U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
TS ELECTRONICS, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 0-29523 73-1564807
-------------- ------------------------ -------------
(state of (Commission File Number) (IRS Employer
incorporation) I.D. Number)
Unit 8, D Area, Office Hall, Haikou Bonded Zone, Haikou, Hainan Province, China.
Zip Code: 570216
Telephone: +86 898 6681 8282
----------------------------------------------------
(Address and telephone number of registrant's principal
executive offices and principal place of business)
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
------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes[X] No [ ]
As of September 30, 2005, the Company had 30,000,000 shares of its $.001
par value common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART 1
FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis or Plan of Operation 12
Item 3. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities 15
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Item 1. Financial Statements
TS ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 300, 2005
(UNAUDITED)
Chinese Yuan (Renminbi)
------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents Y 28,816,278
Trade accounts receivables, less allowance for doubtful accounts of Y11,585,939 48,681,466
Other non-trade receivables, less allowance for doubbtful accounts of Y910,800 7,274,964
Advance to suppliers 397,483
Inventory, net 38,822,115
------------------------------------------------------------------------------------------------
Total current assets 123,992,306
------------------------------------------------------------------------------------------------
Non-current assets
Property and equipment, net 20,532,270
Intangible assets, net 504,158
Deferred tax assets 426,052
------------------------------------------------------------------------------------------------
Total non-current assets 21,462,480
------------------------------------------------------------------------------------------------
Total assets Y145,454,786
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable Y 17,521,905
Accrued expenses 486,426
Taxes payable 1,898,829
Other accounts payable 2,929,802
Advances from customers 2,375,880
Dividend payable 34,688,034
Accounts payable-related parties 889,792
Short-term notes payable 28,000,000
Current portion of long-term note payable 23,000,000
------------------------------------------------------------------------------------------------
Total current liabilities 111,790,668
------------------------------------------------------------------------------------------------
Long-term liabilities
Research and development commitment 250,000
------------------------------------------------------------------------------------------------
Total long-term liabilities 250,000
------------------------------------------------------------------------------------------------
Shareholders' equity
Common shares - Y0.008 par value; 100,000,000 shares authorized;
27,778,445 shares issued and outstanding 229,908
Additional paid-in capital 28,170,574
Retained earnings 5,013,636
------------------------------------------------------------------------------------------------
Total shareholders' equity 33,414,118
------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity Y145,454,786
================================================================================================
See the accompanying notes to the consolidated financial statements.
1
TS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Chinese Yuan (Renminbi)
----------------------------------------------------------------------------------------
For the Three For the Period from
Months Ended January 12, through
September 30, September 30,
2005 2005
----------------------------------------------------------------------------------------
Revenues Y 20,958,797 Y 25,035,222
Cost of revenues 13,056,960 15,717,843
----------------------------------------------------------------------------------------
Gross profit 7,901,837 9,317,379
----------------------------------------------------------------------------------------
Operating expenses
Selling expenses 347,928 385,085
General and administraive 1,991,579 2,157,756
----------------------------------------------------------------------------------------
Total operating expenses 2,339,507 2,542,841
----------------------------------------------------------------------------------------
Income from operations 5,562,330 6,774,538
----------------------------------------------------------------------------------------
Non-operating income(expenses)
Interest income 2,154 2,154
Interest expense (1,004,020) (1,243,167)
----------------------------------------------------------------------------------------
Non-operating income(expenses) (1,001,866) (1,241,013)
----------------------------------------------------------------------------------------
Income before taxes 4,560,464 5,533,525
Income tax expense 430,931 519,889
----------------------------------------------------------------------------------------
Net income Y 4,129,533 Y 5,013,636
========================================================================================
Basic and diluted earnings per common share Y 0.33 Y 1.14
========================================================================================
Weighted-average common shares outstanding 12,407,908 4,399,431
========================================================================================
TS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 12, 2005 (DATE OF INCEPTION) TRHOUGH
SEPTEMBER 30, 2005
(UNAUDITED)
Chinese Yuan (Renminbi)
-------------------------------------------------------------------------------
Common Stock Additional Total
----------------------------- Paid-in Retained Stockholder's
Shares Amount Capital Earnings Equity
--------------------------------------------------------------------------------------------------------------------------------
Balance - January 12, 2005 (Date of Inception) -- Y -- Y -- Y -- Y --
Issuance for cash, April 12, 2005 85,112 704 (696) -- 8
Issuance for cash, August 16, 2005 25,193,273 208,512 28,228,983 -- 28,437,495
Issuance in exchange for the liabilities of
TS Electronics, Inc. 2,500,060 20,692 (57,713) -- (37,021)
Net income -- -- -- 5,013,636 5,013,636
--------------------------------------------------------------------------------------------------------------------------------
Balance - September 30, 2005 27,778,445 Y 229,908 Y 28,170,574 Y 5,013,636 Y 33,414,118
--------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements.
