UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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, 2005
[ ] 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 (I.R.S. Employer
of incorporation 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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
NOTE - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [x] No
State issuer's revenues for its most recent fiscal year: $338,215
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: $14,829,497 AS OF MARCH 31, 2006
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 122,025,069 AS OF MARCH 31, 2006.
Transitional Small Business Disclosure Format (Check one): Yes ; No X
------ ------
EXPLANATORY NOTE
This Amended Report on Form 10-KSB/A (Form 10-KSB/A") is being filed
as Amendment No. 1 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2005, which was filed with the Securities and Exchange
Commission ("SEC") on May 22, 2006. The Company is filing this Amendment No. 1
in order to correct its financial statements. The financial statements in the
original filing inadvertently contained (i) an error in the total liabilities
and stockholders' deficit total on the balance sheet; (ii) errors for net loss
per share on the Statement of Operations; and (iii) errors in additional paid-in
capital and accumulated deficit on the Statement of Shareholders' Equity.
As a result of this Amendment No. 1, the certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed as exhibits to the original
filing, have been re-executed and re-filed as of the date of this Amendment No.
1 on Form 10-KSB/A.
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.
2
In-Touch provided broadband data, video and voice communications
services to customers that were not served by existing landline based fiber
networks. During the quarter ended December 31, 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.
In August 2003, we signed a contract with MCI International Ltd. Co.
("MCI"), with the intent to provide MCI's asynchronous transport mode ("ATM")
services to markets in North America, the South Pacific, Asia and Europe (the
"MCI Agreement"). We never utilized the ATM and the circuit was disconnected in
September 2005.
In December 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. On March 8, 2005, we
entered into a strategic agreement with Jiaxin for the purpose of forming a
holding company for our Chinese operations and incorporated CJ Information
Technology Company in Nevada on March 10, 2005. We own 51% of CJ Information
Technology Company, while Jiaxin owns 49%. Our original plan was to acquire an
interest in Tianjin Create Co., a systems integration and information technology
company located in Tianjin, China ("Tianjin Create Co.") through CJ Information
Technology Company. However, we have since reassessed our business model and
have determined to change the focus of our business. As part of this change, we
terminated our agreements with Jiaxin in June 2005 in order to focus on our
investment in Tianjin Create Co., as more fully described below. As such, CJ
Information Technology Company has been dormant since its inception in March
2005.
We are now working to change our business from the management of a
wireless broadband network to the development of technology integration and IP
services in China. Part of this effort involves seeking complementary
technologies to build a broad base of products and services to be marketed in
China as well as in North America. This broad focus incorporates vertical
integration of telephony, IP security, manufacturing, medical and industrial.
Investments in these industries will be based on a company's positive financial
cash flow, strong management, unique or superior technology/innovation, and its
value to the overall corporation's portfolio of companies.
On May 24, 2005, we entered into a letter agreement to acquire 51% of
the stock of Tianjin Create Co. for total consideration of $53,840, comprised of
cash in the amount of $40,379 and 448,665 shares of our common stock valued at
$0.03 per share, (a total of $13,460 in our common stock). We have since paid
$13,460 in common stock and cash of $8,000 to the founders of Tianjin Create Co.
On May 18, 2006, we entered into an amended agreement whereby we agreed to
further pay $105,307 in cash to the founders of Tianjin Create Co. by August 31,
2006.
We acquired Tianjin Create Co. in part because of its strategic
location in Tianjin City, the third largest city in China. Also, as an
established, young, forward-looking company with a customer base in the
education, oil and gas, banking, brokerage, commercial and government sectors,
Tianjin Create Co. provides a solid base to rebuild our presence in China.
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 our overall strategy to become an 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.
3
The communications and information services industries are highly
competitive. Many of our existing and potential competitors have financial,
personnel, marketing and other resources significantly greater than ours. Many
of these competitors have the added competitive advantage of a larger existing
customer base. In addition, significant new competitors could arise as a result
of:
-the recent increased consolidation in the industry;
-further technological advances; and
-further deregulation and other regulatory initiatives.
If we are unable to compete successfully, our business could be materially
adversely affected.
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.
EMPLOYEES
As of March 31, 2006, we have including Tianjin Create Co., 15
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.
None.
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:
4
BID OR TRADE PRICES
HIGH LOW
---- ---
2004 FISCAL YEAR
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
HIGH LOW
---- ---
2005 FISCAL YEAR
Quarter Ending 03/31/05............... $ 0.06 $ 0.06
Quarter Ending 06/30/05............... $ 0.03 $ 0.02
Quarter Ending 09/30/05............... $ 0.04 $ 0.04
Quarter Ending 12/31/05............... $ 0.02 $ 0.02
Quarter Ending 03/31/06............... $ 0.20 $ 0.01
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
As of December 31, 2005, there were approximately 246 record holders of
our common stock
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 quarter ended December 31, 2005 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 quarter ended December 31, 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 continuing our transition from
management of a wireless broadband network to the development of technology
integration and IP services in China. Part of this effort involves seeking
complementary technologies to build a broad base of products and services to be
marketed in China as well as in North America. This broad focus
5
incorporates vertical integration of telephony, IP security, manufacturing,
medical and industrial. Investments in these industries will be based on a
company's positive financial cash flow, strong management, unique or superior
technology/innovation, and its value to the overall corporation's portfolio of
companies.
In December 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. On March 8, 2005, we
entered into a strategic agreement with Jiaxin for the purpose of forming a
holding company for our Chinese operations and incorporated CJ Information
Technology Company in Nevada on March 10, 2005. We own 51% of CJ Information
Technology Company, while Jiaxin owns 49%. Our original plan was to acquire an
interest in Tianjin Create Co. through CJ Information Technology Company.
However, we have since reassessed our business model and have determined to
change the focus of our business. As part of this change, we terminated our
agreements with Jiaxin in June 2005 in order to focus on our investment in
Tianjin Create Co., as more fully described below. As such, CJ Information
Technology Company has been dormant since its inception in March 2005.
