FULLER, TUBB, POMEROY & STOKES
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
201 ROBERT S. KERR AVE., SUITE 1000
OKLAHOMA CITY, OK 73102
G.M. FULLER (1920-1999) TELEPHONE: 405-235-2575
JERRY TUBB FACSIMILE: 405-232-8384
DAVID POMEROY
TERRY STOKES
------
OF COUNSEL:
MICHEL A. BICKFORD THOMAS J. KENAN E-MAIL:
THOMAS J. KENAN kenan@ftpslaw.com
ROLAND TAGUE
BRADLEY D. AVEY
October 9, 2003
Securities and Exchange Commission
Division of Corporate Finance
ATTENTION JOHN M. HARTZ
Washington, D.C. 20549
Re: Schedule 14C Preliminary Information Statement, Amendment No. 1
TS Electronics, Inc (formerly named "Softstone Inc.")
Commission File No. 0-29523
Dear Mr. Hartz:
As counsel to TS Electronics, Inc., I enclose Amendment No. 1 to its Schedule
14C Information Statement (the "Amended Information Statement"), in accordance
with your instructions in your letter dated August 26, 2003.
We are providing by FedEx, as courtesy copies, two redlined hard copies as well
as two hard copies of the filed version of the Amended Information Statement.
I believe we have provided all relevant disclosures required by Item 14 to
Schedule 14A for both companies involved as well as disclosures required by
Parts B and C of Form S-4 as per your letter.
The audited financial statements of both TS Electronics, Inc. and TS Electronics
(China) Corp. have been included in the Amended Information Statement and have
been updated through June 30, 2003. Pro forma consolidated financial statements
have been updated in the Amended Information Statement and include reasonably
detailed notes thereto.
Kabani & Company has advised us as follows regarding why that company is not
required to be licensed in Texas with regard to its audit of some of the
financial statements contained in the Schedule 14C:
Securities and Exchange Commission
October 9, 2003
Page 2
Kabani & Company, Inc. audited the balance sheets of TS Electronics, Inc.
(formerly, Softstone, Inc.) as of June 30, 2003 and 2002 and the related
statements of operations, stockholders' deficit and cash flows for the
years ended June 30, 2003 and 2002. Audit opinions were issued by Kabani &
Company, Inc. on September 17, 2003 and September 27, 2002 for the audits
of 2003 and 2002, respectively. Kabani & Company, Inc. is based in Fountain
Valley, California. The audits were performed in the state of California
and no audits field work was performed in the State of Texas. Per Kabani &
Company, Inc.'s discussion with the State Board of Accountancy in Texas,
license to practice in the State of Texas is not required if the field work
is not performed in the State of Texas.
If there are questions or matters that could be resolved more effectively by
telephone, please call me at 405-235-2575. My fax number is 405-232-8384.
Sincerely,
/s/ Thomas J. Kenan
Thomas J. Kenan
cc: Keith Boyd (w/enclosure)
Kabani & Co. (w/enclosure)
PRELIMINARY COPIES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
Of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2)
[ ] Definitive Information Statement
TS Electronics, Inc., formerly named Softstone Inc.
---------------------------------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filling Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock
(2) Aggregate number of securities to which transaction applies:
5,400,000 shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount of which the
filing fee is calculated and state how it was determined): $0.275 a share
for 5,350,000 shares of common stock to be distributed to securities
holders in connection with an acquisition, based on the average of the
closing bid and asked prices of the registrant's common stock on August 14,
2003 (the registrant's stock traded then on the Bulletin Board under its
previous name, Softstone, Inc., and stock symbol "SOFS") and $0.275 a share
for 50,000 shares of common stock (based as before) plus $341,110 as the
value of other properties to be distributed to securities holders by the
registrant from the sale of substantially all of its assets.
(4) Proposed maximum aggregate value of transaction:
Acquisition transaction: 5,350,000 shares x $0.275 = $1,417,250.
