Item 405 of
Regulation S-B is not 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). o Yes
x
No
The
Issuer's revenue for its most recent fiscal year was $33, 578, 000.
As
of
December 31, 2007, 10,404,550 shares of the Issuer's $0.001 par value common
stock were outstanding and the aggregate market value of the shares held
by
non-affiliates was approximately $29,946,208
based
upon a closing bid price on March 12, 2008 of $5.07 per share of common
stock on
the NASDAQ Stock Market.
Transitional
Small Business Disclosure Format (check one) Yes
o No
x
|
PART
I
|
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|
ITEM
1. DESCRIPTION OF BUSINESS.
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|||
|
Corporate
History
|
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Current
Business Operations
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Our
Business Strategies
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Competitive
Advantages
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Description
of Products & Services
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Research
& Development
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Competition
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Government
Regulation
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Intellectual
Property and Proprietary Rights
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|
ITEM
1A
|
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|||
|
Cautionary
Statement Regarding Future Results, Forward-Looking Information And
Certain Important Factors
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|
ITEM
2. DESCRIPTION OF PROPERTY.
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|
ITEM
3. LEGAL PROCEEDINGS
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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PART
II
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|
|||
|
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
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|
ITEM
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
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SIGNIFICANT
ACCOUNTING POLICIES AND MANAGEMENT ESTIMATES
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|||
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RESULTS
OF OPERATION
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|||
|
ITEM
7. FINANCIAL STATEMENTS.
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|||
|
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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|
ITEM
8A. CONTROLS AND PROCEDURES.
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|
ITEM
8B. OTHER INFORMATION.
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PART
III
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|
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
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Indemnification
of Officers and Directors
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Involvement
in Certain Legal Proceedings
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Compliance
with Section 16(a) of the Securities Exchange Act of 1934
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Meetings
and Certain Committees of the Board
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Stockholder
Communications
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Compensation
of Directors
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|
ITEM
10. EXECUTIVE COMPENSATION.
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|
ITEM
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS.
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|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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|
ITEM
13. EXHIBITS AND REPORTS ON FORM 8-K
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Statements
filed as part of this Report:
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Exhibits
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Reports
on Form 8-K
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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SIGNATURES
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PART
I
Corporate
History
Unless
otherwise indicated, or unless the context otherwise requires, all references
in
this Annual Report to the terms "Company," "Telestone," "we," "our," or "us"
shall mean Telestone Technologies Corporation, a Delaware corporation.
We
were
organized under the laws of the State of Colorado in February 1987 under the
name Shield Enterprises, Inc.
On
January 3, 2002, we entered into an exchange agreement with EliteAgents Mortgage
Services, Inc. (formerly Elite Agents, Inc.) ("Elite"), a licensed mortgage
banker. As a result of the exchange, Elite became our wholly-owned subsidiary,
and we had 80,000,000 shares of common stock outstanding, of which 72,000,000
shares were owned by the former stockholders of Elite and 8,000,000 shares
were
owned by our existing stockholders. Elite continued its mortgage banking
activities and other financial services subsequent to the exchange. In addition,
effective May 8, 2002, we formed a wholly-owned subsidiary, Elite Agents Leasing
Services, Inc. ("Leasing"), for the purpose of establishing equipment financing
and leasing operations.
On
September 26, 2003, we and Elite (the "Debtors") each filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the District of New Jersey (the “Court”) (Case Nos.
03-41805 and 03-41806). The two voluntary petitions of the Debtors were
consolidated for administrative purposes only on October 20, 2003. On December
30, 2003, the Bankruptcy Court authorized the Debtors to sell substantially
all
of their assets.
On
March
24, 2004, the Court authorized the Debtors to sell both designation rights
for a
plan of reorganization and 25 million common shares, which were nondilutable
under any capitalization, to Focus Tech Investments, Inc. or its designee
("Focus") for a purchase price of $65,000.00. In addition, 14 creditors agreed
to advance an aggregate of $50,000.00, as a non-recourse claim, under the terms
of convertible promissory notes ("Notes") pursuant to Section 1145 of the
Bankruptcy Code, to the Debtors, to fund fees and expenses of the Debtors'
and
related committee's professionals for a plan of reorganization. The Notes were
convertible into a total of 4,000,000 common shares and 1,000,000 warrants
issued pursuant to Section 1145 of the Bankruptcy Code. The transaction was
exempt from the registration requirements of Section 5 of the Securities Act
of
1933 as well as state and local law statutes requiring registration for an
offer
or sale of a security.
