Woods, which he refused to sign. In
addition, the consulting agreement with Kent Lam was not renewed.
On April 16, 2004 Pedro E. Racelis III was installed as President & CEO
for a term of 6 years renewable for one year after the original term expires.
Salary for employee is one hundred and twenty thousand ($120,000.00) dollars per
first year term with 10% 10% annual increase commencing on the first anniversary
the agreement.
On December 3, 2004 Michael A. Bowden was hired as Vice President of
Technology for a term of 6 years renewable for one year after the original
expires. Salary for employee is seventy two thousand ($72,000.00) dollars per
first year term with 10% annual increase commencing on the first anniversary the
agreement.
STOCK PLAN
On January 31, 2003, our shareholders adopted the 2003 Stock Plan,
which provides for the granting of both incentive stock options and nonstatutory
stock options and stock purchase rights to officers, directors,
12
employees, and independent contractors. The total number of shares of common
stock that may be issued under this plan shall not exceed 15% of shares
outstanding.
The board of directors or one or more committees designated by the
board administers this plan, and has the authority and discretion to do the
following:
o determine the fair market value;
o select the employees, directors, or consultants to whom options and
stock purchase rights may be granted;
o determine the number of shares of common stock to be covered by each
option and stock purchase right granted under the Plan;
o approve forms of agreement for use under the Plan;
o determine the terms and conditions of an option or stock purchase right
granted under the Plan;
o construe and interpret the terms of the Plan and awards granted under
the Plan;
o prescribe, amend, and rescind rules and regulations relating to the
Plan;
o modify or amend each option or stock purchase right;
o allow optionees to satisfy withholding tax obligations by electing to
have the company withhold from the shares to be issued upon exercise of
an option or stock purchase right that number of shares having a fair
market value equal to the minimum amount required to be withheld;
o authorize any person to execute on behalf of the company any instrument
required to effect the grant of an option or stock purchase right; and
o make all other determinations deemed necessary or advisable for
administering the Plan.
We may grant incentive stock options with the exercise price being 100%
of the bid price on the date of grant, and nonstatutory stock options with the
exercise price being not less than 85% of the bid price on the date of grant.
The options are subject to any vesting, special forfeiture conditions, rights of
repurchase, rights of first refusal, and other transfer restrictions as may be
determined by the board or committee. Options granted cannot exceed a term of
ten years, except in the case of incentive stock options granted to holders of
10% of more of our total combined voting power of all classes of stock, which
cannot exceed a term of five years. The options terminate upon the earliest of
(1) the stated expiration date, (2) 30 days after the termination of the
optionee's service for any reason other than total and permanent disability, (3)
six months after the termination of the optionee's service by reason of total
and permanent disability, or (4) six months after the optionee's death.
Unless earlier terminated by the board of directors, this plan will
terminate January 30, 2013.
As of December 31, 2004 options to purchase 550,000 shares were
outstanding.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table provides certain information as to the officers and
directors individually and as a group, and the holders of more than 5% of the
Common Stock of the Company, as of December 31, 2004:
------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
------------------------------------------------------------------------------------------------------------------
Brad Woods 1,160,000 2.46%
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401
------------------------------------------------------------------------------------------------------------------
13
------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
------------------------------------------------------------------------------------------------------------------
Henry Zaks 3,927,023 8.32%
11649 N. Port Washington Rd, Suite 224
Mequon, WI 53092
------------------------------------------------------------------------------------------------------------------
Dr. Allan Rabinoff 1,443,000 3.05%
11649 N. Port Washington Rd, Suite 224
Mequon, WI 53092
------------------------------------------------------------------------------------------------------------------
Pedro E. Racelis III 2,188,737 4.64%
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401
------------------------------------------------------------------------------------------------------------------
Michael A Bowden 1,240,000 2.62%
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401
------------------------------------------------------------------------------------------------------------------
All officers and Directors as a Group (5 persons) 9,958,760 21.11%
------------------------------------------------------------------------------------------------------------------
-------------
(1) To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2) This table is based on 47,167,569 shares of Common Stock outstanding as
of December 31, 2004. If a person listed on this table has the right to
obtain additional shares of Common Stock within sixty (60) days from
December 31, 2004, the additional shares are deemed to be outstanding
for the purpose of computing the percentage of class owned by such
person, but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
EQUITY COMPENSATION PLANS
As of December 31, 2004, our equity compensation plan information is as
follows:
-------------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted-average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, options, warrants and remaining available for
Plan Category warrants and rights rights future issuance
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans 550,000 0.36 638,341
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation plans not None None None
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
Total 550,000 0.36 638,341
-------------------------------------------------------------------------------------------------------------------
14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
During the years ended December 31, 2003 and 2004, we paid amounts to
related parties as follows::
-------------------------------------------------------------------------------------------------------------------
NAME RELATIONSHIP AMOUNT PAID NATURE OF PAYMENT
2003 2004 (a)
------------------------------------------------------------------------------------------------------------------
Brad Woods President/CEO/CFO January $169,055 $50,000 Consulting fee
01/2004- April 30, 2004
------------------------------------------------------------------------------------------------------------------
Train Top Beijing In-Touch President $198,112 $125,000 Consulting fee
Kent Lam's Company
------------------------------------------------------------------------------------------------------------------
Henry Zaks (b) Director, Former note holder $14,600 $14,600 Consulting fee
------------------------------------------------------------------------------------------------------------------
Dr. Allan Rabinoff Director $28,290 $28,290 Consulting fee
------------------------------------------------------------------------------------------------------------------
Pete Racelis CEO/President/Director May $75,870 $111,134 Consulting fee
1,2004- December 31, 2004
------------------------------------------------------------------------------------------------------------------
Michael Bowden Vice President of Technology $-0- $54,917 Consulting fee
------------------------------------------------------------------------------------------------------------------
Phillip Allen President/CEO March 2003 - $107,434 $-0- Consulting fee
August 2003
------------------------------------------------------------------------------------------------------------------
Blake Ratliff Shareholder and former Chief $21,874 $-0- Consulting fee
Operating Officer of SCP
------------------------------------------------------------------------------------------------------------------
(a) Each of the individuals listed in the table received the fees enumerated
in this table prior to each joining our board of directors.