In furtherance of our transition plans, on May 24, 2005, we entered
into a letter agreement to acquire 51% of the stock of Tianjin Create Co. for
total consideration of $53,840, comprised of cash in the amount of $40,379 and
448,665 shares of our common stock valued at $0.03 per share, (a total of
$13,460 in our common stock). We have since paid $13,460 in common stock and
cash of $8,000 to the founders of Tianjin Create Co. On May 18, 2006, we entered
into an amended agreement whereby we agreed to further pay $105,307 in cash to
the founders of Tianjin Create Co. by August 31, 2006.
Tianjin Create Co. was established in 2002 by Frank Li, a former
professor of engineering at NanKai University. We acquired Tianjin Create in
part because of its strategic location in Tianjin City, the third largest city
in China. We believe that Tianjin Create provides a solid base for China
Wireless to rebuild its presence in China. Through Tianjin Create Co., we
provide information technology and IP services to 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, 2005 of $1,960,714, and at December
31, 2005 had an accumulated deficit of $10,593,741 and a working capital deficit
of $395,921. These conditions raise substantial doubt as to our ability to
continue as a going concern. These consolidated financial 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
6
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.
CHINESE TAX HOLIDAY
To date, all of our revenues have been generated in the PRC by
In-Touch. As a high-tech enterprise, In-Touch was exempt from the PRC enterprise
income tax from 2003 to 2005, followed by a 50% reduction for the next three
years.
RESULTS OF OPERATIONS
In the quarter ended September 30, 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 of 2004, it was deemed
imperative that we seek an alternative plan to recover the business and regain
shareholder confidence in the company.
In December of 2004, we closed In-Touch in Beijing. The decision to
discontinue its operations was due to higher than expected operating costs, the
inability to acquire the necessary infrastructure, and increased competition.
Revenues from our operations prior to December 2004 had been generated by
In-Touch. Due to the closing of In-Touch, our statements of operations for 2004
did not reflect any revenues. Instead, our statements reflected losses from
discontinued operations of $3,009,949 for fiscal year 2004. In 2005, our
revenues were $338,215 and we had no losses from discontinued operations.
Operating expenses for the year ended December 31, 2005 were $2,028,385 as
compared to $3,106,942 for the year ended December 31, 2004. Net losses for the
years ended December 31, 2005 and 2004 were $1,960,714 and $4,029,162,
respectively. Operating expenses for year ended December 31, 2005 included
$1,927,876 relating to issuance of stock for compensation.
In June 2005, we terminated our agreements with Jiaxin in order to
focus on our investment in Tianjin Create Co. Additionally, CJ Information
Technology Company has been dormant since its inception in March 2005. In
furtherance of our transition plans, on May 24, 2005, we entered into a letter
agreement to acquire 51% of the stock of Tianjin Create Co. for total
consideration of $53,840, comprised of cash in the amount of $40,379 and 448,665
shares of our common stock valued at $0.03 per share, (a total of $13,460 in our
common stock). We have since paid $13,460 in common stock and cash of $8,000 to
the founders of Tianjin Create Co. On May 18, 2006, we entered into an amended
agreement whereby we agreed to further pay $105,307 in cash to the founders of
Tianjin Create Co. by August 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, we had current assets of $101,623 as compared to
$4,789 at December 31, 2004, and current liabilities of $497,544 at December 31,
2005, as compared to $449,004 at December 31, 2004, resulting in working capital
deficits of $395,921 and $444,215 at December 31, 2005 and December 31, 2004,
respectively.
For the year ended December 31, 2005, we used $160,025 of cash for our
operating activities, while financing activities, which consisted of proceeds
from the issuance of our common stock and borrowing, provided cash of $190,267.
Investing activities also used cashed of $20,252, which consisted of the
acquisition of fixed assets. In comparison, during 2004, we used $1,066,583 of
cash for operating activities and $422,436 for a decrease in
7
pledged deposits and the discontinued operations, which cash of $645,130 was
provided by financing activities. Financing activities consisted of sales of our
common stock and borrowing.
PLAN OF OPERATION
We are focusing our efforts on 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. Additionally, we have identified several unique and innovative
North American technologies that can be marketed to business customers in China
through our subsidiary, Tianjin Create Co. As the Company begins to execute its
business plan, we will utilize the leadership of Tianjin Create Co. to oversee
and manage the operations in China. Staffing levels in China will be increased
only as required or as such action is required due to business growth.
The acquisition of Tianjin Create Co. has reestablished our business
presence in China as we build upon its existing business and experience. We
manage all of our operations in China via Tianjin Create Co. Tianjin Create Co.
is a key component to building the company's broad base information technology,
products and services in China, including computer installation and maintenance,
broadband transport service, server installation maintenance and support,
internet services, broadband transport redundancy, fixed wireless transport and
information hosting.
Tianjin Create Co. operates in Tianjin City, the third largest city in
China. Comparable in many respects to Chicago, Illinois in the United States,
Tianjin City has a population of approximately 10,000,000 people and is a major
import and export center for China. Major industries and markets located in
Tianjin City include educational, industrial, international port city, medical,
manufacturing and government. Tianjin City is Beijing's gateway to the sea and
has over 25 ten thousand ton ship berths. The harbor is considered the number
one demarcation point for products entering and leaving China. Tianjin's harbor
is geographically the second largest in China.
In addition to being the industrial and financial capital of northern
China, Tianjin City is home to 31 of China's most noteworthy universities,
including Tianjin University, China's first neoteric university. Tianjin City is
also the headquarters for Motorola Corporation of China. Tianjin has been
selected to host the 2008 Olympic Games Football (Soccer) contests.
Through Tianjin Create Co., we provide information technology and IP
services to customers in China. Our newly formed partnership has enabled us
Company to provide engineering and IP service support for existing and future IP
customers in China. The customer base includes Nankia University, Tian Sea
Transportation Company and Tianjin Gas Company. Additionally 20 of Tianjin
City's 31 universities utilize products or services provided by Tianjin Create
Co. We are also able to offer a broad base of information technologies ranging
from IP security, wireless broadband, and Wi-Fi to "last mile" transport
connections.
The design and construction of fixed wireless broadband network systems
will be part of the overall information technology strategies being executed.