2
TS ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 12, 2005 (DATE OF INCEPTION) THROUGH
SEPTEMBER 30, 2005
(UNAUDITED)
Chinese Yuan (Renminbi)
--------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income Y 5,013,636
Depreciation and amortization 629,887
Accretion of discount on notes payable 700,000
Deferred tax asset (102,935)
Changes in assets and liabilities:
Accounts receivable (12,330,407)
Other receivable (3,506,939)
Advances to suppliers 9,291,099
Inventory (11,599,887)
Accounts payable 13,960,147
Other accounts payable (3,843,802)
Accounts payable-related parties 889,792
Accrued expenses 452,436
Advances from customers 120,834
Accrued taxes payable 232,650
--------------------------------------------------------------------------------
Net cash used in operating activities (93,489)
--------------------------------------------------------------------------------
Cash Flows from Investing Activities
Collection on note receivable 91,728
Net cash received in purchase of Hainan 1,068,275
Purchases of property and equipment (118,115)
--------------------------------------------------------------------------------
Net cash provided by investing activities 1,041,888
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
Payment of dividend payable (532,603)
Proceeds from issuance of common shares 28,400,482
--------------------------------------------------------------------------------
Net cash provided by financing activities 27,867,879
--------------------------------------------------------------------------------
Net increase in cash 28,816,278
Cash and cash equivalents at beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period Y 28,816,278
================================================================================
See the accompanying notes to the consolidated financial statements.
3
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Onny Investment Limited ("Onny") was incorporated in the British
Virgin Islands on January 12, 2005. Through June 15, 2005, Onny was a
development stage enterprise with no development stage activities except for the
acquisition of Helpson, as discussed below. Upon the acquisition of Hainan
Helpson Medical Biotechnology Co., Ltd ("Helpson") and its operations, Onny
emerged from the development stage.
On April 12, 2005, Onny issued 100 shares of common stock to Tsui Hueng Mei
("Ms. Tsui") in exchange for Y8 in cash. Ms. Tsui also 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 by 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 100,000,000
shares, which exchange of shares was on an 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 exchange
was on a 694-for-1 exchange ratio. (The issuance of the preferred shares,
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
Y37,021 of liabilities. The reverse acquisition of TS Electronics, Inc. was
recognized as a nonmonetary exchange and has been included in the accompanying
consolidated financial statements as though the transaction between Onny and TS
Electronics, Inc. had occurred on September 30, 2005.
Nature of Operations - Helpson manufactures and markets several Western and
Chinese medicines sold mainly to hospitals and private sellers in PRC, through
its marketing department in Hainan Province and from nine sales representative
offices in other provinces and cities. Helpson's other operating activities
include biochemical products, health products, and cosmetics.
Accounting Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Consolidation and Basis of Presentation - The accompanying consolidated
financial statements include the accounts and operations of Onny from the date
of its inception on January 12, 2005, the accounts and operations of Helpson
from the date of its acquisition on June 16, 2005, and the accounts and
operations of TS Electronics, Inc. from September 30, 2005. The accompanying
consolidated financial statements have been restated on a retroactive basis for
the effects of the stock split resulting from the reorganization of Onny into TS
Electronics, Inc. All significant inter-company balances and transactions have
been eliminated in consolidation.
4
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
Company's functional currency is the Chinese Yuan (Renminbi) and the
accompanying financial statements have been expressed in Chinese Yuan
(Renminbi).
Fair Values of Financial Instruments --Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying amounts of notes payable approximate fair value because
of either the immediate or short-term maturity of these financial instruments or
because the underlying instruments are at interest rates which approximate
current market rates.
