UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
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(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the fiscal year ended December 31, 2005
[ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
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Commission file number: [0-29523]
TS ELECTRONICS, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 73-1564807
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(State or Other Jurisdiction (I.R.S. Employer I.D. No.)
incorporation or organization)
2nd Floor, No. 17, Jinpan Road, 570216
Haikou, Hainan Province, China
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 858-776-8880 (USA)
86-898-66811730 (China)
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Unit 8, D Area, Office Hall, Haikou Bonded Zone, Haikou, Hainan Province, China.
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(Former name, former address and former fiscal year,
if changed since last report)
1
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common stock, $0.001 par value
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Check whether the issuer has (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ].
The issuer's revenue for the fiscal year ended December 31, 2005 was $8,657,813.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days: 9,444,671 shares held by non-affiliates
had an aggregate market value of $ 11,805,838.75 as of March 28, 2006.
As of March 27, 2006, there were 34,723,056 shares of Common Stock issued and
outstanding.
DOCUMENT INCORPORATED BY REFERENCE
EXHIBITS incorporates by reference certain information which has been filed with
the Securities and Exchange Commission.
Transitional Small Business Disclosure Format: Yes No X
2
TS ELECTRONICS INC.
Table of Contents
Page Number
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Part I
Item 1 Description of Business 4
Item 2 Description of Property 31
Item 3 Legal Proceedings 32
Item 4 Submission of Matters to a Vote of Security Holders 32
Part II
Item 5 Market for Company's Common Stock and Related 32
Stockholders Matters
Item 6 Management's Discussion and Analysis or Plan of Operation 33
Item 7 Financial Statements 41
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Item 8A Controls and Procedures 41
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons; 41
Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation 44
Item 11 Security Ownership of Certain Beneficial Owners and 46
Management and Related Stockholder Matters
Item 12 Certain Relationships and Related Transactions 46
Item 13 Exhibits 46
Item 14 Principal Accountant Fees and Services Signatures 47
FINANCIAL STATEMENTS F-1
EXHIBITS
3
PART I
Certain statements in this Form 10-KSB constitute "forward-looking statements."
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause our actual results, performance or achievements
to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. The forward-looking
statements in this Form 10-KSB are identified by words such as "believes",
"anticipates", "expects", "intends", "may", "will", "estimate", "continue" and
other similar expressions regarding our intent, belief and current expectations.
However, these words are not the exclusive means of identifying such statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances and statements made in the
future tense are forward-looking statements. Actual results may differ
materially from those projected in the forward-looking statements as a result of
various factors, many of which are beyond our control. We undertake no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
occurring subsequent to the filing of this Form 10-KSB with the Securities and
Exchange Commission. Readers are urged to carefully review and consider the
various disclosures made by us in this Form 10-KSB, including those set forth
under "Risk Factors".
Item 1 - Description of Business
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.
4
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 had no operations or significant assets from the last quarter of
2004 to May 2005.
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 Accounting
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
5
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 holds
25,278,385 shares or approximately 72.8% of the issued and outstanding common
capital stock of the Company and Onny became the sole subsidiary of the company.
The Company filed an Information Statement on March 15, 2006 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 60,000,000
shares, to change the Company's name to China Pharma Holdings, Inc. after the
Information Statement is mailed to our stockholders and ending six months
thereafter.
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 October 20, 2005, there were 39,700 ordinary shares issued and
outstanding, all of which are held by the company. No preferred shares were
currently issued and outstanding.
On May 25, 2005, Onny acquired all the equity interests in Helpson in
consideration of 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 laws.
On October 20, 2005, Onny completed a private placement of $5,000,000 (the
"Offering") in consideration of the issuance of 10,000 shares of preferred stock
to 46 accredited investors. 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.
6
Under the terms of the Offering, Ms. Heung Mei Tsui escrowed 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:
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 approximately
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
7
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 US$370,370 for a 10.71%
equity interest in Helpson, and Chongqing Chemical contributed 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 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 laws.
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.
Principal Products and Services
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Helpson's primary business is drug manufacturing and drug sale and marketing.
Helpson manufactures and markets products in three major categories in terms of
purpose: cardiovascular and cerebrovascular medicine, raw materials for surface
wound, and anti-infection medicine.
8
The following drugs have attained new medicine certifications:
Buflomedil Hydrocholoride tablets, Buflomedil Hydrocholorideforinjection,
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.
Helpson obtained the certifications of two new drugs in the last quarter of
2005: Gastrodin and Hepatocyte growth-promoting factor for injection and they
have been put into manufacturing and market.
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 adjust the immune system. Its
function is to adjust and increase the immunity of human being cells. It is
administered by injection.
At present, the Helpson is manufacturing a total of 17 drugs listed in the
following chart, including five that have received new drug certifications. In
9
addition, there are 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
16. Gastrodin
17. Hepatocyte growth-promoting factor for injection
Due to the nature of the biotechnology and pharmaceutical industries, the
product structure of the Company strives to change with market demand. Helpson
traditionally focused on R&D and marketing of cardiovascular and cerebrovascular
medicine medicines. In 2005, Helpson launched Hepatocyte growth-promoting factor
for injection, PuSenOK, and Gastrodin, which 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.
10
Principal Markets
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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 US$42 billion and net profits of
US$3.7 billion; a 17.44% increase in realized sales and 11.74% increase in net
profits from the previous year (Source:http://www.chinapharm.com.cn). According
to a Chinese government report, China's pharmaceutical sales in 2005 are
expected to be approximately US$ 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).
The predicted growth is based upon the relaxation of trade barriers following
China's accession to the World Trade Organization, advances in the Chinese
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 ).