Sale of assets transaction: 50,000 shares x $0.275 = $13,750 + $341,110 =
$354,860
(5) Total fee paid:
$294.25 + $70.97 = $365.22
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PRELIMINARY COPIES
INFORMATION STATEMENT
TS ELECTRONICS, INC.
(formerly named Softstone, Inc.),
This Information Statement is furnished to stockholders in connection with
the proposed taking of certain actions by the written authorization or consent
of persons holding a majority of the outstanding shares of common stock of TS
Electronics, Inc., a Delaware corporation ("our company", formerly named
"Softstone, Inc."). Although the approval of our company's stockholders is
required to fully effect the transactions, shareholders holding more than 75
percent of our outstanding shares have given their written approval of the
transactions. Accordingly, it is not necessary for the company to call a
special meeting of stockholders to consider the proposed reorganization, and
your approval is not required and is not being sought. Regulations of the U.S.
Securities and Exchange Commission (the "Commission") require that our company
transmit an information statement containing certain specified information to
every holder of our common stock that is entitled to vote or give an
authorization or consent with regard to any matter to be acted upon and from
whom proxy authorization or written consent is not solicited. This Information
Statement must be mailed at least 20 calendar days prior to the earliest date on
which the corporate action may be taken. This Information Statement is being
mailed to our stockholders on or about October 15, 2003 to our stockholders of
record of October 3, 2003.
We Are Not Asking You for a Proxy and You are Requested Not To Send Us a Proxy.
SUMMARY TERM SHEET
------------------
We have entered into a Reorganization Agreement with TS Electronics
(China), a Delaware corporation that conducts all of its business in China. The
Reorganization Agreement contemplates two transactions:
We shall acquire all the capital stock of TS Electronics (China) on the
following basis:
- Before acquiring all the capital stock of TS Electronics (China), we
shall consolidate to 600,000 shares, on a pro rata basis, all shares
of our outstanding common stock Each 21.8045 shares outstanding on
August 14, 2003 shall be consolidated into one share with fractional
shares being rounded up or down to the nearest whole number. See
"Description of the Five Transactions - The Stock Consolidation
Transaction" on page 6;
- We shall then issue 5,350,000 shares of our common stock to the
shareholders of TS Electronics (China), pro rata, in exchange for all
the capital stock of TS Electronics (China). See "Description of
the Five Transactions - The Stock Issuance Transaction" on page 7;
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- The officers and directors of TS Electronics (China) shall become the
officers and directors of our company. See "Description of the Five
Transactions - The Reorganization Agreement Transaction" on page 6; and
- We will change our name to TS Electronics, Inc. See "Description of the
Five Transactions - The Name Change Transaction" on page 7.
We shall sell the following assets to an entity to be owned by Gene F.
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Boyd, Betty Sue Boyd and Keith P. Boyd ("the Boyds"), the controlling
--------------------------------------------------------------------------------
shareholders of our company, on the following basis. See "Description of the
--------------------------------------------------------
Five Transactions - The Sale of Assets Transaction" on page 7:
We shall transfer to the Boyds's entity our rubber business and all related
assets, valued on our books at $298,628, which assets have little market value,
We will issue to the Boyds's entity 50,000 shares of post-consolidation
stock,
We will issue to the Boyds's entity 100,000 Common Stock Purchase Warrants
exercisable for one year at $1.25 a warrant, and
We will receive from the Boyds their written release of approximately
$761,768 of debt owed by our company to them, and
We will receive from the Boyds their written assumption of the obligation
to pay all other debt of our company, which is approximately $270,820, together
with written releases of this debt from the creditors to whom this debt is owed.
The net effect of the reorganization agreement transactions will be:
---------------------------------------------------------------------------
- The current rubber business and related assets of our Company, 50,000
shares of common stock and 100,000 stock purchase warrants will be
transferred to an entity to be wholly owned by the Boyds.
- The new business of our Company will be the business currently conducted
by TS Electronics (China).
- The Boyds's ownership of our company's Common Stock will have been
reduced from 50 percent to approximately five percent. The control of
our company will pass to the present shareholders of TS Electronics
(China).