Cash and cash equivalents - Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts, and short-term
certificates of deposit with original maturities of three months or less.
Trade receivables and allowance for doubtful accounts - Trade receivables are
carried at original invoiced amounts less an allowance for doubtful accounts.
The Company presents trade receivables net of allowances for doubtful accounts,
to ensure trade receivables are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts and an estimation of the overall economic conditions affecting
the Company's customer base. The Company reviews a customer's credit history
before extending credit. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Provision is made against accounts receivable to the extent they are considered
unlikely to be collected. It is common practice in China for receivables to
extend beyond one year. Included in trade receivables is approximately
Y1,780,000 that occurred more than one year from September 30, 2005, but is
estimated to still be collectable.
Inventory - Inventories are stated at weighted average costing. The method of
determining inventory costs is used consistently from year to year. Allowance
for inventory obsolescence is provided in situation when its market values are
lower than its costs at the year end valuation.
Valuation of Long-lived Assets - The carrying values of the Company's long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that they may not be recoverable. When such an event occurs, the
Company would project undiscounted cash flows to be generated from the use of
the asset and its eventual disposition over the remaining life of the asset. If
projections were to indicate that the carrying value of the long-lived asset
will not be recovered, the carrying value is reduced by the estimated excess of
the carrying value over the projected discounted cash flows.
Property and Equipment - Property and equipment are stated at cost. Maintenance
and repairs are charged to expense as incurred and major improvements are
capitalized. Gains or losses on sales or retirements are included in the
statements of operations in the period of disposition, determined by reference
to their carrying amounts.
5
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 Y41,372 for the period from January 12, 2005 through September 30,
2005.
Advances to Suppliers and Advances from Customers - The Company, as is the
common practice in the PRC, will often pay advanced payments to suppliers for
materials and receive from customers advances for finished products. As of
September 30, 2005, the advances to suppliers were Y397,483 and the advances
from customers were Y2,375,880, respectively.
Revenue Recognition - The Company recognizes revenue when it is realized and
earned. The Company considers revenue realized or realizable and earned when (1)
it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the
sales price is fixed or determinable, and (4) collectability is reasonably
assured. Delivery does not occur until products have been shipped to the client,
risk of loss has transferred to the client and client acceptance has been
obtained, client acceptance provisions have lapsed, or the Company has objective
evidence that the criteria specified in client acceptance provisions have been
satisfied. The sales price is not considered to be fixed or determinable until
all contingencies related to the sale have been resolved.
Cost of Revenues - Cost of revenues include wages, materials, handling charges,
and other expenses associated with the manufacture and delivery of product.
Research and Development - Research and development expenditures are recorded as
expenses in the period in which they occur.
Retirement Benefit Plans - The Company contributes to various employee
retirement benefit plans organized by provincial governments under which it is
required to make monthly contributions to these plans at rates prescribed by the
related provincial governments. The provincial governments undertake to assume
the retirement benefit obligations of all existing and future retired employees
of the Company. Contributions to these plans are charged to expense as incurred.
Advertising Costs - Advertising costs are expensed when incurred.
Basic and Diluted Earnings per Common Share - Basic earnings per common share is
computed by dividing net income by the weighted-average number of common shares
outstanding. Diluted earnings per common share is calculated to give effect to
potentially issuable dilutive common shares. There were no potential common
shares outstanding at September 30, 2005.
6
Credit risk - The carrying amounts of accounts receivable included in the
balance sheets represent the Company's exposure to credit risk in relation to
its financial assets. No other financial assets carry a significant exposure to
credit risk.
The Company performs ongoing credit evaluations of each customer's financial
condition. It maintains allowances for doubtful accounts and such allowances in
the aggregate have not exceeded management's estimations.
Interest rate risk - The Company is exposed to the risk arising from changing
interest rates, which may affect the ability of repayment of existing debts and
viability of securing future debt instruments within the PRC.
Recently Enacted Accounting Standards - In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs--An
Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and re-handling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005 and is required
to be adopted by the Company beginning on January 1, 2006.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS 123R"), which revises SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS 123R also supersedes APB 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. In general, the
accounting required by SFAS 123R is similar to that of SFAS No. 123. However,
SFAS No. 123 gave companies a choice to either recognize the fair value of stock
options in their income statements or disclose the pro forma income statement
effect of the fair value of stock options in the notes to the financial
statements. SFAS 123R eliminates that choice and requires the fair value of all
share-based payments to employees, including the fair value of grants of
employee stock options, be recognized in the income statement, generally over
the option vesting period. SFAS 123R must be adopted no later than July 1, 2005.