OTC 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 US$300 million(Source:
http://www.fx120.net/ypsj/ypsc/scfx/200406101631184449.htm ).
The sales of such medicines make up 8.3% of total OTC medicine retail sales.
Anti-infection medicines: In the past few years, Anti-infection medicines have
become the best selling drugs within the PRC while also maintaining a growth
rate of 20%. In 2001, the sales reached roughly US$3.6 billion; in 2003, the
sales reached more than US$4.8 billion, achieving a 30% market share. (Source:
SFDA Prospectus of Zhejiang Jingxin Pharmaceutical Co., Ltd.).
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Distribution
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Helpson's products are currently sold in more than 20 provinces, sovereignties,
and autonomous regions. Helpson has 16 sales offices and approximately 250 proxy
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.
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.
There is a low degree of consolidation among pharmaceutical companies in the
PRC. 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
12
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 medicine
administration 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 industry's capital entry barrier.
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.
Employees
The Company currently has 105 regular employees. Helpson is also aided by the
efforts of a 250 member outside sales and marketing team.
Risk Factors
As of December 31, 2005, we had the following Risk Factors:
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,
REDUCE, OR ELIMINATE OUR PRODUCT DEVELOPMENT PROGRAMS
Due to the large 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
13
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 2005, Hainan Xinxin Biotechnology Company, accounted for
approximately 46.25% of the total purchases of our company. Purchases from our
second-to-largest supplier in 2005, Chengdu Xingwangji Pharmaceutical Company
accounted for 41.82% 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 31, 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
employees. Aside from increased difficulties in the management of human
14
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 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 OR 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 $5,709,762 as of December 31, 2005. During the year ended December
31, 2005, the debtors' turnover period was approximately [116] days.
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 assurance that our trade receivables will be fully repaid
on a timely basis.
15
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 SUBSTITUTED BY COMPETITOR'S PRODUCTS, OUR GROSS AND NET
PROFIT MARGINS WILL BE ADVERSELY AFFECTED
In the year ended December 31, 2005, the gross profit margin for our Company was
51%. 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.
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
16
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 COMMUNITY 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, 2004, and 2005 is 7.5%. This
preferential tax rate was expired on December 31, 2005 and Helpson is now
applying for a renewal. If the application is successful, Helpson will enjoy the
7.5% of preferential income tax rate. But if not, the income tax rate for
Helpson will be 15%.
17
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 used for income tax deduction.
In the case of Helpson, US$390,247 can be used for income tax deduction. For the
two years ending December 31, 2005, the amount of tax deduction approved was
USD221,921.
However, 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 control as of the date of this 10-KSB, 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 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 2005, which is valid through December 31, 2010.
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 permit and
18
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 17 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
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
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 anticipate timeframe,
19
if ever at all. There are also no assurances that if the product is developed,
that it will lead to successful commercialization.
WE CANNOT GUARANTEE 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 reputation 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
Item 1 Description of Business of this 10-KSB.
All of our products are sold under these trademarks. As of the date of this
10-KSB, we have not experienced any infringements of such trademarks for sales
of pharmaceutical products and as of the date of this 10-KSB, 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.
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
20
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.
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
21
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.
22
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.
23
In connection with any such original action, a PRC court may award civil
liability, including monetary damages.
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
24
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:
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
25
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 the Circular
on Issues Related to the Administration of Foreign Exchange for Corporate
Financing through Offshore Special Purpose Vehicles and Round-trip Investment by
Domestic Residents ("the Circular") on November 1, 2005. The No. 75 Circular has
set forth explicit regulations concerning the formalities related to
establishing offshore special purpose vehicle (SPV) and round-trip investment by
domestic residents or such SPV.
Under the Circular, the domestic residents must, prior to the establishment of
the SPV, make an application for overseas investment to the local branch of the
SAFE at the place of the applicant's habitual residence. When the SPV has
completed the offshore financing, the domestic residents shall remit the funds
to China in accordance with the Business Plan. The Company shall file
applications to comply with relevant foreign exchange administration formalities
according to the existing laws and regulations governing foreign investment and
foreign debts administration.
In addition, the domestic residents shall file application with SAFE for filing
purpose within 30 days of the occurrence of any material events of the SPV which
does not involve the acquisition of the equity or assets of the Company. The
said material events include the changes in capital structure, share swap,
merger, division, investment into other company and provision of surety or
guarantee to third parties. Any profits, dividends from and income generated
from changes in capital structure of the SPV realized by the domestic residents
shall, according to the Circular, be remitted back to China within 180 days.
26
These provisions in the Circular sets forth explicit regulations concerning the
formalities related to establishing offshore special purpose vehicle and
round-trip investment by domestic residents. However, it did not provide any
criteria or condition on its approval of the application, so that it is very
hard to predict the result of the registration applications, and in light of the
number of the competent local branches of the SAFE throughout the country, there
are greater uncertainty in relation to the application of the Circular. Until
the uncertainties in the Circular are made clear and the implementing measure
are practically adopted we cannot predict how the Circular 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:
27
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 OWNERSHIP PERCENTAGE
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 ownership percentage.
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 will hold 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
28
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.
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
29
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.
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.
SOME OF THE INFORMATION IN THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING
STATEMENTS.
Some of the information in this Annual Report on Form 10-KSB contains
forward-looking statements that involve substantial risks and uncertainties. You
30
can identify these statements by forward-looking words such as "may", "will",
"expect", "intend", "anticipate", "believe", "estimate" and "continue" or
similar words. You should read statements that contain these words carefully
because they:
- discuss our expectations about our future performance;
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our stockholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Annual Report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in these risk factors and elsewhere in
this prospectus could have a material and adverse effect on our business,
results of operations and financial condition and that upon the occurrence of
any of these events, the trading price of our common stock could decline and you
could lose all or part of your investment.