On
August
10, 2004, the Court approved the Plan and entered the order entitled "Order
Approving Disclosure Statement and Confirming First Amended Plan of Liquidation
and Authorizing and Directing Certain Actions In Connection Therewith" (the
"Order"). Pursuant to the Plan, all prior operational assets were liquidated
and
the proceeds were paid, per the approved claim schedule, to creditors and for
the administration of the estate. Pursuant to the Plan, all of the property
of
the Debtor's estate vested in the Plan Trustee, free and clear of all claims,
liens, encumbrances, charges or other interests, and all executory contracts
and
unexpired leases were rejected. The Court also placed an injunction against
all
entities that may have held, currently hold, or may hold a debt, claim or other
liability or interest against the Debtors, dischargeable upon confirmation
of
the Plan, and permanently enjoined any action on account of such debt, claim,
liability, interest or right. The Court further terminated all claims arising
or
related to stock, stock options, stock plans for employees, officers and
directors, warrants and convertible provisions within the debt instruments
by
creditors. The Court ordered that our common stock be diluted by a reverse
stock
split of our issued and outstanding common shares. Under the Order, each share
of our common stock issued and outstanding was reclassified on a one (1) for
822
basis at a $0.001 par value.
The
Court
then ordered that we:
|
·
|
reincorporate
and redomicile from the State of Colorado to the State of Delaware;
|
|
·
|
that
the name of the Company be changed to Telestone Technologies Corporation;
|
|
·
|
that
the company's board of directors be authorized under the Plan to
issue
common stock pursuant to an exchange agreement at the time of closing
or
in escrow, in which effective control or majority ownership of the
Company
is given to the acquired or acquiring business entity without the
need of
stockholder approval; and
|
|
·
|
that
the Board of Directors be authorized to amend the Company's By-Laws
and
amend the Company's fiscal year to a date established and set forth
in an
exchange agreement without the need of stockholder approval.
|
Pursuant
to the Order, we reincorporated in the State of Delaware under the name
Telestone Technologies Corporation on August 13, 2004 by filing a Certificate
of
Incorporation with the State of Delaware. We are now authorized to issue a
total
of 110,000,000 shares with 100,000,000 being shares of common stock with a
par
value of $0.001, and 10,000,000 being shares of preferred stock with a par
value
of $0.001.
Pursuant
to the Order, we approved the reverse stock split of issued and outstanding
common shares. Under the Order, our issued and outstanding common stock was
reclassified on a one (1) for 822 basis at a par value of $0.001. A Certificate
of Amendment was filed with the Delaware Secretary of State on August 17, 2004.
On
August
23, 2004, we completed a share exchange transaction with the stockholders of
Success Million International Limited, a company incorporated under the laws
of
Hong Kong ("SMI"). The share exchange was consummated under Delaware law and
pursuant to the terms of that certain Securities Exchange Agreement, dated
effective as of August 23, 2004 (the "Exchange Agreement").
Pursuant
to the Exchange Agreement, we issued 4.1 million shares of our common stock
to
the stockholders of SMI, representing approximately 97.6% of our issued and
outstanding common stock, immediately upon the consummation of the exchange
transaction, in exchange for 100% of the outstanding capital stock of SMI.
Immediately after giving effect to the exchange, we had 4,199,917 shares of
common stock outstanding. Pursuant to the exchange, SMI became our wholly-owned
subsidiary. For accounting purposes, the exchange is treated as a reverse
acquisition, as the stockholders of SMI own a majority of the issued and
outstanding shares of our common stock. Due to the issuance of the 4.1 million
shares of our common stock, a change in control occurred on August 23, 2004,
the
date of the consummation of the exchange. We now carry on the business of SMI's
wholly-owned subsidiary, Beijing Telestone Technologies Co., Ltd. ("Beijing
Telestone").