(b) On June 27, 2003 and July 31, 2003, Henry Zaks loaned us $80,000 and we
issued a promissory note in such amount payable to Mr. Zaks. This loan
was converted into common stock during 2004. Henry Zaks was compensated
prior to joining the Board as a consultant to review administration and
accounting.
During 2004, Henry Zaks converted notes payable of $80,000 and $45,000
into 657,895 shares of common stock at a conversion price of $0.19 per share.
ITEM 13. EXHIBITS
(a) EXHIBITS:
15
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
2.1 Share Exchange Agreement dated as of March 17, 2003 by and
between i-Track, Inc. and Strategic Communications Partners,
Inc. (1)
--------------------------------------------------------------------------------
3.1 Articles of Incorporation (2)
--------------------------------------------------------------------------------
3.2 Bylaws (2)
--------------------------------------------------------------------------------
3.3 Certificate of Amendment to Articles of Incorporation (3)
--------------------------------------------------------------------------------
3.4 Certificate of Amendment to Articles of Incorporation (4)
--------------------------------------------------------------------------------
10.1 Promissory Notes in the aggregate amount of $140,000,
payable to Buck Krieger
--------------------------------------------------------------------------------
10.2 Promissory Note, dated June 27, 2003 in the amount of
$50,000, and dated July 31, 2003 in the amount of $30,000,
payable to Henry Zaks (5)
--------------------------------------------------------------------------------
10.3 Promissory Note, dated July 31, 2003 in the amount of
$20,000, payable to Robert Zappa
--------------------------------------------------------------------------------
10.4 2003 Stock Plan, as amended (6)
--------------------------------------------------------------------------------
10.5 Investment Contract between Goldvision Technologies Ltd and
SCP dated December 18, 2003 (6)
--------------------------------------------------------------------------------
10.6 Extension Agreement to Investment Contract between
Goldvision Technologies Ltd. and the Company dated August 5,
2003 (5)
--------------------------------------------------------------------------------
10.7 Employment Agreement dated March 25, 2003 with Phillip Allen
(6)
--------------------------------------------------------------------------------
10.8 Employment Agreement dated March 25, 2003 with Brad A. Woods
(6)
--------------------------------------------------------------------------------
10.9 Separation & Voting Trust Agreement with Philip Allen (5)
--------------------------------------------------------------------------------
10.10 Agreement between the Company and Bellador Advisory
Services, Ltd. dated October 22, 2003 (5)
--------------------------------------------------------------------------------
10.11 Agreement between the Company and China Netcom Group Beijing
Company dated September 1, 2003 (5)
--------------------------------------------------------------------------------
10.12 Agreement between the Company and MCI International Ltd. Co.
dated August 14, 2003
--------------------------------------------------------------------------------
10.13 Amendment to Employment Agreement dated April 23, 2004 with
Brad A. Woods (7)
--------------------------------------------------------------------------------
10.14 Employment Agreement dated April 23, 2004 with Pedro E.
Racelis III (7)
--------------------------------------------------------------------------------
10.15 Consulting Agreement with Jiaxin Consulting Group, Inc.
dated December 8, 2004,
--------------------------------------------------------------------------------
16.1 Letter from the Rehmann Group, dated April 22, 2003 (8)
--------------------------------------------------------------------------------
16.2 Letter from Moores Rowland, dated February 28, 2005 (9)
--------------------------------------------------------------------------------
21 Subsidiaries of the registrant
--------------------------------------------------------------------------------
16
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
31.1 Rule 15d-14(a) Certification
--------------------------------------------------------------------------------
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
--------------------------------------------------------------------------------
----------------------
(1) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated March 17, 2003.
(2) Incorporated by reference from the exhibits to the Registration Statement
on Form SB-1 filed on November 6, 2000, File No. 333-49388.
(3) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated March 22, 2003.
(4) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated November 23, 2004.
(5) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2003.
(6) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2002.
(7) Incorporated by reference to the exhibits to the registrant's registration
statement on Form S-8 (File No. 333-104457, filed April 27, 2004.
(8) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated April 15, 2003.
(9) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated January 11, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
On January 11, 2005, Moores Rowland Mazars ("Moores") resigned as our
independent public accountants. Moores had audited our financial statements for
the year ended December 31, 2003 and for the period from August 13, 2002
(inception) to December 31, 2002. On February 1, 2005, we engaged Bongiovanni &
Associates P.A. ("Bongiovanni") to serve as our independent public accountants
for the fiscal year ending December 31, 2004.