Item 2 - 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.
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,
31
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
artificialeyes. 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.
Item 3 - Legal Proceedings
We have no pending legal proceedings. From time to time, we may be involved in
various claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination or breach of contract actions incidental to the
normal operations of the business.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5 - Market for Company's Common Stock 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 $2.65 $1.75
-------------------------------------- --------------- -------------
3rd Quarter $2.25 $1.05
-------------------------------------- --------------- -------------
2nd Quarter $2.00 $0.50
-------------------------------------- --------------- -------------
1st Quarter $2.25 $1.05
32
2004
--------------------------------------
4th Quarter $1.15 $.40
-------------------------------------- --------------- -------------
3rd Quarter $5.40 $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 March 23, 2006, the closing price of our common stock on the OTCBB was $1.15.
As of March 23, 2006, the stockholders' list for our common stock showed 226
registered shareholders of record, which figure does not take into account those
stockholders whose certificates are held in the name of broker-dealers or other
nominees and 30,000,000 shares of common stock issued and outstanding.
Dividend Policy
Since inception, we have not paid, nor declared, any dividends and we do not
intend to declare any such dividends in the foreseeable future. Our ability to
pay dividends is subject to limitations imposed by Delaware law and the laws of
the PRC.
Transfer Agent
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.
Item 6 - Management's Discussion and Analysis or 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 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.
33
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
material, among other things: lay from those projected or implied in such
forward-looking statements include: (i) the impact of competitive products; (ii)
changes in law and regulations; (iii) adequacy and availability of insurance
coverage; (iv) limitations on future financing; (v) increases in the cost of
borrowings and unavailability of debt or equity capital; (vi) the effect of
adverse publicity regarding our products; (vii) our inability to gain and/or
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 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.
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 common
stock dividends payable to the Helpson shareholders of $4,154,041 and for
non-interest bearing promissory notes totaling $3,413,265 payable on September
16, 2005. The acquisition of Helpson was recognized as a business combination.
34
On October 20, 2005, Onny issued 10,000 preferred shares in exchange for
$4,313,000 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 20, 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 60,000,000
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.
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.
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.
35
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 Environmental Protection Bureau.
o Designated as the key technology project in Hainan in 2003 by Haikou
Municipality.
Operations Analysis for the period from
January 12, 2005 (date of inception) through December 31, 2005
The following table presents the operation of the Company for the period January
12 through December 31, 2005:
For the period from January 12, 2005 (Date of
Inception) through December 31,2005
Revenues $ 8,657,813
---------------------------------------------
Cost of revenues 4,166,965
Operating expenses 247,032
Income from operations 4,243,816
Interest expense 186,452
Net income 3,799,550
Basic and diluted earnings
per common share 0.34
The consolidated financial statements of the Company for the period January 12,
2005 (Date of Inception) through December 31, 2005 is principally comprised of
the activities of Helpson, which is the Company's Chinese subsidiary of, from
June 16, 2005 through December 31, 2005,the date we acquired Helpson.
36
Revenues
--------
Revenues were $8,657,813 for the period January 12 through December 31, 2005.
The revenues mainly come from five products of Helpson, which are Buflomedil
Hydrochloride, Cefaclor dispersible tablets, Roxithromycin dispersible tablets,
AFGF, and cerebroprotein hydrolysate injection.
During this period, the sales network and the manufacturing capacity of Helpson
have been expanded. Moreover, reduced selling price increased the demand of our
products. The revenues for the company are expected to grow in 2006 since
Helpson will launch Ozagrel sodium and Hepatocyte growth-promoting factor for
injection on the market.
Cost of Revenues
----------------
The cost of revenues was $4,166,965, which is 48% of the revenues.
Helpson's two new products, Pusen OK and Gastrodin, which have higher gross
profit margins, were introduced into the market. Thus, the cost of revenues was
reduced in 2005. The cost is expected to be further reduced due to economies of
scale caused by the expected rapid growth of the company, the effective cost
control and the improvement of the manufacturing process in the year 2006.
Operating expenses
------------------
The operating expenses for the period January 12 through December 31, 2005 were
$247,032, which is 5.82% of income from operations.
The selling expenses include the welfare and salaries of the sales person and
related transportation expenses. The selling expenses compared with revenue are
lower than the industry average level, the main reasons for that are its major
customers are hospitals and the selling network of the company is through
agents. There are no advertising fees incurred to the date. However, the company
will incur some advertising expenses to promote its new product PuSen OK, which
might increase the percentage of selling expenses compared to the revenues in
2006.
37
The general and administrative expenses include R&D, the welfare and salaries of
the administrative staff. Helpson incurred approximately $50,020 R&D in 2005,
which amounts to .58% of the total revenues. R&D expenditure is lower compared
to the average industry level in China because the researchers come from company
personnel. The low costs of R&D can provide Helpson with a sustained competitive
edge.
Because of the improving management methodology and economies of scale, the
percentage of administrative expenses should be less when compared to the
revenue in 2006.
Income from operations was $4,243,816, which is 49% of the total revenues.
Interest expenses
-----------------
Interest expense for December 31, 2005 is $186,452 and net income is $3,799,550.
The company just paid off two long-term loans and the Company plans to apply for
new loans, of approximately $3,130,000. The expected annual interest rate is 6%.
Helpson is now applying for a special tax policy, which is for the foreign
companies in China. The policy is that the qualified foreign companies do not
have to pay income taxes in the first two years of their operations in China.
