As filed with the Securities and Exchange Commission on December __, 2005
Registration No. ___
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2/A
(Amendment Number 2)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TS Electronics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 73-1564807
(State or other jurisdiction (I.R.S. Employer Incorporation or
of organization) Identification Number)
4953
(Primary Standard Industrial
Classification Code Number)
3 Pennsylvania Lane
Parsippany, NJ 07054
Telephone: 973-3940620
(Address and telephone number of principal executive offices)
Unit 8, D Area, Office Hall, Haikou Bonded Zone, Haikou, Hainan Province, China.
Zip Code: 570216
Telephone: +86 898 6681 8282
(Former address and telephone number of principal executive offices)
Copies to:
Charles Law
King and Wood LLP
650 Page Mill Road
Palo Alto, CA 94304
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
---------------------- ------------------- ----------------- ------------------- --------------
Title of each Amount to be Proposed Proposed Amount of
class of securities registered maximum maximum registration
to be registered offering price aggregate fee
per unit offering price
---------------------- ------------------- ----------------- ------------------- --------------
Common Stock, $.001 8,819,656 Shares $1.83 (1) $16,139,971 (1) $1,900 (1)
par value
---------------------- ------------------- ----------------- ------------------- --------------
Total 8,819,656 Shares $1.83 (1) $16,139,971 (1) $1,900 (1)
---------------------- ------------------- ----------------- ------------------- --------------
(1) Calculated in accordance with Rule 457(c).
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DECEMBER __, 2005
TS Electronics, Inc.
8,819,656 of Shares
Common Stock
This prospectus is an offering of 8,819,656 shares of our common stock by the
selling stockholders.
These securities are more fully described in the section of this prospectus
titled "Description of Securities".
These securities are being registered to permit public secondary trading of the
securities offered by the selling stockholders named in this prospectus. We will
not receive any of the proceeds from the sale of the securities by the selling
stockholders.
The selling stockholders may, but are not obligated to, offer all or part of
their shares of common stock for resale from time to time through public or
private transactions, at either prevailing market prices or at privately
negotiated prices. See "Plan of Distribution."
Our common stock is currently quoted on the Over-the-Counter Bulletin Board
("OTCBB") under the symbol "TSET.OB". On December 19, 2005, the last reported
sale price on our common stock was $1.83 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE
"RISK FACTORS" BEGINNING AT PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ______________, 2005.
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TS Electronics, Inc.
TABLE OF CONTENTS
Page
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Prospectus Summary 3
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Risk Factors 7
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Use of Proceeds 23
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Market for Common Equity and Related Stockholder Matters 24
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Management's Discussion and Analysis or Plan of Operation 24
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Business 31
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Management 38
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Director and Executive Compensation 39
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Relationships and Related Transactions 41
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Security Ownership of Certain Beneficial Owners and Management 41
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Selling Security Holders 42
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Description of Securities 44
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Plan of Distribution 46
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Legal Matters 47
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Experts 47
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Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 47
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Where You Can Find Additional Information 47
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Financial Statements 48
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Funalin, Fukexing, Helpson, HPS logo, Beisha, Shiduotai, Xinuo and other logos
are trademarks or logos of Hainan Helpson Bio-pharmaceutical Co., Ltd.
("Helpson"), our indirect wholly owned subsidiary. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
You should rely only on the information contained in this prospectus in deciding
whether to purchase the securities. We have not authorized anyone to provide
information different from that contained in this prospectus. The information
contained in the prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of
securities. Our business, financial condition, results of operations, and
prospects may have changed since that date.
The information contained in this prospectus is not complete and is subject to
change. The selling stockholders are not permitted to sell securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities, nor is it a
solicitation of an offer to buy these securities in any state where the offer or
sale is not permitted.
3
PROSPECTUS SUMMARY
This summary highlights selected information about TS Electronics, Inc., its
direct and indirect wholly owned subsidiaries and the offering that is contained
elsewhere in this prospectus. You should read the entire prospectus before
making an investment decision, especially the information presented under the
heading "Risk Factors" on page 7 and the financial statements and related notes
included elsewhere in this prospectus, as well as any other documents to which
we refer you. Except as otherwise indicated by context, references in this
prospectus to "we," "us," "our" or the "Company" are to the combined business of
TS Electronics, Inc. and Onny Investment Limited ("Onny"), Helpson, and in each
case do not include the selling stockholders. References to "China" or to the
"PRC" are references to the People's Republic of China. This prospectus contains
forward-looking statements and information about us. See "Forward-Looking
Statements" on page 22.
OUR COMPANY
Overview
TS Electronics, Inc. (formerly, Softstone, Inc.) was incorporated on January 28,
1999 pursuant to the provisions of the General Corporation Act of the State of
Delaware. On May 31, 1999, we merged with Soft Stone Building Products, Inc., an
Oklahoma corporation that was a predecessor to our company's business. Our
initial business operations were conducted at 620 Dallas Drive, Denton TX 76205.
On February 1, 2000, we moved our offices and facilities to Ardmore, OK. In June
2002, we moved our office facilities to Pottsboro, TX . On August 13, 2003, we
changed our name to TS Electronics, Inc.
Our focus initially was solely on realizing the commercial benefits of a process
developed and patented by our first president, Frederick Parker. This process
converted waste tires into useful products. We were not successful in promoting
this business, wrote off all assets associated with the business and shifted our
attention to the commercial possibilities of a then, newly discovered
devulcanization process to which we acquired a 5.5-year exclusive license for
the Western Hemisphere. In addition, we entered into the business of importing
hard-to-find and specialty crumb rubber. We were also not successful in these
endeavors, and have abandoned all efforts regarding these pursuits.
Effective August 11, 2004, the company entered into a Stock Exchange Agreement
with Mr. Hou Xiao, the sole stockholder of China ESCO Holdings Limited ("China
ESCO"), a company organized in the Hong Kong Special Administration Region in
the People's Republic of China and its wholly owned operating subsidiary,
AsiaNet PE Systems Limited. China ESCO was engaged in the development and
manufacturing of electrical energy saving systems and products in the PRC.
The consummation of the transaction with China ESCO was subject to a number of
conditions, including receipt by us of financial statements of China ESCO as
required under applicable regulations, and satisfaction of all applicable
regulatory requirements. In January 2005, we declared China ESCO to be in
material breach of the agreement and rescinded the agreement.
Effective February 8, 2005, we executed a Letter of Intent with Osage Energy
Company, LLC ("Osage") whereby Osage would acquire 90% of the equity interests
of the company. This transaction was never consummated by the parties.
The company has had no operations or significant assets since the quarter ended
December 31, 2004.
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On May 11, 2005, we sold to Halter Financial Group, Inc., in a private
placement, 1,875,045 shares of restricted common stock at a purchase price of
$0.1066641 per share, pursuant to the terms of a Stock Purchase Agreement (the
"Purchase Agreement"). The private placement was exempt from the registration
requirements of the Securities Act of 1933, as amended, in reliance upon Section
4(2) thereunder. As a result of the purchase, Halter Financial Group, Inc.
became our controlling stockholder, owning approximately 75% of our issued and
outstanding shares of common stock.
Immediately subsequent to and as a result of the closing of the transactions
contemplated by the Purchase Agreement, Gene F. Boyd, Keith P. Boyd, Fredrick W.
Parker and Leo G. Templer resigned as officers and directors, as applicable, of
the company. Timothy P. Halter was concurrently appointed as a member of the
Board of Directors, and Mr. Halter was elected as President, Chief Financial
Officer, and Secretary of the company.
On October 19, 2005 we entered into a Securities Exchange Agreement (the
"Exchange Agreement") with Onny and its original stockholders pursuant to which
we acquired all of the issued and outstanding shares of Onny from said
stockholders in exchange for 27,499,940 shares of our common stock. Upon the
effectiveness of an amendment to the Company's Certificate of Incorporation to
increase its common capital stock, as more particularly described below, the
Company shall issue to Heung Mei Tsui, the principal stockholder of Onny, an
additional 4,723,056 shares of common stock (the "Post Closing Shares") to which
she would otherwise have been entitled if the Company had enough authorized
shares as of the closing of the Exchange Transaction (the "Exchange
Transaction"). Upon the issuance of the Post Closing Shares, Ms. Tsui will hold
25,278,385 shares or approximately 72.8% of the issued and outstanding common
capital stock of the Company.
Prior to the closing of the Exchange Transaction, Onny completed a private
placement of its convertible preferred stock to 46 accredited investors. The
offering raised gross proceeds of $5,000,000. Prior to the Exchange Transaction,
participants in the offering exchanged their preferred shares for an aggregate
of 10,000 shares of Onny's common capital stock. Participants in the offering
then participated in the Exchange Transaction, and the shares of our common
stock that they received therein are included in the registration statement of
which this prospectus is a part.
The Company intends to file an Information Statement in accordance with Section
14 of the Securities Exchange Act of 1934, as amended, for the purpose of
increasing the Company's authorized common capital stock to 100,000,000 shares,
to change the Company's name to ChinaPharma Holdings, Inc. and to grant to the
board of directors the right to conduct up to a 2.89 for 1 reverse split of our
common stock at any time commencing 20 days after the Information Statement is
mailed to our stockholders and ending six months thereafter.
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Onny
Onny was incorporated on January 12, 2005 under the laws of the British Virgin
Islands. At the time of incorporation, Onny's authorized capital was $50,000 and
there were 50,000 shares of one class and one series, $1.00 par value, issued
and outstanding. Ms. Heung Mei TSUI was at the time of incorporation the sole
stockholder and director of Onny. On July 6, 2005, Onny adopted a sole
stockholder's resolution and a sole director's resolution that resolved to
change Onny's authorized capital to $50,000 divided into 4,000,000 ordinary
shares, $0.01 par value, and 100 preferred shares, $100 par value. On August 18,
2005, Onny increased its authorized capital to $5,000,000 divided into 40,000
ordinary shares, $100.00 par value, and 10,000 preferred shares, $100.00 par
value. As of Closing Date, 2005, there are 39,700 ordinary shares issued and
outstanding, all of which are held by the Company. No preferred shares are
currently issued and outstanding.
On May 25, 2005, Onny acquired all the equity interests in Helpson in
consideration of RMB 28,000,000 (approximately $3,456,790). Effective as of June
21, 2005, Onny became the sole stockholder of Helpson and Helpson became a
wholly foreign-owned enterprise as defined by Chinese law.
On October 19, 2005, Onny completed a private placement of $5,000,000 (the
"Offering") in consideration of the issuance of 10,000 shares of preferred
stock. Participants in this Offering exchanged their preferred shares for
ordinary shares in contemplation of participating the Exchange Transaction with
the Company. As a result, offering participants received in the aggregate
6,944,611 shares of our common stock.
Under the terms of the Offering, Ms. Heung Mei Tsui has agreed to escrow
6,944,611 shares of the Company's common stock that she received as a result of
the Exchange Transaction, which shares represent 20% of the Company's issued and
outstanding common capital stock immediately following the closing of the
Exchange Transaction (the "Make Good Pool"), so that in the event the
consolidated financial statements of the Company do not reflect $8 million of
Net Income ("NI") for the fiscal year ending December 31, 2006 (the "Guaranteed
NI") the Make Good Shares can be distributed on a pro rata basis to the
participants of the Offering in accordance with the following formula:
Make Good Shares = (($8 million - Actual FY 06 US GAAP Net Income)/$8m)X Make
Good Pool
If required, the Make Good Shares will be delivered to participants in the
Offering within ten (10) business days of the date the audit report for the
period is filed with the SEC.
Ms. Heung Mei Tsui has also escrowed 277,785 shares of the Company's common
stock that she received as a result of the Exchange Transaction, which shares
represent 0.8% of the Company's issued and outstanding common capital stock
immediately following the closing of the Exchange Transaction (the " HFG Make
Good Pool"), so that in the event the Company does not achieve the Guaranteed NI
the HFG Make Good Shares will be distributed to HFG International, Limited in
accordance with the following formula:
6
HFG Make Good Shares = (($8 million - Actual FY 06 US GAAP Net Income)/$8m)X HFG
Make Good Pool
If required, the HFG Make Good Shares will be delivered within ten (10) business
days of the date the audit report for the period is filed with the SEC.
Helpson
Helpson is a foreign-invested enterprise established in Haikou, Hainan Province
on February 25, 1993. Initially, its name was Hainan Fulin Biomedical Co., Ltd.
and it changed to "Helpson" in 1999. The company was originally an "equity joint
venture" as defined by China's laws on foreign invested enterprises. The two
joint venturers were Haikou Biomedical Engineering Co., Ltd. ("Haikou
Biomedical"), a Chinese company, and Hong Kong Fudao Development Co., Ltd.
("Fudao"), a Hong Kong company. Haikou Biomedical invested RMB2,100,000
(equivalent to US$367,197) for a 70% share of Helpson, and Fudao invested
$150,000 for a 30% share of Helpson.
On June 16, 2001, Fudao entered into an equity interest transfer agreement with
Hainan Kaidi Technology Co., Ltd ("Kaidi"). In accordance with the equity
interest transfer agreement, Fudao transferred all its 30% capital contribution
in Helpson to Kaidi. As a result of the transfer, Haikou Biomedical continued to
hold a 70% equity interest in Helpson, while Kaidi had a 30% equity interest in
Helpson. Furthermore, Helpson became a PRC domestic company, rather than a
foreign-invested company.
Effective on December 26, 2003, Helpson issued new shares to Chengdu Huineng
Biomedical Co., Ltd. ("Chengdu Bio") and Chongqing Chemical Medicine Holding
Group ("Chongqing Chemical"). Chengdu Bio contributed RMB3,000,000
(approximately US$370,370) for a 10.71% equity interest in Helpson, and
Chongqing Chemical contributed RMB5,000,000 (approximately US$617,284) for a
17.86% equity interest in Helpson. After the issuance of shares, Helpson had
four equity holders: Haikou Biomedical, which held a 50% equity interest in
Helpson; Kaidi, which held a 21.43% interest in Helpson; Chengdu Bio, which held
a 10.71% interest in Helpson; and Chongqing Chemical, which held a 17.86%
interest in Helpson.
On March 8, 2005, Chongqing Chemical entered into an equity interest transfer
agreement with Haikou Biomedical to transfer all its equity interest in Helpson
to Haikou Biomedical. Upon completion of the transfer, there remain only three
equity holders of Helpson: Haikou Biomedical, who holds a 67.86% equity
interest; Kaidi, who holds a 21.43% equity interest, and Chengdu Bio, who holds
a 10.71% equity interest.
On May 25, 2005, Haikou Biomedical, Kaidi and Chengdu Bio entered into an equity
interest transfer agreement with Onny, a company organized in the British Virgin
Islands, to transfer all their equity interests in Helpson to Onny in
consideration of RMB28,000,000 (approximately $3,456,790). Effective as of June
21, 2005, Onny became the sole stockholder of Helpson, and Helpson became a
wholly foreign-owned enterprise as defined by Chinese law.
7
Since its establishment, Helpson has positioned itself in the research,
development, manufacturing, and sales of a series of bio-pharmaceutical
products. Helpson's products focus primarily on genetic engineering,
bioengineering and peptidergic medicine, as well as chemical medicinal products.
Our principal executive office is located at 3 Pennsylvania Lane, Parsippany, NJ
07054.
THE OFFERING
Common stock to be outstanding after the offering 30,000,000
Common stock offered by the selling stockholders 8,819,656
OTCBB Trading Symbol TSET.OB
Use of Proceeds We will receive no
proceeds from the sale
of shares of common
stock in this offering.
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE AND INVOLVES A HIGH
DEGREE OF RISK. SEE RISK FACTORS BEGINNING ON PAGE 7.
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider the
risks described below before making a decision to buy our common stock. If any
of the following risks actually occurs, our business could be harmed. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment. You should also refer to the other information in
this prospectus, including our financial statements and the related notes.
Except for historical information, the information in this prospectus contains
"forward-looking" statements about our expected future business and performance.
Our actual operating results and financial performance may prove to be very
different from what we have predicted as of the date of this prospectus. The
risks described below address all material risks to us and our investors, as
currently known to us. Notwithstanding the above, Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act expressly state that the safe
harbor for forward looking statements does not apply to companies that issue
securities that meet the definition of a penny stock, as such, the safe harbor
for forward looking statements does not apply to us.
8
Risks Related to Our Business and Industry
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WITHIN THE NEXT TWELVE MONTHS TO FUND
OUR OPERATIONS AND FAILURE TO RAISE ADDITIONAL CAPITAL MAY FORCE US TO DELAY,
REDUE, OR ELMINATE OUR PRODUCT DEVELOPMENT PROGRAMS
Due to the large amount of funds required for research and development and the
subsequent marketing of products, the pharmaceutical industry is very capital
intensive. The industry is characterized by large receivable turnovers, which
signifies that we will need more working capital as our revenues increase. We
have traditionally been committed to biomedical R&D, and are now developing
traditional chemical medicines within specific market segments such as those of
anti-flu and anti-infection. It is likely that we will need to raise additional
capital within the next twelve months. Additional capital may be needed for the
development of new products or product lines, financing of general and
administrative expenses, licensing or acquisition of additional technologies,
and marketing of new or existing products. There are no assurances that we will
be able to raise the appropriate amount of capital needed for our future
operations. Failure to obtain funding when needed may force us to delay, reduce,
or eliminate our product development programs.
WE RELY ON FEW SUPPLIERS AND ANY DISRUPTION WITH OUR SUPPLIERS COULD DELAY
PRODUCT SHIPMENTS AND ADVERSELY AFFECT OUR BUSINESS OPERATIONS AND PROFITABILITY
We have developed relationships with a single or limited number of suppliers for
materials that are otherwise generally available. Purchases from our largest
supplier in 2004, Hainan Xinxin Biotechnology Company, accounted for
approximately 74.35% of the total purchases of our company. Purchases from our
second-to-largest supplier in 2004, Chengdu Xingwangji Pharmaceutical Company
accounted for 12.02% of our total purchases. Although we believe that
alternative suppliers are available to supply materials, should any of these
suppliers terminate their business arrangements with us or increase their prices
of materials supplied, it could delay product shipments and adversely affect our
business operations and profitability.
WE MAY UNDERTAKE ACQUISITIONS IN THE FUTURE, AND ANY DIFFICULTIES IN INTEGRATING
THESE ACQUISITIONS MAY DAMAGE OUR PROFITABILITY
In the future, we may acquire additional businesses or products that complement
our existing business and expand our business scale. The integration of new
businesses and products may prove to be an expensive and time consuming
procedure. We can offer no assurance that we will be able to successfully
integrate the newly acquired businesses and products or operate the acquired
business in a profitable manner. Failure to locate an appropriate M&A target or
failure to successfully integrate and operate acquired businesses and products
may adversely impact our operations and profits.
THE FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OUR OPERATIONS
The rapid market growth of our pharmaceutical products may require our Company
to expand our employee base for managerial, operational, financial, and other
purposes. As of December 19, 2005, we had 105 regular employees. The continued
future growth will impose significant added responsibilities upon the members of
management to identify, recruit, maintain, integrate, and motivate new
9
employees. Aside from increased difficulties in the management of human
resources, we may also encounter working capital issues, as we need increased
liquidity to finance the purchases of raw materials and supplies, research and
development of new products, acquisition of new businesses and technologies, and
the hiring of additional employees. For effective growth management, we will be
required to continue improving our operations, management, and financial systems
and control. Our failure to manage growth effectively may lead to operational
and financial inefficiencies that will have a negative effect on the Company's
profitability.
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FIANANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Company's success is, to a certain extent, attributable to the management,
sales and marketing, and pharmaceutical factory operational expertise of key
personnel. Ms. Zhilin Li, Mr. Heqi Cai, and Ms. Yao Huang perform key functions
in the operation of our Company. Ms. Zhilin Li entered into an Employment
Agreement with Helpson, which provided that Ms. Li was employed by Helpson to
act as its CEO. The term of her employment is from July 1, 2005 to June 30,
2010. Mr. Heqi Cai entered into an Employment Agreement with Helpson to act as
its Director of Development Department for a term from from July 1, 2005 to June
30, 2010. Ms. Yao Huang entered into an Employment Agreement with Helpson to act
as its Head of Pharmaceutical Plant for a term from July 1, 2005 to June 30,
2010. There can be no assurance that we will be able to retain these officers
after the term of their employment contracts expire. The loss of these officers
could have a material adverse effect upon our business, financial condition, and
results of operations. We must attract, recruit and retain a sizeable workforce
of technically competent employees. Our ability to effectively implement our
business strategy will depend upon, among other factors, the successful
recruitment and retention of additional highly skilled and experienced
management and other key personnel. We cannot assure that we will be able to
hire or retain such employees.
IF ALL OR A SIGNIFICANT PORTION OF OUR CUSTOMERS WITH TRADE RECEIVABLES FAIL TO
PAY ALL OF PART OF THE TRADE RECEIVABLES OR DELAY THE REPAYMENT, OUR NET INCOME
WILL DECREASE AND OUR PROFITABILITY WILL BE ADVERSELY AFFECTED
Our Company had trade receivables, net of allowance for doubtful accounts, of
approximately Y10,425,289 ($1,259,595) and Y19,948,709($2,410,282) as of
December 31, 2003 and 2004, respectively. During the years ended December 31,
2003 and 2004, the debtors' turnover period were approximately 213 days and 135
days, respectively.
Our Company had trade receivables, net of allowance for doubtful accounts, of
approximately Y39,705,780 ($4,797,412) as of 30th June 30, 2005. During the six
months ended June 30, 2005, the debtors' turnover period was approximately 297
days.
10
It is usual commercial practice that certain customers may repay their debts
beyond credit periods granted or may repay slowly when transaction volume
increases. There is no assuance that our trade receivables will be fully repaid
on a timely basis.
If all or a significant portion of our customers with trade receivables fail to
pay all or part of the trade receivables or delay the payment due to us for
whatever reason, our net profit will decrease and our profitability will be
adversely affected.
IF WE FAIL TO DEVELOP NEW PRODUCTS WITH HIGH PROFIT MARGINS AND OUR HIGH PROFIT
MARGIN PRODUCTS ARE REPLACED BY COMPETITOR'S PRODUCTS, OUR GROSS AND NET PROFIT
MARGINS WILL BE ADVERSELY AFFECTED
In the years ended December 31, 2003 and 2004, the gross profit margin for our
Company was 50.7% and 40.4% respectively. However, there is no assurance that we
will be able to sustain such profit margins in the future. The pharmaceutical
industry is very competitive, and there may be pressure to reduce sale prices of
products without a corresponding decrease in the price of raw materials. To the
extent that we fail to develop new products with high profit margins and our
high profit margin products are substituted by competitors' products, the gross
profit margins will be adversely affected.