AUDIT FEES
For the fiscal year ended December 31, 2004, Bongiovanni is expected to
bill approximately $24,394for the audit of our annual financial statements. For
the fiscal year ended December 31, 2004, Moores billed $18,000 for the review of
our Form 10-QSB filings. For the fiscal year ended December 31, 2003, Moores
billed $30,000 for the audit of our annual financial statements and review of
our Form 10-QSB filings.
AUDIT-RELATED FEES
There were no fees billed for services reasonably related to the
performance of the audit or review of our financial statements outside of those
fees disclosed above under "Audit Fees" for fiscal years 2004 and 2003.
TAX FEES
For the fiscal year ended December 31, 2004, Bongiovanni is expected to
bill $0 for tax compliance, tax advice, and tax planning services. For the
fiscal year ended December 31, 2003, Moores billed $0 for tax compliance, tax
advice, and tax planning services.
17
ALL OTHER FEES
There were no other fees, other than those described above.
PRE-APPROVAL POLICIES AND PROCEDURES
Prior to engaging our accountants to perform a particular service, our
board of directors obtains an estimate for the service to be performed. The
board of directors in accordance with procedures for the company approved all of
the services described above.
There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the preceding paragraph.
18
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.
CHINA WIRELESS COMMUNICATIONS, INC.
Date: April 15, 2005 By: /s/ PEDRO E. RACELIS III
------------------------------------------
Pedro E. Racelis III
Interim President
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
Interim President (Principal
Executive Officer) and Chief
/s/ PEDRO E. RACELIS III Financial Officer (Principal
------------------------------------ Financial and Accounting Officer) April 15, 2005
Pedro E. Racelis III
/s/ HENRY ZAKS
------------------------------------ Director April 15, 2005
Henry Zaks
/s/ ALLAN RABINOFF
------------------------------------ Director April 15, 2005
Allan Rabinoff
/s/ MICHAEL A. BOWDEN
------------------------------------ Director April 15, 2005
Michael A. Bowden
------------------------------------ Director April , 2005
Brad Woods
19
--------
CONSOLIDATED AUDITED FINANCIAL STATEMENTS
CHINA WIRELESS COMMUNICATIONS, INC.
DECEMBER 31, 2004
--------
BONGIOVANNI & ASSOCIATES, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
F-1
CONTENTS
================================================================================
REPORTS OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM................................................. F-3
CONSOLIDATED BALANCE SHEET........................................ F-5
CONSOLIDATED STATEMENTS OF OPERATIONS............................. F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS............................. F-7
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT................... F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................ F-9
================================================================================
F-2
BONGIOVANNI & ASSOCIATES, P.A.
17111 KENTON DRIVE, SUITE 100-B
CORNELIUS, NORTH CAROLINA 28031
PHONE (704) 892-8733
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
China Wireless Communications, Inc.
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401-3208
To the Board of Directors and Stockholders of China Wireless Communications,
Inc.
We have audited the accompanying consolidated balance sheet of China Wireless
Communications, Inc. (the "Company") and subsidiaries as of December 31, 2004
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the year ended December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statements presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and
subsidiaries as of December 31, 2004 and the consolidated results of their
operations and cash flows for the year ended December 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered losses from
operations, has a stockholders' deficit, has discontinued operations, and has a
negative working capital that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in note 2 to the consolidated financial statements. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ BONGIOVANNI & ASSOCIATES, CPA'S
Bongiovanni & Associates, CPA's
Charlotte, North Carolina
March 28, 2005
F-3
Report of Independent Auditors
To the Board of Directors and Stockholders of
China Wireless Communications, Inc.
(A Development Stage Company)
We have audited the accompanying consolidated balance sheet of China Wireless
Communications, Inc. (a development stage company) (the "Company") and
subsidiaries as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
2003 and for the period from August 13, 2002 (inception) to December 31, 2002
and the amounts included in the consolidated cumulative period from August 13,
2002 (inception) through December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements 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 and
subsidiaries as of December 31, 2003 and the results of their operations and
cash flows for the year ended December 31, 2003 and for the period from August
13, 2002 (inception) to December 31, 2002 and the amounts included in the
consolidated cumulative period from August 13, 2002 (inception) through December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered losses from operations and has a
negative working capital that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in note 2 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Moores Rowland Mazars
Chartered Accountants
Certified Public Accountants
Hong Kong
Date: April 13, 2004
F-4
China Wireless Communications, Inc.
Consolidated Balance Sheet
December 31, 2004
US$
ASSETS
Current assets
Cash and cash equivalents $ 4,789
-------------
Total current assets 4,789
-------------
Total Assets $ 4,789
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 77,811
Interest payable 26,762
Loans payable 220,831
Notes payable 123,600
-------------
Total current liabilities 449,004
-------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, par value $0.01 per share, 1,000,000
shares of preferred stock authorized, none issued and outstanding -
Common stock, par value $0.001 per share,
250,000,000 shares of common stock authorized,
47,167,569 shares of stock issued and outstanding 47,167
Additional paid-in capital 8,088,846
Accumulated deficit (8,580,228)
-------------
Total stockholders' deficit (444,215)
-------------
Total liabilities and stockholders' deficit $ 4,789
=============
See notes to audited financial statements.
F-5
China Wireless Communications, Inc.