From the third to the fifth year, the companies only need to pay half of the
income tax rate 15%, which is 7.5%. Since the Company is a new foreign company,
if it can be approved as a qualified company, Helpson, which is the subsidiary
of TS in China will be tax exempted in the year 2006. The effect of the possible
favorable tax policy from Chinese government could increase the net profit of
Helpson in the year 2006.
Liquidity and capital resource for the period ended
January 12, 2005 (date of inception) through December 31, 2005
The following table presents selected items from the balance sheets as of
December 31, 2005
38
As of December 31, 2005
2005
Cash and cash equivalents $ 461,220
5,709,762
Trade accounts receivable
5,785,196
Inventory
Total current assets 14,465,864
Property and equipment, net 2,808,342
Total assets 17,501,070
Total current liabilities
5,770,926
Long-term liabilities 30,966
Total shareholder's equity 11,699,178
Analysis of financial position
------------------------------
At December 31, 2005, cash and cash equivalents of $461,220 were 31.9% of the
total current assets. The net value of property and equipment was $ 2,808,342,
16.1% of the total assets.
The trade accounts receivables were $5,709,762 and the valuation of inventory is
$5,785,196 at December 31, 2005. Trade accounts receivable and inventory
amounted to 32.6% and 33.1% respectively of the total assets. The dramatic
increase of sales revenues from the subsidiary of TS in China, Helpson, caused
the increase of the value of trade receivables and inventory. Thus, both the
accounts receivables and the inventory turnovers have been decreased as well. In
general, one of the main characteristics of the pharmaceutical industry is the
long collection period of accounts receivable, which causes a high requirement
of working capital.
Long-term liabilities were $30,996 at December 31, 2005. Two long-term loans
were repaid by using cash during the period. The company is applying for a new
39
loan, which is expected to be approximately $3,130,000 to satisfy the demand of
working capital.
The total liabilities of $5,801,892 compared with total assets of $17,501,070,
results in a liability ratio of 33.2%. If the value of inventory is excluded
from total current assets of $14,465,864 compared with the current liabilities
of $5,770,926, result in a quick ratio of 1.50. This shows that the Company has
ability to pay its debts.
The shareholder's equity of $11,699,178 is primarily due to the increase of
issuance of common shares, and the increase of the accumulated profits which is
caused by the increased sales revenue.
Operating activities
---------------------
As of December 31, 2005 we had cash and cash equivalents in the amount of
$461,220. Net cash flow used in operating activities during the period was
$449,095. The main reason for the amount in cash used in operating activities
was an increase of trade accounts receivable in the amount of $1,198,199, and an
increase of inventory in the amount of $2,395,393 during the period. The
utilization of net cash in operating activities was also a result of a decrease
of $588,748 in other accounts payable and a decrease of $226,863 in advances
from customers.
Investing activities
--------------------
Net cash utilized in investing activities was $341,522 during the period. The
use of net cash was due to the purchase of property and equipment and intangible
assets which amounted to $433,524 and $50,611, respectively. Conversely, the net
cash received in the purchase of Helpson of $131,336 and the proceeds from notes
receivable of $11,277 offset these expenditures.
The Company's subsidiary has forecasted $10 million in capital expenditure for
the coming year, which it expects to finance from internal sources and issuance
of shares. The financed cash is intended to be used in the following projects:
(1) $5 million of the amount will be invested in establishment of product line
for new medicine and investment in support of research and development.
(2) $3 million of the amount will be used to increase working capital due to
expansion of manufacturing capacity.
40
(3) $2 million of the amount will be used to expand marketing and promotion of
products.
Financing activities
--------------------
Net cash provided by financing activities was $1,248,727 during the period. The
cash generated during the period was primarily due to issuance of shares in the
amount of $7,804,175.
The repayment of the note payable of $6,317,849 offset the cash from the
issuance of shares.
In conclusion, cash provided for the period amounted to $461,220, primarily due
to the decrease in operating cash flows, the decrease in capital expenditure and
the repayment of a substantial portion of notes payable, as described above,
added to net cash generated by issuance of common shares.
Item 7 - Index to Financial Statements
The Financial Statements required by this Item begins at page F-1 hereof.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On August 15, 2005, we were notified that our auditors, Evans Gaither &
Associates, PLLC ("Evans") of Oklahoma City, Oklahoma had resigned, effective
that date, for reasons related to the firm's decision to cease providing
auditing services to public companies. Our Board of Directors accepted the
resignation of Evans upon receipt of the notification. On August 17, 2005, as a
result of the resignation of Evans Gaither & Associates, PLLC, the Board of
Directors authorized the engagement of Hansen, Barnett & Maxwell, PC of Salt
Lake City, Utah ("HB&M") as its new independent auditors. There were no
disagreements or events as described in Item 304(a)(1)(iv) of Regulation S-B in
connection with the change in accountants described above.
Item 8A - Controls and Procedures
As of December 31, 2005, evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures was carried out under the
supervision and with the participation of management, including our Chief
Executive and Financial Officer. Based upon that evaluation, our Chief Executive
41
and Financial Officer concluded that our disclosure controls and procedures are
effective. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out the evaluation.
Item 8B - Other Information
None.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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 20, 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 20, 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
42
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 20, 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.
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.
43
Code of Ethics
We do not yet have a Code of Ethics. Due to the recent completion of the
Reorganization with Tailong, the board of directors had 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 Compensation
No cash compensation was paid to our director for services as a director during
the fiscal year ended December 31, 2005. We have no standard arrangement
pursuant to which our board of directors are compensated for their services in
their capacity as directors. The board of directors may award special
remuneration to any director undertaking any special services on behalf of our
company other than 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.