Each of the companies with which we are considering partnering has sufficient
telephony and broadband access capabilities to meet their business objectives.
However, we plan to broaden our scope to become a systems solutions company that
will provide a broad base of information technologies through our partnership
companies. These technologies include, but are not limited to, engineering
design, implementation of Wi-Fi, fixed broadband wireless, systems integration,
IP security, information firewalls, data storage, voice/video/data
telecommunications services and managed communications services. To further
broaden our scope, we are exploring leading edge technologies in the equipment
manufacturing, education, brokerage/bank security, network/computer security,
interactive video, oil & gas, power (electrical) disaster recovery & monitoring
and medical industries to acquire.
The Board and management team believe the best path to regain
shareholder value, establish profitability, and improve the Company's stock
performance is to focus on acquiring complementary technology and/or cash
flow-positive companies interested in a long term relationship. Thus, we are
evaluating potential acquisition targets in North America in order to market
innovative products and services through our assets in China. A subsidiary
relationship similar to that of our Tianjin Create Co. structure would be
employed for a North American entity. The subsidiary company in turn may form a
foreign joint venture, as required by the laws of the local jurisdiction.
8
The advantage of pursuing this course of action is to reduce investment
and startup costs while focusing on achieving positive cash flow in a timely
manner. The companies being evaluated as possible acquisitions have captured a
segment of the growing market in their technology specialty and require the
subject matter proficiency, access to future funding, and new technology that
the Company can provide. Additionally, the companies being evaluated as possible
acquisitions would be cash flow positive, having complementary technology, broad
customer bases, and strong management focused on forming a partnership with a
public company for the long term.
As part of our ongoing business planning, we are continuing discussions
with an outside management-consulting group to assist with business development,
fund raising strategies, acquisition of information technology products, public
relations, and support for the Board and management. The management-consulting
group would also provide direction and focus for existing and new market
penetration.
We intend to expand our Tianjin Create Co. operation in order to better
take advantage of system integration opportunities available. The focus of our
systems integration efforts have been in the educational, transportation,
natural gas and manufacturing markets. In addition, the pool of highly skilled
engineering, marketing, sales, and operations personnel in China will be key to
our success in growing our business. We also intend to expand our US operations
by investing in sales/marketing staff to market products in North America.
We anticipate that we will incur the following expenses over the next
twelve months:
1. $500,000 to $850,000 in connection with the potential acquisition of
an e-commerce company located in China, to include associated due diligence
costs; and
2. $800,000 to $1,500,000 in connection with the potential acquisition
of manufacturing operations to include educational products, health/medical
products, and telecommunications services; and
3. $200,000 to $500,000 in connection with the expansion of our
marketing of products and services in North America; and
4. $350,000 for operating expenses, including professional legal and
accounting expenses associated with our being a reporting issuer under the
Securities Exchange Act of 1934.
Accordingly, we anticipate spending approximately $1,850,000 to
$3,200,000 over the next twelve months in pursuing our stated plan of
operations.
We have insufficient cash to cover our costs associated with our plan
of operations or our other working capital requirements. We expect that we will
require additional funding to cover these anticipated costs. We further
anticipate that additional funding will be in the form of equity financing from
the sale of our common stock or through debt financing. However, we cannot
provide investors with any assurance that we will be able to raise sufficient
funding from the sale of our securities to fund our stated plan of operations or
our other working capital requirements. We do not presently have any
arrangements in place for any future debt or equity financing.
ITEM 7. FINANCIAL STATEMENTS.
See pages beginning with page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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.
9
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, nor was it 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 fiscal years ended December 31, 2002 and December 31,
2003, respectively, and the subsequent interim period through January 11, 2005,
there were no disagreements with Moores Rowland Mazars on any matter of
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 the two fiscal years ended December 31, 2002 and December 31,
2003, respectively, and the subsequent interim period ended January 11, 2005.
On February 1, 2005, we engaged Bongiovanni & Associates, C.P.A., based
in 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, C.P.A.
Prior to the engagement of Bongiovanni & Associates, C.P.A., we had not
consulted Bongiovanni & Associates, C.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, 2005. 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.
10
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 55 President, Chief Executive Officer
and Director
Henry Zaks 62 Director
Michael Bowden 56 Chief Operations Officer and Director
Brad Woods 46 Director
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, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Mr. Racelis has been our 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).
HENRY ZAKS, DIRECTOR
Mr. Zaks has been a director since October 2003. Since March 1973, he
has been the President of Zaks-Shane, LTD and Health Insurance Services, Inc.
since December 1988. Both are Wisconsin-based organizations that specialize in
marketing business-to-business solutions to both corporations and small
companies. He has over 35 years experience as a sales professional.
MICHAEL A. BOWDEN, CHIEF OPERATIONS OFFICER AND DIRECTOR
Mr. Bowden has been our Chief Operations Officer since February 2005
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 was a telecommunications consultant 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 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 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
11
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 2005 the board of directors did not have a standing audit,
nominating, or compensation committees, rather the entire board of directors
acted in such capacity. We do not have an audit committee financial expert.
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
We are not subject to Section 16(a) of the Securities Exchange Act of
1934.