WE FACE COMPETITION IN THE PHARMACEUTICAL INDUSTRY AND SUCH COMPETITION COULD
CAUSE OUR SALES REVENUE AND PROTITS TO DECLINE
According to the State Food and Drug Administration of China (the "SFDA"), there
were approximately 5,071 pharmaceutical manufacturing companies in the PRC as of
the end of June 2004, of which approximately 3,237 manufacturers obtained GMP
certification. After GMP certification became a mandatory requirement on July 1,
2004, approximately 1,834 pharmaceutical manufacturers were forced to cease
production (Source: http://www.jlda.gov.cn/hyzx/showhyzx.x?id=789). Only the
3,237 pharmaceutical manufacturers with GMP certifications may continue their
manufacturing operations. The certificates, permits, and licenses required for
pharmaceutical operation in the PRC create a potential barrier for new
competitors seeking entrance into the market. Despite these obstacles, we face
competitors that will attempt to create or are marketing products in the PRC
that are similar to ours. There can be no assurance that our products will be
either more effective in their therapeutic abilities and/or be able to compete
in price with that of our competitors. Failure to do either of these may result
in decreased profits for our Company.
11
OUR SUCCESS IS HIGHLY DEPENDENT ON CONTINUALLY DEVELOPING NEW AND ADVANCED
PRODUCTS, TECHNOLOGIES, AND PROCESSES AND FAILURE TO DO SO MAY CAUSE US TO LOSE
OUR COMPETITIVENESS IN THE PHARMACEUTICAL INDUSTRY AND MAY CAUSE OUR PROFITS TO
DECLINE
To remain competitive in the pharmaceutical industry, it is important to
continually develop new and advanced products, technologies, and processes.
There is no assurance that the competitors' new products, technologies, and
processes will not render our Company's existing products obsolete or
non-competitive. Our Company's competitiveness in the pharmaceutical market
therefore relies upon our ability to enhance our current products, introduce new
products, and develop and implement new technologies and processes. Our
Company's failure to technologically evolve and/or develop new or enhanced
products may cause us to lose our competitiveness in the pharmaceutical industry
and may cause our profits to decline.
THE COMMERCIAL SUCCESS OF OUR PRODUCTS DEPENDS UPON THE DEGREE OF MARKET
ACCEPTANCE AMONG THE MEDICAL COMMUNITY AND FAILURE TO ATTAIN MARKET ACCPETANCE
AMONG THE MEDICAL COMMUNICTY MAY HAVE AN ADVERSE IMPACT ON OUR OPERATIONS AND
PROFITABILITY
The commercial success of our products depends upon the degree of market
acceptance among the medical community. Even if our products are approved by the
SFDA, there is no assurance that physicians will prescribe or recommend our
products to patients. Furthermore, a product's prevalence and use at hospitals
may be contingent upon our relationship with the medical community. The
acceptance of our products among the medical community may depend upon several
factors, including but not limited to, the product's acceptance by physicians
and patients as a safe and effective treatment, cost effectiveness, potential
advantages over alternative treatments, and the prevalence and severity of side
effects. Failure to attain market acceptance among the medical community may
have an adverse impact on our operations and profitability.
WE ENJOY CERTAIN PREFERENTIAL TAX CONCESSIONS AND LOSS OF THESE PREFERENTIAL TAX
CONCESSIONS WILL CAUSE OUR TAX LIABILITIES TO INCREASE AND OUR PROFITABILITY TO
DECLINE
Helpson enjoys preferential tax concessions as a high-tech enterprise. Pursuant
to the State Council's Regulations on Encouraging Investment in and Development
of Hainan Island, Hainan Provincial State Tax Bureau recognized and approved
Helpson's status as a high and new technology enterprise and thus Helpson was
granted a 50% reduction in its income tax liability for the years 2003, 2004 and
2005. As the corporate income tax in Hainan province is 15%, Helpson's income
tax liability for the period between 2003 and 2005 is 7.5%. After the expiration
of the preferential tax treatment to Helpson as a high and new technology
enterprise, Helpson will be subject to 15% corporate income tax unless it
receives other preferential tax treatments.
Pursuant to the Examining and Administrative Measures Regarding Income Tax
Deduction for Investment in PRC Made Equipment Used in Technical Reform, 40% of
the purchase price in PRC-made equipment can be deducted for income tax
purposes. In the case of Helpson, RMB3,161,001.40 (approximately US$390,247) can
be used for income tax deduction .
For the two years ending December 31, 2003 and December 31, 2004, the amount of
tax deduction approved was USD$27,916 and USD$19,726 respectively.
12
There is no assurance that the preferential tax treatment mentioned above will
remain unchanged and effective. Helpson's tax liabilities will increase and its
profits may accordingly decline if the reduced income tax rate of 7.5% is no
longer applicable and/or the tax relief on investment in PRC-made equipment is
no longer available.
WE MAY BE SUBJECT TO THE PRC'S PRICE CONTROL OF DRUGS WHICH MAY LIMIT OUR
PROFITABILITY AND EVEN CAUSE US TO STOP MANUFACTURING CERTAIN PRODUCTS
The State Development and Reform Commission ("SDRC") of the PRC and the price
administration bureaus of the relevant provinces of the PRC in which the
pharmaceutical products are manufactured are responsible for the retail price
control over our pharmaceutical products. The SDRC sets the price ceilings for
certain pharmaceutical products in the PRC. Although our products have not been
subject to such price controls as of the date of this Prospectus, there is no
assurance that our products will remain unaffected by it. Where our products are
subject to a price ceiling, we will need to adjust the product price to meet the
requirement and to accommodate for the pricing of competitors in the competition
for market shares. The price ceilings set by the SDRC may limit our
profitability, and in some instances, such as where the price ceiling is below
production costs, may cause us to stop manufacturing certain products.
OUR CERTIFICATES, PERMITS, AND LICENSES ARE SUBJECT TO GOVERNMENTAL CONTROL AND
RENEWAL AND THE FAILURE TO OBTAIN RENEWAL WILL CAUSE ALL OR PART OF OUR
OPERATIONS TO BE TERMINATED
Our Company is subject to various PRC laws and regulations pertaining to the
pharmaceutical industry. Our Company has attained certificates, permits, and
licenses required for the operation of a pharmaceutical enterprise and the
manufacturing of pharmaceutical products in the PRC. We obtained the Medicine
Production Permit in December 2000, which is valid through December 31, 2005.
When the permit expires, our Company will not be able to operate medicine
production which will cause our operations to be terminated. We also obtained
three GMP certificates which are effective through July 17, 2008, December 2,
2009 and February 2, 2010 respectively. The pharmaceutical production permits
and GMP certificates are valid for a term of five years and must be renewed
before their expiration. During the renewal process, we will be re-evaluated by
the appropriate governmental authorities and must comply with the then
prevailing standards and regulations which may change from time to time. In the
event that we are not able to renew the certificates, permits and licenses, all
or part of our operations may be terminated. Furthermore, if escalating
compliance costs associated with governmental standards and regulations restrict
or prohibit any part of our operations, it may adversely affect our operation
and profitability.
IF OUR PRODUCTS FAIL TO RECEIVE REGULATORY APPROVAL OR ARE SEVERELY LIMITED IN
THE PRODUCTS SCOPE OF USE, WE MAY BE UNABLE TO RECOUP CONSIDERABLE RESEARCH AND
DEVELOPMENT EXPENDITURES
Our products that are approved to be manufactured include 15 medicines. We
applied to the SFDA for registration of manufacturing 21 medicines and SFDA has
accepted these applications. There are eight products in the stage of research
and development. The production of our pharmaceutical products is subject to the
13
regulatory approval of the SFDA. The regulatory approval procedure for
pharmaceuticals can be quite lengthy, costly, and uncertain. Depending upon the
discretion of the SFDA, the approval process may be significantly delayed by
additional clinical testing and require the expenditure of resources not
currently available; in such an event, it may be necessary for us to abandon our
application. Even where approval of the product is granted, it may contain
significant limitations in the form of narrow indications, warnings,
precautions, or contra-indications with respect to conditions of use. If
approval of our product is denied, abandoned, or severely limited in terms of
the scope of products use, it may result in the inability to recoup considerable
research and development expenditures.
OUR RESEARCH AND DEVELOPMENT MAY BE COSTLY AND/OR UNTIMELY AND THERE ARE NO
ASSURANCES THAT OUR RESEARCH AND DEVELOPMENT WILL EITHER BE SUCCESSFUL OR
COMPLETED WITHIN THE ANTICIPATED TIMEFRAME, IF EVER AT ALL
The research and development of our new and existing products and their
subsequent commercialization plays an important role in our success. There are
eight Products that are currently under research and development, including
rh-CNTF, rh-aFGF, Thymopetidum for Injection, Mycophenolate mofetil, Yimaikang
Capsule, Compound Ossotide for Injection, and Deproteinised Calf Blood for
Injection. The research and development of new products is costly and time
consuming, and there are no assurances that our research and development of new
products will either be successful or completed within the anticipated
timeframe, if ever at all. There are also no assurances that if the product is
developed, that it will lead to successful commercialization.
WE CANNOT GAURANTEE THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS AND IF
INFRINGEMENT OR COUNTERFEITING OF OUR INTELLECTUAL PROPERTY RIGHTS OCCURS, OUR
REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED
To protect the brand names of our products, we have registered and applied for
registration of our trademarks in the PRC where we have a major business
presence. Please refer to the paragraph headed "Intellectual property rights" in
the Business section of this Prospectus on page 35.
All of our products are sold under these trademarks. As of the date of this
Prospectus, we have not experienced any infringements of such trademarks for
sales of pharmaceutical products and as of the date of this Prospectus, the
Directors were not aware of any infringement of our intellectual property
rights. However, there is no assurance that there will not be any infringement
of our brand name or other registered trademarks or counterfeiting of our
products in the future. Should any such infringement or counterfeiting occur,
our reputation and business may be adversely affected. We may also incur
significant expenses and substantial amounts of time and effort to enforce our
intellectual property rights in the future. Such diversion of our resources may
adversely affect our existing business and future expansion plans.
14
WE MAY SUFFER AS A RESULT OF PRODUCT LIABILITY OR DEFECTIVE PRODUCTS
We may produce products which inadvertently have an adverse pharmaceutical
effect on the health of individuals despite proper testing. Existing PRC laws
and regulations do not require us to maintain third party liability insurance to
cover product liability claims. However, if a product liability claim is brought
against us, it may, regardless of merit or eventual outcome, result in damage to
our reputation, breach of contract with our customers, decreased demand for our
products, costly litigation, product recalls, loss of revenue, and the inability
to commercialize some products. We currently are not aware of any existing or
anticipated product liability claims with respect to our products.
WE RELY ON THE COOPERATION WITH RESEARCH LABORATORIES, PHARMACEUTICAL
INSITITUIONS, AND UNIVERSITIES AND IF THESE INSTITUTIONS CEASE TO COOPERATE WITH
US AND WE CANNOT FIND OTHER SUITABLE SUBSTITUTE RESEARCH AND DEVELOPMENT
PARTNERS, OUR ABILITY TO DEVELOP NEW PRODUCTS MAY BE HINDERED AND OUR BUSINESS
MAY BE ADVERSELY AFFECTED
Helpson cooperates with several research institutions including Chinese Academy
of Sciences, China University of Pharmaceuticals, Military Medical Academy Basic
Medical Science Institute, Chongqing Medical Industry Institute and China
Sichuan University. Helpson relies to a certain extent on the above-mentioned
institutions for its development of new products. There is no assurance that
these institutions will continue cooperating with Helpson to develop new
products. In the event that these institutions cease to cooperate with Helpson
and Helpson cannot find other suitable substitute research and development
partners, our ability to develop new products may be hindered and our business
may be adversely affected.
Risks Related to Doing Business in China
Helpson operates from facilities that are located in China. Accordingly, its
operations must conform to governmental regulations and rules of China.
THE PRC LEGAL SYSTEM HAS INHERENT UNCERTAINTIES THAT COULD LIMIT THE LEGAL
PROTECTIONS AVAILABLE TO US
The Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedent value. In the late 1970s, the Chinese government began to promulgate a
comprehensive system of laws and regulations governing commercial matters. The
overall effect of legislation enacted over the past 20 years has significantly
enhanced the protections afforded to foreign-invested enterprises in China.
However, these laws, regulations, and legal requirements are relatively recent
and are evolving rapidly, and their interpretation and enforcement involve
uncertainties. These uncertainties could limit the legal protections available
to foreign investors.
15
The practical effect of the PRC's legal system on our business operations in
China can be viewed from two separate but intertwined considerations. First, as
a matter of substantive law, the Foreign Invested Enterprise laws provide
significant protection from government interference. In addition, these laws
guarantee the full benefit of corporate articles and contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the corporation laws found in the United States. Similarly, PRC
accounting laws mandate accounting practices which may not be consistent with
the US Generally Accepted Accounting Principles. China accounting laws require
that an annual "statutory audit" be performed in accordance with PRC accounting
standards and that the books of account of Foreign Invested Enterprises be
maintained in accordance with Chinese accounting laws. Article 14 of the PRC
Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise
to submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation.
Second, while the enforcement of substantive rights may appear less clear than
United States procedures, Foreign Invested Enterprises and Wholly Foreign-Owned
Enterprises are Chinese registered companies that enjoy the same status as other
Chinese registered companies in business-to-business dispute resolutions. The
Chinese legal infrastructure is significantly different in operation from its
United States counterpart, and may present a significant impediment to the
operation of Foreign Invested Enterprises.
PRC ECONOMIC REFORM POLICIES OR NATIONALIZATION COULD RESULT IN A TOTAL
INVESTMENT LOSS IN OUR COMMON STOCK
Since 1979, the Chinese government has reformed its economic policies. Because
many reforms are unprecedented or experimental, they are expected to be refined
and improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within China, could lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
Although the Chinese government owns the majority of productive assets in China,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
- We will be able to capitalize on economic reforms;
- The Chinese government will continue its pursuit of economic reform
policies;
- The economic policies, even if pursued, will be successful;
- Economic policies will not be significantly altered from time to
time; and
- Business operations in China will not become subject to the risk of
nationalization.
16
Over the last few years, China's economy has registered high growth rates.
Recently, there have been indications that rates of inflation have increased. In
response, the Chinese government recently has taken measures to curb this
excessively expansive economy. These measures have included restrictions on the
availability of domestic credit, reducing the purchasing capability of some of
its customers, and limited recentralization of the approval process for
purchases of certain foreign products. These austere measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets. These
measures may adversely affect our operations.
There can be no assurance that the reforms to China's economic system will
continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN THE PRC BASED ON U.S. OR OTHER
FOREIGN LAWS AGAINST OUR MANAGEMENT AND US
Helpson, our operating company, is incorporated under the laws of the PRC, and
substantially all of our assets are located in the PRC. In addition, many of our
directors, managers, and executive officers reside within the PRC, and
substantially all of the assets of these persons are located within the PRC. As
a result, it may not be possible to effect service of process within the United
States or elsewhere outside the PRC upon certain directors, supervisors or
executive officers, including with respect to matters arising under U.S. federal
securities laws or applicable state securities laws. Moreover, the PRC does not
have treaties providing for the reciprocal recognition and enforcement of
judgments of courts with the United States, the United Kingdom, Japan or many
other countries. As a result, recognition and enforcement in the PRC of
judgments of a court in the United States and any of the other jurisdictions
mentioned above in relation to any matter may be difficult or impossible.
Furthermore, an original action may be brought in the PRC against us, our
directors, managers, or executive officers only if the actions are not required
to be arbitrated by PRC law and Helpson's articles of association, and only if
the facts alleged in the complaint give rise to a cause of action under PRC law.
In connection with any such original action, a PRC court may award civil
liability, including monetary damages.
17
BECAUSE WE RECEIVE SUBSTANTIALLY ALL OF OUR REVENUE IN RENMINBI, WHICH CURRENTLY
IS NOT A FREELY CONVERTIBLE CURRENCY, AND THE GOVERNMENT CONTROLS THE CURRENCY
CONVERSION AND THE FLUCTUATION OF THE RENMINBI, WE ARE SUBJECT TO CHANGES IN THE
PRCS' POLITICAL AND ECNOMONIC DECISIONS
We receive substantially all of our revenues in Renminbi, which currently is not
a freely convertible currency. The Chinese government may, at its discretion,
restrict access in the future to foreign currencies for current account
transactions.
The value of the Renminbi against the U.S. dollar and other currencies
fluctuates and is affected by, among other things, changes in the PRC's
political and economic conditions. Since 1994, the conversion of Renminbi into
foreign currencies, including Hong Kong and U.S. dollars, has been based on
rates set by the People's Bank of China, which are set daily based on the
previous day's inter-bank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate for
the conversion of Renminbi to U.S. Dollars generally has been stable. Any
devaluation of the Renminbi, however, may materially and adversely affect the
value of, and any dividends payable on, our shares in foreign currency terms,
since we will receive substantially all of our revenues, and express our
profits, in Renminbi. Our financial condition and results of operations also may
be affected by changes in the value of certain currencies other than the
Renminbi. Our results of operation may be adversely affected by changes in the
political and social conditions in the PRC, and 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 GROWTH OF THE CHINESE ECONOMY HAS BEEN UNEVEN ACROSS GEOGRAPHIC REGIONS AND
ECONOMIC SECTORS, AND A DOWNTURN IN CERTAIN REGIONS IN WHICH WE DO BUSINESS OR
IN OUR ECONMIC SECTOR WOULD SLOW DOWN OUR GROWTH AND PROFITABILITY
The growth of the Chinese economy has been uneven across geographic regions and
economic sectors. For example, during the years between 1978 and 2000, the per
capital GDP growth rate of Fujian Province in Southeastern China was 12% while
that of Gansu Province in Northwestern China was 5.3% (Source: New China
Statistical Materials Compilation for 50 Years and 2001 China Annual
Statistics). There can be no assurance that growth of the Chinese economy will
be steady or that any downturn will not have a negative effect on our business.
Our profitability may decrease due to a downturn in the Chinese economy. More
specifically, the expansion of our sales area in the less economically developed
central and western provinces of China will depend on those provinces achieving
certain income levels.
ANY OCCURRENCE OF SERIOUS INFECTIOUS DISEASES, SUCH AS RECURRENCE OF SEVERE
ACUTE RESPIRATORY SYNDROME (SARS) CAUSING WIDESPREAD PUBLIC HEALTH PROBLEMS,
COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS
A renewed outbreak of SARS or other widespread public health problems in China,
where all of our revenue is derived, and in Hainan, where our operations are
headquartered, could have a negative effect on our operations. Our operations
may be impacted by a number of public health-related factors, including the
following:
18
o quarantines or closures of our factories or subsidiaries which would
severely disrupt its operations;
o the sickness or death of the key officers and employees; and
o general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health
problems could adversely affect our business and results of operations.
WE ARE SUBJECT TO THE ENVIRONMENTAL PROTECTION LAWS OF THE PRC
Our manufacturing process may produce by-products such as effluent, gases and
noise, which are harmful to the environment. We are subject to multiple laws
governing environmental protection, such as "The Law on Environmental Protection
in the PRC" and "The Law on Prevention of Effluent Pollution in the PRC", as
well as standards set by the relevant governmental bodies determining the
classification of different wastes and proper disposal. We have properly
attained a waste disposal permit for our manufacturing facility, which details
the types and concentration of effluents and gases allowed for disposal. The
temporary waste disposal permit will expire on September 28, 2009. We are
responsible for the renewal of the waste disposal permit. There is no assurance
that we will obtain the renewal of the waste disposal permit when the current
permit expires.
China is experiencing substantial problems with environmental pollution.
Accordingly, it is likely that the national, provincial and local governmental
agencies will adopt stricter pollution controls. There can be no assurance that
future changes in environmental laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities. Our
business's profitability may be adversely affected if additional or modified
environmental control regulations are imposed upon us.
RECENT PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN
ENTITIES MAY LIMIT OUR ABILITY TO ACQUIRE PRC COMPANIES AND ADVERSELY AFFECT THE
IMPLEMENTATION OF OUR STRATEGY AS WELL AS OUR BUSINESS AND PROSPECTS
The PRC State Administration of Foreign Exchange, or SAFE, issued a public
notice in January 2005 concerning foreign exchange regulations on mergers and
acquisitions in China ("January Notice"). The public notice states that if an
offshore company controlled by PRC residents intends to acquire a PRC company,
such acquisition will be subject to strict examination by the relevant foreign
exchange authorities. The public notice also states that the approval of the
relevant foreign exchange authorities is required for any sale or transfer by
the PRC residents of a PRC company's assets or equity interests to foreign
entities, such as us, for equity interests or assets of the foreign entities.
19
In April 2005, SAFE issued another public notice further explaining the January
notice. In accordance with the April notice, if an acquisition of a PRC company
by an offshore company controlled by PRC residents has been confirmed by a
Foreign Investment Enterprise Certificate prior to the promulgation of the
January notice, the PRC residents must each submit a registration form to the
local SAFE branch with respect to their respective ownership interests in the
offshore company, and must also file an amendment to such registration if the
offshore company experiences material events, such as changes in the share
capital, share transfer, mergers and acquisitions, spin-off transactions or use
of assets in China to guarantee offshore obligations. The April notice also
provides that failure to comply with the registration procedures set forth
therein may result in a restriction on the PRC company's ability to distribute
profits to its offshore parent company. Pending the promulgation of detailed
implementation rules, the relevant government authorities are reluctant to
commence processing any registration or application for approval required under
the SAFE notices.
As it is uncertain how the SAFE notices will be interpreted or implemented, we
cannot predict how they will affect our business operations or future strategy.
For example, we may be subject to more stringent review and approval process
with respect to our foreign exchange activities, such as remittance of dividends
and foreign-currency-denominated borrowings, which may adversely affect our
results of operation and financial condition. In addition, if we decide to
acquire a PRC company by stocks, we cannot assure that the owners of such
company, as the case may be, will be able to complete the necessary approval,
filings and registrations for the acquisition. This may restrict our ability to
implement our acquisition strategy and adversely affect our business and
prospects.
OUR BUISNESS MAY BE ADVERSELY AFFECTED AS A RESULT OF CHINA'S ENTRY INTO THE
WORLD TRADE ORGANIZATION ("WTO") BECAUSE THE PREFERENTIAL TAX TREATMENTS
AVAILABLE TO US MAY BE DISCONTINUED AND FOREIGN PHARMACEUTICAL MANUFACTURERS MAY
COMPETE WITH US IN THE PRC PHARMACEUTIAL INDUSTRY
The PRC became a member of the WTO on 11th December, 2001. The current tax
benefits enjoyed by our Company may be regarded as unfair treatment by other
members of the WTO. Accordingly, the preferential tax treatments available to us
may be discontinued. In such circumstances, our profitability may be adversely
affected. In addition, we may face additional competition from foreign
pharmaceutical manufacturers if they set up their production facilities in the
PRC or form Sino-foreign joint ventures with our competitors in the PRC. In the
event that we fail to maintain our competitiveness against these competitors,
our profitability may be adversely affected.