Consolidated Statements of Operations
For the Years Ending December 31, 2004 and 2003
US$ US$
Year ended Year ended
Dec. 31, 2004 Dec. 31, 2003
------------------ -----------------
Operating revenue:
Service revenue $ - $ -
------------------ -----------------
Cost of services - -
------------------ -----------------
Gross profit - -
------------------ -----------------
Operating expenses:
Common stock issued for compensation 3,106,942 2,325,604
------------------ -----------------
Total operating expenses 3,106,942 2,325,604
------------------ -----------------
Loss from operations (3,106,942) (2,325,604)
Non-operating income (expenses):
Interest income - 484
Other income (expense) 116,134 175
Interest expense (19,141) (17,328)
------------------ -----------------
Total non-operating income (expenses) 96,993 (16,669)
Net loss from continuing operations (3,009,949) (2,342,273)
Discontinued Operations:
Loss from discontinued operations (1,019,213) (1,193,794)
------------------ -----------------
Net Loss $ (4,029,162) $ (3,536,067)
================== =================
Net loss per share from continuing operations $ (0.087) $ (0.104)
Net loss per share from discontinued operations $ (0.029) $ (0.052)
------------------ -----------------
Basic and fully diluted net loss per common share $ (0.116) $ (0.156)
================== =================
Weighted average common shares outstanding,
basic and fully diluted 34,752,716 22,732,000
================== =================
See notes to audited financial statements.
F-6
China Wireless Communications, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004 and 2003
Year ended Year ended
Dec. 31, 2004 Dec. 31, 2003
US$ US$
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,029,162) $ (3,536,067)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for compensation 3,107,158 2,325,604
Discontinued operations, net (345,831) 19,032
(Increase) decrease in operating assets:
Prepayments and other receivables 201,631 (201,631)
Increase (decrease) in operating liabilities:
Trade and other payables (379) 255,008
---------------- -----------------
NET CASH (USED IN) OPERATING ACTIVITIES (1,066,583) (1,138,054)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets - (419,271)
Discontinued operations, net 400,239 -
(Increase) decrease in pledged deposits 22,197 (22,197)
Repayment from related party - 60,000
---------------- -----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 422,436 (381,468)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 770,829 755,122
Incurrence (repayment) of loans (147,090) 367,921
Proceeds from issuance of notes payable 45,000 275,000
Bank overdraft increase (decrease) (6,609) 6,609
Repayment of notes payable (6,000) (119,900)
Repayments of convertible notes (11,000) -
Proceeds from issuance of convertible notes - 41,000
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 645,130 1,325,752
---------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 983 (193,770)
---------------- -----------------
CASH AND CASH EQUIVALENTS:
Beginning of year 3,806 197,576
---------------- -----------------
End of year $ 4,789 $ 3,806
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ 17,328
================ =================
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Common stock issued for compensation $ 3,107,158 $ 2,325,604
================ =================
Conversion of convertible debt into notes payable $ 30,000 $ -
================ =================
Conversion of notes payable into common stock $ 125,000 $ -
================ =================
See notes to audited financial statements.
F-7
China Wireless Communications, Inc.
Consolidated Statement of Stockholders' Equity
For the Years Ended December 31, 2004 and 2003
Common stock Additional
------------------------------ paid-in Accumulated
Number Amount capital deficit Total
US$ US$ US$ US$
------------- ------------- ------------ -------------- -------------
Balance of January 1, 2003 21,500,000 $ 21,500 $ 2,353,850 $ (1,014,999) $ 1,360,351
Common stock issued for services at prices ranging
from $.25 per share to $.72 per share 3,293,751 3,294 1,456,878 - 1,460,172
Common stock issued for cash at prices ranging
from $.50 per share to $.80 per share, net of
issuance costs of $491,949 1,420,202 1,420 421,084 - 422,504
Net loss for the year 2003 - - - (3,536,067) (3,536,067)
------------- ------------- ------------- -------------- -------------
Balances at December 31, 2003 26,213,953 $ 26,214 $ 4,231,812 $ (4,551,066) $ (293,040)
============= ============= ============= ============== =============
Common stock issued for services at prices ranging
from $.04 per share to $.80 per share 18,476,746 18,477 3,088,681 - 3,107,158
Common stock issued for cash at prices ranging
from $.28 per share to $.73 per share, net of
issuance costs of $795,458 2,476,870 2,476 768,353 - 770,829
Net loss for the year 2004 - - - (4,029,162) (4,029,162)
------------- ------------- ------------- -------------- -------------
Balances at December 31, 2004 47,167,569 $ 47,167 $ 8,088,846 $ (8,580,228) $ (444,215)
============= ============= ============= ============== =============
See notes to audited financial statements.
F-8
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Wireless Communications., Inc. (the "Company") was incorporated under the
laws of the State of Nevada on March 8, 1999 under the name of i-Track., Inc. On
March 21, 2003, the Company entered into an agreement with a related entity
whereby the Company distributed to the related entity all its assets and the
related entity assumed all liabilities of the Company. Accordingly, as of March
21, 2003, the Company entirely ceased its prior business operations.
Pursuant to a share exchange agreement effective on March 22, 2003, the Company
acquired SCP, a Wyoming corporation incorporated on August 13, 2002, by issuance
of 19,000,000 restricted shares of the Company's common stock to the
shareholders of SCP, resulting in the SCP shareholders as a group owning
approximately 88.4% of the outstanding shares of common stock of the Company. As
a result, SCP became a wholly-owned subsidiary of the Company.