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 $100,000 per annum during any part of our last three
fiscal years:
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
---------------------------------------------------------------------------------------------------------------------
Pedro 2003 N/A N/A N/A N/A N/A N/A N/A
Racelis, III 2004 -0- -0- -0- 64,000 800,000 -0- -0-
President (1) 2005 144,000 -0- -0- 128,000 -0- -0- -0-
---------------------------------------------------------------------------------------------------------------------
Brad Woods
Former President 2003 153,305 15,750 -0- -0- 300,000 -0- -0-
& CFO (2) 2004 40,000 -0- -0- -0- -0- -0- -0-
2005 N/A N/A N/A N/A N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
Philip Allen 2003 32,434 75,000 -0- -0- -0- -0- -0-
Former CEO (3) 2004 N/A N/A N/A N/A N/A N/A N/A
2005 N/A N/A N/A N/A N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
12
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPENSA- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY ($) BONUS ($) TION ($) ($) SARS (#) ($) TION ($)
---------------------------------------------------------------------------------------------------------------------
Peter Fisher 2003 150,000 -0- -0- -0- -0- -0- -0-
Former Director 2004 N/A N/A N/A N/A N/A N/A N/A
(4) 2005 N/A N/A N/A N/A N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
Tyler Fisher 2003 108,000 -0- -0- -0- -0- -0- -0-
Former Director 2004 N/A N/A N/A N/A N/A N/A N/A
(4) 2005 N/A N/A N/A N/A N/A N/A N/A
---------------------------------------------------------------------------------------------------------------------
Henry Zaks 2003 3,000 -0- -0- -0- -0- -0- -0-
Director (5) 2004 30,000 -0- -0- 800,000 -0- -0- -0-
2005 30,000 -0- -0- -0- -0- -0- -0-
---------------------------------------------------------------------------------------------------------------------
Michael Bowden 2003 N/A N/A N/A N/A N/A N/A N/A
(6) 2004 -0- -0- -0- 25,000 -0- -0- -0-
2005 120,000 -0- -0- 500,000 -0- -0- -0-
---------------------------------------------------------------------------------------------------------------------
------------------
(1) Mr. Racelis become the 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. Mr. 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.
(5) Mr. Zaks joined our Board of Directors in September 2003.
(6) Mr. Bowden became our Chief Operations Officer in February 2005 and has
been a director since January 2005.
There have been no grants of stock appreciation rights, benefits under
long-term incentive plans or other forms of compensation involving our officers,
through December 31, 2005.
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.
EMPLOYMENT AGREEMENTS
On April 16, 2004, Pedro E. Racelis III was appointed as President &
CEO of the Company and we entered into an employment agreement with Mr. Racelis
at that time. Salary for Mr. Racelis in 2005 was $144,000. On March 1, 2006, we
entered into a new employment agreement with Mr. Racelis for a term of six years
renewable for one year after the original term expires. Under the terms of the
new employment agreement, Mr. Racelis will be paid an annual salary of $250,000,
with increases of 10% annually.
On February 1, 2005 Michael A. Bowden was appointed COO and we entered
into an employment agreement with Mr. Bowden at that time. Salary for Mr. Bowden
was $120,000 in 2005. On March 1, 2006, we entered into a new employment
agreement with Mr. Bowden for a term of six years renewable for one year after
the original term expires. Under the terms of the new employment agreement, Mr.
Bowden will be paid an annual salary of $225,000, with increases of 10%
annually.
13
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, 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, 2005 options to purchase 13,518,052 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 March 31, 2006:
------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
------------------------------------------------------------------------------------------------------------------
Pedro E. Racelis III (3)
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401 12,850,045 10.417%
------------------------------------------------------------------------------------------------------------------
14
------------------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)
------------------------------------------------------------------------------------------------------------------
Pedro E. Racelis III (3)
1746 Cole Boulevard, Suite 225
Golden, Colorado 80401 12,850,045 10.417%
------------------------------------------------------------------------------------------------------------------
Michael A Bowden (4)
1746 Cole Boulevard, Suite 225 10,420,725 8.459%
Golden, Colorado 80401
------------------------------------------------------------------------------------------------------------------
Brad Woods
1746 Cole Boulevard, Suite 225 612,500 0.502%
Golden, Colorado 80401
------------------------------------------------------------------------------------------------------------------
Henry Zaks (5)
11649 N. Port Washington Rd, Suite 224 5,454,627 4.461%
Mequon, WI 53092
------------------------------------------------------------------------------------------------------------------
All officers and Directors as a Group (4 persons) 29,337,897 23.561%
------------------------------------------------------------------------------------------------------------------
----------
(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 122,025,069 shares of Common Stock outstanding
as of March 31, 2005. If a person listed on this table has the right to
obtain additional shares of Common Stock within sixty (60) days from
March 31, 2006, 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.
(3) 2,341,667 of these shares are held in the name of Pedro E. Racelis III
individually; an additional 9,175,000 shares are held in the name of
Global Sales Strategies Inc., a Colorado corporation 100% owned and
controlled by Pedro E. Racelis III; and 1,333,378 of these shares are
100% vested stock options granted pursuant to the Company's 2003 Stock
Plan, exercisable at a price of $0.018.
(4) 1,875,000 of these shares are held in the name of Michael A. Bowden
individually; 7,384,615 shares are held in the name of MBE Ltd., a
Colorado corporation 100% owned and controlled by Michael A. Bowden;
1,111,110 of these shares are 100% vested stock options granted
pursuant to the Company's 2003 Stock Plan, exercisable at a price of
$0.018; and 50,000 of these shares are 100% vested warrants,
exercisable at a price of $0.50.
(5) 5,217,785 of these shares are held in the name of Henry Zaks; an
additional 236,842 of these shares are 100% vested warrants,
exercisable at a price of $0.40.
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, 2005, 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 12,440,929 $0.022 1,027,123
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
15
-------------------------------------------------------------------------------------------------------------------
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 not 50,000 None None
approved by securities holders
-------------------------------------------------------------------------------------------------------------------
Total 12,490,929 $0.022 1,027,123
-------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, none of our present directors, officers
or principal shareholders, nor any family member of the foregoing, nor, to the
best of our information and belief, any of our former directors, senior officers
or principal shareholders, nor any family member of such former directors,
officers or principal shareholders, has or had any material interest, direct or
indirect, in any transaction, or in any proposed transaction which has
materially affected or will materially affect us.
During the years ended December 31, 2004 and 2005, we paid amounts to
related parties as follows:
----------------------------------------------------------------------------------------------------------------------
NAME RELATIONSHIP AMOUNT PAID ($) NATURE OF PAYMENT (a)
---------------------------------------
2004 2005
----------------------------------------------------------------------------------------------------------------------
Brad Woods Former President, 50,000
CEO & CFO
January 2004 - April 2004
Current Director -0- Consulting fee
----------------------------------------------------------------------------------------------------------------------
Beijing In-Touch President, 125,000 -0-
Train Top Kent Lam's Company Consulting fee
----------------------------------------------------------------------------------------------------------------------
Current Director, 14,600 -0- Consulting fee;
Henry Zaks (b) Notes holder Promissory note
----------------------------------------------------------------------------------------------------------------------
Dr. Allan Former Director 28,290 -0- Consulting fee
Rabinoff
----------------------------------------------------------------------------------------------------------------------
Pedro E. Racelis 111,134 -0-
III (c) CEO/President/Director Consulting fee
----------------------------------------------------------------------------------------------------------------------
Michael A. COO & Director 54,917 -0- Consulting fee;
Bowden (d) Promissory note
----------------------------------------------------------------------------------------------------------------------
(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, a Director, loaned us
$80,000 and we issued a promissory note in such amount payable to Mr. Zaks.