Risks Related to Our Common Stock
THE MARKET PRICE FOR OUR COMMON STOCK MAY BE VOLATILE WHICH COULD RESULT IN A
COMPLETE LOSS OF YOUR INVESTMENT
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
20
o actual or anticipated fluctuations in our quarterly operating
results,
o announcements of new products by us or our competitors,
o changes in financial estimates by securities analysts,
o conditions in the pharmaceutical market,
o changes in the economic performance or market valuations of other
companies involved in pharmaceutical production,
o announcements by our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments,
o additions or departures of key personnel, or
o potential litigation,
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE MAY ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK TO RAISE ADDITIONAL CASH FOR
WORKING CAPITAL. IF WE ISSUE ADDITIONAL SHARES OF OUR CAPITAL STOCK, OUR
STOCKHOLDERS WILL EXPERIENCE DILUTION IN THEIR RESPECTIVE PERCENTAGE OWNERSHIP
IN US
We may issue additional shares of our capital stock to raise additional cash for
working capital. If we issue additional shares of our capital stock, our
stockholders will experience dilution in their respective percentage ownership
in us.
A LARGE PORTION OF OUR COMMON STOCK IS CONTROLLED BY A SMALL NUMBER OF
STOCKHOLDERS AND AS A RESULT, THESE STOCKHOLDERS ARE ABLE TO INFLUENCE THE
OUTCOME OF STOCKHOLDER VOTES ON VARIOUS MATTERS
A large portion of our common stock is held by a small number of stockholders.
For instance, Ms. Tsui holds 72.8% of the Company's common stock after the
closing of the Exchange Transaction. As a result, this stockholder is able to
influence the outcome of stockholder votes on various matters, including the
election of directors and other corporate transactions including business
combinations. In addition, the occurrence of sales of a large number of shares
of our common stock, or the perception that these sales could occur, may affect
our stock price and could impair our ability to obtain capital through an
offering of equity securities. Furthermore, the current ratios of ownership of
our common stock reduce the public float and liquidity of our common stock which
can in turn affect the market price of our common stock.
21
THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK WHICH MAY MAKE
IT DIFFICULT TO SELL SHARES OF OUR COMMON STOCK
Our common stock is traded in the over-the-counter market through the
Over-the-Counter Electronic Bulletin Board. While there is an active trading
market for our common stock, it is small. Further, there can be no assurance
that an active trading market will be maintained. We cannot assure you that our
common stock will ever be included for trading on any stock exchange or through
any other quotation system (including, without limitation, the NASDAQ Stock
Market).
WE ARE LIKELY TO REMAIN SUBJECT TO "PENNY STOCK" REGULATIONS AND AS A
CONSEQUENCE THERE ARE ADITIONAL SALES PRACTICE REQUIREMENTS AND ADDITIONAL
WARNINGS ISSUED BY THE SEC
As long as the trading price of our common stock is below $5.00 per share, the
open-market trading of our common stock will be subject to the "penny stock"
rules. The "penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
common stock and may affect a stockholder's ability to resell the common stock.
Stockholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) boiler room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differential and markups by selling broker-dealers; and (v)
the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market.
22
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS WHICH
COULD RESULT IN SUBSTANTIAL EXPENDITURES, WHICH WE MAY BE UNABLE TO RECOUP
Our bylaws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of us. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
COMPLIANCE WITH THE SARBANES-OXLEY ACT COULD COST HUNDREDS OF THOUSANDS OF
DOLLARS, REQUIRE ADDITIONAL PERSONNEL AND REQUIRE HUNDREDS OF MAN HOURS OF
EFFORT, AND THERE CAN BE NO ASSURANCE THAT WE WILL HAVE THE PERSONNEL, FINANCIAL
RESOURCES OR EXPERTISE TO COMPLY WITH THESE REGULATIONS
The US Public Company Accounting Reform and Investor Protection Act of 2002,
better known as Sarbanes-Oxley, is the most sweeping legislation to affect
publicly traded companies in 70 years. Sarbanes-Oxley created a set of complex
and burdensome regulations. Compliance with such regulations requires hundreds
of thousands of dollars, additional personnel and hundreds of man hours of
effort. There can be no assurance that we will have the personnel, financial
resources or expertise to comply with these regulations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act (the
"Exchange Act"). We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements are subject to a number of risks, uncertainties, and assumptions,
including, among other things:
- general economic and business conditions, both internationally and
in the PRC markets,
- our expectations and estimates concerning future financial
performance, financing plans, and the impact of competition,
- our ability to implement our growth strategy,
- anticipated trends in our business,
- advances in technologies, and
- other risk factors set forth under "Risk Factors" in this
prospectus.
In addition, in this prospectus, we use words such as "anticipates," "believes,"
"plans," "expects," "future," "intends," and similar expressions to identify
forward-looking statements.
We undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
23
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act expressly state that the safe harbor for forward
looking statements doe not apply to companies that issue penny stock. Because we
issue penny stock, the safe harbor for forward looking statements does not apply
to us.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We trade on the OTCBB under the symbol "TSET.OB". The following quotations
reflect the high and low bids for our common stock based on inter-dealer prices
without retail mark-up, markdown, or commission and may not represent actual
transactions. The high and low bid prices for our common stock for each full
financial quarter for the two most recent full fiscal years were as follows:
Quarter Ended High Low
2005
-------------------------------------- ------------- -----------
4th Quarter(through December 15, 2005) $2.65 $1.75
-------------------------------------- ------------- -----------
3rd Quarter $2.25 $1.05
-------------------------------------- ------------- -----------
2nd Quarter $2.00 $0.50
-------------------------------------- ------------- -----------
1st Quarter $2.25 $1.05
-------------------------------------- ------------- -----------
2004
-------------------------------------- ------------- -----------
4th Quarter $1.15 $.40
-------------------------------------- ------------- -----------
3rd Quarter $1.15 $1.01
-------------------------------------- ------------- -----------
2nd Quarter $0.65 $.52
-------------------------------------- ------------- -----------
1st Quarter $0.20 $.60
2003
--------------------------------------
4th Quarter $5.20 $2.00
-------------------------------------- ------------- -----------
3rd Quarter $5.40 $0.08
-------------------------------------- ------------- -----------
2nd Quarter $0.10 $0.05
-------------------------------------- ------------- -----------
1st Quarter $0.10 $0.10
-------------------------------------- ------------- -----------
On October 11, 2005, the closing price of our common stock was $2.25. As of
October 11, 2005, the stockholders' list for our common stock showed 169
registered stockholders of record. This figure does not take into account those
stockholders whose certificates are held in the name of broker-dealers or other
nominees. As of October 19, 2005, 30,000,000 shares of common stock are issued
and outstanding.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. Our financial statements are prepared in RMB and
are in accordance with accounting principles generally accepted in the United
States. When used in this discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected due
to a number of factors beyond our control.
We do not undertake to publicly update or revise any of the forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. You
are also urged to carefully review and consider our discussions regarding the
various factors, which affect our business, included in this section and
elsewhere in this report.
Factors that might cause actual results, performance or achievements to differ
materially, among other things: from those projected or implied in such
forward-looking statements include: (i) the impact of competitive products; (ii)
changes in laws and regulations; (iii) adequacy and availability of insurance
coverage; (iv) limitations on future financing; (v) increases in the cost of
borrowings and availability of debt or equity capital; (vi) the effect of
adverse publicity regarding our products; (vii) our inability to gain and/or
25
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands;
(xii)market and industry conditions including pricing and demand for products,
(xiii)the success of product development and new product introductions into the
marketplace; (xiv)the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act expressly states that the safe harbor for forward
looking statements does not apply to companies that issue securities that meet
the definition of a penny stock, as such, the safe harbor for forward looking
statements does not apply to us.
Overview
On June 16, 2005, Onny Investment Limited ("Onny") acquired all of the
outstanding common shares of Hainan Helpson Medical Biotechnology Co., Ltd
("Helpson"), a privately held Chinese joint venture, in exchange for cash
payments to the Hainan shareholders in the form of common stock dividends from
Hainan of Y34,076,800 and non-interest bearing promissory notes totaling
Y28,000,000 payable on September 16, 2005. The acquisition of Hainan was
recognized as a business combination.
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
(Y)35,692,406 in cash, net of offering costs and estimated registration costs,
and on that same date, those preferred shares were converted into 10,000 Onny
common shares. Also on October 19, 2005, Onny was reorganized as a wholly-owned
subsidiary of TS Electronics, Inc. The reorganization was accomplished by the
original Onny common shareholder exchanging her 29,700 Onny common shares for
20,555,329 common shares of TS Electronics, Inc. and for the commitment by TS
Electronics, Inc. to issue the original Onny common shareholder 4,723,056 common
shares following an amendment of the TS Electronics, Inc. articles of
incorporation increasing the number of common shares authorized to 100,000,000
shares. In addition, the prior Onny preferred shareholders exchanged their
10,000 Onny common shares for 6,944,611 common shares of TS Electronics, Inc.
26
The accompanying unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 2005 and for the year ended
December 31, 2004 have been prepared to present the effects of the acquisition
of Helpson and the issuance of the TS Electronics, Inc. common shares to the
prior Onny preferred shareholders as though those transactions had occurred on
January 1, 2005 and 2004, respectively.
The unaudited pro forma financial information is only illustrative of the
effects of these transactions and does not necessarily reflect the results of
operations that would have resulted had the transactions actually occurred on
January 1, 2005 and 2004. In addition, the pro forma financial information is
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005, or any other period.
We launched an anti-flu product named PuSenOK, which is the only anti flu
medicine in the market mixed with pseudo ephedrine hydrochloride, that has a
non-drowsy formula and a runny nose suppressant. We plan to expand our
biotechnology product series. Based on the foundation established by some of
Helpson's widely recognized medicine labels such as Neurotrophicpeptide, we will
launch several additional biological medicines, including the brain peptide
injection, injected hepatocyte growth-promoting factors, as well as new genetic
medicines, rh-CNTF and rha-FGF, which will give us a new growth following that
of Neurotrophicpeptide.
Our products have been sold in more than 20 provinces, sovereignties, and
autonomous regions. We have 16 sales offices and approximately 250 proxy agents
in the whole country. The main channels we use to deliver our products were as
follows: (1) Distribution system (Proxy Agency); (2) Direct sale system to
hospitals; (3) Direct representation in clinic hospitals through medical
representatives; and (4) Distribution of products to local medical companies
through logistics companies.
27
Our recent business activities include the following:
2005: Helpson launched a new anti-flu medicine: PusenOK.
2003: Helpson gained GMP authentication.
2003: Helpson named "the best enterprise for storing SARS medicine" by Hainan
Food and Drug Administration.
2000: Helpson recognized as Hainan Hi-tech enterprise by Hainan Science and
Technology Bureau.
2000: Helpson awarded as one of 50 best enterprises in Hainan by Hainan Economic
and Trade Bureau and Hainan Statistical Bureau.
Buflomedil Hydrochloride (Raw material; injection; & troche)
o Received the best technology commercialization award in Hainan in 2004 by
Hainan Scientific and Technological Result Examination Committee.
o received the national key new products certificate in 2003 by the State
Science and Technology Department, State Taxation Bureau, Ministry of
Commerce, State Bureau of Quality Supervision, Inspection and Quarantine,
and State Enviromental Protection Bureau.
o designated as the key technology project in Hainan in 2003 by Haikou
Municpality.
The pro forma financial information is only illustrative of the effects of the
acquisition and the capital investment received and does not necessarily reflect
the financial position or results of operations that would have resulted had the
acquisition actually occurred at those dates. In addition, the pro forma
financial information is not necessarily indicative of the results that may be
expected for the year ending December 31, 2005, or any other period
The following table presents the operations of Hainan Helpson for the years
ended December 31, 2003 and December 31,2004, the operations of Onny for the
nine months ended September 30, 2005 and the Pro Forma operations of the company
for the year ended December 31, 2004 and for the nine months ended September 30,
2005.
Hainan Helpson Onny Pro Forma
---------------------------
For the years ended For the nine For the For the nine
December 31, months ended year ended months ended
--------------------------- September 30, December 31, September 30,
2003 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
Revenue Y 31,149,004 Y 64,059,750 Y 25,035,222 Y 64,059,750 Y 69,102,267
Cost of revenue 15,354,998 38,200,114 15,717,843 36,754,826 42,662,286
Operating expenses 6,141,955 3,615,988 2,542,841 3,615,988 5,709,631
Income from operations 9,652,051 22,243,648 6,774,538 23,688,936 20,730,350
Interest expense 634,336 1,340,709 1,243,167 2,040,709 2,536,700
Net income 8,774,363 19,344,826 5,013,636 20,091,367 18,637,080
Basic and diluted earnings
per common share 0.58 0.54
28
Pro forma Operations Analysis
For the year ended December 31, 2004 and the nine months ended September 30,2005
Revenues were Y64,059,750 for the year ended December 31, 2004, and the cost of
revenues was Y36,754,826, which is 57.37% of the revenues.
The operating expenses were Y3,615,988, which is 15.26% of income from
operations.
Pro forma interest expense for December 31, 2004 is Y2, 040,709 and net income
is Y20,091,367.
Revenues were Y69,102,267 for the nine months ended September 30, 2005, and the
cost of revenues was Y42,662,286, which is 61.7% of the revenues.
Operating expenses were Y5,709,631 for the nine months ended September 30, 2005,
which is 27.54% of income from operations.
Interest expense for the nine months ended September 30, 2005 is Y2,536,700 and
the net income is Y18,637,080
Operations of Onny
For the nine months ended September 30, 2005
Onny had revenues of Y25,035,222 for the nine months ended September 30, 2005,
and cost of revenues of Y15, 717,843, which is 62.78% of the revenues.
Onny had operating expenses of Y2, 542,841 for the nine months ended September
30, 2005, which is 37.53% of income from operations and interest expense of Y1,
243,167 for the nine months ended September 30, 2005, and the net income is
Y5,013,636
Results of Operations of Helpson
For the year ended December 31, 2004 as compared to the year ended December 31,
2003.
Revenues
Revenues increased to approximately Y64.06 million for the year ended December
31, 2004 as compared to approximately Y31.15 million for the prior year, an
increase of approximately Y32.91 million or 105.65%.
Our revenues increased during the period as a result of the completion of
application for GMP, which not only increased sale revenues, but also expanded
the production capacity dramatically.
Cost of revenue
Cost of revenue for the year ended December 31, 2004 was approximately Y38.20
million or 60% of revenues as compared to Y15.35 million or 49% of revenues for
the prior period.
29
The reduction in gross profit as a percentage of revenues resulted from the
fierce price competition in the pharmaceutical industry and the administrative
notification from the National Development & Reform Commission, requiring all
pharmaceutical companies to reduce the price of certain anti-infective drugs,
the price per unit has been cut down drastically in 2004. As a result, an
overall decrease in gross profit by 11% of revenues.
Operating Expenses
Operating expenses grew to approximately Y3.62 million for the year ended
December 31, 2004 as compared to approximately Y6.14 million for the prior year,
a decrease of approximately Y2.53 million or 41%.
The reduction in operating expenses resulted from the decrease in the provision
for bad debts in the amount of Y3.04 million.
Operating Income
Operating income totaled approximately Y22.24 million for the year ended
December 31, 2004 as compared to operating income of approximately Y9.65 million
for the year ended December 31, 2003, an increase of approximately Y12.59
million or 130.47%.
As a percentage of revenues, operating income was 34.7% in 2004 as compared to
31% for the prior year. The increase in operating income as a percentage of
revenues was 3.7%.
Interest expenses
Finance costs increased to approximately Y1.34 million for the year ended
December 31, 2004 as compared to approximately Y0.63 million for the prior year,
an increase of approximately Y0.71 million or 114.5%.
We had no Short-term notes payable as of December 31, 2004 as compared to
approximately Y3.80 million Short-term notes payable as of December 31, 2003.
However, we had Y15.00 million in current portion of Long-term notes payable and
Y8.00 million in Long-term notes payable at of December 31, 2004 as compared to
approximately Y15.00 million in long-term notes payable and no current portion
of long-term notes payable as of December 31, 2003.
The increase in interest bearing debt caused the increase in finance costs. The
Funds obtained were only used in research and development. This R&D fund was
appropriated by the ministry of finance of Hainan Province China and the
ministry of Science and technology of Hainan Province China.
Liquidity and capital resource of Helpson for the year ended December 31, 2003
and 2004, and Onny for the four months ended September 30, 2005
The following table presents selected items from the balance sheets of Hainan
Helpson as of December 31, 2003 and 2004, and the balance sheet of Onny as of
September 30, 2005.
30
Hainan Helpson ONNY
December 31 September 30
2003 2004 2005
----------------------------------------
cash and cash equivalents Y2,768,395 Y5,027,342 Y28,816,278
trade accounts receivable 10,425,289 19,948,709 48,681,466
inventory 14,889,677 23,226,529 38,822,115
current assets 43,608,946 63,085,222 123,922,306
property and equipment, net 43,510,867 41,050,518 20,532,270
total assets 89,130,678 106,010,352 145,454,786
Helpson purchase obligation -- -- 62,688,034
other current liabilities 23,797,716 29,532,564 49,102,634
long-term liabilities 25,250,000 18,250,000 250,000
shareholder's equity 40,082,962 58,227,788 33,414,118
Liquidity and capital resources of Onny for the four months ended September 30,
2005.
As of September 30, 2005, cash and cash equivalents of Onny is Y28,816,278. Cash
used in operating activities was Y93,489 for the four months ended September 30,
2005, which resulted from trade accounts receivable increasing by Y12,330,407
and the other receivables increasing by Y3,506,939 and the inventory increasing
by Y11,599,887 offset by decreases in advances to suppliers and increases to
accounts payable.
Cash flows from investing activities for the four months ended September 30,
2005 was mainly a result of the net cash received in the purchase of Hainan
Helpson of Y1,068,275.
Liquidity and Capital Resources of Helpson for the year ended December 31, 2003
and 2004
As of December 31, 2004 we had cash and cash equivalents in the amount of
approximately Y5.01 million as compared to approximately Y2.75 million as of
December 31, 2003. Cash used in operation activities was approximately
Y3.41million in 2004 as compared to approximately Y4.93 million provided by
operating activities in 2003.
The main reason for the decrease in cash provided by operating activities was an
increase of trade accounts receivable in the amount of Y9.52 million in 2004 as
compared to the prior year.
We have historically financed our liquidity requirements mainly from notes from
financial institutions due within a year. Cash provided by bank was Y8 million
in 2004 as compared to Y15 million in 2003. There was no cash provided by
shareholders in 2004 as compared to Y16 million in the prior year.
On October 19, 2005, Onny completed a private offering of its securities. The
offering resulted in the issuance of an aggregate of 10,000 shares of preferred
stock for gross offering proceeds of $5 million, or an offering price of $500
per share. Investors in the offering participated in the exchange transaction
with the Company and received an aggregate of 6,944,611 restricted shares of the
Company's common stock, along with attendant registration rights. Net proceeds
from the financing are anticipated to be used approximately as follows:
approximately US$0.6 million for expanding production capacity; approximately
US$0.6 million for R & D; approximately US$1.4 million for products promotion
and advertisement; and approximately US$1.2 million for working capital
purposes.
31
BUSINESS
Principal Products and Services
-------------------------------
Helpson's primary business is the manufacturing, marketing sales of
pharmaceuticals. Helpson manufactures and markets products in three major
categories: cardiovascular and cerebrovascular medicine, raw materials for
surface wound, and anti-infection medicine.
The following drugs have attained new medicine certifications:
Buflomedil Hydrocholoride tablets, Buflomedil Hydrocholoridefor injection,
Buflomedil frozen powder aricula and raw materials. This product is a chemical
medicine used for the nervous system.
PuSenOK tablets. PuSenOK is a new anti-flu medicine in the market mixed with
pseudoephederine hydrochloride with a non-drowsy formula and a runny nose
suppressant.
In addition to the above new medicines, Helpson is manufacturing the following
products:
Neurotrophicpeptide 2ml, 5ml, and 10ml: This product is a biopharmaceutical
medicine intended for the nervous system. Its effect is to provide nutrition to
the neural system and fight nerve system diseases. The product is administered
by injection.
Haizhu oral liquid: This product is a Chinese herbal medicine. It is available
in fluid form to be taken orally.
Andrographolide tablet: This product is a Chinese herbal medicine that is
intended for use as an anti-infectant. The product has low bacteria resistance
and is suitable for long-term use. It is available in tablet form.
Clarithromycin capsules and granules: This product is a chemical medicine
intended to be used as an anti-infectant. The product is an antibiotic
specifically used for the effective curing of Helicobacter. The product is
available in capsule and granule forms.
Roxithromycin: This product is a chemical medicine that is used as an
anti-infectant. The product has germ- and virus-resistant characteristics, but
is also a troche type of Roxithromycin that makes it more attractive for use by
patients with deglutition problems. It is administered through tablets.
Thymopetidum Injection: This product is used to strengthen the immune system.
Its function is to increase the immunity of human cells. It is administered by
injection.
32
At present, Helpson is manufacturing a total of 15 drugs listed in the following
chart, including three that have received new drug certifications. In addition,
there are 21 drugs being reviewed by SFDA and eight drugs undergoing research
and development. Among them, two new drugs have gained the important national
new product certificate.
1. Buflomedil Hydrocholoride tablets.
2. Buflomedil Hydrocholoride for injection
3. Buflomedil Hydrocholoride frozen powder aricula
4. Buflomedil Hydrocholoride raw materials
5. PuSenOK tablets
6. Neurotrophicpeptide 2ml
7. Neurotrophicpeptide 5ml
8. Neurotrophicpeptide 10ml
9. Haizhu Oral Liquid
10. Andrographolide tablet
11. Thymopetidum Injection
12. Clarithromycin capsules
13. Clarithromycin granules
14. Cefaclor dispersible tablets
15. Roxithromycin dispersible tablets
Due to the nature of the biotechnology and pharmaceutical industries, the
Company continually strives to change its product portfolio to respond to
changes in market demand. Helpson traditionally focused on R&D and marketing of
cardiovascular and cerebrovascular medicine medicines. Recently, Helpson
launched PuSenOK, an anti-flu medicine in the market mixed with pseudoephederine
hydrochloride that has a non-drowsy formula and a runny nose suppressant.
Helpson's PuSenOK has passed clinical experiments and entered the trial
production stage, and awarded the new medicine certificate.
Helpson also plans to expand its biotechnology product series. Based upon the
foundation established by Helpson's Neurotrophicpeptide, Helpson will launch
several additional biological medicines, including brain peptide injections, and
injected Hepatocyte Growth-promoting Factors.
Helpson adjusts the delivery system and marketing for each of its products based
on the product's target patient group. Maintaining a variety of delivery systems
(e.g. tablet, injection, powder, etc) targeted for different groups enhances
Helpson's competitive position in the market. Helpson's present types of
delivery include covered tablet, capsule, troche, oral fluid, injection, frozen
powder, acicula, and germfree powder acicula.
Principal Markets
-----------------
The principal markets of Helpson lie within China. China has the world's largest
population of nearly 1.3 billion people. The pharmaceutical industry accounts
for approximately 3% of China's annual GDP (Source:
http://www.chinability.com/2004%20economic%20performance.htm). In 2004, PRC's
pharmaceutical industry realized sales of RMB347.6 billion (US$42 billion) and
net profits of RMB30.64 billion (US$3.7 billion); a 17.44% increase in realized
sales and 11.74% increase in net profits from the previous year
(Source:http://www.chinapharm.com.cn). According to a Chinese government report,
China's pharmaceutical sales in 2005 are expected to be approximately RMB 376.6
billion (US$ 45.5 billion), growing 17% from the previous year (Source:
http://www.biotech.org.cn/news/news/show.php ?id=21470). It is estimated that
China's pharmaceutical industry will maintain at least a 12%-15% growth rate
through the year 2010(Source: http://www.511511. com/A1/200501/A1000003917200501
04093750375.shtml).