On
June
17, 2005, Beijing Telestone established Beijing Telestone Wireless
Telecommunication Company Limited ("BTWTC") in Beijing, the People's Republic
of
China (the "PRC") with an operating period of 20 years through the efforts
of
Mr. Han Daqing and Mr. Luo Zhengbin, both who are officers and directors of
the
Company. Beijing
Telestone controls BTWTC through contractual arrangements. The registered
capital of BTWTC amounts to RMB10 million (approximately US$1.2 million). BTWTC
was established to engage in the business of wireless telecommunication
networking and system integration
On
July
5, 2007, BTWTC, Shandong Guolian Telecommunication Technology Limited
(“Guolian”)(note) and owners of Guolian entered into a Share Transfer Agreement
(the “Agreement”). Under the Agreement, 100% equity ownership interests in
Guolian and its wholly owned subsidiary, Pan-pacific Telecommunication Company
Limited (“Pan-pacific”), was transferred by all of the owners of Guolian to
BTWTC. Guolian and Pan-pacific were established in Jinan, Shandong Province,
the
PRC on February 9, 1999 and October 22, 1999 respectively. The principal
business activities of Guolian and Pan-pacific are design, development,
production and installation and trading of wireless telecommunication coverage
system equipment.
On
October 8, 2007, BTWTC formed a subsidiary named Beijing Telestone
Communication Technology Corp. Ltd (the "Subsidiary") which focuses on
developing and managing Telestone's overseas businesses. The
Subsidiary will be responsible for all of Telestone's international businesses
and focuses on the Company's international expansion efforts. The move is
intended to simplify current command and reporting lines. The Subsidiary will
also seek to identify new opportunities to ensure consistent growth in
Telestone's overseas businesses.
Our
executive offices are those of Beijing Telestone Technologies Co., Ltd. and
are
located at Floor 6, Saiou Plaza, No. 5 Haiyang Road, Fengtai Technology Park,
Beijing China 100070. Our telephone number is 86-10-83670505.
Current
Business Operations
Our
present activities as set out below were primarily the business of Telestone.
Telestone was initially established as a Chinese limited liability company
in
the PRC in October 1997. In March of 2004, Telestone became a wholly-owned
subsidiary of SMI. Business within the PRC is conducted through Telestone and
SMI.
In
2005,
Telestone was a wireless communications coverage solutions provider solely
to
the Chinese market, and in
2006 the
Company expanded marketing efforts to cover Vietnam, Indonesia,
Malaysia,
Thailand, and India. Since 2007 Beijing Telestone Communication Technology
Corp.
Ltd was established as one of the subsidiaries focusing on developing and
managing Telestone's overseas businesses. So far, marketing has expanded to
19
countries in the world, such as the U.S., Vietnam, Mexico, Brazil, Russia,
India, The Philippines, Thailand, Ireland, Ecuador, Mongolia, South Africa,
Turkey, Indonesia & New Zealand. The expansion outside of China is a
relatively new strategy for Telestone. The Company is pleased with the initial
results and believe that the quality of our products and services will allow
Telestone to be increasingly competitive internationally
The
wireless coverage solutions include research and development and application
of
wireless communications technology. In addition to our homegrown wireless
communications equipment which includes repeaters, antennas and radio frequency
peripherals, we also offer project design, project management, installation,
maintenance and other after-sales services which are required by our customers.
Our wireless coverage solutions are created to further enhance the coverage
of
mobile telecommunications networks; this is done so as to improve the quality
of
reception for mobile phone users. These solutions we provide to the
telecommunications industry cover indoor and outdoor environments, including
hotels, residential estates, office buildings, airports, exhibition centers,
underground stations, highways and tunnels. In 2006, having successfully
completed commercial trials and deployment of 3D
solution (third
generation indoor coverage solution researched and developed by the Company),
the Company expanded its services to telecommunication technologies markets,
including the 3D solution, which utilizes fiber technology in the radio
frequency signal distribution to transmit high speed data signals, and the
PHS
system optimization solution, which transitioned to network optimization phase
from network maintenance phase, to address four major issues of wireless
network; namely, network coverage, network planning, network capacity and
network disturbance. The Company’s TD-SCDMA repeaters application solutions have
the following merits: flexible network grouping, low construction cost,
convenient and fast equipment installation and removal. It can be applied in
signal coverage of blind spots such as signal blocked areas, tunnels and
temporary meeting rooms. Because the TD-SCDMA system works in 2GHz frequency
bands, it has weak penetrability compared with the 800MHz and the 900MHz
frequency band of the 2G network. This weak penetrability will cause many blind
signal spots and TD-SCDMA repeaters can be used to cover these blind signal
spots. The Company anticipates that the TD-SCDMA repeaters application solutions
will be very marketable in the PRC, because the development of the TD-SCDMA
network will be completed in the PRC.