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. During 2005, Henry Zaks converted
notes payable of $30,000 into shares of common stock at a conversion price
of $0.05 per share, and converted notes payable of $20,000 into 857,085
shares of common stock at a conversion price of $0.029 per share. During
2005 and the first five months of 2006, Henry Zaks loaned us $23,217 and on
May 3, 2006, we issued a promissory note in such amount payable to Mr.
Zaks payable in full on October 2, 2006.
(c) During the first five months of 2006, Pedro E. Racelis, our
CEO/President/Director loaned us $15,500 and on May 3, 2006, we issued a
promissory note in such amount payable to Mr. Racelis payable in full on
July 2, 2006.
16
(d) During 2005, our COO and Director, Michael Bowden loaned us $12,698 and
and we issued a promissory note in such amount payable to Mr. Bowden
payable in full on July 2, 2006. During the first five months of 2006,
Michael Bowden loaned us $73,059 and on May 3, 2006, we issued a promissory
note in such amount payable to Mr. Bowden payable in full on July 2, 2006.
ITEM 13. EXHIBITS
(a) EXHIBITS:
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------
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 (10)
--------------------------------------------------------------------------------
17
--------------------------------------------------------------------------------
REGULATION
S-B NUMBER EXHIBIT
--------------------------------------------------------------------------------
10.16 Letter agreement with Tianjin Create IT Company Ltd. dated May
24, 2005 (11)
--------------------------------------------------------------------------------
10.17 Employment Agreement dated July 20, 2005 with Michael A. Bowden
(12)
--------------------------------------------------------------------------------
10.18 Promissory Note, dated August 1, 2005 in the amount of
$12,698.16 payable to Michael Bowden (12)
--------------------------------------------------------------------------------
10.19 Employment Agreement dated March 1, 2006 with Michael A. Bowden
(12)
--------------------------------------------------------------------------------
10.20 Employment Agreement dated March 1, 2006 with Pedro E. Racelis
III (12)
--------------------------------------------------------------------------------
10.21 Amendment to Letter agreement with Tianjin Create IT Company
Ltd. dated May 18, 2006 (12)
--------------------------------------------------------------------------------
10.22 Promissory Note, dated May 3, 2006 in the amount of $15,500
payable to Pedro E. Racelis III (12)
--------------------------------------------------------------------------------
10.23 Promissory Note, dated May 3, 2006 in the amount of $23,217
payable to Henry Zaks (12)
--------------------------------------------------------------------------------
10.24 Promissory Note, dated May 3, 2006 in the amount of $73,059.35
payable to Michael Bowden (12)
--------------------------------------------------------------------------------
16.1 Letter from the Rehmann Group, dated April 22, 2003 (8)
--------------------------------------------------------------------------------
16.2 Letter from Moores Rowland, dated February 28, 2005 (9)
--------------------------------------------------------------------------------
21.1 Subsidiaries of the registrant (12)
--------------------------------------------------------------------------------
31.1 Rule 15d-14(a) Certification
--------------------------------------------------------------------------------
32.1 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.
(10) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2004.
(11) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated May 24, 2005 and filed June 6, 2005.
(12) Incorporated by reference to the exhibits to the registrant's annual report
on Form 10-KSB for the year ended December 31, 2005.
18
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 C.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, 2005, Bongiovanni is expected to
bill approximately $33,000 for the audit of our annual financial statements. For
the fiscal year ended December 31, 2004, Bongiovanni billed $24,000 for the
audit of our annual financial statements.
For the fiscal year ended December 31, 2005, Bongiovanni billed $2,750
for the review of our Form 10-QSB filings. For the fiscal year ended December
31, 2004, Moores billed $18,000 for the 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 2005 and 2004.
TAX FEES
For the fiscal year ended December 31, 2005, Bongiovanni is expected to
bill $0 for tax compliance, tax advice, and tax planning services. For the
fiscal year ended December 31, 2004, Bongiovanni and Moores billed $0 for tax
compliance, tax advice, and tax planning services, respectively.
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.
19
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: June 13, 2006 By: /s/ PEDRO E. RACELIS III
------------------------------------------
Pedro E. Racelis III, 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
President (Principal Executive
Officer) and Chief Financial Officer
/s/ PEDRO E. RACELIS III (Principal Financial and Accounting June 13, 2006
-------------------------------------------- (Officer)
Pedro E. Racelis III
/s/ HENRY ZAKS Director June 13, 2006
--------------------------------------------
Henry Zaks
/s/ MICHAEL A. BOWDEN Director and Chief Operating Officer June 13, 2006
--------------------------------------------
Michael A. Bowden
Director
--------------------------------------------
Brad Woods
20
--------
CONSOLIDATED AUDITED FINANCIAL STATEMENTS
CHINA WIRELESS COMMUNICATIONS, INC.