33
The predicted growth is based upon the relaxation of trade barriers following
China's accession to the World Trade Organization, advances in China's economy,
and China's large, aging population.
Detailed Market Sectors
-----------------------
Reepitheliazation/Wound rehabilitation medications: These products belong to a
new and advanced classification of drugs used to speed the rehabilitation of a
wide variety of wounds ranging from lacerations and burns to injuries sustained
during childbirth and surgery. Cardiovascular & Cerebrovascular Disease
medications: Cardiovascular & cerebrovascular diseases have become increasingly
common and have a serious impact on people's health. The SFDA estimated the
market share in 2003 of these two medicines in the PRC to be 14.36% of the
US$5.1 billion (RMB42.2 billion) market. (Source: http://www.specc.com.cn/hydt/
ShowHydt.aspx?id=121 )
Over-the-Counter Cold & Flu medicines: In 2003, the OTC medicine market capacity
in the PRC was approximately US$3.6 billion, (Source: http://www.cnm21.com/
xinwen2/ 041028_007.htm) with cold & flu medicines having a market of RMB2.5
billion (Source: http://www.fx120.net/ypsj/ypsc/scfx/200406101631184449.htm ).
The sales of such medicines make up 8.3% of total Over-the-Counter medicine
retail sales.
Anti-infection medicines: In the past few years, Anti-bacterial medicines have
become the best selling drugs within the PRC while also maintaining a growth
rate of 20%. In 2001, the sales reached roughly RMB30 billion (US$3.6 billion);
in 2003, the sales reached more than RMB40 billion (US$4.8 billion), achieving a
30% market share. (Source: SFDA Prospectus of Zhejiang Jingxin Pharmaceutical
Co., Ltd.).
Distribution
------------
Helpson's products are currently sold in more than 20 provinces, sovereignties,
and autonomous regions. Helpson has 16 sales offices and approximately 250 sales
agents in China.
Helpson uses a flat distribution channel system of independent regional
distributors. In a typical distribution contract, a distributor will be provided
with certain sales targets for a particular period according to a set retail
price. If the distributor completes the sales task within the prescribed period,
the agent distributor will be given greater economic incentives and future
distribution opportunities. If the distributor fails to complete the sales task
within the prescribed period, Helpson will cancel its contract with the
distributor and sign with other competent distributors. Helpson also signs
reselling contracts with franchise drug companies for the distribution of its
products. The franchise drug company, as a reseller, resells the Company's
products to local hospitals, drug stores, and other channel distributors. In
addition, Helpson sells its products directly to hospitals and retail drug
stores.
34
Industry Background and Competition
The pharmaceutical industry accounts for approximately 3% of China's GDP.
(Source: http://blog.fh21.com.cn/post/65/106). The industry's primary categories
include chemical medicine, traditional Chinese medicinal material, traditional
Chinese medicinal film, prepared Chinese herbal medicine, antibiotics,
biological products, biological medicine, radioactive medicine, medical
appliances, sanitation materials, pharmaceutical machinery, medical packaging,
and trading.
The pharmaceutical industry in China is fragmented with many drug manufacturers
According to the SFDA-reported statistics, in July of 2004, there were 5071
manufacturing pharmaceutical companies (not including companies producing
traditional Chinese medicinal film, medical oxygen, reagent of in-vitro
diagnosis or supplementary materials). The total market share of the top 10
biggest companies was about 42%, compared to 66% in the US. (Source: SFDA(pound)
Prospectus of Zhejiang Jingxin Pharmaceutical Co., Ltd.)
Competition in the pharmaceutical industry is reduced by barriers to entry. A
company wishing to enter the industry must comply with the standards and
regulations set forth by the government. In the PRC, SFDA is the authority that
monitors and supervises the administration of the pharmaceutical industry
including pharmaceutical products, medical appliances, and equipment.
Pharmaceutical manufacturing enterprises must obtain a Pharmaceutical
Manufacturing Enterprise Permit issued by the relevant pharmaceutical
administrative authorities and relevant health departments at the provincial
level where the enterprise is located. Furthermore, all pharmaceutical products
produced in the PRC, with the exception of Chinese herbal medicines in soluble
form, must bear a registered number approved by the appropriate governmental
authorities in the PRC. Lastly, in accordance with the World Health
Organization, the PRC now requires compliance with GMP standards in
pharmaceutical production in order to minimize the risks involved in any
pharmaceutical production that cannot be eliminated through testing final
products. As the regulatory approval process becomes more stringent, it also
increases the barriers to entering the market.
Due to the variety of consumer demands within the pharmaceutical market,
pharmaceutical companies have relatively dispersed product lines. We have
identified, however, two primary strategies we must adopt in order to stay
competitive. In expanding market share of common traditional medicine, we must
take advantage of 1) our large manufacturing scale and reasonable cost control
mechanisms, and 2) our strong sales network.
Description of Property
-----------------------
Helpson owns a factory with a floor area of 663.94 square meters located at the
East Wing, 6/F, 5 Jianshe Road, Jinpan Industrial Development Zone, Haikou.
35
Helpson also owns the land use rights to another 31,050 square meters located at
plot C09-2, Hainan Bonded Zone, Haikou. Helpson built a factory with a floor
area of approximately 7,300 square meters on this parcel.
In addition, Helpson entered into a lease agreement with Hainan Zhongfu
Going-abroad Personnel Service Center ("Zhongfu"), under which Helpson rented
the offices located at 2/F, Jiahai Building owned by Zhongfu as its principal
executive offices. The term of the lease is 10 years, from November 21, 2000 to
November 20, 2010. The rent from November 21, 2000 to November 20, 2005 is
RMB3,600 per month. The rent from November 21, 2005 to November 20, 2010 may be
adjusted within 5% of the original rent.
Intellectual Property
---------------------
Helpson owns 10 registered trademarks and logos used in connection with western
medicine, raw material medicine, Chinese herbal medicine and medicine
injections, which are: Funalin, Fukexing, Helspon, Beisha, Shiduotai, Xinuo and
HPS logo and three other logos; one logo used in connection with bathing
cosmetics, shampoo, hair stimulating shampoo, facials, nail polish, cosmetics,
perfume, perfume essence oils, skin care toner, and cosmetics cleansers; and 1
registered trademark, Helpson, and one logo, used in connection with medical
appliances and equipment, surgical implants, surgical implanted artificial eyes,
surgical artificial crystalline lens, surgical artificial skin, and artificial
eyes. In addition, Helpson is applying for registration of nine other trade
marks used in connection with western medicine, raw material medicine, Chinese
herbal medicine and medicine injections.
Helpson owns the intellectual property rights of its genetic engineering
technology for rh-CNTF and rh-aFGA, and fungi form engineering and production
techniques.
Employees
---------
The Company currently has 105 regular employees. Helpson is also aided by the
efforts of a 250 member outside sales and marketing team.
Government Regulation
---------------------
The following is a summary of the principal governmental laws and regulations
that are or may be applicable to pharmaceutical manufacturing companies like
Helpson in China. The scope and enforcement of many of the laws and regulations
described below are uncertain. We cannot predict the effect of further
developments in the Chinese legal system, including the promulgation of new
laws, changes to existing laws, or the interpretation or enforcement of laws.
The major pieces of legislation regarding the pharmaceutical industry include
the Law of Drug Administration of the PRC, effective as of December 1, 2001, its
Implementing Regulations effective as of September 15, 2002, and the
Administrative Measures of Drug Registration effective as of May 1, 2005.
36
Production Licenses
In the PRC, SFDA is the authority that monitors and supervises the
administration of the pharmaceutical industry including pharmaceutical products
and medical appliances and equipment. Any pharmaceutical manufacturing
enterprise must obtain a Pharmaceutical Manufacturing Enterprise Permit issued
by the relevant pharmaceutical administrative authorities and relevant public
health departments at the provincial level where the enterprise is located.
Registration of Pharmaceutical Products
All pharmaceutical products that are produced in the PRC must bear a registered
number approved by the SFDA in the PRC, with the exception of Chinese herbs and
Chinese herbal medicines in soluble form. The medicine manufacturing enterprises
must obtain the medicine registration number before manufacturing any medicine.
GMP
The World Health Organization encourages the adoption of GMP standards in
pharmaceutical production in order to minimize the risks involved in any
pharmaceutical production that cannot be eliminated through testing final
products. In 1998, the Ministry of Health of the PRC started to issue GMP
standards for the pharmaceutical manufacturing enterprises in the PRC. Any
pharmaceutical manufacturing enterprise must comply with GMP standards by the
end of June 30th, 2004. The process of GMP authorization requires about 3
months.
Examination and Approval of New Medicines
New medicines generally refer to those that have not yet been marketed in the
PRC. Marketed medicines changing the type or application method, or adding new
therapeutic functions shall also be treated as new medicines.
According to the Administrative Measures of Drug Registration, the approval of
new medicine shall undergo the following procedures:
The applicant shall first carry out clinical trials, which consists of four
phases.
Upon completion of the clinical trial, the applicant shall submit the Medicine
Registration Application Form, clinical trial materials and other supplementary
materials to the provincial medicine administration authority where the
applicant is located. In the meantime, the applicant submits raw materials of
the medicine to the China Medicine and Biological Products Examination Institute
(the "Institute").
The provincial medicine administration authority will conduct a preliminary
examination of the application. If it decides to accept the application, it will
conduct an on-site examination of the application and draw sample products
37
within five days of accepting the application. The provincial medicine
administration authority will then send the samples to the medicine inspection
institute for inspection, which shall submit its inspection report to the SFDA
with a copy to the provincial medicine administration authority.
The provincial medicine administration authority will submit its examination
opinion, examination report and application materials to the SFDA, which will
perform a comprehensive examination of the application. If the SFDA deems the
application complete, it will issue the Medicine Registration Certificate and
New Medicine Certificate to the applicant. If the applicant already holds a
Medicine Manufacturing Permit, the SFDA will issue the Medicine Registration
Number at the same time.
Legal Proceedings
-----------------
We have no pending legal proceedings. From time to time, we may be involved in
various claims, lawsuits, disputes with third parties, and actions involving
allegations of breach of contract or product liability actions incidental to the
normal business operations.
MANAGEMENT
The following table sets forth the names of all of our current directors and
executive officers to be appointed. The directors will serve until the next
annual meeting of the stockholders or until their successors are elected or
appointed and qualified. Executive officers will serve at the board's
discretion.
--------------------- -------------- -------------------------------------------
Name and Address Age Position
--------------------- -------------- -------------------------------------------
Heung Mei TSUI 48 Director
--------------------- -------------- -------------------------------------------
Zhilin LI 48 President and Chief Executive Officer
--------------------- -------------- -------------------------------------------
Xinhua WU 38 Chief Financial Officer
--------------------- -------------- -------------------------------------------
Jian YANG 45 Secretary
--------------------- -------------- -------------------------------------------
Ms. Heung Mei TSUI. Ms. TSUI is director of the Company since October 190, 2005.
She is a self-employed business woman engaged in the re-export business,
including chemical products trade and electromechanical products trade. She is
also the Toyota automobile's agent in Hainan province. She graduated from Huhan
Financial & Economic College in 1982.
Ms. Zhilin LI: Ms. Li is President and Chief Executive Officer of the Company
since October 19, 2005. she is a founder of Helpson, and has served as chairman
and CEO of Helpson since 1993. Ms. Li was formerly the president of Haikou
Bio-engineering institute, and the vice president of the Sichuan Institute of
Biology . She graduated from Sichuan University, where she majored in biology,
and later became an instructor.
Mr. Xinhua WU: Mr. Wu is Chief Financial Officer of the Company since October
20, 2005. He has acted as CFO of Helpson since his hiring in 1999. Mr. Wu served
as CFO and assistant to the CEO at Hainan Guobang Enterprises Inc., where he was
employed from 1992 to 1999. Mr. Wu graduated from the University of Wales with
an MBA degree and Jiangxi Financial college with a Bachelor of Science degree in
Finance.
Ms. Jian YANG: Ms. Yang is Secretary of the Company since October 19, 2005. She
is a founder and director of Helpson. Ms. Yang was a technician at the Sichuan
Institute of Biology in 1990 and vice president of Haikou Biomedicine
Enginerring Co., Ltd. in 1991 Ms. Yang earned her MBA at the University of
Wales, England.
38
Board Composition and Committees
The board of directors is currently composed solely of Heung Mei Tsui. All board
actions require the approval of a majority of the directors in attendance at a
meeting at which a quorum is present.
We currently have no committees of Audit, Compensation, or any other committees;
therefore, the board will act in the capacity of the absent committees.
Disclosure of Commission Position of Indemnification for Securities and
Liabilities
Our Amended and Restated Certificate of Incorporation, with certain exceptions,
eliminates any personal liability of directors or officers to us or our
stockholders for monetary damages for the breach of such person's fiduciary duty
to the extent permitted by law. We have also adopted by-laws which provide for
indemnification to the full extent permitted under the law which includes all
liability, damages, costs, or expenses arising from or in connection with
service for, employment by, or other affiliation with us to the maximum extent
and under all circumstances permitted by law.
There are presently no material pending legal proceeding to which a director,
officer, or employee of ours is a party. There is no pending litigation or legal
proceeding involving one of our directors, officers, employees or other agents
as to which indemnification is being sought, and we are not aware of any pending
or threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
To the extent provisions of our Amended and Restated Certificate of
Incorporation provide for indemnification of directors for liabilities arising
under the Securities Act or the Exchange Act, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy and
therefore are unenforceable.
Code of Ethics
We do not yet have a code of ethics. Due to the recent completion of the
Reorganization with Onny, the board of directors has decided to postpone the
adoption of a code of ethics until we are able to focus our business plan and
develop a greater infrastructure. Once we have adopted a Code of Ethics, a copy
may be obtained by sending a written request to our corporate Secretary.
DIRECTOR AND EXECUTIVE COMPENSATION
No cash compensation was paid to our director for services as a director during
the fiscal year ended June 30, 2005. We have no standard arrangement pursuant to
which our board of directors is compensated for their services in their capacity
as directors. The board of directors may award special remuneration to any
39
director undertaking any special services on behalf of our Company other than
those services ordinarily required of a director. All authorized out-of-pocket
expenses incurred by a director on our behalf will be subject to reimbursement
upon our receipt of required supporting document of such expenses. No director
received and/or accrued any compensation for his services as a director,
including committee participation and/or special assignments.
The following table provides compensation information for the period indicated
with respect to the person who served as our President for the years ended June
30, 2005, 2004 and 2003, and all other of our executive officers receiving total
salary and bonus in excess of $100,000 during the years ended June 30, 2005,
2004and 2003 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------------
Long Term Compensation
---------------------- ------ --------------------------------- -------------------------- --------- ------------
Annual Compensation Awards Payouts
---------------------- ------ --------------------------------- -------------------------- --------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Under-lying LTIP All Other
Name and Principal Bonus Compensa- Stock Options/ Payouts Compen-
Position Year Salary ($) ($) tion Awards ($) SARs (#) ($) sation ($)
---------------------- ------ ------------ ------- ------------ ------------ ------------- --------- ------------
(1) Keith P. Boyd 2005 0 0 0 0 0 0 0
CEO, CFO & President 2004 0 0 0 0 0 0 0
2003 36,000 0 0 0 0 0 0
---------------------- ------ ------------ ------- ------------ ------------ ------------- --------- ------------
(1) Tim Halter 0 0 0 0 0 0 0
President, CAO and 2005
Secretary
---------------------- ------ ------------ ------- ------------ ------------ ------------- --------- ------------
(1) Our management did not spend any material time working since we had no
material business. Accordingly, we did not compensate any officer or director
during this time period.
STOCK OPTION GRANTS AND EXERCISES
We currently have no option, retirement, pension, or profit sharing programs for
the benefit of the directors, officers or other employees, but the board of
directors may recommend adoption of one or more such programs in the future.
40
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
Ms. Zhilin Li, Mr. Xinhua Wu and Ms. Jian Yang receive no compensation for
acting as officers of the Company. However, Ms. Zhilin Li entered into an
Employment Agreement with Helpson, which provides that Ms. Li is employed by
Helpson to perform executive management. The term of her employment is from July
1, 2005 to June 30, 2010. Her annual salary is RMB800,000 or approximately
$100,000. Mr. Xinhua Wu was employed by Helpson to act as its CFO. The term of
his employment is from July 1, 2005 to June 30, 2010. His annual salary is
RMB500,000 or approximately $62,500. Ms. Jian Yang was employed by Helpson to
act as its Deputy General Manager. The term of her employment is from July 1,
2005 to June 30, 2010. Her annual salary is RMB500,000 or approximately $62,500.
RELATIONSHIPS AND RELATED TRANSACTIONS
None.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of October 19, 2005 and (i) all
persons who are known to us to be beneficial owners of five percent or more of
the common stock, (ii) each of our Directors, and (iii) all current Directors
and executive officers as a group.
NAME AND ADDRESS OF SHARES BENEFICIALLY OWNED % OF CLASS OWNED
BENEFICIAL OWNER (1)
Heung Mei TSUI (2) 20,555,329 68.5
(1) Unless otherwise stated, the address of all persons in the table is c/o
Unit 8, D Area, Office Hall, Haikou Bonded Zone, Haikou, Hainan
Province, China.
(2) Upon the effectiveness of an amendment to the Company's Certificate of
Incorporation to increase its common capital stock, the Company shall
issue to Heung Mei Tsui, the principal stockholder of Onny, an
additional 4,723,056 shares of Post Closing Shares. Upon the issuance
of the Post Closing Shares, Ms. Tsui will hold 25,278,385 shares or
approximately 72.8% of the issued and outstanding common capital stock
of the Company. Ms. Heung Mei Tsui has also agreed to escrow 6,944,611
shares of common stock for the participants in Onny's private placement
and 277,785 shares for HFG International, Limited .
41
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for each of
the individuals listed in the table is care of Hainan Helpson Bio-Pharmaceutical
Co. Ltd, Unit 8, D Area, Office Hall, Haikou Bonded Zone, Haikou, Hainan
Province, China.
Unless otherwise indicated by footnote, the persons named in the table have sole
voting and sole investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to applicable community property
laws. Percentage of beneficial ownership is based on 30,000,000 shares of our
common stock outstanding as of October 19, 2005.
SELLING SECURITY HOLDERS
We have prepared this prospectus to allow the selling stockholders or their
pledgees, donees, transferees or other successors in interest, to sell up to
8,819,656 shares of our common stock. All of the common stock offered by this
prospectus is being offered by the selling stockholders for their own accounts.
2005 Private Placements
On May 11, 2005, we sold to Halter Financial Group, Inc. ("HFG") 1,875,045
shares of restricted common stock at a purchase price of $0.1066641 per share in
a private placement, pursuant to the terms of a Stock Purchase Agreement (the
"Purchase Agreement") executed by the parties on said date. As a result of the
purchase, HFG became our controlling shareholder, owning approximately 75% of
our issued and outstanding shares of common stock.. This issuance was made in
reliance on Section 4(2) of the Act and was made without general solicitation or
advertising. On October 4, 2005, Halter Financial Group transferred 1,828,170
shares to Halter Financial Investments, L.P., an affiliated entity, and an
aggregate of 46,875 shares to members of its advisory board. .
Prior to the closing of the Exchange Transaction, Onny completed a private
placement of its convertible preferred stock to 46 accredited investors. The
offering raised gross proceeds of $5,000,000. Prior to the Exchange Transaction,
participants in the offering exchanged their preferred shares for an aggregate
of 10,000 shares of Onny's common capital stock. Participants in the offering
then participated in the Exchange Transaction, and the shares of our common
stock that they received therein are included in the registration statement of
which this prospectus is a part..
The following table sets forth the names of the selling stockholders and for
each selling stockholder the number of shares of common stock beneficially owned
as of December 19, 2005, and the number of shares being registered. Except as
otherwise indicated in the footnotes to the below table, each selling
stockholder acquired its securities in the Company's private placements of
securities completed on October 19, 2005. Furthermore, except as set forth in
the footnotes below, none of the selling stockholders has held a position as an
officer or director of the company, nor has any selling stockholder had a
material relationship of any kind with the company. All information with respect
to share ownership has been furnished by the selling stockholders. The shares
42
being offered are being registered to permit public secondary trading of the
shares and each selling stockholder may offer all or part of the shares owned
for resale from time to time. A selling stockholder is under no obligation,
however, to sell any shares immediately pursuant to this prospectus, nor is a
selling stockholder obligated to sell all or any portion of the shares at any
time. Therefore, no estimate can be given as to the number of shares of common
stock that will be sold pursuant to this prospectus or the number of shares that
will be owned by the selling stockholders upon termination of the offering made
hereby. We will file a supplement to this prospectus to name successors to any
named selling stockholders who are able to use this prospectus to resell the
securities registered hereby.
Selling Stockholder Shares of Percent of Shares of Percent of Common
Common Stock Class Common Stock to Stock owned after
Owned be Registered Completion of Offering
Halter Financial Investments, 890,647 2.97 890,647 0
L.P.
Halter Financial Group, Inc. 937,523 3.12 937,523 0
James R. Sasser* 9,375 0.03 9,375 0
Liu Hongru* 9,375 0.03 9,375 0
Pieter P. Bottelier* 9,375 0.03 9,375 0
James W. McDowell * 9,375 0.03 9,375 0
Gary C. Evans 703,836 2.35 703,836 0
Liu Hainan* 41,668 0.14 41,668 0
Nie Xinyong* 208,338 0.69 208,338 0
Jiao Xueqian* 13,889 0.05 13,889 0
Ma Fengdi* 69,446 0.23 69,446 0
Yang Wei* 27,778 0.09 27,778 0
Peng Yuguo* 13,889 0.05 13,889 0
He Shengping* 69,446 0.23 69,446 0
Baslow Technology Limited* 69,446 0.23 69,446 0
Huang Xueming* 34,723 0.12 34,723 0
Wu Xiaowei* 13,889 0.05 13,889 0
Li Zhi* 41,668 0.14 41,668 0
Wang Guimin* 41,668 0.14 41,668 0
Yu Li* 13,889 0.05 13,889 0
Qiu Kun* 13,889 0.05 13,889 0
Wang Xinlu* 69,446 0.23 69,446 0
Dai Xianshu* 41,668 0.14 41,668 0
Long Yuqi* 41,668 0.14 41,668 0
Jin Shuzhi* 27,778 0.09 27,778 0
Clear View Investment 41,668 0.14 41,668 0
Fund, LP*
Zhou Huaizu* 13,889 0.05 13,889 0
Liang Yinwen* 20,835 0.07 20,835 0
Guo Zhiying* 125,003 0.42 125,003 0
Zheng Min* 41,668 0.14 41,668 0
Cui Heming* 55,558 0.19 55,558 0
Yang Yonggang* 55,558 0.19 55,558 0
Zhang Jianye* 27,778 0.09 27,778 0
Shang Liying* 13,889 0.05 13,889 0
Chang Yundong* 27,778 0.09 27,778 0
Han Yi* 13,889 0.05 13,889 0
Qian Cheng* 41,668 0.14 41,668 0
Zhou Lin* 69,446 0.23 69,446 0
Zhao Kai* 27,778 0.09 27,778 0
Wang Tianan* 13,889 0.05 13,889 0
Lv Ping* 6,945 0.02 6,945 0
Mu Chuanquan* 6,945 0.02 6,945 0
43
Tang Zhixiong* 13,889 0.05 13,889 0
Ma Yong 416,677 1.39 416,677 0
SICAV Placeuro-global 277,784 0.93 277,784 0
China Fund*
Gu Liping* 277,784 0.93 277,784 0
Shao Jianmin 569,458 1.90 569,458 0
Zhao Jingzhen* 138,892 0.46 138,892 0
Dou Qilv* 138,892 0.46 138,892 0
Bob Wu* 41,668 0.14 41,668 0
Pinncale China Fund, LP 2,777,844 9.26 2,777,844 0
Danny Conwill* 138,892 0.46 138,892 0
Total 8,819,656 29.4 8,819,656 0
*Denotes less than 1% of the outstanding shares of common stock.