Section 16(a) Beneficial Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
officers and directors, and persons who own more than ten percent of a class of
our capital stock, to file reports of ownership and changes in their ownership
with the Securities and Exchange Commission. These persons are required to
furnish us with copies of all Section 16(a) forms they file. Based solely on a
review of the copies of such forms received by us, we believe that during the
year ended December 31, 2005, all persons subject to Section 16(a) filing
requirements have filed on a timely basis reports required to be filed by
Section 16(a) of the Exchange Act.
Item 10 - Executive Compensation
No cash compensation was paid to our director for services as a director during
the fiscal year ended December 31, 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 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.
44
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 $100,000 during the years ended December 31, 2005,
2004 and 2003 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------- ---------------------------------- ---------
Long Term Compensation
---------------------------------------------------------------- ---------------------------------- ---------
Annual Compensation Awards Payouts
------------------------- -------- ----------------------------- -------------------------- ------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Principal Year Salary ($) Bonus Other Restricted Securities LTIP All Other
Position ($) Annual Stock Under-lying Payouts Compen-
Compensa- Awards ($) Options/SARs ($) sation ($)
tion (#)
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(1) Zhilin LI 2005 18,007 0 0 0 0 0 0
CEO and President
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(2) 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
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(2) Tim Halter President, 2005 0 0 0 0 0 0 0
CAO and Secretary
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(2) Heung Mei TSUI 2005 0 0 6,002 0 0 0 0
Director
------------------------- -------- ---------- ----- ------------ ---------- --------------- ------- ---------
(1) Zhilin LI has been our CEO and president since October 20, 2005 and her
salary was paid in RMB.
(2) Prior to October 20, 2005, Keith P. Boyd and Tim Halter did not spend any
material time working since we had no material business then. 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.
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
45
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 approximately $100,000
(RMB800,000). 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
approximately $62,500 (RMB500,000). 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 approximately $62,500 (RMB500,000).
Item 11 - 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 March 27, 2006 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 BENEFICIAL SHARES BENEFICIALLY % OF CLASS OWNED
OWNER (1) OWNED
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 escrowed
6,944,611 shares of common stock for the participants in Onny's private
placement and 277,785 shares for HFG International, Limited .
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
46
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 March 24, 2006.
Item 12 - Certain Relationships and Related Transactions
None.
Item 13 - Exhibits
(1) Our audited financial statements are included in this Annual Report on Form
10-KSB.
(2) EXHIBITS
-------------- -----------------------------------------------------------------
Exhibit No. Description
-------------- -----------------------------------------------------------------
2.1 Securities Exchange Agreement by and among Onny Investment
Limited dated October 19, 2005 filed on October 20, 2005. (3)
-------------- -----------------------------------------------------------------
3.1 Memorandum and Articles of Association filed December 23, 2005.
(5)
-------------- -----------------------------------------------------------------
3.2 Articles of Association of Helpson Medical Biotechnology Co.,
filed on October 20, 2005. (3)
-------------- -----------------------------------------------------------------
10.1 Stock Purchase Agreement by and among Halter Financial Group Inc.
dated May 11, 2005 filed on May 11, 2005. (1)
-------------- -----------------------------------------------------------------
10.2 Subscription Agreement by and among Onny Investment Limited
stockholders dated October 19, 2005 filed on October 20, 2005.
(4)
-------------- -----------------------------------------------------------------
10.3 Employment Contract by and among Zhilin LI dated July 1, 2005
filed on December 23, 2005. (5)
-------------- -----------------------------------------------------------------
10.4 Employment Contract by and among Xinhua WU dated July 1, 2005
filed on December 23, 2005. (5)
-------------- -----------------------------------------------------------------
10.5 Employment Contract by and among Jian YANG dated July 1, 2005
filed on December 23, 2005. (5)
-------------- -----------------------------------------------------------------
16.1 Letter regarding Change in certifying Accountant dated August 15,
2005 filed on August 18, 2005. (3)
-------------- -----------------------------------------------------------------
21 Subsidiaries of TS Electronics, Inc. filed on October 20, 2005.
(4)
-------------- -----------------------------------------------------------------
-------------- -----------------------------------------------------------------
(1) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 0-29523) filed with the Commission on May 11, 2005.
(2) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 0-29523) filed with the Commission on August 18, 2005.
(3) Previously filed as an exhibit to our report on Form 8-K (Commission File
Number: 0-29523) filed with the Commission on August 18, 2005.
(4) Previously filed as an exhibit to our report on Form SB-2 (Commission File
47
Number: 333-129161) filed with the Commission on August 18, 2005.
(5) Previously filed as an exhibit to our report on Form SB-2 (Commission File
Number: 333-129161) filed with the Commission on December 23, 2005.
Item 14. Principal Accountant Fees and Services
Kabani & Company Inc. was our auditor during September 5, 2002 to February 4,
2004. On February 4 2004, we engaged Evans, Gaither & Associates, PLLC of
Oklahoma City, Oklahoma as its new principal accountant to audit its
consolidated financial statements and then changed our auditor from Evans
Gaither & Associates, PLLC ("Evans") to Hansen, Barnett & Maxwell ("HB&M"), PC,
as indicated in Item 8 of this 10-KSB, in August 2005. HB&M is currently our new
independent auditors.
FISCAL 2004 FISCAL 2005
------------------- ---------------
--------------------------------------------------------------------------------
Audit Fees $ 142,005 $ 108,000
--------------------------------------------------------------------------------
Audit-Related Fees $ 0 $ 0
--------------------------------------------------------------------------------
Tax Fees $ 0 $ 0
--------------------------------------------------------------------------------
All Other Fees $ 0 $ 0
--------------------------------------------------------------------------------
Total $ 142,005 $ 108,000
--------------------------------------------------------------------------------
Audit Fees. This category includes the aggregate fees billed for professional
services rendered for the audits of our consolidated financial statements for
fiscal years 2004 and 2005.