Early adoption is permitted.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets--An Amendment of APB Opinion No. 29, Accounting for Non-monetary
Transactions ("SFAS 153"). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Non-monetary Transactions, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a non-monetary exchange have commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange.
The adoption of these pronouncements is not expected to have a material effect
on the Company's financial position or results of operations.
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
7
acquire and the shareholders of Helpson agreed to sell all of the outstanding
common shares of Helpson to the Company in exchange for the assumption of
obligations to make cash payments to the Helpson shareholders in the form of
common stock dividends from Helpson of Y34,076,800, the assumption of
Y38,115,843 of other liabilities and the issuance of non-interest bearing
promissory notes totaling Y28,000,000 payable three months after Helpson obtains
a business license in the People's Republic of China as a wholly foreign owned
entity. Helpson obtained such license on June 16, 2005 and the shares of Helpson
were transferred to the Company on that date. June 16, 2005 was recognized as
the date of the acquisition. The promissory notes are due September 16, 2005.
Helpson manufactures and markets several Western and Chinese medicines sold
mainly to hospitals and private sellers in the Peoples Republic of China,
through its marketing department in Hainan Province and from nine sales
representative offices in other provinces and cities. Helpson's other operating
activities include biochemical products, health products, and cosmetics.
Since Helpson is an operating company and control of Helpson changed upon the
closing of the acquisition agreement, 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 Y34,076,800, which equaled Helpson's retained earnings at March
31, 2005 less deferred income tax assets of Y713,565 that are not considered
part of distributable profits under Chinese law. The fair value of the net
assets of Helpson was determined by appraisal and exceeded the cost of the net
assets acquired. That excess was allocated as a pro rata reduction of the
amounts that otherwise would have been assigned to the non-current assets
acquired.
At June 16, 2005, the purchase price was allocated to the assets acquired and
liabilities assumed as follows:
Current assets Y 78,513,015
Property and Equipment 20,964,041
Intangible assets 584,158
--------------------------------------------------------------------------------
Total assets acquired 100,061,214
--------------------------------------------------------------------------------
Current liabilities 64,511,214
Long-term liabilities 8,250,000
--------------------------------------------------------------------------------
Total liabilities assumed 72,761,214
--------------------------------------------------------------------------------
Net assets acquired Y 27,300,000
================================================================================
Intangible assets consist of registered patents, trademarks, licenses,
techniques and formulas related to several Western and Chinese medicines,
biochemical products, health products, and cosmetics. These intangible assets
have a weighted-average useful life of approximately 5 years.
The following unaudited pro forma information is presented to reflect the
operations of the Company and Helpson on a combined basis as if the acquisition
of Helpson had been completed as of January 1, 2005, respectively. The unaudited
pro forma information is only illustrative of the effects of the acquisition and
does not necessarily reflect the results of operations that would have resulted
had the acquisition actually occurred on those dates.
8
For the Period from
January 12, through
September 30,
2005
--------------------------------------------------------------------------------
(unaudited)
Revenue Y 69,102,267
Net income 18,749,610
Basic earnings per common share 1.51
================================================================================
Pro forma net income for the for the nine months ended September 30, 2005
include nonrecurring interest expense of Y700,000 resulting from the
amortization of the discount on the Y28,000,000 promissory notes payable to the
former Helpson shareholders, which discount was computed based upon an imputed
interest rate of 10% per annum.
The reorganization 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
Y37,021 of liabilities. The acquisition of TS Electronics, Inc. was recognized
as a non-monetary exchange.
NOTE 3 - INVENTORY
Inventory consisted of the following at September 30, 2005:
--------------------------------------------------------------------------------
Raw materials Y33,901,357
Work in progress 1,163,392
Finished goods 3,772,075
Provision for obsolescence (14,709)
--------------------------------------------------------------------------------
Total Inventory Y38,822,115
================================================================================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
--------------------------------------------------------------------------------
Permit of land use Y 2,816,679
Building 9,067,566
Plant, machinery and equipment 9,029,542
Motor vehicle 115,405
Office equipment 91,592
--------------------------------------------------------------------------------
Total 21,120,784
Less: Accumulated depreciation (588,514)
--------------------------------------------------------------------------------
Property and equipment, net Y20,532,270
================================================================================
9
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
--------------------------------------------------------------------------------
Depreciation expense was Y588,514 for the period from January 12, 2005 through
September 30, 2005.