DESCRIPTION OF SECURITIES
The descriptions in this section and in other sections of this prospectus of our
securities and various provisions of our certificate of incorporation and our
bylaws are limited solely to descriptions of the material terms of our
securities, articles of incorporation and bylaws. Our Amended and Restated
Certificate of Incorporation and bylaws have been filed with the SEC as exhibits
to this registration statement of which this prospectus forms a part.
Our authorized capital stock consists of 30,000,000 shares of common stock, par
value $0.001per share, all of which are issued and outstanding.
Common Stock
The holders of our common stock are entitled to equal dividends and
distributions per share with respect to the common stock when and if declared by
the Board of Directors from funds legally available therefore. No holder of any
shares of our common stock has a pre-emptive right to subscribe for any of our
securities. Upon liquidation, dissolution, or winding up of us, and after
payment of creditors and preferred stockholders, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of common
stock. All shares of common stock now outstanding are fully paid, validly
issued, and non-assessable.
Each share of common stock is entitled to one vote with respect to the election
of any director or any other matter upon which stockholders are required or
permitted to vote. Holders of the common stock do not have cumulative voting
rights, so the holders of more than 50% of the combined shares voting for the
election of directors may elect all of the directors if they choose to do so,
and, in that event, the holders of the remaining shares will not be able to
elect any members to the board of directors.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR ARTICLES OF
INCORPORATION AND BYLAWS
We are subject to Section 203 of the Delaware General Corporation Law. Subject
to certain exceptions, this statute regulating corporate takeovers prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for three years following the date that the stockholder
became an interested stockholder.
44
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates
and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation's
outstanding voting securities. We expect the existence of this provision to have
an anti-takeover effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section 203 may discourage
takeover attempts that might result in a premium over the market price for the
shares of common stock held by stockholders.
Provisions of our certificate of incorporation and bylaws may have the effect of
making it more difficult for a third party to acquire, or discourage a third
party from attempting to acquire, control of our Company by means of a tender
offer, a proxy contest or otherwise. These provisions may also make the removal
of incumbent officers and directors more difficult. These provisions are
intended to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. These provisions could also limit the price that
investors might be willing to pay in the future for shares of our common stock.
These provisions may make it more difficult for stockholders to take specific
corporate actions and could have the effect of delaying or preventing a change
in control.
Shares Eligible for Future Sale
-------------------------------
On October 19, 2005, 30,000,000 shares of our common stock were outstanding. Of
the outstanding shares, 502,391shares of common stock are immediately eligible
for sale in the public market without restriction or further registration under
the Securities Act. All other outstanding shares of our common stock are
"restricted securities" as such term is defined under Rule 144, in that such
shares were issued in private transactions not involving a public offering and
may not be sold in the absence of registration other than in accordance with
Rules 144, 144(k), or 701 promulgated under the Securities Act or another
exemption from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of affecting a sale under Rule 144 commences on
the date of transfer from the affiliate. As of October 19, 2005, approximately
97,624 of our outstanding restricted shares were eligible for sale under Rule
144.
45
There has been very limited trading volume in our common stock to date. Sales of
substantial amounts of our common stock under Rule 144, this prospectus, or
otherwise, could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through the future sale of
our securities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Securities Transfer
Corporation, 2591 Dallas Parkway, Suite 102, Frisco, Texas 75234 and its
telephone number is 469.633.0100.
PLAN OF DISTRIBUTION
We are registering a total of 8,819,656 shares of our common stock that are
being offered by the selling stockholders. As used in this prospectus, "selling
stockholders" includes the pledgees, donees, transferees or others who may later
hold the selling stockholders' interests in the common stock. We will pay the
costs and fees of registering the common shares, but the selling stockholders
will pay any brokerage commissions, discounts or other expenses relating to the
sale of the common stock. We will not receive the proceeds from the sale of the
shares by the selling stockholders.
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- An exchange distribution in accordance with the rules of the
applicable exchange;
- Privately negotiated transactions;
- Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- A combination of any such methods of sale; and
- Any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
46
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledges, or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act,
amending the list of selling stockholders to include the pledgee, transferee, or
other successors in interest as selling stockholders under this prospectus.
LEGAL MATTERS
The validity of the registration for the resale of common stock will be passed
upon for us by King & Wood LLP.
EXPERTS
The balance sheet of Onny as of May 31, 2005, and the related statement of
operations, stockholder's equity, and cash flows for the period from January 12,
2005 (date of inception) through May 31, 2005, balance sheets of Helpson as of
December 31, 2003 and 2004, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended, and the balance
sheet of TS Electronics, Inc. as of June 30, 2005, and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended, have
been included in the registration on Form SB-2/A, of which this prospectus forms
a part, in reliance on the report of Hansen, Barnett & Maxwell, an independent
registered public accounting firm, given on the authority of that firm as
experts in auditing and accounting.
The balance sheet of TS Electronics, Inc. as of June 30, 2004 and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended included in this prospectus have been so included in reliance on the
report of Evans, Gaither & Associates PLLC, an independent registered public
accounting firm, given on the authority of said firm as experts in auditing and
accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2/A under the
Securities Act in connection with the offering of the common stock by the
selling stockholders. This prospectus, which is part of the registration
statement, does not contain all of the information included in the registration
statement. Some information is omitted and you should refer to the registration
statement and its exhibits. With respect to references made in this prospectus
to any contract, agreement or other document of ours, such references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract, agreement or other
document. You may review a copy of the registration statement, including
exhibits, at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The public may obtain information on the operation of
the public reference room by calling the SEC at 1-800-SEC-0330.
We also file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the public reference rooms. You can also request copies
of these documents, for a copying fee, by writing to the SEC.
TS ELECTRONICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
PRO FORMA FINANCIAL INFORMATION
Pro Forma Financial Information..............................................F-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Nine Months Ended September 30, 2005...................................F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the Year Ended December 31, 2004...........................................F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information....F-4
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Report of Independent Registered Public Accounting Firm......................F-5
Consolidated Balance Sheets..................................................F-6
Consolidated Statements of Operations........................................F-7
Consolidated Statements of Stockholder's Equity..............................F-7
Consolidated Statements of Cash Flows........................................F-8
Consolidated Notes to Financial Statements...................................F-9
HAINAN HELPSON MEDICINE & BIOTECHNIQUE CO., LTD.
Report of Independent Registered Public Accounting Firm.....................F-19
Balance Sheets..............................................................F-20
Statements of Operations....................................................F-21
Statements of Stockholders' Equity..........................................F-22
Statements of Cash Flows....................................................F-23
Notes to Financial Statements...............................................F-24
TS ELECTRONICS, INC.
Report of Hansen, Barnett & Maxwell, Independent Registered Public
Accounting Firm...........................................................F-32
Report of Evans, Gaither & Associates PLLC, Independent Registered
Public Accounting Firm....................................................F-33
Balance Sheets..............................................................F-34
Statements of Operations....................................................F-35
Statements of Changes in Stockholder' Deficit...............................F-36
Statements of Cash Flows....................................................F-37
Notes to Financial Statements...............................................F-38
F-1
TS ELECTRONICS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On June 16, 2005, Onny Investment Limited ("Onny") acquired all of the
outstanding common shares of Hainan Helpson Medical Biotechnology Co., Ltd
("Helpson"), a privately held Chinese joint venture, in exchange for common
stock dividends payable to the Helpson shareholders of (Y)34,076,800 and for
non-interest bearing promissory notes totaling (Y)28,000,000 payable on
September 16, 2005. The acquisition of Helpson was recognized as a business
combination.
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
(Y)35,692,406 in cash, net of offering costs and estimated registration costs,
and on that same date, those preferred shares were converted into 10,000 Onny
common shares. Also on October 19, 2005, Onny was reorganized as a wholly-owned
subsidiary of TS Electronics, Inc. The reorganization was accomplished by the
original Onny common shareholder exchanging her 29,700 Onny common shares for
20,555,329 common shares of TS Electronics, Inc. and for the commitment by TS
Electronics, Inc. to issue the original Onny common shareholder 4,723,056 common
shares following an amendment of the TS Electronics, Inc. articles of
incorporation increasing the number of common shares authorized to 100,000,000
shares. In addition, the prior Onny preferred shareholders exchanged their
10,000 Onny common shares for 6,944,611 common shares of TS Electronics, Inc.
The accompanying unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 2005 and for the year ended
December 31, 2004 have been prepared to present the effects of the acquisition
of Helpson and the issuance of the TS Electronics, Inc. common shares to the
prior Onny preferred shareholders as though those transactions had occurred on
January 1, 2005 and 2004, respectively.
The unaudited pro forma financial information is only illustrative of the
effects of these transactions and does not necessarily reflect the results of
operations that would have resulted had the transactions actually occurred on
January 1, 2005 and 2004. In addition, the pro forma financial information is
not necessarily indicative of the results that may be expected for the year
ending December 31, 2005, or any other period.
F-2
TS ELECTRONICS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
Hainan TS Pro Forma
Onny Helpson Electronics Adjustments Pro Forma
----------- ----------- ------------ ----------- ---------------------------
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------- --------------------------------------------------------------------------- ------------
Revenues Y25,035,222 Y44,067,045 Y -- Y -- Y69,102,267 $ 8,539,578
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Cost of revenues 15,717,843 27,667,087 -- (722,644) (C) 42,662,286 5,272,156
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Gross profit 9,317,379 16,399,958 -- 722,644 26,439,981 3,267,422
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Operating expenses
Selling expenses 385,085 318,065 -- -- 703,150 86,894
Stock-based compensation -- -- 14,018,140 (14,018,140) (A) -- --
General and administrative 2,157,756 2,848,725 997,898 (997,898) (A) 5,006,481 618,695
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Total operating expenses 2,542,841 3,166,790 15,016,038 (15,016,038) 5,709,631 705,589
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Income (loss) from operations 6,774,538 13,233,168 (15,016,038) 15,738,682 20,730,350 2,561,833
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Non-operating income (expense)
Interest income 2,154 3,278 -- -- 5,432 671
Interest expense (1,243,167) (593,533) -- (700,000) (B) (2,536,700) (313,482)
Other income -- 1,786,412 -- -- 1,786,412 220,763
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Non-operating income (expense) (1,241,013) 1,196,157 -- (700,000) (744,856) (92,048)
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Income before taxes 5,533,525 14,429,325 (15,016,038) 15,038,682 19,985,494 2,469,785
Income tax expense (519,889) (774,327) -- (54,198) (D) (1,348,414) (166,635)
------------------------------------ ----------- ----------- ------------ ----------- ----------- ------------
Net income (loss) Y 5,013,636 Y13,654,998 Y(15,016,038) Y14,984,484 Y18,637,080 $ 2,303,150
==================================== =========== =========== ============ =========== =========== ============
Basic and diluted earnings per share Y 0.54 $ 0.07
------------------------------------------------------------------------------------------------------------------ ------------
Weighted-average common shares
outstanding Y34,723,056 34,723,056
------------------------------------------------------------------------------------------------------------------ ------------
F-3
TS ELECTRONICS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Hainan TS Pro Forma
Onny Helpson Electronics Adjustments Pro Forma
----------- ----------- ----------- ----------- --------------------------
Chinese Yuan (Renminbi) U.S. Dollars
---------------------------------------------------------------------------------------------------------------- ------------
Revenues Y -- Y64,059,750 Y 132,076 Y (132,076) (A) Y64,059,750 $ 7,739,957
Cost of revenues 38,200,114 148,778 (148,778) (A)
-- (1,445,288) (C) 36,754,826 4,440,866
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Gross profit -- 25,859,636 (16,702) 16,702 27,304,924 3,299,091
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Operating expenses
Selling expenses -- 661,333 -- -- 661,333 79,905
General and administrative -- 2,954,655 484,523 (484,523) 2,954,655 356,993
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Total operating expenses -- 3,615,988 484,523 (484,523) 3,615,988 436,898
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Income from operations -- 22,243,648 (501,225) 501,225 23,688,936 2,862,193
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Non-operating income (expense)
Interest income -- 14,506 -- -- 14,506 1,753
Interest expense -- (1,340,709) -- (700,000) (B) (2,040,709) (246,567)
Other income (expense) -- 57,262 20,691 (20,691) (A) 57,262 6,919
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Non-operating expense -- (1,268,941) 20,691 (720,691) (1,968,941) (237,895)
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Income before taxes -- 20,974,707 (480,534) (219,466) 21,719,995 2,624,298
Income tax expense -- (1,629,881) -- 1,253 (D) (1,628,628) (196,777)
----------------------------------- ----------- ----------- ----------- ----------- ----------- ------------
Net income Y -- Y19,344,826 Y (480,534) Y (218,213) Y20,091,367 $ 2,427,521
==================================== =========== =========== =========== =========== =========== ============
Basic and diluted earnings per share Y 0.58 $ 0.07
================================================================================================================ ============
Weighted-average common shares
outstanding 34,723,056 34,723,056
---------------------------------------------------------------------------------------------------------------- ------------
TS ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
A Elimination of the prior operations of TS Electronics, Inc.
B Amortization of the discount on the notes payable to former Helpson
shareholders. The amortization of the discount is not expected to be a
recurring expense to the Company.
C Decrease in depreciation expense from the property and equipment
acquired and decrease in amortization expense from the intangible
assets acquired in the Helpson acquisition.
D To adjust income taxes for the effects of the pro forma adjustments to
the statements of operations. Also to increase in income tax expense
related to the non-deductible amortization expense from the discount on
the short-term notes payable. The expense is not deductible against the
income earned in The People's Republic of China.
See the accompanying notes to unaudited pro forma condensed consolidated
financial information.
F-4
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
Onny Investment Limited
We have audited the accompanying consolidated balance sheet of Onny Investment
Limited and subsidiary, a development stage enterprise, as of May 31, 2005, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the period from January 12, 2005 (date of inception) through May
31, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Onny Investment
Limited and subsidiary, a development stage enterprise, as of May 31, 2005 and
the results of their operations and their cash flows for the period from January
12, 2005 (date of inception) through May 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
August 1, 2005, except for the fourth paragraph of Note 8
and Note 10, as to which the date is October 19, 2005
F-5
ONNY INVESTMENT LIMITED AND SUBSIDIARY
BALANCE SHEETS
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------ -------------
May 31, September 30, September 30,
2005 2005 2005
----------------------------------------------------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
ASSETS
Current assets
Cash and cash equivalents Y 8 Y 28,816,278 $ 3,561,082
Trade accounts receivables, less allowance for doubtful
accounts of (Y)11,585,939 (unaudited) -- 48,681,466 6,015,999
Other non-trade receivables, less allowance for doubbtful
accounts of (Y)910,800 (unaudited) -- 7,274,964 899,032
Advances to suppliers -- 397,483 49,120
Inventory -- 38,822,115 4,797,592
----------------------------------------------------------- ------------- ------------- -------------
Total current assets 8 123,992,306 15,322,826
----------------------------------------------------------- ------------- ------------- -------------
Non-current assets
Property and equipment, net -- 20,532,270 2,537,354
Intangible assets, net -- 504,158 62,303
Deferred tax assets -- 426,052 52,651
----------------------------------------------------------- ------------- ------------- -------------
Total non-current assets -- 21,462,480 2,652,308
----------------------------------------------------------- ------------- ------------- -------------
Total assets Y 8 Y 145,454,786 $ 17,975,134
----------------------------------------------------------- ------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable Y -- Y 17,521,905 $ 2,165,337
Accrued expenses -- 486,426 60,112
Taxes payable -- 1,898,829 234,655
Other accounts payable -- 2,929,802 362,062
Advances from customers -- 2,375,880 293,609
Dividends payable -- 34,688,034 4,286,707
Accounts payable - related party -- 889,792 109,959
Short-term notes payable -- 28,000,000 3,460,208
Current portion of long-term note payable -- 23,000,000 2,842,313
----------------------------------------------------------- ------------- ------------- -------------
Total current liabilities -- 111,790,668 13,814,961
----------------------------------------------------------- ------------- ------------- -------------
Long-term liabilities
Research and development commitment -- 250,000 30,895
----------------------------------------------------------- ------------- ------------- -------------
Total long-term liabilities -- 250,000 30,895
----------------------------------------------------------- ------------- ------------- -------------
Shareholders' equity
Common shares - (Y)0.008 par value; 100,000,000 shares
authorized; 85,112 shares and 27,778,445 shares (unaudited)
issued and outstanding 704 229,908 28,412
Additional paid-in capital (696) 28,170,574 3,481,287
Retained earnings -- 5,013,636 619,579
----------------------------------------------------------- ------------- ------------- -------------
Total shareholders' equity 8 33,414,118 4,129,278
----------------------------------------------------------- ------------- ------------- -------------
Total liabilities and shareholders' equity Y 8 Y 145,454,786 $ 17,975,134
=========================================================== ============= ============= =============
See accompanying notes to the financial statements.
F-6
ONNY INVESTMENT LIMITED AND SUBSIDIARY
STATEMENTS OF OPERATIONS
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------ ------------
From January 12,
2005 (Date of For the Four For the Four
Inception) Months Ended Months Ended
through September 30, September 30,
May 31, 2005 2005 2005
--------------------------------------------------------------------------- -------------
(Unaudited) (Unaudited)
Revenues Y -- Y 25,035,222 $ 3,093,824
Cost of revenues -- 15,717,843 1,942,393
--------------------------------------------------------------------------- -------------
Gross profit -- 9,317,379 1,151,431
--------------------------------------------------------------------------- -------------
Operating expenses
Selling expenses -- 385,085 47,588
General and administrative -- 2,157,756 266,653
--------------------------------------------------------------------------- -------------
Total operating expenses -- 2,542,841 314,241
--------------------------------------------------------------------------- -------------
Income from operations -- 6,774,538 837,190
--------------------------------------------------------------------------- -------------
Non-operating income (expenses)
Interest income -- 2,154 266
Interest expense -- (1,243,167) (153,629)
--------------------------------------------------------------------------- -------------
Non-operating income (expenses) -- (1,241,013) (153,363)
--------------------------------------------------------------------------- -------------
Income before taxes -- 5,533,525 683,827
Income tax expense -- 519,889 64,247
--------------------------------------------------------------------------- -------------
Net income Y -- Y 5,013,636 $ 619,579
--------------------------------------------------------------------------- -------------
Basic and diluted earnings per common share Y -- Y 0.53 $ 0.07
=========================================================================== =============
Weighted-average common shares outstanding 30,004 9,377,713 9,377,713
--------------------------------------------------------------------------- -------------
ONNY INVESTMENT LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 12, 2005 (DATE OF INCEPTION) TRHOUGH MAY 31, 2005
AND FOR THE FOUR MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED)
Chinese Yuan (Renminbi)
-----------------------------------------------------------------------
Common Stock Additional Total
------------------------- Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
----------- ----------- ----------- ----------- -------------
Balance - January 12, 2005 (Date of Inception) -- Y -- Y -- Y -- Y --
Issuance for cash, April 12, 2005 85,112 704 (696) -- 8
-----------------------------------------------------------------------------------------------------------------------
Balance - May 31, 2005 85,112 704 (696) -- 8
Issuance for cash, August 16, 2005 25,193,273 208,512 28,228,983 -- 28,437,495
Issuance in exchange for the liabilities of
TS Electronics, Inc. (unaudited) 2,500,060 20,692 (57,713) -- (37,021)
Net income (unaudited) -- -- -- 5,013,636 5,013,636
-----------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2005 (Unaudited) 27,778,445 Y 229,908 Y28,170,574 Y 5,013,636 Y 33,414,118
=======================================================================================================================
See accompanying notes to the financial statements.
F-7
ONNY INVESTMENT LIMITED AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
Chinese Yuan (Renminbi) U.S. Dollars
-------------------------------- --------------
From January 12,
2005 (Date of For the Four For the Four
Inception) Months Ended Months Ended
through September 30, September 30,
May 31, 2005 2005 2005
---------------------------------------------------------------------------------- --------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income Y -- Y 5,013,636 $ 619,579
Depreciation and amortization -- 629,887 77,841
Accretion of discount on notes payable -- 700,000 86,505
Deferred income taxes -- (102,935) (12,721)
Changes in assets and liabilities:
Accounts receivable -- (12,330,407) (1,523,777)
Other receivable -- (3,506,939) (433,383)
Advances to suppliers -- 9,291,099 1,148,183
Inventory -- (11,599,887) (1,433,501)
Accounts payable -- 13,960,147 1,725,179
Other accounts payable -- (3,843,802) (475,013)
Accounts payable-related parties -- 889,792 109,959
Accrued expenses -- 452,436 55,912
Advances from customers -- 120,834 14,933
Accrued taxes payable -- 232,650 28,751
---------------------------------------------------------------------------------- --------------
Net cash used in operating activities -- (93,489) (11,553)
---------------------------------------------------------------------------------- --------------
Cash Flows from Investing Activities
Collection on note receivable -- 91,728 11,336
Net cash received in purchase of Hainan -- 1,068,275 132,016
Purchases of property and equipment -- (118,115) (14,597)
---------------------------------------------------------------------------------- --------------
Net cash provided by investing activities -- 1,041,888 128,755
---------------------------------------------------------------------------------- --------------
Cash Flows from Financing Activities
Payment of dividend payable -- (532,603) (65,818)
Proceeds from issuance of common shares 8 28,400,474 3,509,698
---------------------------------------------------------------------------------- --------------
Net cash provided by financing activities 8 27,867,871 3,443,879
---------------------------------------------------------------------------------- --------------
Net increase in cash 8 28,816,270 3,561,081
Cash and cash equivalents at beginning of period -- 8 1
---------------------------------------------------------------------------------- --------------
Cash and cash equivalents at end of period Y 8 Y 28,816,278 $ 3,561,082
================================================================================== ==============
See accompanying notes to the financial statements.