Audit-Related Fees. This category includes the aggregate fees billed in each of
the last two fiscal years for assurance and related services by the independent
auditors that are reasonably related to the performance of the audits or reviews
of the financial statements and are not reported above under "Audit Fees," and
generally consist of fees for other attest engagements under professional
auditing standards, accounting and reporting consultations, internal
control-related matters, and audits of employee benefit plans.
Tax Fees. This category includes the aggregate fees billed in each of the last
two fiscal years for professional services rendered by the independent auditors
for tax compliance, tax planning and tax advice.
All Other Fees. This category includes the aggregate fees billed in each of the
last two fiscal years for products and services provided by the independent
48
auditors that are not reported above under "Audit Fees," "Audit-Related Fees,"
or "Tax Fees."
SIGNATURES
In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
TS Electronics Inc.
Dated: March 27, 2006 By: /s/ Zhilin Li
-------------- ------------------------
Zhilin Li,
Chief Executive Officer,
President and Director
Dated: March 27, 2006 By: /s/ Xinhua Wu
-------------- ------------------------
Xinhua Wu
Chief Financial Officer,
In accordance with the Securities Exchange Act of 1934, as amended, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the date as indicated.
Dated: March 27, 2006 By: /s/ Zhilin Li
-------------- ------------------------
Zhilin Li,
Chief Executive Officer,
President and Director
Dated: March 27, 2006 By: /s/ Xinhua Wu
-------------- ------------------------
Xinhua Wu,
Chief Financial Officer,
49
TS ELECTRONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated Balance Sheet...................................................F-3
Consolidated Statement of Operations.........................................F-4
Consolidated Statements of Stockholder' Equity...............................F-5
Consolidated Statement of Cash Flows.........................................F-6
Notes to Financial Statements................................................F-7
F-1
HANSEN, BARNETT & MAXWELLHIC
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Shareholders
TS Electronics, Inc.
We have audited the accompanying consolidated balance sheet of TS Electronics,
Inc., as of December 31, 2005, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the period from January 12,
2005 (date of inception) to December 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 TS Electronics,
Inc., and the results of their operations and their cash flows for the period
from January 12, 2005 (date of inception) to December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 3, 2006
F-2
TS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 2005
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 461,220
Trade accounts receivables, less allowance for doubtful
accounts of $1,412,353 5,709,762
Other non-trade receivables, less allowance for doubtful
accounts of $111,029 385,957
Advances to suppliers 2,123,729
Inventory 5,785,196
--------------------------------------------------------------------------------
Total current assets 14,465,864
--------------------------------------------------------------------------------
Non-current assets
Property and equipment, net 2,808,342
Intangible assets, net 96,406
Deferred tax assets 130,458
--------------------------------------------------------------------------------
Total non-current assets 3,035,206
--------------------------------------------------------------------------------
Total assets $ 17,501,070
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 679,104
Accrued expenses 15,625
Taxes payable 565,236
Other accounts payable 250,317
Advances from customers 50,755
Dividends payable 4,209,889
--------------------------------------------------------------------------------
Total current liabilities 5,770,926
--------------------------------------------------------------------------------
Long-term liabilities
Research and development commitment 30,966
--------------------------------------------------------------------------------
Total long-term liabilities 30,966
--------------------------------------------------------------------------------
Shareholders' equity
Common shares - $0.001 par value; 60,000,000 shares
authorized; 34,723,056 shares issued and outstanding 34,723
Additional paid-in capital 7,764,979
Accumulated other comprehensive income 99,926
Retained earnings 3,799,550
--------------------------------------------------------------------------------
Total shareholders' equity 11,699,178
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 17,501,070
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-3
TS ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the period from
January 12, 2005
(Date of Inception)
through
December 31, 2005
--------------------------------------------------------------------------------
Revenues $ 8,657,813
Cost of revenues 4,166,965
--------------------------------------------------------------------------------
Gross profit 4,490,848
--------------------------------------------------------------------------------
Operating expenses
Selling expenses 106,129
General and administrative 140,903
--------------------------------------------------------------------------------
Total operating expenses 247,032
--------------------------------------------------------------------------------
Income from operations 4,243,816
--------------------------------------------------------------------------------
Non-operating income (expenses)
Interest income 769
Interest expense (186,452)
Other income(expenses) (6,482)
--------------------------------------------------------------------------------
Non-operating income (expenses) (192,165)
--------------------------------------------------------------------------------
Income before taxes 4,051,651
Income tax expense 252,101
--------------------------------------------------------------------------------
Net income $ 3,799,550
--------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.34
--------------------------------------------------------------------------------
Weighted-average common shares outstanding 11,289,480
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-4
TS ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 12, 2005 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 2005
Accumulated
Additional Other Total
Comprehensive Common Stock Paid-in Comprehensive Retained Stockholders'
Income Shares Amount Capital Income Earnings Equity
---------------------------------------------------------------------------------------------------------------------------------
Balance - January 12, 2005
(Date of Inception) -- -- $ -- $ -- $ -- $ -- $ --
Issuance for cash
April 12, 2005 -- 85,112 85 (84) -- -- 1
Issuance for cash
Auguest 16, 2005 -- 25,193,273 25,193 3,465,981 -- -- 3,491,174
Issuance for cash, net
October 20, 2005 -- 6,944,611 6,945 4,306,055 -- -- 4,313,000
Issuance in exchange for
the liabilities of TS --
Electronics, Inc. -- 2,500,060 2,500 (6,973) -- -- (4,473)
Net income 3,799,550 -- -- -- -- 3,799,550 3,799,550
Currency translation
adjustment 99,926 -- -- -- 99,926 -- 99,926
---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 3,898,476 --
------------------------------------------
Balance - December 31, 2005 -- 34,723,056 $ 34,723 $ 7,764,979 $ 99,926 $ 3,799,550 $ 11,699,178
---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-5
TS ELECTRONICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period from
January 12, 2005