- Our company's debt owed to creditors other than the Boyds will have been
released or paid by the Boyds. Our company's debt to the Boyds will have
been cancelled. Our company will have no liabilities.
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- Our company's management will be replaced by the present management of TS
Electronics (China).
- The historical financial statements of our company will be those of TS
Electronics (China), not our company.
- For Federal income tax purposes, the Reorganization Transaction will be
tax-free to our shareholders pursuant to the provisions of Section
368(a)(1) of the Internal Revenue Code. There will be no income tax
consequences to our shareholders other than a change in the per-share
tax basis of their shareholdings after giving effect to the stock
consolidation.
- There are no changes in the rights of our stockholders as a result of the
transaction.
- Our company will be renamed "TS Electronics, Inc."
SPECIAL FACTORS
The fifth Transaction described in this Information Statement (The "Sale of
Assets Transaction" on page 7) relates to the sale of substantially all the
present assets and the rubber business of our Company to Gene F. Boyd, Betty Sue
Boyd and Keith P. Boyd ("the Boyds"). Gene and Betty Boyd are the parents of
Keith Boyd. Gene and Keith Boyd are directors of our company. Keith Boyd is
the president of our company, and Gene Boyd is the secretary of our company.
Our stockholders should be aware of the following matters:
- In contemplation of the sale of our assets and rubber business (with a
book value of $298,628) to an entity to be owned by the Boyds and of the
effectuation of all five Transactions, in August 2003 our company issued
3,650,651 shares of common stock to Gene Boyd, 1,064,187 shares of its
common stock to Keith Boyd and 507,895 shares of its common stock to
Betty Sue Boyd (the "Boyds"). The issuance of these shares increased
the stock position of the Boyds to 50 percent of the 13,082,698
presently outstanding shares of our common stock. These shares were
issued primarily in exchange for (i) the Boyds releasing our company
from the obligation to pay approximately $761,768 in notes owed to them
and (ii) the Boyds assuming the obligation to personally pay, and
obtaining the release of our company from the obligation to pay,
approximately $270,820 of additional debt owed by our company to other
persons. These shares were also issued in recognition of the fact that
of the approximately $1,309,234 cash (disregarding shares issued for
services) raised by our company through the sale of stock since its
inception, the Boyds have contributed slightly more than half of that,
or $684,099, and have not been fully recognized for this contribution.
The total contributions of the Boyds, including their recent assumption
to release or pay all debt of our company, is approximately
$1,716,687 or 51.6 percent of the $3,327,026 total contributions of
capital to our company, after giving effect to the release and
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assumption of debt by the Boyds described above. Absent the Boyds'
release of $761,768 of company debt owed to them and their assuming
the obligation to pay an additional $270,820 of debt of our company owed
to other parties, the Transactions described below would not be possible
and would not even be attempted.
- The Boyds negotiated the terms of the sale of our rubber business assets
to themselves.
- Because of the Boyds's control of our company, they have actual
conflicts of interest with regard to their participation in the
negotiation of the terms of the sale of our rubber business to
themselves. They also have conflicts of interest in the manner in
which they would approve the sale of assets to themselves. In an
effort to resolve these conflicts of interest, the Boyds agreed to
their approving the five Transactions only after the approval of
the transactions should first be obtained from holders of a majority
of the outstanding shares not counting the shares held by the Boyds.
Such written approval was obtained before the Boyds gave their written
consent to this and the other Transactions described herein.
- The Transactions described in this Information Statement relate to the
acquisition by our company of all the capital stock of TS Electronics
(China) Corp., a Delaware corporation with its principal business
located in Tianjin, China. TS Electronics (China)'s business shall
become the business of our company and TS Electronics (China)'s 129
employees shall effectively become employees of our company. The sale
of our rubber business and assets to the Boyds is a coincidence of the
acquisition of the business and assets of TS Electronics (China). This
sale of assets to the Boyds could not occur unless our stockholders
should also approve the other four Transactions described herein.