F-8
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Onny Investment Limited ("Onny") was incorporated in the British
Virgin Islands on January 12, 2005. Through June 15, 2005, Onny was a
development stage enterprise with no development stage activities except for the
acquisition of Helpson, as discussed below. Upon the acquisition of Hainan
Helpson Medical Biotechnology Co., Ltd ("Helpson") and its operations, Onny
emerged from the development stage.
On April 12, 2005, Onny issued 100 shares of common stock to Tsui Hueng Mei
("Ms. Tsui") in exchange for (Y)8 in cash. Ms. Tsui also elected herself as
Onny's sole director. On August 16, 2005, Ms. Tsui made a capital investment in
Onny of (Y)28,437,495 in cash in exchange for the issuance of 29,600 common
shares.
On June 16, 2005, the Company acquired all the outstanding shares of Helpson.
See Note 2.
On October 19, 2005, Onny was reorganized as a wholly-owned subsidiary of TS
Electronics, Inc. The reorganization was accomplished by the original Onny
common shareholder exchanging her 29,700 Onny common shares for 20,555,329
common shares of TS Electronics, Inc. and for the commitment by TS Electronics,
Inc. to issue the original Onny common shareholder 4,723,056 common shares
following an amendment of the TS Electronics, Inc. articles of incorporation
increasing the number of common shares authorized to 100,000,000 shares, which
was on an 851-for-1 exchange ratio. The reorganization was further accomplished
by the prior Onny preferred shareholders exchanging their 10,000 Onny common
shares for 6,944,611 common shares of TS Electronics, Inc. which exchange was on
a 694-for-1 exchange ratio.
The reorganization was recognized as a stock split of the common stock of Onny
and the effective issuance by Onny of the 2,500,060 shares of common stock of TS
Electronics, Inc. that remained outstanding in exchange for the assumption of
(Y)37,021 of liabilities. The reverse acquisition of TS Electronics, Inc. was
accounted for as a nonmonetary exchange and has been included in the
accompanying consolidated financial statements as though the transaction between
Onny and TS Electronics, Inc. had occurred on September 30, 2005.
Consolidation and Basis of Presentation - The accompanying consolidated
financial statements include the accounts and operations of Onny from the date
of its inception on January 12, 2005, the accounts and operations of Helpson
from the date of its acquisition on June 16, 2005, and the accounts and
operations of TS Electronics, Inc. from September 30, 2005. The accompanying
consolidated financial statements have been restated on a retroactive basis for
the effects of the stock split resulting from the reorganization of Onny into TS
Electronics, Inc. All significant inter-company balances and transactions have
been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company's functional currency is the Chinese Yuan (Renminbi) and the
accompanying financial statements have been expressed in Chinese Yuan
(Renminbi). The financial statements as of and for the period ended September
30, 2005 have been translated into United States dollars solely for the
convenience of the reader and are unaudited. Solely for this purpose, the
financial statements have been translated into U.S. dollars at the rate of
(Y)8.092 = US $1.00, the approximate exchange rate prevailing on September 30,
2005. The translated United States dollar amounts should not be construed as
representing Chinese Yuan amounts or that the Yuan amounts have been or could be
converted into United States dollars.
F-9
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private sellers in PRC, through
its marketing department in Hainan Province and from nine sales representative
offices in other provinces and cities. Helpson's other operating activities
include biochemical products, health products, and cosmetics.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Fair Values of Financial Instruments --Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying amounts of notes payable approximate fair value because
of either the immediate or short-term maturity of these financial instruments or
because the underlying instruments are at interest rates which approximate
current market rates.
Cash and cash equivalents - Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or less.
Trade receivables and allowance for doubtful accounts - Trade receivables are
carried at original invoiced amounts less an allowance for doubtful accounts.
The Company presents trade receivables net of allowances for doubtful accounts,
to ensure trade receivables are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting
the Company's customer base. The Company reviews a customer's credit history
before extending credit. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Provision is made against accounts receivable to the extent they are considered
unlikely to be collected. It is common practice in China for receivables to
extend beyond one year. Included in trade receivables is approximately
(Y)1,780,000 that occurred more than one year from September 30, 2005, but is
estimated to still be collectable.
Inventory - Inventories are stated at weighted average costing. The method of
determining inventory costs is used consistently from year to year. Allowance
for inventory obsolescence is provided in situation when its market values are
lower than its costs at the year end valuation.
Valuation of Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that they may not be recoverable. When such an event occurs, the
Company would project undiscounted cash flows to be generated from the use of
the asset and its eventual disposition over the remaining life of the asset. If
projections were to indicate that the carrying value of the long-lived asset
will not be recovered, the carrying value is reduced by the estimated excess of
the carrying value over the projected discounted cash flows.
F-10
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
statements of operations in the period of disposition, determined by reference
to their carrying amounts.
Intangible Assets - Acquisition costs on patents, trademarks, licenses,
techniques, formulas and other intangibles are capitalized and amortized using
the straight-line method over their useful lives. For those intangible assets,
such as patents, with legal protection over a period, their useful life is the
protected period. Others that do not have legal protection periods, are
amortized generally over 5 to 10 years. The Company does not capitalize
internally generated intangible assets.
Intangible assets are techniques for medicines. Amortization on intangible
assets was (Y)41,372 for the period from January 12, 2005 through September 30,
2005.
Advances to Suppliers and Advances from Customers - The Company, as is the
common practice in the PRC, will often pay advanced payments to suppliers for
materials and receive from customers advances for finished products. As of
September 30, 2005, the advances to suppliers were (Y)397,483 and the advances
from customers were (Y)2,375,880, respectively.
Revenue Recognition - The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectability is reasonably
assured. Delivery does not occur until products have been shipped to the client,
risk of loss has transferred to the client and client acceptance has been
obtained, client acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in client acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until
all contingencies related to the sale have been resolved.
Cost of Revenues - Cost of revenues include wages, materials, handling charges,
and other expenses associated with the manufacture and delivery of product.
Research and Development - Research and development expenditures are recorded as
expenses in the period in which they occur.
Retirement Benefit Plans - The Company contributes to various employee
retirement benefit plans organized by provincial governments under which it is
required to make monthly contributions to these plans at rates prescribed by the
related provincial governments. The provincial governments undertake to assume
the retirement benefit obligations of all existing and future retired employees
of the Company. Contributions to these plans are charged to expense as incurred.
Advertising Costs - Advertising costs are expensed when incurred.
Basic and Diluted Earnings per Common Share - Basic earnings per common share is
computed by dividing net income by the weighted-average number of common shares
outstanding. Diluted earnings per common share are calculated to give effect to
potentially issuable dilutive common shares. There were no potential common
shares outstanding at September 30, 2005.
F-11
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
Credit risk - The carrying amounts of accounts receivable included in the
balance sheets represent the Company's exposure to credit risk in relation to
its financial assets. No other financial assets carry a significant exposure to
credit risk.
The Company performs ongoing credit evaluations of each customer's financial
condition. It maintains allowances for doubtful accounts and such allowances in
the aggregate have not exceeded management's estimations.
Interest rate risk - The Company is exposed to the risk arising from changing
interest rates, which may affect the ability of repayment of existing debts and
viability of securing future debt instruments within the PRC.
Recently Enacted Accounting Standards - In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs--An
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 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). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company beginning on January 1, 2006.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS 123R"), which revises SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123R also supersedes APB 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. In general, the
accounting required by SFAS 123R is similar to that of SFAS No. 123. However,
SFAS No. 123 gave companies a choice to either recognize the fair value of stock
options in their income statements or disclose the pro forma income statement
effect of the fair value of stock options in the notes to the financial
statements. SFAS 123R eliminates that choice and requires the fair value of all
share-based payments to employees, including the fair value of grants of
employee stock options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than July 1, 2005.
Early adoption is permitted.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Non-monetary Transactions, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a non-monetary exchange have commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange.
The adoption of these pronouncements is not expected to have a material effect
on the Company's financial position or results of operations.
F-12
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
NOTE 2. ACQUISITION OF HELPSON (UNAUDITED)
On May 25, 2005, the Company entered into an agreement with the shareholders of
Hainan Helpson Medical Biotechnology Co., Ltd ("Helpson"), a privately held
Chinese joint venture, in which the Company agreed to acquire and the
shareholders of Helpson agreed to sell all of the outstanding common shares of
Helpson to the Company in exchange for the assumption of obligations to make
cash payments to the Helpson shareholders in the form of common stock dividends
from Helpson of (Y)34,076,800, the assumption of (Y)38,115,843 of other
liabilities and the issuance of non-interest bearing promissory notes totaling
(Y)28,000,000 payable three months after Helpson obtains a business license in
the People's Republic of China as a wholly foreign owned entity. Helpson
obtained such license on June 16, 2005 and the shares of Helpson were
transferred to the Company on that date. June 16, 2005 was recognized as the
date of the acquisition. The promissory notes are due September 16, 2005.
Helpson manufactures and markets several Western and Chinese medicines sold
mainly to hospitals and private sellers in the Peoples Republic of China,
through its marketing department in Hainan Province and from nine sales
representative offices in other provinces and cities. Helpson's other operating
activities include biochemical products, health products, and cosmetics.
Since Helpson is an operating company and control of Helpson changed upon the
closing of the acquisition agreement, Onny is the accounting acquirer and has
recognized the acquisition of Helpson as a business combination in accordance
with Statements of Financial Accounting Standards No. 141, Business
Combinations. On April 25, 2005, Helpson declared a dividend to the selling
shareholders of (Y)34,076,800, which equaled Helpson's retained earnings at
March 31, 2005 less deferred income tax assets of (Y)713,565 that are not
considered part of distributable profits under Chinese law. The fair value of
the net assets of Helpson was determined by appraisal and exceeded the cost of
the net assets acquired. That excess was allocated as a pro rata reduction of
the amounts that otherwise would have been assigned to the non-current assets
acquired.
At June 16, 2005, the purchase price was allocated to the assets acquired and
liabilities assumed as follows:
Current assets Y 78,513,015
Property and equipment 20,964,041
Intangible assets 584,158
--------------------------------------------------------------------------------
Total assets acquired 100,061,214
--------------------------------------------------------------------------------
Current liabilities 64,511,214
Long-term liabilities 8,250,000
--------------------------------------------------------------------------------
Total liabilities assumed 72,761,214
--------------------------------------------------------------------------------
Net assets acquired Y 27,300,000
================================================================================
Intangible assets consist of registered patents, trademarks, licenses,
techniques and formulas related to several Western and Chinese medicines,
biochemical products, health products, and cosmetics. These intangible assets
have a weighted-average useful life of approximately 5 years.
The following unaudited pro forma information is presented to reflect the
operations of the Company and Helpson on a combined basis as if the acquisition
of Helpson had been completed as of January 1, 2004 and 2005, respectively. The
unaudited pro forma information is only illustrative of the effects of the
acquisition and does not necessarily reflect the results of operations that
would have resulted had the acquisition actually occurred on those dates.
F-13
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
For the Year For the Six
Ended Months Ended
December 31, September 30,
2004 2005
--------------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue Y 64,059,750 Y 69,102,267
Net income 20,091,367 18,637,080
Basic and diluted earnings per common share 0.58 0.54
================================================================================
Pro forma net income for both the year ended December 31, 2004 and for the nine
months ended September 30, 2005 include nonrecurring interest expense of
(Y)700,000 resulting from the amortization of the discount on the (Y)28,000,000
promissory notes payable to the former Helpson shareholders, which discount was
computed based upon an imputed interest rate of 10% per annum.
The reorganization of Onny into TS Electronics, Inc. was recognized as a stock
split of the common stock of Onny and the effective acquisition of TS
Electronics, Inc. through the issuance by Onny of the 2,500,060 shares of common
stock of TS Electronics, Inc. that remained outstanding in exchange for the
assumption of (Y)37,021 of liabilities. The acquisition of TS Electronics, Inc.
was recognized as a non-monetary exchange.
NOTE 3 - INVENTORY
Inventory consisted of the following at September 30, 2005:
-------------------------------------------------------------------------------
Raw materials Y 33,901,357
Work in progress 1,163,392
Finished goods 3,772,075
Provision for obsolescence (14,709)
-------------------------------------------------------------------------------
Total Inventory Y 38,822,115
===============================================================================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2005:
F-14
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
-------------------------------------------------------------------------------
Permit of land use Y 2,816,679
Building 9,067,566
Plant, machinery and equipment 9,029,542
Motor vehicle 115,405
Office equipment 91,592
-------------------------------------------------------------------------------
Total 21,120,784
Less: Accumulated depreciation (588,514)
-------------------------------------------------------------------------------
Property, pland and equipment, net Y 20,532,270
===============================================================================
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, which were as follows in years:
Assets Life
--------------------------------------------------------------------------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
--------------------------------------------------------------------------------
Depreciation expense was (Y)588,514 for the period from January 12, 2005 through
September 30, 2005.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average useful life
of approximately 5 years. The estimated aggregate amortization expense for the
remainder of the period ending December 31, 2005 and the succeeding four years
is as follows:
--------------------------------------------------------------------------------
2005 Y 41,372
2006 41,936
2007 41,936
2008 27,826
2009 24,638
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires recognition of
deferred tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any tax credit carry forwards
available. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-15
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
The provision for income taxes consisted only of current taxes payable of
(Y)519,889. The Company is not subject to any income taxes in the United States.
Income tax expense differed from the amounts computed by applying the enterprise
income tax rate of 7.5% to pretax income as a result of the following for the
four months ended September 30, 2005:
Tax at statutory rate (7.5%) Y 342,035
Nondeductible expenses 177,854
--------------------------------------------------------------------------------
Provision for income taxes Y 519,889
================================================================================
At September 30, 2005, net deferred tax assets consisted of the following:
Allowances for doubtful accounts receivable Y 936,644
Property and equipment 1,385,901
Intangible assets 35,017
--------------------------------------------------------------------------------
Total deferred tax assets 2,357,562
Less: Valuation allowance 1,931,510
--------------------------------------------------------------------------------
Net deferred tax assets Y 426,052
================================================================================
The Company has also incurred various other taxes, primarily comprised of
business tax, value-added tax, urban construction tax, education surcharges and
etc. Any unpaid amounts are reflected on the balance sheets as other taxes
payable.
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at September 30, 2005:
-------------------------------------------------------------------------------------
Note payable to a bank, bearing interest at 6.6%, secured by equipment,
building and land use rights, due in August 2005 Y 15,000,000
Note payable to a bank, bearing interest at 6.6%, secured by equipment,
building and land use rights, due in March 2006 8,000,000
Note payable to former Hainan Helpson shareholders, noninterest
bearing, secured by the capital stock of Hainan Helpson, due
September 16, 2005, net of 593,478 unamortized discount,
discount is based on imputed interest rate of 10% 28,000,000
-------------------------------------------------------------------------------------
Total notes payable 51,000,000
Less: Current portion (51,000,000)
-------------------------------------------------------------------------------------
Long-term notes payable Y --
=====================================================================================
Annual maturities of notes payable for the remainder of the period ending
December 31, 2005 and thereafter are as follows:
F-16
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
--------------------------------------------------------------------------------
2005 Y 43,000,000
2006 8,000,000
================================================================================
NOTE 8. STOCKHOLDERS' EQUITY
On July 6, 2005, the shareholder of Onny amended Onny's articles of
incorporation increasing the number of authorized common shares to 4,000,000,
reducing the par value of the common shares to (Y)0.08 per share and authorizing
100 preferred shares with a par value of (Y)825. On August 18, 2005, prior to
the reorganization with TS Electronics, Inc., the articles of incorporation of
Onny, were amended changing the authorized capital of Onny to 40,000 common
shares, (Y)827.65 (US$100) par value, and 10,000 preferred shares, (Y)827.65
(US$100) par value.
The Onny preferred shareholders were entitled to receive dividends prior to
common shareholders at a rate of (Y)0.64 per annum for each preferred share.
Following the payment of preferred dividends, the preferred shareholders were
entitled to participate equally with common shareholders in dividends. The
preferred dividends were non-cumulative. The preferred shares were convertible
into common shares on a one-for-one basis any time after the date of issuance,
at the option of the holder.
As described in Note 1, the reorganization of Onny into TS Electronics, Inc. was
recognized as a stock split of the Onny common shares previously outstanding.
The number of common shares issued and outstanding have been restated in the
accompanying consolidated financial statements on a retroactive basis for the
effects of the stock split.
On August 16, 2005, the Onny shareholder made a capital investment in Onny of
(Y)28,437,495 in cash in exchange for the issuance of 25,193,273 common shares
(29,600 pre-split common shares).
The accompanying financial statements reflect the effective issuance by Onny of
the 2,500,060 shares of common stock of TS Electronics, Inc. that remained
outstanding in exchange for the assumption of (Y)37,021 of liabilities as though
the issuance had occurred on September 30, 2005.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in The People's Republic of China, the Company is subject to special
considerations and significant risks not typically associated with companies
operating in the United States of America. These risks include, among others,
the political, economic and legal environments and foreign currency exchange.
The Company's results may be adversely affected by changes in the political and
social conditions in The People's Republic of China 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.
In addition, all of the Company's revenue is denominated in The People's
Republic of China's currency of the Chinese Yuan (Renminbi), which must be
converted into other currencies before remittance out of China. Both the
conversion of Yuan into foreign currencies and the remittance of foreign
currencies abroad require approval of the Chinese government.
F-17
ONNY INVESTMENT LIMITED AND SUBSIDIARY
Notes to the Consolidated Financial Statements
(Information with Respect to September 30, 2005 and for the Four Months Ended
September 30, 2005 is Unaudited)
(Information in United States Dollars is Unaudited)
NOTE 10. SUBSEQUENT EVENTS
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
(Y)35,692,406 in cash, net of (Y)5,690,094 of offering costs and estimated
registration costs, and on that same date, those preferred shares were converted
into 6,944,611 common shares (10,000 pre-split common shares).
On October 19, 2005, Onny was reorganized as a wholly-owned subsidiary of TS
Electronics, Inc. The reorganization was accomplished by the original Onny
common shareholder exchanging her 29,700 Onny common shares for 20,555,329
common shares of TS Electronics, Inc. and for the commitment by TS Electronics,
Inc. to issue the original Onny shareholder 4,723,056 common shares following an
amendment of the TS Electronics, Inc. articles of incorporation increasing the
number of common shares authorized to 100,000,000 shares. In addition, the prior
Onny preferred shareholders exchanged their 10,000 Onny common shares for
6,944,611 common shares of TS Electronics, Inc.
On November 4, 2005 the Company made payments to satisfy in full the notes
payable to the former Helpson shareholders in the amount of (Y)28,000,000
(unaudited).
F-18
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
Hainan Helpson Medicine & Biotechnique Co., Ltd.
We have audited the accompanying balance sheets of Hainan Helpson Medicine &
Biotechnique Co., Ltd. as of December 31, 2003 and 2004, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hainan Helpson Medicine &
Biotechnique Co., Ltd. as of December 31, 2003 and 2004, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
June 4, 2005
F-19
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
BALANCE SHEETS
Chinese Yuan (Renminbi) U.S. Dollars
--------------------------------------- --------------------------
December 31, March 31, December 31, March 31,
------------------------- ----------- ------------ -----------
2003 2004 2005 2004 2005
--------------------------------------------------------------------- ------------ ----------- ------------ -----------
ASSETS (unaudited) (unaudited) (unaudited)
Current assets
Cash and cash equivalents Y 2,768,395 Y 5,027,342 Y 238,450 $ 607,424 $ 28,810
Trade accounts receivables, less allowance for doubtful
accounts of 8,115,881, 8,611,547, 8,611,547 (unaudited)
$1,040,482 (unaudited), and $1,040,482 (unaudited),
respectively 10,425,289 19,948,709 25,047,836 2,410,282 3,026,380
Other non-trade receivables, less allowance for doubtful
accounts of 707,119 , 910,800 , 910,800 (unaudited),
$110,047 (unaudited), and $110,047 (unaudited),
respectively 5,216,693 7,563,904 7,309,331 913,901 883,143
Advances to suppliers 7,814,575 6,616,135 15,668,789 799,388 1,893,166
Notes receivable 619,317 170,000 30,000 20,540 3,625
Inventory, less provision for obsolescence
of 14,709, 14,709, 14,709 (unaudited),
$1,777 (unaudited), and $1,777 (unaudited),
respectively 14,889,677 23,226,529 26,251,668 2,806,323 3,171,832
Accounts receivable - related parties 1,875,000 532,603 532,603 64,351 64,351
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total current assets 43,608,946 63,085,222 75,078,677 7,622,209 9,071,307
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Non-current assets
Property and equipment, net of accumulated depreciation
of 5,247,911 and 5,607,021, 6,306,908 (unaudited),
$677,463 (unaudited), and $762,026 (unaudited),
respectively 43,510,867 41,050,518 40,534,431 4,959,889 4,897,533
Intangible assets, net of accumulated amortization
of 1,493,952and 1,871,579 1,942,829 (unaudited),
$226,132 (unaudited), and $234,740 (unaudited),
respectively 1,356,048 1,161,047 1,089,797 140,282 131,674
Deferred tax asset 654,817 713,565 713,565 86,216 86,216
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total non-current assets 45,521,732 42,925,130 42,337,793 5,186,387 5,115,423
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total assets Y89,130,678 Y106,010,352 Y117,416,470 $ 12,808,596 $14,186,730
===================================================================== ============ ============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable Y 7,694,571 Y 2,237,476 Y 3,411,700 $ 270,341 $ 412,215
Accrued expenses 95,221 80,874 4,861 9,772 587
Taxes payable 897,899 3,229,483 3,022,253 390,199 365,161
Other accounts payable 7,651,839 4,317,858 5,015,070 521,701 605,941
Advances from customers 2,357,672 2,140,307 3,087,397 258,600 373,032
Dividend payable 220,274 1,420,274 1,643,836 171,603 198,615
Accounts payable - related party 1,080,240 1,106,292 1,209,792 133,667 146,172
Short-term notes payable 3,800,000 -- -- -- --
Current portion of long-term note payable -- 15,000,000 15,000,000 1,812,360 1,812,360
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total current liabilities 23,797,716 29,532,564 32,394,909 3,568,243 3,914,083
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Long-term liability
Long-term note payable 15,000,000 8,000,000 8,000,000 966,592 966,592
Research and development commitment 250,000 250,000 250,000 30,206 30,206
Convertible mandatorily redeemable preferred stock,
1.00 ($0.12) par value; 5,000,000, 5,000,000 and 0
shares authorized, issued and outstanding 10,000,000 10,000,000 -- 1,208,240 --
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total long-term liabilities 25,250,000 18,250,000 8,250,000 2,205,038 996,798
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total liabilities 49,047,716 47,782,564 40,644,909 5,773,281 4,910,881
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Shareholders' equity
Common shares, 1.00 ($0.12) par value; 23,000,000,
23,000,000, 28,000,000 shares authorized, issued
and outstanding 23,000,000 23,000,000 28,000,000 2,778,952 3,383,073
Additional paid-in capital 3,164,000 3,164,000 8,164,000 382,287 986,407
Statutory reserves 2,924,284 5,817,196 5,817,196 702,857 702,857
Retained earnings 10,994,678 26,246,592 34,790,365 3,171,219 4,203,512
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total shareholders' equity 40,082,962 58,227,788 76,771,561 7,035,315 9,275,849
--------------------------------------------------------------------- ------------ ------------ ------------ -----------
Total liabilities and shareholders' equity Y89,130,678 Y106,010,352 Y117,416,470 $ 12,808,596 $14,186,730
===================================================================== ============ ============ ============ ===========
See accompanying notes to the financial statements.