Since
the
establishment of Telestone in 1997, we have developed business relationships
with both China Mobile Communications Corporation ("China Mobile") and China
Unicom Limited ("China Unicom"), along with two PRC-based telecom carriers,
China Netcom and China Telecom. China Unicom was our main customer in 2005,
and
this business association accounted for approximately 50.49% of total sales.
In
2006, our main customers were China Unicom, China Mobile and China Telecom.
In
2006, the total sales amount generated from China Unicom, China Mobile and
China
Telecom was roughly 35.65%, 29.97% and 26.56%, respectively. In 2007, our main
customers were China Mobile and China Unicom, and the revenues from them were
41.92% and 38.69%, respectively. Over the three years, our business has grown
steadily, and we believe there is a strong potential for growth.
Revenues
Generated in 2005, 2006 and 2007
|
|
|
|
|
||||||||||||||||
|
$'000
|
%
of revenue
|
|
$'000
|
%
of revenue
|
$'000
|
%
of revenue
|
|||||||||||||
|
China
Mobile
|
3,055
|
17.55
|
%
|
6,505
|
29.97
|
%
|
14,076
|
41.92
|
%
|
||||||||||
|
Chian
Unicom
|
8,791
|
50.49
|
%
|
7,739
|
35.65
|
%
|
12,993
|
38.69
|
%
|
||||||||||
|
China
Netcom
|
1,011
|
5.81
|
%
|
1,457
|
6.71
|
%
|
1,407
|
4.19
|
%
|
||||||||||
|
China
Telecom
|
3,416
|
19.62
|
%
|
5,765
|
26.56
|
%
|
4,101
|
12.21
|
%
|
||||||||||
|
Others
|
1,137
|
6.53
|
%
|
|
1.11
|
%
|
1,001
|
2.98
|
%
|
||||||||||
|
Total
|
17,410
|
21,708
|
33,578
|
||||||||||||||||
Our
business priority is committed to the research and development of wireless
communication related technology. Over 90% of our technology is developed
in-house at our research and development center. We employ a highly trained
and
professional staff of engineers, and our scientists concentrate on invention
and
further advances in wireless communication technology. Since its introduction,
our
3D
solution as
a new
innovative product has received high recognition in the telecommunications
industry and has won commendations and praise from several telecommunications
carriers.
Our
technology is licensed to a third party production center, owned by Shijiazhuang
Spectrum Digital Communication Co., Ltd., which is located near our in-house
research and development center. We are parties to a Memorandum of Cooperation
with Shijiazhuang Spectrum Digital Communication Co., Ltd, which governs the
relationship between us. The production center manufactures our products, per
our research and development specifications, for resale and delivery by us
to
our customers.
We
have
offices in 26 provinces across the PRC offering sales, project survey, design,
project management, and installation and maintenance services. We believe that
this intensive sales and service strategy enriches our capability to increase
our existing customers base in the PRC and empower us to provide timely response
to customers’ inquires as well as technical and maintenance service upon our
customer request. Our sales efforts are not focused in or dependent upon any
particular regions or provinces of the PRC in terms of a material portion of
the
Company’s profit.
Our
Business Strategies
In
order
to maintain our leading position in the PRC’s wireless coverage solutions
sector, and expand and diversify our revenue streams, we will adopt a three
pronged strategy to ensure value for its shareholders:
1.
We
plan to continue to invest in research and development for our key technologies
and our products to enhance our leading position in wireless coverage technology
and take full advantage of the PRC’s investment in the 3G networks. We have
dedicated research and development to wireless coverage solutions and in the
next three years our main business will continue to be wireless coverage
solutions for mobile telecommunications. Our proprietary WFDS product is one
of
the leading indoor wireless coverage products in China, and it is applicable
to
2G, 3G,, Broadband access and CATV networks.
2.
In the
domestic market, we intend to maintain strong relationships with Chinese mobile
carriers and potentially make selective acquisitions in major provincial markets
where we do not have leading market share. Our potential targets are companies
that enjoy a leading market position and have strong business networks in their
provincial markets or that have strong production capability and companies
that
own applicable value-added products whose customer premises network p