- Our company is insolvent. If all five Transactions described herein
should not be effectuated, the rubber business of our company would
almost surely fail in the immediate future. In such a case, the Boyds
would be the major creditor of our company. By reason of this, in any
bankruptcy or reorganization case, the Boyds would be in a position to
acquire the substantial majority or all of our assets. Our
stockholders would almost surely receive nothing in such a bankruptcy
reorganization or liquidation case.
- We have received no offers for the sale of our rubber business and are
not aware of any prospective purchaser of our assets or rubber
business. We believe the equipment relating to our rubber business
that we have, which equipment has been in storage for several months,
would have minimal or no value as a bankruptcy auction item.
- Essentially, the business, management and control of our company are to
be changed. Because of the consolidation of all presently outstanding
shares of common stock of our company to only 600,000 shares and
because of (i) our issuance of 5,350,000 shares of Common Stock to the
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TS Electronics (China) shareholders in exchange for all the capital
stock of TS Electronics (China) and (ii) our issuance of 50,000
shares of Common Stock to an entity to be owned by the Boyds plus
100,000 Common Stock Purchase Warrants exercisable for one year at $1.25
a warrant in exchange for the Boyds's paying or assuming and obtaining
the release of approximately $1,032,588 total indebtedness of our
company, you - our existing stockholders - will experience a 90
percent dilution in your share ownership of our company. However, your
shares will become shares in a growing, profitable company that
realizes net income from its operations, a development that should
improve the market liquidity and value of your Common Stock.
DESCRIPTION OF THE FIVE TRANSACTIONS
REORGANIZATION AGREEMENT TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, a Reorganization Agreement dated as of July 31, 2003 between our
company and TS Electronics (China), a Delaware corporation with its principal
offices in Tianjin, China; pursuant to which agreement, among other things -
- all outstanding shares of common stock of our company will be
consolidated, pro rata, into 600,000 shares,
- after such consolidation, 5,350,000 million shares of our common stock
will be issued to the TS Electronics (China) shareholders in exchange
for all the issued and outstanding shares of capital stock of TS
Electronics (China),
- the business of our company will then become the business of TS
Electronics (China) in China (see "Information With Respect to TS
Electronics (China) on page 28, and
- our company's present rubber business and assets (see "Information With
Respect to Our Company" on page 14), 50,000 shares of post-consolidation
Common Stock plus 100,000 Common Stock Purchase Warrants exercisable for
one year at $1.25 a warrant will be sold to an entity to be owned by the
Boyds in exchange for their releasing, paying, or obtaining the
cancellation of, approximately $1,032,588 of debt of our company owed to
the Boyds and others.
STOCK CONSOLIDATION TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, a Transaction to authorize the consolidation, pro rata, of all
the presently outstanding shares of common stock of our company into 600,000
shares. This is equivalent to each 21.8045 shares of stock being consolidated
down to one share of stock. Fractional shares shall be rounded up or down to the
nearest whole number.
STOCK ISSUANCE TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, a Transaction to authorize the issuance of 5,350,000 million
shares of Common Stock to the TS Electronics (China)'s shareholders in exchange
for all the issued and outstanding capital stock of that company.
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NAME CHANGE TRANSACTION. The Board of Directors of our company has recommended
that our stockholders approve, and a majority of the shareholders have approved,
the adoption of an amendment to our company's Certificate of Incorporation to
change the name of our company from "Softstone, Inc." to "TS Electronics, Inc."
SALE OF ASSETS TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, the Transaction - which is part of the Reorganization Agreement
Transaction - that our company sell, to an entity to be owned by the Boyds, our
company's rubber business and all our company's assets, 50,000 shares of
post-consolidation Common Stock plus 100,000 Common Stock Purchase Warrants
exercisable for one year at $1.25 a warrant in exchange for the Boyds's
releasing, paying or obtaining the release of approximately $1,032,588 in debt
owed by our company to the Boyds and others.
LACK OF APPRAISAL RIGHTS
Delaware law and our certificate of incorporation do not provide appraisal
rights to stockholders that dissent from the transactions described herein.
PRINCIPAL PARTIES TO THE TRANSACTIONS
The principal parties to the transactions described below are:
The acquiring company:
Softstone, Inc. (now named "TS Electronics, Inc.)