F-20
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
STATEMENTS OF OPERATIONS
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------------------------------ ------------------------------
For the years ended For the three For the period For the year For the three
December 31, months ended from April 1 ended months ended
-------------------------- March 31, to June 15, December 31, March 31,
2003 2004 2005 2004 2005 2005
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues Y31,149,004 Y64,059,750 Y 24,400,868 Y 19,666,177 $ 7,739,957 $ 2,948,211
Cost of revenues 15,354,998 38,200,114 14,221,864 13,445,223 4,615,491 1,718,343
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Gross profit 15,794,006 25,859,636 10,179,004 6,220,954 3,124,466 1,229,868
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Operating expenses
Selling expenses 479,979 661,333 164,448 153,616 79,905 19,869
General and administrative 5,661,976 2,954,655 622,443 2,226,281 356,993 75,206
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Total operating expenses 6,141,955 3,615,988 786,891 2,379,897 436,898 95,075
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Income from operations 9,652,051 22,243,648 9,392,113 3,841,057 2,687,568 1,134,793
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Non-operating income (expense)
Interest income 18,879 14,506 2,139 1,139 1,753 258
Interest expense (634,336) (1,340,709) (332,577) (260,956) (161,990) (40,183)
Other income (expense) 304,688 57,262 (840) (3,748) 6,919 (101)
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Non-operating expense (310,769) (1,268,941) (331,278) (263,565) (153,318) (40,026)
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Income before taxes 9,341,282 20,974,707 9,060,835 3,577,492 2,534,250 1,094,767
Income tax expense (566,919) (1,629,881) (293,500) 1,388,972 (196,929) (35,462)
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Net income 8,774,363 19,344,826 8,767,335 4,966,464 2,337,321 1,059,305
Perferred stock dividends (220,274) (1,200,000) (223,562) -- (144,989) (27,012)
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
Net income available
to common shareholders Y 8,554,089 Y18,144,826 Y 8,543,773 4,966,464 $ 2,192,332 $ 1,032,293
=============================================== =========== ============= ============= ============= =============
Earnings per common share
Basic Y 0.43 Y 0.84 0.36 $ 0.18 $ 0.10 $ 0.04
Diluted Y 0.40 Y 0.65 Y 0.35 $ 0.18 $ 0.08 $ 0.04
----------------------------------------------- ----------- ------------- ------------- ------------- -------------
See accompanying notes to the financial statements.
F-21
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
STATEMENTS OF STOCKHOLDERS' EQUITY
Chinese Yuan (Renminbi)
----------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-in Statutory Retained
Shares Amount Capital Reserves Earnings Total
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 20,000,000 Y 20,000,000 Y 164,000 Y 1,650,116 Y 3,714,757 Y 25,528,873
Issuance of common stock 3,000,000 3,000,000 3,000,000 -- -- 6,000,000
Net income for the year -- -- -- 1,274,168 7,500,195 8,774,363
Perferred stock dividend -- -- -- -- (220,274) (220,274)
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003 23,000,000 23,000,000 3,164,000 2,924,284 10,994,678 40,082,962
Net income for the year -- -- -- 2,892,912 16,451,914 19,344,826
Perferred stock dividend -- -- -- -- (1,200,000) (1,200,000)
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 23,000,000 23,000,000 3,164,000 5,817,196 26,246,592 58,227,788
Net income for the period -- -- -- -- 8,767,335 8,767,335
Perferred stock dividend -- -- -- -- (223,562) (223,562)
Conversion of preferred stock 5,000,000 5,000,000 5,000,000 -- -- 10,000,000
--------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2005 28,000,000 Y 28,000,000 Y 8,164,000 Y 5,817,196 Y 34,790,365 Y 76,771,561
==========================================================================================================================
U.S. dollars
(unaudited)
----------------------------------------------------------------------------------------
Ordinary Stock Additional
--------------------------- Paid-in Statutory Retained
Shares Amount Capital Reserves Earnings Total
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 2003 23,000,000 $ 2,778,952 $ 382,287 $ 353,324 $ 1,328,421 $ 4,842,984
Net profit for the year -- -- -- 349,533 1,987,788 2,337,321
Dividends declared -- -- -- -- (144,990) (144,990)
--------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004 23,000,000 2,778,952 382,287 702,857 3,171,219 7,035,315
Net profit for the period -- -- -- -- 1,059,305 1,059,305
Dividends declared -- -- -- -- (27,012) (27,012)
Conversion of preferred stock 5,000,000 604,121 604,120 -- -- 1,208,241
--------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2005 28,000,000 $ 3,383,073 $ 986,407 $ 702,857 $ 4,203,512 $ 9,275,849
==========================================================================================================================
See accompanying notes to the financial statements.
F-22
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
STATEMENTS OF CASH FLOWS
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------------- -----------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
-------------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
------------------------------------------------------------------ ----------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Cash flows from operating activities:
Net income Y 8,774,363 Y19,344,826 Y 8,767,335 $ 2,337,321 $ 1,059,305
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,574,554 3,008,229 771,137 363,466 93,172
Change in assets and liabilities:
Trade accounts receivable 2,506,986 (9,523,420) (5,099,127) (1,150,658) (616,098)
Other receivables (1,310,302) (2,347,211) 254,573 (283,599) 30,759
Advances to suppliers 5,820,109 1,198,440 (9,052,654) 144,800 (1,093,778)
Inventories (8,287,112) (8,336,852) (3,025,139) (1,007,292) (365,509)
Deferred tax asset (279,908) (58,748) -- (7,098) --
Accounts payable 5,093,294 (5,457,095) 1,174,224 (659,348) 141,874
Accrued expenses 95,221 (14,347) (76,013) (1,733) (9,184)
Taxes payable 429,249 2,331,584 (207,230) 281,711 (25,038)
Other accounts payable (8,800,608) (3,333,981) 697,212 (402,825) 84,240
Advances from customers (679,110) (217,365) 947,090 (26,264) 114,431
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Net cash provided by (used in) operating activities 4,936,736 (3,405,940) (4,848,592) (411,519) (585,826)
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (31,042,805) (170,253) (183,800) (20,571) (22,208)
Purchase of intangible assets (600,000) (182,626) -- (22,066) --
Change in accounts receivable - related parties (1,875,000) 1,342,397 -- 162,194 --
Change in notes receivable (619,317) 449,317 140,000 54,288 16,915
Change in accounts payable - related parties (3,881,068) 26,052 103,500 3,148 12,505
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Net cash provided by (used) in investing activities (38,018,190) 1,464,887 59,700 176,993 7,212
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds received from long-term notes payable 15,000,000 8,000,000 -- 966,592 --
Proceeds from short-term loans 5,000,000 -- -- -- --
Principal payment on short-term loans (1,200,000) (3,800,000) -- (459,131) --
Proceeds from issuance of preferred stock 10,000,000 -- -- -- --
Proceeds from issuance of common stock 6,000,000 -- -- -- --
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Net cash provided by financing activities 34,800,000 4,200,000 -- 507,461 --
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Net increase (decrease) in cash 1,718,546 2,258,947 (4,788,892) 272,935 (578,614)
Cash and cash equivalents at beginning of period 1,049,849 2,768,395 5,027,342 334,489 607,424
------------------------------------------------------------------ ----------- ------------- ------------- -------------
Cash and cash equivalents at end of period Y2,768,395 Y 5,027,342 Y 238,450 $ 607,424 $ 28,810
================================================================== =========== ============= ============= =============
Supplemental Cash Flow In Formation
Taxes paid Y 715,333 Y 712,015 8,979 $ 86,028 $ 1,085
Interest paid 627,554 1,317,287 Y 362,781 159,160 43,833
================================================================== =========== ============= ============= =============
Schedule of Noncash Investing and Financing Activities
Preferred dividends declared but not paid Y 220,274 Y 1,200,000 223,562 $ 144,989 $ 27,012
Convert preferred stock and preferred stock dividends
to common stock Y -- Y -- Y 11,643,836 $ -- $ 1,406,856
================================================================== =========== ============= ============= =============
See accompanying notes to the financial statements.
F-23
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS
Organization - Hainan Helpson Medicine & Biotechnique Co., Ltd. (the Company),
formerly Hainan Fulin International Biomedical Industrial Co., Ltd., was
incorporated as a privately foreign and Chinese held joint venture between
Haikou Biomedical Engineering Co., Ltd. and Fordisland Development, Ltd. in
Hainan Province, People's Republic of China (PRC), on February 25, 1993.
Fordisland Development held a 30% interest in the Company and Haikou Biomedical
Engineering held a 70% interest in the Company. In July 1999, the Company
changed its name to Hainan Helpson Medicine & Biotechnique Co., Ltd.
In October 2001, Fordisland Development transferred its 30% interest in the
Company to Hainan Kaidi Technique Co. Ltd. and the Company changed its
organization status to a wholly Chinese owned enterprise. In June 2005, the
Company's shareholders sold their interest in the Company to Onny Investment
Limited, a British Virgin Islands company, and the Company changed its
organization status to a wholly foreign owned enterprise.
Nature of Operations -The Company manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private sellers in PRC, through
its marketing department in Hainan Province and from nine sales representative
offices in other provinces and cities. The Company's other operating activities
include biochemical products, health products, and cosmetics.
NOTE 2. SIGNIFICANT ACCONTING POLICIES
Basis of Presentation and Translating Financial Statements - The accompanying
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The Company's functional
currency is the Chinese Yuan (Renminbi) and the accompanying financial
statements have been expressed in Chinese Yuan. The financial statements as of
and for the year ended December 31, 2004 and as of and for the three months
ended March 31, 2005 have been translated into United States dollars solely for
the convenience of the reader and are unaudited. Solely for this purpose, the
financial statements have been translated into U.S. dollars at the rate of
Y8.2765 = US $1.00, the approximate exchange rate prevailing on December 31,
2004 which remained unchanged as of March 31, 2005. These translated United
States dollar amounts should not be construed as representing Chinese Yuan
amounts or that the Yuan amounts have been or could be converted into United
States dollars.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Fair Values of Financial Instruments - The carrying amounts reported in the
balance sheets for cash and cash equivalents, trade receivables, advances to
supplier, notes receivable , accounts receivable-related parties, accounts
payable and accrued expenses, taxes payable, other accounts payable, deferred
tax assets, short-term debts approximate fair value because of the immediate or
short-term maturity of these financial instruments. The Company had no
derivative financial instruments in any of the years presented.
Cash and cash equivalents - Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or less.
Trade receivables and allowance for doubtful accounts - Trade receivables are
carried at original invoiced amounts less an allowance for doubtful accounts.
F-24
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
The Company presents trade receivable, net of allowances for doubtful accounts,
to ensure trade receivable are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting
the Company's customer base. The Company reviews a customer's credit history
before extending credit. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Provision is made against accounts receivable to the extent they are considered
unlikely to be collected. It is common practice in China for receivables to
extend beyond one year. Included in trade receivables is approximately Y5,000
that occurred more than one year from December 31, 2004, but is estimated to
still be collectable.
Inventory - Inventories are stated at weighted average costing. The method of
determining inventory costs is used consistently from year to year. Allowance
for inventory obsolescence is provided in situation when its market values are
lower than its costs at the year end valuation.
Valuation of Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that they may not be recoverable. When such an event occurs, the
Company would project undiscounted cash flows to be generated from the use of
the asset and its eventual disposition over the remaining life of the asset. If
projections were to indicate that the carrying value of the long-lived asset
will not be recovered, the carrying value is reduced by the estimated excess of
the carrying value over the projected discounted cash flows. The Company had an
appraisal performed as of March 31, 2005 and determined that no impairment had
occurred.
Property and Equipment - Gains and losses on disposal of property, plant and
equipment are determined by reference to their carrying amounts.
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets as follows:
Asset Life
--------------------------------------------------------------------------------
Permit of land use 40 - 70
Building 20 - 35
Plant, machinery and equipment 10
Motor vehicle 5 - 10
Office equipment 5
--------------------------------------------------------------------------------
Maintenance and repairs are charged to expense as incurred and major
improvements are capitalized. Gains or losses on sales or retirements are
included in the statements of operations in the year of disposition.
Depreciation expense was Y1,439,553, Y2,630,602 ($317,840), and Y699,887
($84,563) for the years ended December 31, 2003 and 2004 and for the three
months ended March 31, 2005, respectively.
Intangible Assets - Acquisition costs on patents, trademarks, licenses,
techniques, formulas and other intangibles are capitalized and amortized using
the straight-line method over their useful lives. For those intangible assets,
such as patents, with legal protection over a period, their useful life is the
protected period. Others that do not have legal protection periods, are
amortized generally over 5 to 10 years. The Company does not capitalize
internally generated intangible assets.
Intangible assets are techniques for medicines. Amortization on intangible
assets was Y135,001, Y377,627 ($45,626) and Y71,250 ($8,609) for the years ended
December 31, 2003 and 2004 and for the three months ended March 31, 2005,
respectively.
F-25
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
Advances to suppliers/ advances from customers - The Company, as is the common
practice in the PRC, will often pay advanced payments to suppliers for materials
and receive from customers advances for finished products. For the years ended
December 31, 2003 and 2004 and for the three months ended March 31, 2005, the
advances to suppliers were: Y7,814,575, Y6,616,135 ($799,388) and Y15,668,789
($1,893,166), respectively and the advances from customers were: Y2,357,672,
Y2,140,307 ($258,600) and Y3,087,397 ($373,033), respectively.
Revenue Recognition - The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectibility is reasonably
assured. Delivery does not occur until products have been shipped to the client,
risk of loss has transferred to the client and client acceptance has been
obtained, client acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in client acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until
all contingencies related to the sale have been resolved.
Cost of Revenues - Cost of revenues include wages, materials, handling charges,
and other expenses associated with the manufacture and delivery of product.
Research and Development - Research and development expenditures are recorded as
expenses at the period they occurred and were Y6,902, Y306,984 ($37,091) and
Y689 ($83) for the years ended December 31, 2003 and 2004 and for the three
months ended March 31, 2005, respectively.
Retirement benefit plans - The Company contributes to various employee
retirement benefit plans organized by provincial governments under which it is
required to make monthly contributions to these plans at rates prescribed by the
related provincial governments. The provincial governments undertake to assume
the retirement benefit obligations of all existing and future retired employees
of the Company. Contributions to these plans are charged to expense as incurred.
Advertising Costs - Advertising costs are expensed when incurred. Total
advertising expense was Y17,100, Y14,500 ($1,751) and Y3,000 ($362) for the
years ended December 31, 2003 and 2004 and for the three months ended March 31,
2005, respectively.
Income taxes - The Company accounts for its income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, which requires
recognition of deferred tax assets and liabilities for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and any tax
credit carry forwards available. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
The Company is not subject to any income taxes in the United States. Income tax
expense differed from the amounts computed by applying the enterprise income tax
rate of 7.5% to pretax income as a result of the following:
Chinese Yuan (Renminbi) U.S. Dollars
-------------------------------------- --------------------------
December 31, March 31, December 31, March 31,
------------------------ ---------- --------------------------
2003 2004 2005 2004 2005
---------------------------------------------------------------------------- ---------- --------------------------
Tax calculated at a tax rate of 7.5% Y 846,827 Y1,688,629 Y 679,563 $ 204,027 $ 82,108
Impairment loss on valuation (net of tax effects) (279,908) (58,748) (386,063) (7,098) (46,646)
---------------------------------------------------------------------------- ---------- --------------------------
Income tax provision (benefit) Y 566,919 Y1,629,881 Y 293,500 $ 196,929 $ 35,462
========================================================================================== ==========================
The Company also incurs various other taxes, primarily comprised of business
tax, value-added tax, urban construction tax, education surcharges and etc. Any
unpaid amounts are reflected on the balance sheets as other taxes payable.
F-26
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
Net Earnings per Common Share - Basic earnings per common share is computed by
dividing net income by the weighted-average number of common shares outstanding.
Diluted earnings per common share is computed by dividing net income, adjusted
for dividends associated with mandatorily redeemable preferred stock, by the
weighted-average number of common shares and dilutive potential common share
equivalents outstanding. Potential common share equivalents consist of shares
issuable upon the conversion of preferred stock.
The following table is a reconciliation of the numerators and denominators used
in the calculation of basic and diluted earnings per share and the
weighted-average common shares outstanding for the years ended December 31, 2003
and 2004 and for the three months ended March 31, 2005:
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------------ -------------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
------------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
(unaudited) (unaudited) (unaudited)
Net income available to common shareholders 8,554,089 18,144,826 8,543,773 $ 2,192,332 $ 1,032,293
Preferred stock dividend 220,274 1,200,000 223,562 144,989 27,012
-------------------------------------------------------------------------------------- -------------- --------------
Net income Y 8,774,363 Y 19,344,826 Y 8,767,335 2,337,321 1,059,305
Basic weighted-average common shares
outstanding 20,550,685 23,000,000 24,544,118 23,000,000 24,544,118
Effect of dilutive securities
Convertible Preferred Stock 917,808 5,000,000 -- 5,000,000 --
-------------------------------------------------------------------------------------- -------------- --------------
Diluted weighted-average common shares
outstanding 21,468,493 28,000,000 24,544,118 28,000,000 24,544,118
-------------------------------------------------------------------------------------- -------------- --------------
Basic earnings per share Y 0.43 Y 0.84 Y 0.36 $ 0.10 $ 0.04
Diluted earnings per share Y 0.40 Y 0.65 Y 0.35 $ 0.08 $ 0.04
====================================================================================== ============== ==============
From October 25, 2003 through March 10, 2005, there were mandatory redeemable
preferred stock potential common share equivalents from convertible preferred
stock of 5,000,000 common shares. On March 10, 2005, the Preferred stock was
converted to common stock.
Credit risk - The carrying amounts of accounts receivable included in the
balance sheets represent the Company's exposure to credit risk in relation to
its financial assets. No other financial assets carry a significant exposure to
credit risk.
The Company performs ongoing credit evaluations of each customer's financial
condition. It maintains allowances for doubtful accounts and such allowances in
the aggregate have not exceeded management's estimations.
Interest rate risk - The Company is exposed to the risk arising from changing
interest rates, which may affect the ability of repayment of existing debts and
viability of securing future debt instruments within the PRC.
Recently Enacted Accounting Standards - In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs--An
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 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). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company beginning on January 1, 2006.
F-27
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS 123R"), which revises SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123R also supersedes APB 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. In general, the
accounting required by SFAS 123R is similar to that of SFAS No. 123. However,
SFAS No. 123 gave companies a choice to either recognize the fair value of stock
options in their income statements or disclose the pro forma income statement
effect of the fair value of stock options in the notes to the financial
statements. SFAS 123R eliminates that choice and requires the fair value of all
share-based payments to employees, including the fair value of grants of
employee stock options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than July 1, 2005.
Early adoption is permitted.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Non-monetary Transactions, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a non-monetary exchange have commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange.
The adoption of these pronouncements is not expected to have a material effect
on the Company's financial position or results of operations.
NOTE 3. INVENTORY
Inventory consisted of the following:
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------------- ------------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
-------------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
--------------------------------------------------------------------------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Raw materials Y 4,817,221 Y13,566,628 Y 16,955,038 $ 1,639,175 $ 2,048,576
Work in progress 147,088 2,714,904 4,097,491 328,026 495,075
Finished Goods 9,940,077 6,959,706 5,213,848 840,900 629,958
Provision for impairment (14,709) (14,709) (14,709) (1,777) (1,777)
--------------------------------------------------------------------------------- ------------- -------------
Total inventory Y14,889,677 Y23,226,529 Y 26,251,668 $ 2,806,323 $ 3,171,832
================================================================================= ============= =============
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------------- ------------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
-------------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
---------------------------------------------------------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Permit of land use Y 5,589,000 Y 5,589,000 Y 5,589,000 $ 675,285 $ 675,285
Building 19,784,852 19,784,852 19,794,905 2,390,485 2,391,700
Plant, machinery and equipment 22,080,454 22,207,141 22,233,441 2,683,156 2,686,334
Motor vehicle 844,685 844,685 992,132 102,058 119,873
Office equipment 459,787 503,353 503,353 60,817 60,817
--------------------------------------------------------------------------------- ------------- -------------
Total 48,758,778 48,929,031 49,112,831 5,911,802 5,934,010
Less: Accumulated depreciation (5,247,911) (7,878,513) (8,578,400) (951,914) (1,036,477)
--------------------------------------------------------------------------------- ------------- -------------
Property, plant and equipment, net Y43,510,867 Y41,050,518 Y 40,534,431 $ 4,959,889 $ 4,897,533
================================================================================= ============= =============
F-28
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
NOTE 5. INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques, formulas, etc. Intangible assets have a weighted-average useful life
of approximately 2 years. One intangible asset, valued at Y782,626 ($94,560) is
not being amortized by the company. Estimated aggregate amortization expense for
the succeeding five years ending December 31, is as follows:
Yuan U.S. Dollars
--------------------------------------------------------------------------------
2005 91,625 11,071
2006 79,124 9,560
2007 79,124 9,560
2008 52,501 6,343
2009 45,000 5,437
Thereafter 31,047 3,751
NOTE 6. NOTES PAYABLE
The Company received proceeds of Y15,000,000 and Y8,000,000 under the terms of a
note payable during 2003 and 2004 respectively. Each note is due in 24 months,
and accrues interest at 6.59% per annum.
A summary of notes payable at December 31, 2003, 2004 and March 31, 2005 are as
follows:
Chinese Yuan (Renminbi) U.S. Dollars
--------------------------------------- -----------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
----------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
------------------------------------------------------------------ ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Note payable to bank bearing interest at
6.6% secured by equipment, building and
land use rights; payable in 24 months Y15,000,000 Y15,000,000 Y 15,000,000 $1,812,360 $1,812,360
Note payable to bank bearing interest at
6.6% secured by equipment, building and
land use rights; payable in 24 months -- 8,000,000 8,000,000 966,592 966,592
------------------------------------------------------------------------------------------------------------------
Total Y15,000,000 Y23,000,000 Y 23,000,000 $ 2,778,952 $ 2,778,952
Annual maturities of long-term debt as of December 31, 2004 for each of the next
five years are as follows:
Yuan U.S. Dollars
--------------------------------------------------------------------------------
2005 Y15,000,000 $ 1,812,360
2006 8,000,000 966,592
Thereafter - -
--------------------------------------------------------------------------------
Interest accrued on the notes payable equaled Y16,104, Y32,204 ($3,891) and 0
($0) for the years ended December 31, 2003 and 2004 and for the three months
ended March 31, 2005, respectively.