DECEMBER 31, 2005
--------
BONGIOVANNI & ASSOCIATES, C.P.A.'s
CERTIFIED PUBLIC ACCOUNTANTS
F-1
CONTENTS
=========================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM..................................... F-3
CONSOLIDATED BALANCE SHEET.......................... F-4
CONSOLIDATED STATEMENTS OF OPERATIONS............... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS............... F-6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT..... F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......... F-8 to F-18
=========================================================================
F-2
BONGIOVANNI & ASSOCIATES, C.P.A.'s
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, 2005
and the related consolidated statements of operations, stockholders' deficit and
cash flows for the years ended December 31, 2005 and 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
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 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, 2005 and the consolidated results of their
operations and cash flows for the years ended December 31, 2005 and 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, has a
negative cash flow 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
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
May 22, 2006
F-3
CHINA WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
US$
ASSETS
Current assets:
Cash and cash equivalents $ 14,779
Prepaid expenses 5,796
Accounts receivable 12,487
Advances to suppliers 6,939
Due from related party 39,389
Other receivables 22,233
--------------------------
TOTAL CURRENT ASSETS 101,623
--------------------------
Fixed assets:
Vehicle 19,900
Office equipment 351
Accumulated depreciation (10,488)
--------------------------
Fixed assets 9,763
--------------------------
TOTAL ASSETS $ 111,386
==========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 244,921
Advances from customers 56,930
Interest payable 25,520
Notes payable 170,173
--------------------------
TOTAL CURRENT LIABILITIES 497,544
--------------------------
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,
89,787,018 shares of stock issued and outstanding 89,787
Additional paid-in capital 10,117,796
Accumulated deficit (10,593,741)
--------------------------
TOTAL STOCKHOLDERS' DEFICIT (386,158)
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 111,386
==========================
See notes to consolidated financial statements.
F-4
CHINA WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDING DECEMBER 31, 2005 AND 2004
US$ US$
YEAR ENDED YEAR ENDED
DEC. 31, 2005 DEC. 31, 2004
Operating revenue:
Sales $ 338,215 $ -
------------------------------------------------
Cost of Sales 383,162 -
------------------------------------------------
GROSS PROFIT (LOSS) (44,947) -
Operating expenses:
Common stock issued for compensation 1,927,876 3,106,942
General and administrative expenses 100,509 -
------------------------------------------------
TOTAL OPERATING EXPENSES 2,028,385 3,106,942
------------------------------------------------
Loss from operations (2,073,332) (3,106,942)
Non-operating income (expenses):
Interest income 237 -
Other income 132,783 116,134
Interest expense (20,402) (19,141)
------------------------------------------------
TOTAL NON-OPERATING INCOME 112,618 96,993
Net loss from continuing operations (1,960,714) (3,009,949)
Discontinued operations:
Loss from discontinued operations - (1,019,213)
------------------------------------------------
NET LOSS $ (1,960,714) $ (4,029,162)
================================================
Net loss per share from continuing operations (0.03) (0.09)
Net loss per share from discontinued operations (0.00) (0.03)
------------------------------------------------
Basic and fully diluted net loss per common share $ (0.03) $ (0.12)
================================================
Weighted average common shares outstanding,
basic and fully diluted 71,618,722 34,752,716
================================================
See notes to consolidated financial statements.
F-5
CHINA WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
YEAR ENDED YEAR ENDED
DEC. 31, 2005 DEC. 31, 2004
US$ US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,960,714) $ (4,029,162)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation 10,488 -
Common stock issued for compensation 1,927,876 3,107,158
Forgiveness of loans payable (220,831) -
Discontinued operations, net - (345,831)
Prior period adjustment (52,799) -
(Increase) decrease in operating assets:
Prepayments and other receivables (47,454) 201,631
Due from related party (39,389) -
Increase (decrease) in operating liabilities:
Accounts payables and accrued expesnes 167,110 (379)
Advances from customers 56,930 -
Interest payable (1,242) -
---------------- ----------------
NET CASH (USED IN) OPERATING ACTIVITIES (160,025) (1,066,583)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (20,252) -
Discontinued operations, net - 400,239
Decrease in pledged deposits - 22,197
---------------- ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (20,252) 422,436
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 143,694 770,829
Incurrence (repayment) of loans - (147,090)
Proceeds from issuance of notes payable 46,573 45,000
Bank overdraft increase (decrease) - (6,609)
Repayment of notes payable - (6,000)
Repayments of convertible notes payable - (11,000)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 190,267 645,130
---------------- ----------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 9,990 983
---------------- ----------------
CASH AND CASH EQUIVALENTS:
Beginning of year 4,789 3,806
---------------- ----------------
End of year $ 14,779 $ 4,789
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ - $ -
================ ================
Income taxes paid $ - $ -
================ ================
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Common stock issued for compensation $ 1,927,876 $ 3,107,158
================ ================
Conversion of convertible debt into notes payable $ - $ 30,000
================ ================
Conversion of notes payable into common stock $ 50,000 $ 125,000
================ ================
Interest paid with common stock $ 21,644 $ -
================ ================
See notes to consolidated financial statements.
F-6
CHINA WIRELESS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005,2004 AND 2003
Common stock Additional
------------------------ paid-in Accumulated
Number Amount capital deficit Total
US$ US$ US$ US$
----------- ---------- ------------ ------------- -------------
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)
----------- ---------- ------------ ------------- -------------
Common stock issued for services at prices ranging
from $.02 per share to $.10 per share 38,926,923 38,927 1,888,949 - 1,927,876
Common stock issued for cash at prices ranging
from $.02 per share to $.10 per share 3,692,526 3,693 140,001 - 143,694
Prior period adjustment - see footnotes (52,799) (52,799)
Net loss for the year 2005 - - - (1,960,714) (1,960,714)
----------- ---------- ------------ ------------- -------------
Balances at December 31, 2005 89,787,018 $ 89,787 $ 10,117,796 $(10,593,741) $ (386,158)
=========== ========== ============ ============= =============
See notes to consolidated financial statements.
F-7
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 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. 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.
On May 24, 2005, the Company entered into a letter agreement to acquire 51% of
the stock of Tianjin Create Co. for total consideration of $53,839, comprised of
cash in the amount of $40,379 and 448,665 shares of the Company's common stock
valued at $0.03 per share, (a total of $13,460 in the Company's common stock).
The Company has since paid $13,460 in its common stock and cash of $8,000 to the
founders of Tianjin Create Co. On May 18, 2006, the Company entered into an
amended agreement whereby it agreed to further pay $105,307 in cash to the
founders of Tianjin Create Co. by August 31, 2006. Presently, the Company,
through its subsidiary Tianjin Create Co., provides information technology
systems integration and internet protocol services to customers. It also
provides IP routing equipment and network cabling and its customers are
principally in the People's Republic of China.