111 Hilltop Lane
Pottsboro, TX 75076
Telephone: (903) 786-9618
The company to be acquired:
TS Electronics (China) Corp.
c/o ShenDing Electronics, Inc.
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
Telephone: 011-86-22-83710114-
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The persons to whom control of our company shall pass:
Jingyi Wang
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
JianZhong Wang
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
The persons who shall purchase our rubber business and related assets:
Gene F. Boyd
712 Franklin Court
Ardmore, OK 73401
Keith P. Boyd
111 Hilltop Lane
Pottsboro, TX 75076
Betty Sue Boyd
712 Franklin Court
Ardmore, OK 73401
MATERIAL CONTACTS WITH TS ELECTRONICS (CHINA)
During the period for which financial statements of our company and TS
Electronics (China) are provided herein, there were no material contacts,
arrangements, understandings, relationships, negotiations or transactions
between the two companies and their affiliates until mid-July 2003 when
negotiations commenced directly between the parties regarding what came to be
executed as the Reorganization Agreement on July 31, 2003.
The negotiations were conducted by telephone on behalf of our company by
our counsel, Thomas J. Kenan, and on behalf of T S Electronics (China) by
Tianbing Wei, a New York City agent of T S Electronics (China) in late July
2003. Mr. Kenan and Mr. Wei had become acquainted several years earlier when Mr.
Wei had resided in Oklahoma City, the city of Mr. Kenan's residence. Mr. Wei
initiated the negotiations, being aware that Mr. Kenan had been known to
represent companies in reverse merger transactions. Neither Mr. Wei, Mr. Kenan
nor any other person is being compensated by our company as a finder, broker or
consultant with regard to the transactions described herein.
In addition to the Reorganization Agreement, the principal terms of which
are described in this Information Statement, the executive officers, directors,
controlling persons and several shareholders associated or earlier associated
with our company have executed written "lockup agreements" with TS Electronics
(China). The effect of these agreements is to remove from the "public float"
41,247 of the 600,000 shares of our company presently outstanding (after giving
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effect to the 1-for-21.8045 stock consolidation) until February 14, 2004 and an
additional approximately 259,000 of these 600,000 shares until nine months after
the closing of the Reorganization agreement.
There are no other present or proposed agreements, arrangements,
understandings or relationships between our company or any of our executive
officers, directors or controlling persons or subsidiaries and TS Electronics
(China) Corp. or any of its executive officers, directors, controlling persons
or subsidiaries.
REASONS FOR ENGAGING IN THE TRANSACTIONS
Our directors considered the facts that our company has never had a
profitable quarter, is insolvent, and faces liquidation or receivership this
year if it remains in the rubber business.
Our directors also considered the impressive growth of TS Electronics
(China). TS Electronics (China) has 40 full-time employees as of October 1,
2003. Its assets at June 30, 2003 were $1,464,295 against liabilities of
$671,930. It had sales for the nine-month period ended June 30, 2003 of
$1,271,004 - a 7-fold increase from sales of $97,049 for the preceding
nine-month period ended June 30, 2002. It had net income of $520,272 for the
nine-month period ended June 30, 2003 - a 29-fold increase from net profits of
$17,920 for the preceding nine-month period ended June 30, 2002. It dominates
its market in the third largest city in China and has solidified its position in
that region as a supplier of certain equipment used in the rapidly growing
wireless communications industry in China. It has ambitious growth plans, plans
that can best be achieved if it is a public company with its stock trading in
the United States.
CONDITIONS TO THE CONSUMMATION OF THE REORGANIZATION AGREEMENT
CONDITIONS TO THE CLOSING BY OUR COMPANY. The obligation of our company to
consummate the transactions contemplated by the Reorganization Agreement is
subject to the satisfaction, or waiver by our company, of certain conditions
including the following:
(i) The representations and warranties made by TS Electronics (China)
under the Reorganization Agreement must be true and correct as of the
date of the Reorganization Agreement and as of the Closing Date
with the same force and effect as if they had been made on the
Closing Date;
(ii) All covenants, agreements and conditions contained in the
Reorganization Agreement must be performed or complied with by TS
Electronics (China) on or prior to the Closing Date in all
material respects; and
(iii) Our company must have obtained stockholder approval of the
Transactions, which approval has been obtained.