For financial reporting purposes, the acquisition of SCP by the Company was
treated as a reverse acquisition whereby SCP was considered as the acquirer,
i.e. the surviving entity, for financial reporting purposes. On this basis, the
historical financial statements prior to March 22, 2003 represent the financial
statements of SCP. The historical shareholders' equity accounts of the Company
have been retroactively restated in 2003 and prior years to reflect the issuance
of 19,000,000 shares of common stock since inception of SCP plus the original
2,500,000 shares of common stock of the Company just before the reverse
acquisition, with corresponding adjustments to additional paid-in capital.
On March 24, 2003, the Company's name was changed to China Wireless
Communications, Inc. Its former principal activities were to provide wireless
services. The details of its subsidiaries and their principal activities, prior
to the discontinuing of these operations in 2004, are listed out in the
following paragraph.
Date of Equity interest
acquisition/ Place of owned by the Principal
Name of company formation incorporation Company activities
Direct Indirect
SCP August 13, Wyoming, the 100% -- Investment holding
2002 United States
Strategic December 9, Hong Kong -- 100% Investment holding
Communications 2002
Partners Limited
Beijing In-Touch March 4, People's Republic -- 100% Telecommunication
Information System Co. 2003 of China ("PRC") services
Ltd. ("In-Touch")
During 2004, Beijing In-Touch Information System Company Ltd was closed due to
high operating expenses incurred. In the meantime, the management team began
discussion with Jianxin Consulting Group, Vancouver, BC and Tianjin, China to
assist in gaining entry into the new markets. These operations appear under
discontinued operations in the accompanying financial statements.
Presently, the Company provides information technology and internet protocol
services to customers.
F-9
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
2. BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("USGAAP").
(a) Going concern. The Company has suffered recurring losses from operations,
has negative working capital and has a stockholders' deficit as of December 31,
2004. In addition, the Company has yet to generate an internal cash flow from
its business operations and has generated operating losses since its inception.
These factors raise substantial doubt as to the ability of the Company to
continue as a going concern.
Management's plans with regard to these matters encompass the following actions:
1) obtain funding from new investors to alleviate the Company's working
deficiency, and 2) implement a plan to increase cash flows. The Company's
continued existence is dependent upon its ability to resolve it liquidity
problems and increase profitability in its current business operations. However,
the outcome of management's plans cannot be ascertained with any degree of
certainty. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these risks and uncertainties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting. The consolidated financial statements have been
prepared at historical cost under the accrual basis of accounting. Cost in
relation to assets represents the cash paid or the fair value of the assets, as
appropriate.
(b) Principles of consolidation. The consolidated financial statements include
the financial information of the Company and its subsidiaries. The results of
subsidiaries acquired or disposed of during the period are consolidated from or
to their effective dates of acquisition or disposal respectively.
All material intercompany balances and transactions have been eliminated on
consolidation.
(c) Subsidiary. A subsidiary is an affiliate controlled by the Company directly,
or indirectly through one or more intermediaries. The term control (including
the terms controlling, controlled by and under common control with) means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of voting
shares, by contract, or otherwise.
(d) Revenue recognition. Revenue is recognized when it is probable that the
economic benefits will flow to the Company and when the revenue and cost, if
applicable, can be measured reliably and on the following basis.
Service revenue is recognized in the period when services are rendered.
(e) Income taxes. Provision for income and other related taxes have been
provided in accordance with the tax rates and lows in effect in various
countries of operations.
F-10
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
Deferred taxes are provided using the liability method for all significant
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net operating
loss carry forwards. The tax consequences of those differences are classified as
current or non-current based on the classification of the related assets or
liabilities in the financial statements.
(f) Operating leases. Leases where substantially all of the rewards and risks of
ownership of assets remain with the leasing company are accounted for as
operating leases. Rentals payable under operating leases are recorded in the
accompanying consolidated statement of operations on a straight-line basis over
the lease term.
(g) Earnings (Loss) per share. Basic earnings (loss) per common share are
computed by dividing earnings (loss) available to common stockholders by the
weighted average number of common shares outstanding for the periods.
The calculation of diluted earnings (loss) per share is based on earnings (loss)
available to common shareholders and on the weighted average number of common
shares outstanding adjusted to reflect potentially dilutive securities. The
Company's stock warrants and stock options are anti-dilutive due to the net loss
per share. There were no adjustments required to net loss for the periods
presented in the computation of diluted earnings per share. There were 1,775,000
common stock equivalents (CSE) excluded from the computation of diluted loss per
share.
(h) 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.
(i) Foreign currencies. Transactions in currencies other than functional
currencies during the period are translated into the respective functional
currencies at the applicable rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in currencies other
than functional currencies are translated into respective functional currencies
at the applicable rates of exchange in effect at the balance sheet date.
Exchange gains and losses are dealt with in the statement of operations.
On consolidation, assets and liabilities of subsidiaries denominated in
respective functional currencies are translated into United States Dollars at
the exchange rate as of the balance sheet date. The share capital and retained
earnings are translated at exchange rates prevailing at the time of the
transactions. Revenues, costs and expenses denominated in respective functional
currencies are translated into United States Dollars at the weighted average
exchange rate for the period. The effects of foreign currencies translation
adjustments are included as a separate component of accumulated other
comprehensive income.