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, has a negative cash flow from operations, and has
a stockholders' deficit as of December 31, 2005. 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.
F-8
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2. BASIS OF PRESENTATION (continued)
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.
Comprehensive Income (Loss) - The Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting and display
of comprehensive income and its components in the consolidated financial
statements. There were no items of comprehensive income (loss) applicable to the
Company during the years covered in the consolidated financial statements.
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.
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.
F-9
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 9,022,684
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.
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) Management's use of estimates. The preparation of consolidated 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 consolidated
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. The
Company has a change in accounting estimate of $17,755 as a result of an over
accrual of travel expenses due to a former employee. The change resulted in an
increase in other income of $17,755 and a reduction in accrued liability of
$17,755.
(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 receivable, prepaid expenses, advances to
suppliers, other receivables, accounts payable and accrued expenses, interest
payable, advances from customers 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.
F-10
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) Fixed assets and depreciation. Fixed assets 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 fixed assets sold or no longer in service
are eliminated from the accounts and any gain or loss is included in the
consolidated statement of operations.
Depreciation is calculated to write off the cost of fixed assets 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:
Vehicles 20%
Office equipment 20%
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 consolidated statement of operations.
The Company recognizes an impairment loss on fixed assets 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.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, the Company reviews and evaluates its
long-lived assets for impairment whenever events or changes in circumstances
indicate that their net book value may not be recoverable. When such factors and
circumstances exist, including those noted above, the Company comparies the
assets' carrying amounts against the estimated undiscounted cash flows to be
generated by those assets over their estimated useful lives. If the carrying
amounts are greater than the undiscounted cash flows, the fair values of those
assets are estimated by discounting the projected cash flows. Any excess of the
carrying amounts over the fair values are recorded as impairments in that fiscal
period.
(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 October 31, 2004. The options were
granted at an exercise price of $0.35 per share, which was the market price on
the grant date. As of December 31, 2005, none of these options were outstanding.
50,000 options were exercised during 2004 and none were exercised during 2005.
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 $0.41 per share, which approximates the market price on the
grant date.
During the year ended December 31, 2005, the Company granted options to
subscribe for shares of the Company to its employees ("Obtions III"). The option
periods commenced January 19, 2005 and were granted on a series of dates through
August 9, 2005. The options were granted at exercise prices ranging from $0.063
to $0.020, each approximating the market prices on the respective grant dates.
All the options granted during 2005 expire one year from their respective grant
dates. As of December 31, 2005, 6,571,605 options were outstanding and no
options were exercised during the year ended December 31, 2005.
F-11
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 2005
------------- --------------
Net loss
As reported ($4,029,162) ($1,935,968)
Total stock-based
compensation expenses $-0- $-0-
Pro forma ($4,029,162) ($1,935,968)
Basic net loss per share
As reported ($0.116) ($0.03)
Pro forma ($0.116) ($0.03)
The fair values of the options have been calculated using the Black-Scholes
option pricing model with the following assumptions:
Expected volatility: 57%
Risk-free interest rate: 3.5%
Contractual life: 1.75 years
(o) New Accounting Pronouncements
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.
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.
F-12
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
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:
Year Ended Year Ended
December 31, December 31,
2005 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 $1,200,000 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 Tianjin Create Co.
(and In-Touch prior to discontinued operations in 2004.) Tianjin Create Co. and
In-Touch, both being hi-tech enterprises, are exempted from the PRC enterprise
income tax from 2004 to 2005, followed by a 50% reduction for the next three
years. Under current PRC tax laws, In-Touch's losses of $553,625 (2003:
$545,000) will expire after five years. The tax effect of Tianjin Create Co.'s
net loss for 2005 is immaterial to the consolidated financial statements taken
as a whole.
F-13
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
4. INCOME TAXES (continued)
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: $ 448,000
Start-up and cost capitalized for tax purposes: 1,351,000
-----------
Total deferred tax assets 1,799,000
Valuation allowance for deferred tax assets (1,799,000)
------------
Net deferred taxes $ -0-
============
5. LOANS PAYABLE
The loans were advanced by three Chinese companies in prior years, which were
unsecured, interest-free (interest was imputed) and had no fixed repayment
terms.
During 2005, $220,831 in loans payable were forgiven by all three Chinese
companies in 2005. This amount is included in other income in the accompanying
consolidated statements of operations.
6. NOTES PAYABLE
The notes payable at December 31, 2005 are unsecured, bear interest at 8% per
annum and are all currently payable. Other details are set out below:
Amount as of
December 31,
Holder Issue Date Maturity Date Original Amount 2005
Unrelated September 17, 2002 February 28, 2003 $50,000
individual
January 17, 2002 February 28, 2003 $50,000
May 21, 2003 August 30, 2003 $40,000
May 21, 2003 August 30, 2003 $35,000
----------
$175,000 $ 69,600
==========
Unrelated entity July 31, 2003 September 30, 2003 $20,000 $ 20,000
Unrelated July 31, 2003 June 11, 2004 $30,000 $ 30,000
individual
Related party August 30, 2005 December 31, 2005 $12,875 $ 12,875
Director to November 8, 2005
Related party August 1, 2005 July 2, 2006 $12,698 $ 12,698
Director to Devember 20, 2005
Unrelated October 12, 2005 Paid off in $ 5,000 $ 5,000
individual January 2006
Unrelated January 1, 2005 July 15, 2005 $20,000 $20,000
individual to July 11, 2005
-----------
$170,173
===========
F-14
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
6. NOTES PAYABLE (continued)
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.
During 2005 $50,000 of notes payable was converted into common stock by an
unrelated individual note holder.
7. RELATED PARTY TRANSACTIONS
In addition to the transactions/information disclosed elsewhere in these
consolidated financial statements, the Company had the following transactions
with related parties.