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The Boyds, who own 50 percent of the outstanding voting stock of our company,
withheld their consent to the five transactions until our company had first
obtained the written consent to the transactions from holders of a majority of
the other outstanding shares of the company.
CONDITIONS TO THE CLOSING BY TS ELECTRONICS (CHINA). The obligation of TS
Electronics (China) to consummate the transactions contemplated by the
Reorganization Agreement is subject to the satisfaction, or waiver by TS
Electronics (China), of certain conditions including the following:
(i) The representations and warranties made by our company under the
Reorganization Agreement must be true and correct as of the date of
the Reorganization Agreement and as of the Closing Date with the same
force and effect as if they had been made on the Closing Date; and
(ii) All covenants, agreements and conditions contained in the
Reorganization Agreement must be performed or complied with by our
company on or prior to the Closing Date in all material respects; and
(iii) Prior to the Closing, our company shall not have suffered any
material adverse change.
REPRESENTATIONS AND COVENANTS OF THE PARTIES
COMPANY REPRESENTATIONS AND COVENANTS. Under the terms of the
Reorganization Agreement, our company has made numerous representations and
agreed to abide by several affirmative covenants, among which are the following:
(i) The financial statements of our company, which are attached hereto as
Annex I, present fairly the financial condition and results of
operations of our company in accordance with generally accepted
accounting practices;
(ii) All material liabilities of our company, contingent or matured, are
revealed in the financial statements or as a separate exhibit;
(iii) Our company has filed, or will file prior to the Closing, all tax
returns required to be filed by any taxing authority and has paid or
accrued all taxes required to be paid; and
(iv) We have not made any material misstatements of fact or omitted to
state any material fact necessary or desirable to make complete,
accurate and not misleading every representation set forth in the
Reorganization Agreement.
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TS ELECTRONICS (CHINA)'S REPRESENTATIONS AND COVENANTS. Under the terms
of the Reorganization Agreement, TS Electronics (China) has made numerous
representations and agreed to abide by several affirmative covenants, among
which are the following:
(i) The financial statements of TS Electronics(China), which are attached
hereto as Annex II, present fairly the financial condition and results
of operations of TS Electronics (China) in accordance with U.S.
generally accepted accounting principles;
(ii) All material liabilities of TS Electronics(China), contingent or
matured, are revealed either in the financial statements or in Exhibit
4.10 attached to the Reorganization Agreement.
(iii) TS Electronics (China) has filed, or will file prior to the Closing,
all tax returns required to be filed by any taxing authority and has
paid or accrued all taxes required to be paid; and
(iv) TS Electronics (China) has not made any material misstatements of fact
or omitted to state any material fact necessary or desirable to make
complete, accurate and not misleading every representation set forth
in the Reorganization Agreement.
APPROVALS AND CONSENTS
Other than the approval of our company's stockholders of the transactions,
the transactions contemplated by the Reorganization Agreement do not require the
approval or consent of third parties, including governmental entities, in order
for the parties to perform their obligations under the Reorganization Agreement.
OTHER REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains customary representations and
warranties of our company and of TS Electronics (China) relating to, among other
things, (i) organization, good standing, qualification to do business and other
corporate matters; (ii) the authorization, execution, delivery and
enforceability of the Reorganization Agreement; (iii) the status of the shares
of Common Stock of our company and of TS Electronics (China) to be delivered;
(iv) the status of certain financial statements referenced in the Reorganization
Agreement; (v) the absence of certain changes or events since the date of the
balance sheet referenced in the Reorganization Agreement; (vi) the status of our
company's contracts and commitments; (vii) the absence of certain litigation;
(viii) the employees and employee benefit programs of our company; (ix) required
consents and approvals; (x) compliance with laws; (xi) the title of each of our
company and TS Electronics (China) to its property and assets; (xii) tax
matters; and (xiii) related party transactions, including indebtedness to
officers and directors.