(j) Use of estimates. The preparation of financial statements in conformity with
USGAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Such estimates
include but not limited to depreciation, taxes and contingencies. Actual results
could differ from those estimates.
F-11
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
(k) Fair value of financial instruments. The estimated fair values for financial
instruments under SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", are determined at discrete points in time based on relevant market
information. These estimates involve uncertainties and cannot be determined with
precision. The estimated fair values of the Company's financial instruments,
which include cash, accounts payable, interest payable, loans payable and notes
payable, approximate their carrying values in the consolidated financial
statements.
(l) Cash and cash equivalents. Cash equivalents include all highly liquid
investments, generally with original maturities of three months or less that are
readily convertible to known amount of cash and which are subject to an
insignificant risk of changes in value.
(m) Property, plant and equipment and depreciation. Property, plant and
equipment are recorded at cost less accumulated depreciation and impairment.
Repairs and maintenance expenditures, which are not considered improvements and
do not extend the useful life of property, plant and equipment, are expensed as
incurred. The cost and related accumulated depreciation applicable to property,
plant and equipment sold or no longer in service are eliminated from the
accounts and any gain or loss is included in statement of operations.
Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives from the date on which they become
fully operational and after taking into account of their estimated residual
values, using the straight-line method, at the following rates per annum:
Leasehold improvement 20%
Telecommunication equipment 20%
Furniture and fixture 20%
Office equipment 20% - 33.33%
When assets are sold or retired, their costs and accumulated depreciation are
eliminated from the accounts and any gain or loss resulting from their disposal
is included in the statement of operations.
The Company recognizes an impairment loss on property, plant and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the assets.
(n) Stock-based compensation. The Company records compensation expense for
stock-based employee compensation plans using the intrinsic value method in
which compensation expense, if any, is measured as the excess of the market
price of the stock over the exercise price of the award on the measurement date.
On March 22, 2003, the Company granted options to subscribe for shares of the
Company to its directors and officers ("Options I"). The option period commenced
on the effective date of grant and expired on
F-12
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
October 31, 2004. The options were granted at an exercise price of US $0.35 per
share, which was the market price on the grant date. As of December 31, 2004,
none of these options were outstanding. 50,000 options were exercised during
2004.
On July 7, 2003, the Company granted options to subscribe for shares of the
Company to its employees ("Options II"). The option period commenced on October
1, 2004 and will expire three years after such date. The options were granted at
an exercise price of US $0.41 per share, which approximates the market price on
the grant date. As of December 31, 2004, 100,000 options were outstanding and no
options have been exercised during the year ended December 31, 2004.
As the exercise prices of the Company's stock options are either the same as or
approximate the market prices of the underlying stock on the grant dates, no
compensation expense has been recognized for stock options pursuant to APB
Opinion No. 25.
Had compensation prices of the same stock options been determined based on their
values at the dates of grant and been amortized over the period from the date of
grant to the date that the award is vested, consistent with the provisions of
SFAS No.123, the Company's net loss and loss per share would have been reported
as follows:
Year ended Year ended
December 31, December 31,
2004 2003
Net loss
As reported ($4,029,162) ($3,536,067)
Total stock-based
compensation expenses $-0- ($55,437)
Pro forma ($4,029,162) ($3,591,504)
Basic net loss per share
As reported ($0.116) ($0.156)
Pro forma ($0.116) ($0.158)
The fair values of the options have been calculated using the Black-Scholes
option pricing model with the following assumptions:
Expected volatility: 58%
Risk-free interest rate: 1.50%
Contractual life: 2.75 years
F-13
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
(o) New accounting pronouncements. In January 2003, the FASB issued FIN No. 46,
"Consolidation of Variable Interest Entities". FIN No. 46 requires the
consolidation of entities that cannot finance their activities without the
support of other parties and that lack certain characteristics of a controlling
interest, such as the ability to make decisions about the entity's activities
via voting rights or similar rights. The entity that consolidates the variable
interest entity is the primary beneficiary of the entity's activities. FIN No.
46 applies immediately to variable interest entities created after January 31,
2003, and must be applied in the first period beginning after June 15, 2003 for
entities in which an enterprise holds a variable interest entity that it
acquired before February 1, 2003. The adoption of this standard did not have an
impact on the Company's consolidated financial statements.
In January 2003, the EITF released Issue No. 00-21, ("EITF 00-21"), "Revenue
Arrangements with Multiple Deliveries", which addressed certain aspects of the
accounting by a vendor for arrangement under which it will perform multiple
revenue-generating activities. Specifically, EITF 00-21 addresses whether an
arrangement contains more than one unit of accounting and the measurement and
allocation to the separate units of accounting in the arrangement. EITF 00-21 is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The adoption of this standard did not have an impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this standard did not have an impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
companies to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. The standard
did not impact the Company's consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Accounting for Stock-Based
Compensation". SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SGAS 123(R) requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS 123(R), only certain pro-forma disclosures of fair
value were required. SFAS 123(R) shall be effective for the Company as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. The adoption of this new accounting pronouncement is expected
to have a material impact on the consolidated financial statements of the
Company commencing with the third quarter of the year ending September 30, 2006.
Small business issuers need not comply with the new standard until fiscal
periods beginning after December 15, 2005.
F-14
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (SFAS 151).
This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS No. 151 are effective for inventory costs
incurred in fiscal years beginning after June 15, 2005.