During the years ended December 31, 2004 and 2005, the Company paid amounts
to related parties as follows:
----------------------------------------------------------------------------------------------------------
NATURE OF
NAME RELATIONSHIP AMOUNT PAID ($) PAYMENT (a)
-------------------------------
2004 2005
----------------------------------------------------------------------------------------------------------
Former President,
CEO & CFO 50,000 -0- Consulting fee
Brad Woods January 2004 - April 2004
Current Director
---------------------------------------------------------------------------------------------------------
Train Top Beijing In-Touch President, 125,000 -0- Consulting fee
---------------------------------------------------------------------------------------------------------
Current Director, 14,600 -0- Consulting fee;
Henry Zaks (b) Notes holder Promissory note
---------------------------------------------------------------------------------------------------------
Dr. Allan Rabinoff Former Director 28,290 -0- Consulting fee
---------------------------------------------------------------------------------------------------------
Pedro E. Racelis CEO/President/Director 111,134 -0- Consulting fee
III (c)
---------------------------------------------------------------------------------------------------------
Michael A. Bowden COO & Director 54,917 -0- Consulting fee;
(d) Promissory note
---------------------------------------------------------------------------------------------------------
(a) Each of the individuals listed in the table received the fees enumerated in
this table prior to each joining the Company's board of directors.
(b) On June 27, 2003 and July 31, 2003, Henry Zaks, a Director, loaned the
Company $80,000 and the Company issued a promissory note in such amount
payable to Mr. Zaks. 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. During 2005, Henry
Zaks converted notes payable of $30,000 into shares of common stock at a
conversion price of $0.05 per share, and converted notes payable of $20,000
into 857,085 shares of common stock at a conversion price of $0.029 per
share. During the first five months of 2006, Henry Zaks loaned the Company
$23,217 and on May 3, 2006, the Company issued a promissory note in such
amount payable to Mr. Zaks payable in full on October 2, 2006.
F-15
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
7. RELATED PARTY TRANSACTIONS (continued)
(c) During the first five months of 2006, Pedro E. Racelis, the Company's
CEO/President/Director loaned the Company $15,500 and on May 3, 2006, the
Company issued a promissory note in such amount payable to Mr. Racelis
payable in full on July 2, 2006.
(d) On August 1, 2005, the Company's COO and Director, Michael Bowden loaned
the Company $12,698.16 and the Company issued a promissory note in such
amount payable to Mr. Bowden payable in full on July 2, 2006. During 2006,
Michael Bowden loaned the Company $73,059.35 and on May 3, 2006, the
Company issued a promissory note in such amount payable to Mr. Bowden
payable in full on July 2, 2006.
8. COMMITMENTS AND CONTINGENCIES
On March 1, 2006, the Company entered into a new employment agreement with Mr.
Racelis as President and Chief Executive Officer for a term of six years
renewable for one year after the original term expires. Under the terms of the
new employment agreement, Mr. Racelis will be paid an annual salary of $250,000,
with increases of 10% annually.
On March 1, 2006, the Company entered into a new employment agreement with Mr.
Bowden as its Chief Operating Officer for a term of six years renewable for one
year after the original term expires. Under the terms of the new employment
agreement, Mr. Bowden will be paid an annual salary of $225,000, with increases
of 10% annually.
The Company leases certain office premises under non-cancelable operating
leases. All leases are for a term of less than one year. Rental expenses under
operating leases was $7,214 and $168,568 for the years ended December 31, 2005
and 2004, respectively.
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, 2005 was $-0- and for
December 31, 2004 it was $41,631.
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.
F-16
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
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 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.
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 1,953,125
warrants of the Company. Each warrant entitles its holder to purchase one share
of the Comapny's common stock at $1.00 per share. The Company extended the
exercise date of these warrants until and prior to July 1, 2006.
In June 2004, the Company issued 261,670 warrants to non-employees in a private
placement. None of these warrants has been exercised. Each warrant entitles its
holder to purchase one share of the Company's common stock at $0.45 per share.
These warrants are exercisable until and prior to July 1, 2006. Michael Bowden,
a Director and COO of the Company holds 50,000 of these warrants, where were
issued to him prior to his employment as an officer with the Company.
Henry Zaks, a Director of the Company holds 236,842 warrants exercisable at
$0.40 per share. These warrants are exercisable until and prior to July 8, 2007.
As a result, total warrants outstanding at December 31, 2005 were 2,451,079.
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 operations are reported in these
consolidated financial statements for reporting year of December 31, 2004
as follows:
2005 2004
---- ----
Revenues $ - $ 259,467
Costs and Expenses $ - $(1,278,680)
------------------------
Loss from discontinued operations $ - $(1,019,213)
------------------------
F-17
CHINA WIRELESS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
15. SUBSEQUENT EVENTS
On March 1, 2006, the Company entered into a new employment agreement with Mr.
Racelis for a term of six years renewable for one year after the original term
expires. Under the terms of the new employment agreement, Mr. Racelis will be
paid an annual salary of $250,000, with increases of 10% annually.
On March 1, 2006, the Company entered into a new employment agreement with Mr.
Bowden for a term of six years renewable for one year after the original term
expires. Under the terms of the new employment agreement, Mr. Bowden will be
paid an annual salary of $225,000, with increases of 10% annually.
During the first five months of 2006, Henry Zaks loaned the Company $23,217 and
on May 3, 2006, the Company issued a promissory note in such amount payable to
Mr. Zaks payable in full on October 2, 2006.
During the first five months of 2006, Pedro E. Racelis, the Company's
CEO/President/Director loaned the Company $15,500 and on May 3, 2006, the
Company issued a promissory note in such amount payable to Mr. Racelis payable
in full on July 2, 2006.
During the first five months of 2006, Michael Bowden loaned the Company $73,059
and on May 3, 2006, the Company issued a promissory note in such amount payable
to Mr. Bowden payable in full on July 2, 2006.
On May 18, 2006, the Company entered into an amended agreement whereby the
Company agreed to further pay $105,307 in cash to the founders of Tianjin Create
IT Co. by August 31, 2006 in connection with the Company's acquisition of
Tianjin Create IT Co.
16. PRIOR PERIOD ADJUSTMENT
Accounts payable and accrued expenses at the beginning of 2005 has been
adjusted. The adjustments resulted from addition 2004 unpaid vendor invoices
that were discovered by management of the Company in 2006. The errors have an
effect on net loss for 2004 in the amount of $52,799.
F-18