NOTE 5 - INTANGIBLE ASSETS
Intangible assets represent the costs on patents, trademarks, licenses,
techniques and formulas. Intangible assets have a weighted-average useful life
of approximately 5 years. The estimated aggregate amortization expense for the
remainder of the period ending December 31, 2005 and the succeeding four years
is as follows:
--------------------------------------------------------------------------------
2005 Y 41,372
2006 41,936
2007 41,936
2008 27,826
2009 24,638
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires recognition of
deferred tax assets and liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and any tax credit carry forwards
available. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The provision for income taxes consisted only of current taxes payable of
Y519,889. The Company is not subject to any income taxes in the United States.
Income tax expense differed from the amounts computed by applying the enterprise
income tax rate of 7.5% to pretax income as a result of the following:
Tax at statutory rate (7.5%) Y 342,035
Nondeductible expenses 177,854
--------------------------------------------------------------------------------
Provision for income taxes Y 519,889
--------------------------------------------------------------------------------
At September 30, 2005, net deferred tax assets consisted of the following:
10
Allowances for doubtful accounts receivable Y 936,644
Property and equipment 1,385,901
Intangible assets 35,017
--------------------------------------------------------------------------------
Total deferred tax assets 2,357,562
Less: Valuation allowance 1,931,510
--------------------------------------------------------------------------------
Net deferred tax assets Y 426,052
--------------------------------------------------------------------------------
The Company has also incurred various other taxes, primarily comprised of
business tax, value-added tax, urban construction tax, education surcharges and
etc. Any unpaid amounts are reflected on the balance sheets as other taxes
payable.
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following at September 30, 2005:
Note payable to a bank, bearing interest at 6.6%, secured by equipment,
building and land use rights, matured, in process of renewal Y15,000,000
Note payable to a bank, bearing interest at 6.6%, secured by equipment,
building and land use rights, due in March 2006 8,000,000
Note payable to former Hainan Helpson shareholders, noninterest
bearing, secured by the capital stock of Hainan Helpson 28,000,000
-------------------------------------------------------------------------------------------
Total notes payable 51,000,000
Less: Current portion (51,000,000)
-------------------------------------------------------------------------------------------
Long term notes payable Y --
===========================================================================================
Annual maturities of notes payable for the remainder of the period ending
December 31, 2005 and thereafter are as follows:
--------------------------------------------------------------------------------
2005 Y 43,000,000
2005 8,000,000
================================================================================
NOTE 8. STOCKHOLDERS' EQUITY
On July 6, 2005, the shareholder of Onny amended Onny's articles of
incorporation increasing the number of authorized common shares to 4,000,000,
reducing the par value of the common shares to Y0.08 per share and authorizing
100 preferred shares with a par value of Y825. 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,
Y827.65 (US$100) par value, and 10,000 preferred shares, Y827.65 (US$100) par
value.
The Onny preferred shareholders were entitled to receive dividends prior to
common shareholders at a rate of Y0.64 per annum for each preferred share.
Following the payment of preferred dividends, the preferred shareholders were
entitled to participate equally with common shareholders in dividends. The
preferred dividends were non-cumulative. The preferred shares were convertible
into common shares on a one-for-one basis any time after the date of issuance,
at the option of the holder.
11
As described in Note 1, the reorganization of Onny into TS Electronics, Inc. was
recognized as an 851-for-1 stock of the Onny common shares previously
outstanding. The number of common shares issued and outstanding have been
restated in the accompanying consolidated financial statements on a retroactive
basis for the effects of the stock split.
On August 16, 2005, the Onny shareholder made a capital investment in Onny of
Y28,437,495 in cash in exchange for the issuance of 25,193,273 common shares
(29,600 pre-split common shares).