In December 2003, the issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition," rescinded the accounting guidance contained in SAB No. 101,
"Revenue Recognition in Financial Statements," and incorporated the body of
previously issued guidance related to multiple-element revenue arrangements. The
Company's adoption of SAB No. 104 did not have any impact on its consolidated
financial statements.
In March 2004, the FASB ratified EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments"
("EITF 03-1"), but delayed the recognition and measurement provisions of EITF
03-1 in September 2004. For reporting periods beginning after June 14, 2004,
only the disclosure requirements for available-for-sale securities and cost
method investments are required. The Company's adoption of the requirements did
not have a significant impact on the Company's consolidated disclosures.
In July 2004, the FASB issued EITF Issue No. 02-14, "Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other than Common Stock"
("EITF 02-14"). EITF 02-14 requires application of the equity method of
accounting when an investor is able to exert significant influence over
operating and financial policies of an investee through ownership of common
stock or in-substance common stock. EITF 02-14 is effective for reporting
periods beginning after September 15, 2004. The adoption of EITF 02-14 will not
have a significant impact on the Company's consolidated financial statements.
4. INCOME TAXES
The Company is subject to income taxes on an entity basis on income arising in
or derived from the tax jurisdiction in which it is domiciled and operates. As
the Company has incurred losses since inception, there is no current provision
for income taxes.
A reconciliation of the Company's effective tax rate to the statutory rate in
the United States is as follows:
F-15
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
Year Ended Year Ended
December 31, December 31,
2003 2004
----------- -----------
United States statutory rate 34.0% 34.0%
State taxes, net of Federal benefits 3.3% 3.3%
----------- ----------
Statutory rate 37.3% 37.3%
Effect of different tax rates of companies
operating in other jurisdiction (1.0%) (1.0%)
Non-deductible expenses (0.2%) (1.9%)
Valuation allowance for deferred tax assets
(Note (a)) (31.0%) (29.3%)
Effect of tax holidays (Note (b)) (5.1%) (5.1%)
----------- -----------
-- --
=========== ===========
(a) The Company's operating loss carry forward amounted to a total of
approximately US $1,100,000 that will expire after twenty years from the year of
the losses were incurred unless utilized. Additionally, the ability to recognize
the benefit from the net operating loss carry forwards of the Company could be
limited under Section 382 of the Internal Revenue Code if ownership of the
Company changes by more than 50%, as defined. As a result, the income tax
benefit of the net operating loss carry forwards has not been recognized.
(b) All of the Company's income was generated in the PRC by In-Touch prior to
discontinued operations. In-Touch, being a hi-tech enterprise, is exempted from
the PRC enterprise income tax from 2003 to 2005, followed by a 50% reduction for
the next three years. Under current PRC tax laws, In-Touch's losses of
US$553,625 (2003: US$545,000) will expire after five years.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets are as follows:
Net operating loss carry forward: $408,000
Start-up and cost capitalized for tax purposes: 1,351,000
-----------
Total deferred tax assets 1,759,000
Valuation allowance for deferred tax assets (1,759,000)
-----------
Net deferred taxes 0
-
F-16
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
5. LOANS PAYABLE
The loans were advanced by three Chinese companies in prior years, which are
unsecured, interest-free and have no fixed repayment terms.
During 2004, approximately $117,000 in loans was forgiven by a related party.
This amount is included in other income in the accompanying statements of
operations.
6. NOTES PAYABLE
The notes payable are unsecured and bear interest at 9% per annum. Other details
are set out below.
Amount as
of
Original December
Holder Issue date Maturity date amount Repayment 31, 2004
US$ US$ US$
Unrelated September 17, February 28,
individual 2002 2003 $ 50,000
January 21, February 28,
2003 2003 $ 50,000
May 21, 2003 August 30, 2003 $ 40,000
May 21, 2003 August 30, 2003 $ 35,000
$ 175,000 $(101,400) $ 73,600
Unrelated entity July 31, 2003 September 30,
2003 $ 20,000 $ - $ 20,000
Unrelated individual June 11, 2003 June 11,
2004 $ 30,000 $ - $ 30,000
----------
$123,600
The Company is in default on all of its notes payable. The Company is working
with the note holders to satisfy these outstanding obligations. It is exploring
the conversion of the amounts due with interests into common stock of the
Company, where possible.
During 2004, one of the former notes payable of $80,000 and an additional 2004
loaned amount of $45,000 was converted into $125,000 in common stock at a
conversion price of $.19 per share by a related party.
During 2004, $30,000 of former convertible debt was converted into notes
payable.
7. RELATED PARTY TRANSACTIONS
In addition to the transactions/information disclosed elsewhere in these
consolidated financial statements, the Company had the following transactions
with related parties.