(Date of Inception)
through
December 31, 2005
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 3,799,550
Depreciation and amortization 250,184
Accretion of discount on notes payable 86,060
Changes in assets and liabilities:
Accounts receivable (1,198,199)
Other receivable 80,164
Advances to suppliers (916,792)
Inventory (2,395,393)
Deferred tax asset (89,763)
Accounts payable 383,188
Other accounts payable (588,748)
Accrued expenses 11,330
Advances from customers (226,863)
Accrued taxes payable 356,187
--------------------------------------------------------------------------------
Net cash used in operating activities (449,095)
--------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (433,524)
Purchase of intangible assets (50,611)
Notes receivable 11,277
Net cash received in purchase of Helpson 131,336
--------------------------------------------------------------------------------
Net cash used by investing activities (341,522)
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payment of dividend payable (237,599)
Payment of note payable (6,317,849)
Proceeds from issuance of common shares 7,804,175
--------------------------------------------------------------------------------
Net cash provided by financing activities 1,248,727
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Effect of exchange rate changes in cash 3,110
--------------------------------------------------------------------------------
Net increase in cash 461,220
Cash and cash equivalents at beginning of period -
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 461,220
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-6
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 activities except for the acquisition of
Hainan Helpson Medical & Biotechnology Co., Ltd ("Helpson"), as discussed below.
Upon the acquisition of Helpson and its operations, Onny emerged from the
development stage.
On April 12, 2005, Onny issued 100 (85,112 post-split) shares of common stock to
Tsui Hueng Mei ("Ms. Tsui") in exchange for $1 in cash. Ms. Tsui then elected
herself as Onny's sole director.
On June 16, 2005, the Company acquired all the outstanding shares of Helpson See
Note 2.
On October 20, 2005, Onny was reorganized as a wholly-owned subsidiary of TS
Electronics, Inc. The reorganization was accomplished by Ms. Tsui exchanging her
29,700 Onny common shares for 20,555,329 common shares of TS Electronics, Inc.
and for the commitment of TS Electronics, Inc. to issue Ms. Tsui 4,723,056
common shares following an amendment of the TS Electronics, Inc. articles of
incorporation increasing the number of common shares authorized to 60,000,000
shares, the exchange of shares was a 851-for-1 exchange ratio. In addition, the
prior Onny preferred shareholders exchanged their 10,000 Onny common shares for
6,944,611 common shares of TS Electronics, Inc. which was a 694-for-1 exchange
ratio. (The issuance of the preferred shares to the prior Onny preferred
shareholders, conversion into Onny common shares and the exchange for TS
Electronics, Inc. common shares are not presented herein). The reorganization of
Onny into TS Electronics, Inc. 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 $4,473 of liabilities. The reverse acquisition of TS
Electronics, Inc. was recognized as a non-monetary exchange.
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private retailers in The People's
Republic of China (PRC). The Marketing Department is in Hainan Province and
there are also nine offices with sales representatives in other provinces and
cities throughout China. 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.
F-7
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 and the accounts and operations of Helpson
from the date of its acquisition on June 16, 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.
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 that were outstanding during
the current period approximated 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 approximated 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 $189,758
that occurred more than one year from December 31, 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 when the market value of certain
inventory items are lower than the cost.
F-8
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. Should such an event occur, 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 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.
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
statement of operations in the period of disposition.
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 $36,488 for the period from January 12, 2005 through December 31,
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
December 31, 2005, the advances to suppliers were $2,123,729 and the advances
from customers were $50,755 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.
F-9
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 is calculated to give effect to
potentially issuable dilutive common shares. There were no potentially issuable
common shares outstanding at December 31, 2005.
Credit risk - The carrying amounts of accounts receivable included in the
balance sheet 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 December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 123R, Share-Based Payment, which is a revision to SFAS No.
123. SFAS No. 123R establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services.
Primarily, SFAS No. 123R focuses on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
SFAS No. 123R requires the Company to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award,
which is usually the vesting period. No compensation cost is recognized for
equity instruments for which employees do not render the requisite service.
F-10
In accordance with the Securities and Exchanges Commission's Staff Accounting
Bulletin 107, SFAS No. 123R is effective as of the beginning of the annual
reporting period that begins after June 15, 2005. Under these guidelines, the
Company will adopt SFAS No. 123R as of January 1, 2006. The Company does not
expect the implementation of this standard to have a material impact on the
company.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. This Statement
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not
expected to have a material impact on the operations of the Company.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets.
This Statement amends APB Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective for fiscal years beginning after June 15, 2005. The adoption of
SFAS 153 is not expected to have a material impact on the operations of the
Company.
In May 2005, the FASB issued SFAS No. 154 Accounting Changes and Error
Corrections. This Statement replaces APB Opinion 20 and SFAS No. 3. Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This Statement
requires that the new accounting principle be applied to the balances of assets
and liabilities as of the beginning of the earliest period for which
retrospective application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings for that period rather than
being reported in an income statement. The adoption of SFAS 154 is not expected
to have a material impact on the Company.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments -- an amendment of FASB Statements No. 133 and 140. SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets. SFAS No. 155 will become effective for the Company's fiscal year after
F-11
September 15, 2006. The impact of SFAS No. 155 will depend on the nature and
extent of any new derivative instruments entered into after the effective date.