The accompanying financial statements reflect the effective issuance by Onny of
the 2,500,060 shares of common stock of TS Electronics, Inc. that remained
outstanding in exchange for the assumption of Y37,021 of liabilities as though
the issuance had occurred on September 30, 2005.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Economic environment - Significantly all of the Company's operations are
conducted in the 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"), which must be converted into other currencies before
remittance out of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require approval of the PRC
government.
NOTE 10. SUBSEQUENT EVENTS
On October 19, 2005, Onny issued 10,000 preferred shares in exchange for
Y35,692,406 in cash, net of Y5,690,094 offering costs and estimated registration
costs, and on that same date, those preferred shares were converted into 10,000
Onny common shares.
On November 4, 2005 the Company made payments to satisfy in full the notes
payable to the former Helpson shareholders in the amount of Y28,000,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. Our financial statements are prepared in RMB and
are in accordance with accounting principles generally accepted in the United
States. When used in this discussion, the words "believes," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected due
to a number of factors beyond our control.
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We do not undertake to publicly update or revise any of the forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. You
are also urged to carefully review and consider our discussions regarding the
various factors, which affect our business, included in this section and
elsewhere in this report.
Factors that might cause actual results, performance or achievements to differ
materially, among other things: from those projected or implied in such
forward-looking statements include: (i) the impact of competitive products; (ii)
changes in laws and regulations; (iii) adequacy and availability of insurance
coverage; (iv) limitations on future financing; (v) increases in the cost of
borrowings and availability of debt or equity capital; (vi) the effect of
adverse publicity regarding our products; (vii) our inability to gain and/or
hold market share; (viii) exposure to and expense of resolving and defending
product liability claims and other litigation; (ix) consumer acceptance of our
products; (x) managing and maintaining growth; (xi) customer demands;
(xii)market and industry conditions including pricing and demand for products,
(xiii)the success of product development and new product introductions into the
marketplace; (xiv)the departure of key members of management; (xv) our ability
to efficiently market our products; as well as other risks and uncertainties
that are described from time to time in our filings with the Securities and
Exchange Commission.
Notwithstanding the above, Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act expressly states that the safe harbor for forward
looking statements does not apply to companies that issue securities that meet
the definition of a penny stock, as such, the safe harbor for forward looking
statements does not apply to us.
Overview
On June 16, 2005, Onny Investment Limited ("Onny") acquired all of the
outstanding common shares of Helpson, a privately held Chinese joint venture, in
exchange for cash payments to the Hainan shareholders in the form of common
stock dividends from Helpson of Y34,076,800 and non-interest bearing promissory
notes totaling Y28,000,000 payable on September 16, 2005. The acquisition of
Helpson was recognized as a business combination.
On August 16, 2005, the Onny shareholder made a capital investment in Onny of
Y28,437,495 in cash in exchange for the issuance of 25,193,273 (29,600
pre-split) additional common shares. On August 18, 2005, the memorandum and
articles of association of Onny were amended to increase the number of shares of
preferred stock authorized to 10,000 shares with a Y827.65 (US$100) par value.
On October 20, 2005, Onny issued 10,000 preferred shares in exchange for
Y35,692,406 in cash, net of offering costs and estimated registration costs, and
on that same date, those preferred shares were converted into 10,000 Onny common
shares and on November 4, 2005 principal payments on the promissory notes of
Y28,000,000 were made to the former Helpson shareholders.
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
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common shares of TS Electronics, Inc. and for the commitment by TS Electronics,
Inc. to issue the original Onny common shareholder 4,723,056 common shares
following an amendment of the TS Electronics, Inc. articles of incorporation
increasing the number of common shares authorized to 100,000,000 shares, which
was on an 851-for-1 exchange ratio. 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 on a 694-for-1 exchange ratio.
The reorganization was recognized as a stock split of the common stock of Onny
and the effective issuance by Onny of the 2,500,060 shares of common stock of TS
Electronics, Inc. that remained outstanding in exchange for the assumption of
Y37,021 of liabilities. The acquisition of TS Electronics, Inc. was recognized
as a nonmonetary exchange.
As a result of these transactions, we currently operate as a holding company for
Helpson, our China-based indirect wholly owned subsidiary. Through Helpson, we
research and produce a variety of bio-pharmaceutical products that focus
primarily on genetic engineering, bioengineering, peptidergic medicine. We have
recently expanded into chemical medicine. Our main products can be separated
into three major categories, in terms of product purposes: anti-infection
products, and raw materials for surface wound-recovery and the neural system
product.. We present product types including the covered tablet, capsule,
troche, oral fluid, injection, frozen powder acicula, and germfree powder
acicula. By increasing investment in research & development to develop products
with easier absorption, stability and improved transportation safety, we strive
to fulfill a larger range of patient needs.