F-17
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
(a) Name and relationship of related parties
NAME EXISTING RELATIONSHIPS WITH THE COMPANY
---- ---------------------------------------
Brad Woods Shareholder, Chairman of the Board of
Directors, Interim President & Chief
Executive Officer, Chief Financial
Controller 01/2004-04/2004
Train Top Investment &
Trading Ltd. ("Train Top") A company beneficially owned and
controlled by Kent Lam
Dr. Allan Rabinoff Shareholder and Chairman of the Company
Henry Zaks Shareholder and director of the Company
Pete Racelis Shareholder and Interim President of the
Company, Chief Executive Officer
Michael Bowden Vice President of Operations
(b) Summary of related party transactions
Consulting fees paid to:
2003 2004
---- ----
Brad Woods $169,055 $50,000
Train Top 198,112 125,000
Dr. Allan Rabinoff 28,290 28,290
Henry Zaks 14,600 14,600
Pete Racelis 75,870 111,134
Blake Ratcliff 21,874 -0-
Phillip Allen 107,434 -0-
Michael Bowden -0- 54,917
(c) Advances to related parties:
2003 2004
---- ----
Advances to Brad Woods $ 295 $ -0-
Advances to Train Top 74,979 -0-
F-18
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
8. COMMITMENTS AND CONTINGENCIES
During the year ended December 31, 2004, the Company entered into an Employment
Agreement with its Interim President. Pursuant to the agreement, the Vice
President agrees to serve the Company for a six years period as the "Initial
Term." After the Initial Term, this agreement shall be renewable automatically
for successive one-year periods. In return for the services, the Company shall
pay to the Interim President an annual salary of $120,000. The salary shall
increase each year during the Term of this Agreement at the cumulative rate of
10% per annum.
The Company leases certain staff quarters and offices premises under
non-cancelable operating leases. Rental expenses under operating leases was
US$168,568 for the year ended December 31, 2004 (2003: US$ 121,406).
The Company extended the Office Service Agreement (Lease) with an unrelated
company for the period of twelve months, commencing on September 1, 2004, and
ending on August 31, 2005.
9. EMPLOYEE RETIREMENT BENEFIT PLANS
As stipulated by the rules and regulations in the PRC, the Company is required
to contribute to a state-sponsored social insurance plan for all of its
employees who are residents of PRC at a rate of 20% on an agreed amount with
each of its employee, subject to limits set out by the PRC government. The
Company has no further obligations for the actual pension payments or
post-retirement benefits beyond the annual contributions. The state sponsored
retirement plan is responsible for the entire pension obligations payable to all
employees.
The pension expense for the year ended December 31, 2004 was US $41,631 (2003:US
$13,981).
10. REPORT ON SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in respect of its operating segments. The Company's
income is substantially derived from the operation in a single business segment
which is the provision of broadband data, video and voice communications
services. In addition, the Company's services are only provided to customers in
the PRC. Therefore, no geographical segment information is presented.
11. OPERATING RISKS
(a) Country risks
The Company may be exposed to the risks as a result of its operations being
carried out 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
F-19
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
significant. There can be no assurance, however, those changes in political and
other conditions will not result in any adverse impact.
(b) Cash balances
The Company maintains its cash balances with various banks and trust companies
located in the PRC. In common with local practice, such amounts are not insured
or otherwise protected should the amounts placed with the banks and trust
companies be non-recoverable. There has been no history of credit losses in
these regards and there are neither material commitment fees nor compensating
balance requirements for all outstanding loans of the Company.
(c) Concentration of credit risk
For the year ended December 31, 2003, 5 customers accounted for 30.1%, 14.9%,
11.7%, 10.6% and 10.2% of total operating revenue of the Company respectively.
No other customer accounted for more than 10% of total operating revenue of the
Company for the year ended December 31, 2003.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when there
are similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The major concentration of credit risk arises from the Company's
receivables. Even though the Company does have major customers, it does not
consider itself be exposed to significant credit risk with regards to collection
of the related receivables.
12. STOCK WARRANTS
In prior years, the Company issued 670,000 warrants to non-employees and none of
the warrants has been exercised. Upon the reverse acquisition as detailed in
note 1 to the financial statements, those warrants were converted into warrants
of the Company at a ratio of 1 to 2.5. As a result, the non-employee warrants of
the Company outstanding as of December 31, 2004 were 1,675,000. These warrants
are exercisable until and prior to August 15, 2005. Each warrant entitles its
holder to purchase one share of the Company's common stock, as follows: the
purchase price of one share of common stock shall be equal to: US$1 if exercised
on or before 5:00 p.m. Colorado time on August 15, 2003; US$2 if exercised on or
before 5:00 p.m. Colorado time on August 15, 2004; and US$3 if exercised on or
before 5:00 p.m. Colorado time on August 15, 2005.
13. EQUITY
On November 22, 2004, the Company legally amended its Articles of Incorporation
to increase its authorized common shares to 250,000,000 with a continued par
value of $.001 per share.
14. DISCONTINUED OPERATIONS
During 2004, the Company's operating subsidiaries ceased operations due to
recurring losses and change in management. The subsidiaries represented 100% of
the Company's revenues. The discontinued
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CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
operations are reported in these financial statements for the two reporting
years, at December 31, 2004 and 2003 as follows:
2004 2003
Revenues $ 259,467 $ 35,372
Costs and Expenses 1,278,680 1,229,166
----------------------------------
Loss from discontinued operations $ (1,019,213) $ (293,236)
----------------------------------
15. SUBSEQUENT EVENTS
Subsequent to December 31, 2004, the Company partnered with Jiaxin Consulting
Group, a mergers and acquisitions firm in Tianjin City, China to create a
Nevada corporation, CJ Information Technology Company.
Subsequent to December 31, 2004, the Company, through CJ Information Technology
Company, acquired a majority interest in Tianjin Create IT Co. Ltd, a system
integration and broadband integrator located in Tianjin City, China. Pursuant to
the agreement, CJ Information Technology Company is committed to investing
$250,000 to own 60% of the new venture.
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