NOTE 2 - ACQUISITION
On May 25, 2005, the Company entered into an agreement with the shareholders of
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 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 $4,154,041 the assumption of $4,646,409 of other liabilities and
the issuance of non-interest bearing promissory notes totaling $3,413,265
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. Since June 16, 2005 was recognized as the date of the
acquisition, the promissory notes became 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, the Company 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 $4,154,041 which equaled Helpson's retained earnings at March
31, 2005 less deferred income tax assets of $86,985 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:
12
Current Assets $ 9,570,918
Property and equipment 2,555,565
Intangible assets 71,210
--------------------------------------------------------------------------------
Total assets acquired 12,197,692
--------------------------------------------------------------------------------
Current liabilities 7,864,066
Long-term liabilities 1,005,694
--------------------------------------------------------------------------------
Total liabilities assumed 8,869,760
--------------------------------------------------------------------------------
Net assets acquired $ 3,327,933
--------------------------------------------------------------------------------
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 10 years.
The following 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, 2005, respectively. The 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.
For the Year Ended
December 31, 2005
(Pro Forma)
--------------------------------------------------------------------------------
Revenues $ 14,075,521
Net income 5,778,901
Basic and diluted earnings per common share 0.51
--------------------------------------------------------------------------------
Pro forma net income for the twelve months ended December 31, 2005 include
nonrecurring interest expense of $85,332 resulting from the amortization of the
discount on the $3,413,265 promissory notes payable to the former Helpson
shareholders, which discount was computed based upon an imputed interest rate of
10% per annum.
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
$4,513 of liabilities. The acquisition of TS Electronics, Inc. was recognized as
a non-monetary exchange.
NOTE 3 - INVENTORY
Inventory consisted of the following at December 31, 2005:
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--------------------------------------------------------------------------------
Raw materials $ 4,673,353
Work in progress 819,146
Finished goods 292,698
--------------------------------------------------------------------------------
Total Inventory $ 5,785,196
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2005:
--------------------------------------------------------------------------------
Permit of land use $ 348,885
Building 1,123,144
Plant, machinery and equipment 1,120,289
Motor vehicle 14,295
Office equipment 62,211
Construction in progress 389,703
--------------------------------------------------------------------------------
Total 3,058,526
Less: Accumulated depreciation (250,184)
--------------------------------------------------------------------------------
Property and equipment, net $ 2,808,342
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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Depreciation expense was $213,696 for the period from January 12, 2005 (Date of
Inception) through December 31, 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 five years.
The estimated aggregate amortization expense for the succeeding four years is as
follows:
Year Amount
--------------------------------------------------------------------------------
2006 $ 33,332
2007 25,599
2008 19,200
2009 18,275
--------------------------------------------------------------------------------
$ 96,406
--------------------------------------------------------------------------------
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.
Helpson enjoys the benefits of two tax breaks. One, a reduction of 15% from 30%,
for being in the first five years of operations and another 7.5% break for being
in a developing economic area in China; resulting in a rate of 7.5% enterprise
income tax rate which when applied to the pre-tax income the result is as
follows:
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For the period from
January 12, 2005
(Date of Inception)
through December 31, 2005
--------------------------------------------------------------------------------
Tax at US Federal statutory rate (34%) $ 1,377,561
Non-deductible expenses 137,458
Change in temporary differences (114,254)
Effect of lower foreign tax rates (1,035,261)
--------------------------------------------------------------------------------
Income tax provision $ 251,250
--------------------------------------------------------------------------------
The company has deferred tax asset based upon the temporary differences from the
allowance for bad debt which equals 130,458. 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 - 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 $.02 per share and authorizing
100 preferred shares with a par value of $100 per share. 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, $100 par value, and 10,000 preferred shares, $100 par
value.
The Onny preferred shareholders were entitled to receive dividends prior to
common shareholders at a rate of $.08 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 an 851-for-1 stock exchange of the Onny common shares previously
outstanding. The number of common shares issued and outstanding has 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
$3,491,174 in cash in exchange for the issuance of 25,193,273 common shares
(29,600 pre-split common shares).
On October 19, 2005, the Company issued 2,500,060 shares for the acquisition of
TS Electronics, Inc. and the assumption of $4,513 of liabilities. On October 20,
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2005 the Company issued 6,944,611 shares of common stock for $4,313,000 net of
offering costs of $687,000.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
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.
In addition, all of the Company's revenue is denominated in the PRC's currency
of Renminbi ("RMB" or "(Y)"), 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 9 - SUBSEQUENT EVENT (UNAUDITED)
Dividend payable on common stock - According to the shareholders' meeting on
April 25, 2005, Helpson planned to distribute a dividend of $4,154,041 to the
common shareholders. However, the dividend had not been paid as of December 31,
2005. In terms of the provision of shareholder's meeting, the dividend not paid
should be transferred to the loan of Helpson if the dividend was not paid as of
December 31, 2005.
Administrative changes - During March, 2006, a majority of the Company's
shareholders approved an amendment to the Company's Certificate of Incorporation
to make the following changes:
o Change the Corporate name from TS Electronics, Inc. to China Pharma
Holdings, Inc;
o Increase the number of authorized shares of common stock from thirty
million (30,000,000) shares to sixty million (60,000,000) shares; and
o Set the number of directors constituting the entire Board of Directors
at between three and nine, with the specific number to be fixed from
time to time by a vote of the majority of the entire Board of
Directors.
The change in the Corporate name has not been reflected in these financial
statements. The change in the authorized shares of common stock has been
reflected in these financial statements.
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