Operations for the three months ended September 30, 2005 and the period from
January 12 to September 30, 2005
Revenues were Y20,958,797 for the three months ended September 30, 2005, and the
cost of revenues was Y13,056,960, which was 62% of the revenues. Operating
expenses were Y2,339,507, which was 42% of income from operations. Interest
expense was Y1,004,020 and net income was Y4,129,533. Revenues were Y25,035,222
for the period from January 12 to September 30, 2005, and the cost of revenues
was Y15,717,843, which is 63% of the revenues. Operating expenses were
Y2,542,841 for the period from January 12 to September 30, 2005, which was 38%
of income from operations. Interest expense for the period from January 12 to
September 30, 2005 was Y1,243,167, and the net income was Y5,013,636.
Liquidity and capital resources of TS Electronics for the period January 12,
2005 to September 30, 2005.
As of September 30, 2005 ,cash and cash equivalents of TS Electronics is
Y28,816,278. Cash used in operating activities was approximately Y93,489 for the
period January 12, 2005 to September 30, 2005, which resulted from trade
accounts receivable increasing by Y12,330407 and advances to suppliers
decreasing by Y9,291,099 and the inventory increasing by Y11,599,887 and account
payable increased amounts Y13,960,147.
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Cash flows from investing activities for the period January 12,2005 to September
30,2005 were Y1,041,888. This was mainly a result of the net cash received in
the purchase TS Electronics..
ITEM 3. CONTROLS AND PROCEDURES
1) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the
Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities
and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information include, without limitation, controls and procedures designed
to ensure that information required to be disclosed in the reports filed
under the Exchange Act of 1934 is accumulated and communicated to the
Company's management, including its principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its principal executive and financial
officer of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon and as of the date of that
evaluation, the Company's principal executive and financial officer
concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the
reports that Company files and submits under the Exchange Act of 1934 is
recorded, processed, summarized and reported as and when required.
2) Changes in Internal Control
There were no changes in the Company's internal controls or in other
factors that could have significantly affected those controls subsequent to
the date of the Company's most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEAGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceeding or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our business,
financial condition or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 11, 2005, we sold to Halter Financial Group, Inc. ("HFG") in a private
placement 1,875,045 shares of restricted common stock at a purchase price of
$0.1066641 per share, pursuant to the terms of a Stock Purchase Agreement (the
"Purchase Agreement") executed by the parties on said date. As a result of the
purchase, HFG became our controlling shareholder, owning approximately 75% of
our issued and outstanding shares of common stock. This issuance was made in
reliance on Section 4(2) of the Act and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
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On October 20, 2005, we entered into a Securities Exchange Agreement with Onny
and its original stockholders pursuant to which we acquired all of the issued
and outstanding shares of Onny from said stockholders in exchange for 27,499,940
shares of our common stock. This issuance was made in reliance on Section 4(2)
of the Act and was made without general solicitation or advertising. The
acquirers were sophisticated investors with access to all relevant information
necessary to evaluate the investment, and who represented to us that the shares
were being acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On August 17, 2005 we filed a Form 8-K to announce the dismissal of Evans
Gaither & Associates, PLLC ("Evans") and the appointment of Hansen, Barnett &
Maxwell, PC.
On October 20, 2005, we filed a Form 8-K to disclose that we entered into a
Securities Exchange Agreement (the "Exchange Agreement") with Onny Investment
Limited, a corporation organized under the laws of the British Virgin Islands
("Onny"), and its original stockholders and Halter Financial Group, Inc.
("Halter") 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a) of the Exchange Act.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14
and Rule 15d-14(a) of the Exchange Act.
32.1 - Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
See Item 5.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TS Electronics, Inc.
Date: November 18, 2005 /s/ Zhilin Li
-------------------------------------
Zhilin Li
Chief Executive Officer and President
Date: November 18, 2005 /s/ Xinhua Wu
-------------------------------------
Xinhua Wu
Chief Financial Officer
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