NOTE 7. STOCKHOLDERS' EQUITY
Preferred stock - On October 25, 2003, the Company issued 5,000,000 shares of
preferred stock. The preferred stock carries a 24% cumulative dividend. After
three years from the date of issuance, the preferred shareholder can convert
their preferred shares to common shares or have the preferred shares redeemed by
F-29
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
the Company at a price not less than the original value. The Company accrued
Y220,274, Y1,200,000 ($144,989) and Y223,562 ($27,012) as dividends payable for
the years ended December 31, 2003 and 2004 and for the three months ended March
31, 2005. During March 2005, the preferred shareholder sold their preferred
shares to the majority common shareholder and immediately upon sale, the
preferred shares, valued at Y10,000,000 ($1,208,240) was converted to common
shares by issuing 5,000,000 shares of common stock.
Common Stock - The Company is required to keep enough common shares available as
to allow for the conversion of the convertible, mandatorily redeemable Preferred
Stock. At December 31, 2004 this amounted to keeping at least 5,000,000 shares
of common stock available for issuance.
Statutory Reserves - According to the Articles of Association of the Company,
the Company is required to transfer 10% of its net profits, as determined under
PRC accounting regulations, to the legal accumulated fund. When the accumulated
fund equals 50% of the registered capital of the Company, transfers will cease.
In addition, 5% will be transferred into the commonwealth fund. The transfers to
these reserve funds in 2003 or 2004 were Y1,274,168 and Y2,892,912,
respectively. The amount comprising these capital reserve funds for the years
ended December 31, 2003, and 2004 was Y2,924,284 and Y5,817,196 ($702,560),
respectively. The Company has not made the statutory reserves for the three
months ended March 31, 2005.
NOTE 8. RELATED-PARTY TRANSACTIONS
Significant related party transactions affecting the results of operations are
as follows:
Chinese Yuan (Renminbi) U.S. Dollars
------------------------------------- -----------------------------
For the years ended For the three For the year For the three
December 31, months ended ended months ended
--------------------- March 31, December 31, March 31,
2003 2004 2005 2004 2005
--------------------------------------------------------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Purchase of material from:
Haikou Biomedical Engineering Co., Ltd. Y2,867,657 Y -- Y -- $ -- $ --
(shareholder) Due from related parties:
Chongquing Chemcial Medicine 1,875,000 532,603 -- 64,351 --
Holding Group, Ltd.
(shareholder) Due to related parties:
Haikou Biomedical Engineering Co., Ltd. 1,080,240 1,106,292 1 209,792 133,667 146,172
(shareholder)
---------------------------------------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company incurred rental expense, of Y68,336, Y75,707 ($9,147) and Y9,443
($1,140) during 2003 and 2004 and for the three months ended March 31, 2005,
respectively.
Economic environment - Significantly all of the Company's operations are
conducted in the PRC, the Company is subject to special considerations and
significant risks not typically associated with companies operating in the
United States of America. These risks include, among others, the political,
economic and legal environments and foreign currency exchange. The Company's
results may be adversely affected by changes 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.
F-30
HAINAN HELPSON MEDICINE & BIOTECHNIQUE Co., Ltd.
Notes to Financial Statements
December 31, 2003 and 2004
(Information with Respect to March 31, 2005 and for the Three Months
Ended March 31, 2005 is Unaudited)
(Information in United States Dollars is Unaudited.)
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("RMB"), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
NOTE 10. CONCENTRATIONS
For the year ended December 31, 2004, the company had sales to five major
customers that accounted for 52% of total sales. In the year ended December 31,
2003, the company had sales to one major customer that accounted for 62% of
total sales
NOTE 11. SUBSEQUENT EVENTS (UNAUDITED)
On May 25, 2005, Onny Investment Limited ("Onny"), a British Virgin Island
company, entered into an agreement with the shareholders of Hainan Helpson
Medical Biotechnology Co., Ltd ("Hainan"), in which Onny agreed to acquire and
the shareholders of Hainan agreed to sell all of the outstanding common shares
of Hainan to Onny in exchange for cash payments to the Hainan shareholders in
the form of common stock dividends from Hainan of Y34,076,800 and non-interest
bearing promissory notes totaling RMB Y28,000,000 payable three months after
Hainan obtains a business license in the People's Republic of China as a wholly
foreign owned entity. Hainan obtained such license on June 16, 2005 and the
shares of Hainan were transferred to Onny on that date. June 16, 2005 was
recognized as the date of the acquisition. Accordingly, the promissory notes are
due September 16, 2005.
As Hainan is an operating company and control of Hainan changed upon the closing
of the acquisition agreement; accordingly, Onny is the accounting acquirer and
has recognized the acquisition of Hainan as a business combination in accordance
with Statements of Financial Accounting Standards No. 141, Business
Combinations. On April 25, 2005, Hainan declared a dividend to the selling
shareholders of Y34,076,800, which equaled Hainan's retained earnings at March
31, 2005 less deferred income tax assets of Y713,565 that are not considered
part of distributable profits under Chinese law. The fair value of the assets
and liabilities of Hainan was determined by appraisal and exceeded the cost of
the assets acquired by Y15,394,761. That excess was allocated as a pro rata
reduction of the amounts that otherwise would have been assigned to the acquired
non-current assets except deferred tax assets.
F-31
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders
TS Electronics, Inc.
We have audited the balance sheet of TS Electronics, Inc. as of June 30, 2005,
and the related statements of operations, stockholders' deficit, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of TS Electronics, Inc. as of June 30,
2005, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has incurred significant losses and negative
cash flows from operating activities during the year ended June 30, 2005. As of
June 30, 2005, the Company had no assets, an accumulated deficit of $5,676,660,
and negative working capital of $4,473. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with respect to these matters are also described in Note C. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
September 8, 2005
F-32
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Stockholders and Board of Directors
TS Electronics, Inc. (formerly, Softstone, Inc.)
We have audited the accompanying balance sheet of TS Electronics, Inc.
(formerly, Softstone, Inc.) as of June 30, 2004 and the related statements of
operations, stockholders' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TS Electronics, Inc. as of June
30, 2004 and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company had an accumulated deficit of $3,834,281 through June 30,
2004 and negative working capital of $68,322 at June 30, 2004. These factors, as
discussed in Note C to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note C. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Evans, Gaither & Associates PLLC
October 7, 2004
Oklahoma City, Oklahoma
F-33
TS Electronics, Inc.
Balance Sheets
June 30,
--------------------------
2005 2004
-------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ -- $ 84
-------------------------------------------------------------------------------------------
Total Current Assets -- 84
-------------------------------------------------------------------------------------------
Total Assets $ -- $ 84
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable - trade and accrued liabilities $ -- $ 68,406
Payable to major stockholder 4,473 --
-------------------------------------------------------------------------------------------
Total Current Liabilities 4,473 68,406
-------------------------------------------------------------------------------------------
Stockholders' Deficit
Common stock - $0.001 par value; 30,000,000 shares authorized;
2,500,060 shares and 600,015 shares outstanding, respectively 2,500 600
Additional paid-in capital 5,669,687 3,763,359
Shares to be issued -- 2,000
Accumulated deficit (5,676,660) (3,834,281)
-------------------------------------------------------------------------------------------
Total Stockholders' Deficit (4,473) (68,322)
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $ -- $ 84
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-34
TS Electronics, Inc.
Statements of Operations
For the Years Ended June 30,
----------------------------
2005 2004
-------------------------------------------------------------------------------
Revenues $ -- $ 23,275
Cost of Sales -- 47,681
-------------------------------------------------------------------------------
Gross Loss -- (24,406)
-------------------------------------------------------------------------------
General and Administrative Expense
Stock-based compensation 1,693,728 --
Other 148,651 92,963
-------------------------------------------------------------------------------
Total General and Administrative Expense 1,842,379 92,963
-------------------------------------------------------------------------------
Loss from Operations (1,842,379) (117,369)
Other Income (Expense)
Other income -- 2,500
Interest expense -- (5,595)
Loss on settlement of liabilities -- (504,190)
Gain on settlement of debt -- 120,362
-------------------------------------------------------------------------------
Net Loss $ (1,842,379) $ (504,292)
===============================================================================
Basic and Diluted Loss per Common Share $ (2.20) $ (0.89)
===============================================================================
Basic and Diluted Weighted-Average
Common Shares Outstanding 837,144 565,450
===============================================================================
The accompanying notes are an integral part of these financial statements.
F-35
TS Electronics, Inc.
Statements of Changes in Stockholders' Deficit
For the Years ended June 30, 2004 and 2005
Common Stock Additional Shares Total
------------------------- Paid-in to be Accumulated Stockholders'
Shares Amount Capital Issued Deficit Deficit
----------------------------------------------------------------------------------------------------------------------------------
Balances at July 1, 2003 350,155 $ 350 $ 2,294,088 $ 6,515 $(3,329,989) $ (1,029,036)
Issuance for cash received in prior period 344 1 2,514 (2,515) -- --
Settlement of related party accounts -- --
payable 6,879 7 40,512 -- -- 40,519
Issuance for services 1,988 2 14,143 -- -- 14,145
Issuance for payment of interest 229 -- 1,024 -- -- 1,024
Issuance as payment of loan incentive
recognized in prior period 1,147 1 1,999 (2,000) -- --
Issuance in exchange for the assumption
of liabilities by major stockholders 239,273 239 1,409,079 -- -- 1,409,318
Net loss for the year -- -- -- -- (504,292) (504,292)
----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2004 600,015 600 3,763,359 2,000 (3,834,281) (68,322)
Issuance for settlement of accounts
payable 25,000 25 12,475 -- -- 12,500
Issuance for cash 1,875,045 1,875 198,125 -- -- 200,000
Stock-based compensation -- -- 1,693,728 -- -- 1,693,728
Cancellation of obligation to issue
shares paid for in prior period -- -- 2,000 (2,000) -- --
Net loss for the year -- -- -- -- (1,842,379) (1,842,379)
----------------------------------------------------------------------------------------------------------------------------------
Balances at June 30, 2005 2,500,060 $ 2,500 $ 5,669,687 $ -- $(5,676,660) $ (4,473)
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
F-36
TS Statements of Cash Flows
For the Years Ended June 30,
----------------------------
2005 2004
-------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (1,842,379) $ (504,292)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on settlement of liabilities -- 504,190
Gain on settlement of debt -- (120,362)
Expenses paid with common stock 12,500 14,145
Expenses paid by increase in payable due to major stockholder 4,473
Stock-based compensation 1,693,728 --
Change in accounts payable and accrued expenses (68,406) 70,507
-------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (204,557) (35,812)
-------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cash received from disposition of property and equipment -- 2,500
-------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities -- 2,500
-------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Principal payments on loans and debts -- (3,804)
Proceeds from borrowing -- 35,411
Proceeds from issuance of common stock 200,000 --
-------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 200,000 31,607
-------------------------------------------------------------------------------------------
Net Decrease in Cash (84) (1,705)
Cash at beginning of year 84 1,789
-------------------------------------------------------------------------------------------
Cash at End of Year $ -- $ 84
===========================================================================================
Supplemental Disclosures of Cash Flow Information
Interest paid during the year $ -- $ 5,595
===========================================================================================
================================================================================
Supplemental Schedule of Noncash Investing and Financing Activities During the
year ended June 30, 2004, the major stockholders of the Company assumed $905,128
of liabilities from the Company in exchange for the transfer of assets with a
fair value of zero and the issuance of 239,273 shares of common stock with a
fair value of $1,409,318. A $504,190 loss on settlement of the liabilities was
recognized as a result of the transaction.
During the year ended June 30, 2005, the Company obtained a cancellation of a
$2,000 obligation to issue common stock that resulted from cash received in a
prior period. The cancellation was recognized as an increase in additional
paid-in capital.
================================================================================
The accompanying notes are an integral part of these financial statements.
F-37
TS Electronics, Inc.
Notes to Financial Statements
Note A - Organization and Description of Business
TS Electronics, Inc. (Company) was incorporated as Softstone, Inc. in accordance
with the Laws of the State of Delaware on October 7, 1998. The Company's initial
business plan was to manufacture a patented rubber product used in the road and
building construction industries.
On July 24, 2001, the Company entered into a plan of reorganization involving
Kilkenny Acquisition Corp. (Kilkenny) whereby the Company is the survivor and in
control of the Board of Directors. The merger agreement provided for the
exchange of 1,158,387 shares of the Company's common stock for all the issued
and outstanding common stock of Kilkenny. For accounting purposes, the
transaction between the Company and Kilkenny was treated as a re!capitalization
of the Company, with the Company as the accounting acquirer.
On August 13, 2003, the Company changed its name to TS Electronics, Inc.
On or about August 11, 2004 the Company entered into a Stock Exchange Agreement
(Agreement) with the sole shareholder of China ESCO Holdings Limited (China
ESCO), a company organized in the Hong Kong Special Administration Region in The
People's Republic of China and its wholly owned operating subsidiary, AsiaNet PE
Systems Limited. The agreement provided that the Company would issue
approximately 11,201,902 shares of its restricted common stock in exchange for
100% of the issued and outstanding capital stock of China ESCO which would
represent approximately 94% of the then total issued and outstanding common
stock of the Company after the exchange. On January 14, 2005, the August 17,
2003 Agreement was rescinded on the grounds of material breaches of the
agreement by the sole shareholder of China ESCO. Accordingly, the Agreement was
not given accounting recognition in the accompanying financial statements.
On or about February 8, 2005, the Company signed a letter of intent with Osage
Energy Company, LLC with regard to a proposed business combination transaction.
Subsequent discussions between the Company and Osage Energy resulted in an
abandonment of any further efforts with regard to such a business combination.
Note B - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America and has
a year-end of June 30.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented.
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
F-38
TS Electronics, Inc.
Notes to Financial Statements - Continued
Note C - Going Concern Contingency
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the company as a going concern. However, the Company has an
accumulated deficit of $5,676,660 and negative working capital of $(4,473) at
June 30, 2005.
The Company's continued existence is dependent upon its ability to generate
sufficient cash flows from operations to support its daily operations as well as
provide sufficient resources to retire existing liabilities and obligations on a
timely basis.
The Company anticipates offering equity securities in the future. However, there
is no assurance that the Company will be able to obtain additional funding
through the issuance of additional equity securities or, that such funding, if
available, will be obtained on terms favorable to or affordable by the Company.
If no additional operating capital is received during the next twelve months,
the Company will be forced to rely upon additional loans from management and/or
significant stockholders to preserve the integrity of the corporate entity at
this time. In the event, the Company is unable to acquire advances from
management and/or significant stockholders, the Company's ongoing operations
would be negatively impacted.
It is the intent of management and significant stockholders to provide
sufficient working capital necessary to support and preserve the integrity of
the corporate entity. However, no formal commitments or arrangements to advance
or loan funds to the Company or repay any such advances or loans exist. There is
no legal obligation for either management or significant stockholders to provide
additional future funding.
Note D - Summary of Significant Accounting Policies
Research and Development Expenses - Research and development expenses are
charged to operations as incurred.
Advertising Expenses - The Company does not utilize direct solicitation
advertising. All other advertising and marketing expenses are charged to
operations as incurred. For the years ended June 30, 2005 and 2004,
respectively, an aggregate of $-0- was charged to operations for advertising
expenses.
Stock-Based Compensation - The Company utilizes the fair-value method of
accounting for the payment for goods and/or services with the issuance of equity
shares.
Basic and Diluted Loss per Share - Basic loss per share is computed by dividing
net loss by the weighted-average number of common shares outstanding during the
period. Diluted loss per share is computed by dividing net loss by the
weighted-average number of common shares and dilutive potential common shares
outstanding.
New accounting pronouncements - In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" which revised Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This
statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based compensation transactions using APB 25 and
requires that the compensation costs relating to such transactions be recognized
in the statement of operations using the fair value method. The revised
statement is effective for the Company as of July 1, 2005. Adoption of the
revised statement is not expected to have any effect on the Company's financial
statements since the Company has not granted share-based compensation to any
employees.
Note E - Advances from Major Shareholder
Through June 30, 2005, the Company's major shareholder has paid $4,473 to others
on behalf of the Company to support the Company's operations, settle outstanding
trade accounts payable and provide working capital. These advances are repayable
upon demand, are non-interest bearing and are unsecured.
Note F - Income Taxes
The Company had no provision for income taxes during the years ended June 30,
2005 or 2004.
Concurrent with a May 2005 change in control, the Company's operating loss
carryforward for Federal income tax purposes will be limited. The Company's
income tax expense (benefit) for each of the years ended June 30, 2005 and 2004,
respectively, differed from the statutory federal rate of 34 percent as follows:
F-39
TS Electronics, Inc.
Notes to Financial Statements - Continued
Year Ended Year Ended
June 30, 2005 June 30, 2004
------------- -------------
Statutory rate applied to income before income taxes $ (626,400) $ (171,000)
Effect of non-deductible stock-based compensation expense 575,900
Change in deferred tax valuation allowance 50,500 171,000
------------- -------------
Income tax expense $ -- $ --
============= =============
Deferred tax assets consisted of the following as of June 30, 2005 and 2004,
respectively, after taking the May 2005 change in control into consideration:
June 30, 2005 June 30, 2004
------------- -------------
Deferred tax assets
Net operating loss carryforwards $ 1,500 $ --
Less valuation allowance (1,500) --
------------- -------------
Net Deferred Tax Asset $ -- $ --
============= =============
Note G - Common Stock Transactions
During the year ended June 30, 2004, the Company issued 344 shares of
restricted, unregistered common stock for cash received in the prior year.
During the year ended June 30, 2004, the Company issued 6,879 shares of
restricted, unregistered common stock valued at $40,519 for settlement of notes
payable amounting to $160,881 resulting in a gain of $120,362 on settlement of
debt.
During the year ended June 30, 2004, the Company issued 1,988 shares of
restricted, unregistered common stock for services valued at $14,145.
During the year ended June 30, 2004, the Company issued 229 shares of
restricted, unregistered common stock for interest valued at $1,024.
During the year ended June 30, 2004 the Company issued 1,147 shares of
restricted, unregistered common stock for loan incentives included in the prior
period valued at $2,000.
During the year ended June 30, 2004, the Company issued 239,273 shares of
restricted, unregistered common stock valued at $1,409,318, based on the market
value of the common stock on the date of issuance, and transferred its operating
assets to the Company's major stockholder in exchange for the major stockholder
assuming $905,128 of liabilities from the Company. As a result of the assumption
and issuance of the common stock, the Company recognized a loss on the
settlement of the liabilities of $504,190.
During the year ended June 30, 2005, the Company issued 25,000 shares of
restricted, unregistered common stock, valued at $12,500, for payment of legal
fees.
During the year ended June 30, 2005, the Company issued 1,875,045 shares of
restricted, unregistered common stock for cash proceeds of $200,000. The Company
used these proceeds to retire outstanding accounts payable and other
liabilities. This transaction was executed at less than the closing market price
for the Company's stock on the date of the transaction and therefore resulted in
recognition of stock-based compensation for the services rendered by management
of the Company in the amount of $1,693,728.
F-40
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to award,
or a corporation's board of directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act.
Our Amended and Restated Certificate of Incorporation and our Bylaws provide for
the indemnification of a present or former director or officer. Such
indemnification shall include expenses, including attorney's fees actually or
reasonably incurred by him. We may indemnify such individuals against all costs,
expenses, and liabilities incurred in a threatened, pending, or completed
action, suit, or proceeding brought because such individual is one of our
directors or officers.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of various expenses, all of which
we will pay in connection with the sale and distribution of the securities being
registered. All of the amounts shown are estimates, except the SEC registration
fee.
SEC Registration Fee $ 1,900.00
Accounting Fees and Expenses $ 30,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 3,000.00
Total $ 84,900.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On May 11, 2005, we sold to Halter Financial Group, Inc. ("HFG") in a private
placement 1,875,045 shares of restricted common stock at a purchase price of
$0.1066641 per share, pursuant to the terms of a Stock Purchase Agreement (the
"Purchase Agreement") executed by the parties on said date. As a result of the
purchase, HFG became our controlling shareholder, owning approximately 75% of
our issued and outstanding shares of common stock. This issuance was made in
reliance on Section 4(2) of the Act and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
On October 19, 2005, we entered into a Securities Exchange Agreement with Onny
and its original stockholders pursuant to which we acquired all of the issued
and outstanding shares of Onny from said stockholders in exchange for 27,499,940
shares of our common stock. This issuance was made in reliance on Section 4(2)
of the Act and was made without general solicitation or advertising. The
acquirers were sophisticated investors with access to all relevant information
necessary to evaluate the investment, and who represented to us that the shares
were being acquired for investment.
ITEM 27. EXHIBITS
The following Exhibits are attached hereto or incorporated herein by reference.
-------------- -----------------------------------------------------------------
Exhibit No. Description
-------------- -----------------------------------------------------------------
2.1* Securities Exchange Agreement, dated as of October 19, 2005.
-------------- -----------------------------------------------------------------
3.1* Certificate of Incorporation for TS Electronics, Inc.
-------------- -----------------------------------------------------------------
3.2* Bylaws of TS Electronics, Inc.
-------------- -----------------------------------------------------------------
3.3 Memorandum and Articles of Association of Onny Investments Ltd.
-------------- -----------------------------------------------------------------
3.4* Articles of Association of Helpson
-------------- -----------------------------------------------------------------
5.1 Opinion regarding legality
-------------- -----------------------------------------------------------------
10.1* Stock Purchase Agreement dated May 11, 2005 by and between TS
Electronics, Inc. and Halter Financial Group, Inc.
-------------- -----------------------------------------------------------------
10.2* Subscription Agreement
-------------- -----------------------------------------------------------------
10.3+ Material Agreements
-------------- -----------------------------------------------------------------
10.4 Employment Agreement between Zhilin Li and Helpson.
-------------- -----------------------------------------------------------------
10.5 Employment Agreement between Xinhua Wu and Helpson.
-------------- -----------------------------------------------------------------
10.6 Employment Agreement between Jian Yang and Helpson.
-------------- -----------------------------------------------------------------
21* Subsidiaries of the Registrant
-------------- -----------------------------------------------------------------
23.1 Consent of King and Wood (Included in Exhibit 5.1)
-------------- -----------------------------------------------------------------
23.2 Consent of Hansen, Barnett & Maxwell
-------------- -----------------------------------------------------------------
23.3 Consent of Evans, Gaither & Associates PLLC
-------------- -----------------------------------------------------------------
* Previously filed
+ To be filed by amendment.
ITEM 28. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually, or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
Offering.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Haikou, on December
__, 2005.
TS Electronics, Inc.
By: /s/ Zhilin Li
----------------------------------
Zhilin Li, President and CEO
By: /s/ Xinhua Wu
----------------------------------
Xinhua Wu, Chief Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
------------------- -------------------------------------- ----------------
/s/ Zhilin Li President and Chief Executive Officer, December 23, 2005
-------------------
/s/ Xinhua Wu Chief Financial Officer and December 23, 2005
------------------- Chief Accounting Officer
/s/ Heung Mei Tsui Director December 23, 2005
-------------------