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CHANGE OF CONTROL
The 5,350,000 shares of Common Stock to be issued to the shareholders of TS
Electronics (China) pursuant to the Reorganization Agreement will represent, in
the aggregate, 89 percent of all shares then outstanding, after considering the
effect of consolidating to 600,000 the number of shares of our company
outstanding prior to the issuance of such 5,350,000 shares and the issuance of
50,000 shares to an entity to be owned by the Boyds. As a result, following the
consummation of the transactions contemplated by the Reorganization Agreement,
the number of shares that will be controlled by the present two shareholders of
TS Electronics (China) will enable them, acting in concert, to effectively
control the outcome of any matter presented to the stockholders, including the
election of all of the members of our board of directors.
INFORMATION WITH RESPECT TO OUR COMPANY
Business Development
Our company was incorporated as "Softstone, Inc." 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, Texas
76205. On February 1, 2000, we moved our offices and facilities to Ardmore,
Oklahoma. In June 2002 we moved our production facilities into storage and
moved our office facilities to 111 Hilltop Lane, Pottsboro, Texas 75076, which
is our present address. On August 13, 2003 we changed our name to "TS
Electronics, Inc."
Description of Business
Our focus initially was solely on realizing the commercial benefits of a
process developed for this purpose and patented by our first president,
Frederick Parker. Because we have this process, we have a contract with
Michelin North America's Ardmore tire manufacturing facility that pays us to
take its waste tires.
Our primary focus later shifted to the commercial possibilities of a
superior, newly discovered devulcanization process to which we acquired a
5.5-year exclusive license for the Western Hemisphere and to the importation and
resale of hard-to-find and specialty crumb rubber manufactured by other
companies.
Devulcanization - The Levgum Process
This process - called the Levgum Process after the name of the company of
scientists and engineers in Israel that developed and patented the process -
breaks down the sulfur links across polymer chains in vulcanized rubber. It
allows the rubber to be used again.
There are other devulcanization techniques. But, we believe ours is better,
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cheaper and eco-friendlier than all others.
Before we agreed to pay $250,000 for our exclusive license, we took the
Levgum devulcanized rubber product to the Akron Rubber Development Laboratory in
Akron, Ohio for testing and for comparison with virgin rubber and with the best
devulcanized rubber produced by other techniques. The laboratory results:
- Levgum devulcanized rubber retains 80 percent of virgin rubber's
properties, making it most useful. Other techniques retain 40 percent at
best.
- Levgum's devulcanized rubber can be produced at significantly less cost
than can other devulcanization technologies or than the cost of virgin
rubber.
- We use conventional machines operating at room temperatures. Competing
technologies employ lengthy operations involving grinding, chemical,
heating and mechanical processes.
- The Levgum devulcanization process is non-toxic and eco-friendly. Other
technologies are not.
We took a sample of the Levgum devulcanized rubber and the Akron Rubber
Development Laboratory test results to the chief chemist at Michelin's Ardmore
tire factory. The chemist advised us that our product is superior to all other
devulcanized rubber products.
We have attempted to exploit our licensed technology through sub-licenses
throughout the Western Hemisphere. In addition to our Michelin contract, we are
engaged in discussions with Rubbermaid's principal plant in Mexico. It has to
dispose of 150 tons of waste rubber a month. By substituting our Levgum
technology and making use of its own waste rubber, this Rubbermaid facility
should effect savings of $99,000 a month - savings that drop to its bottom line.
We have not proposed to build devulcanization plants. Instead, it has been
our intention to sub-contract the initial manufacturing of the devulcanized
rubber, sell sub-licenses to other companies, and offer our assistance with the
marketing of the devulcanized rubber for a commission. We have not been
successful in realizing our intentions.
Our license obligations to Levgum and our anticipated charges to our
sub-licensees are as follows:
Charges
-----------------------------------------
Our outgo Income from Net to
to Levgum sub-licensees Softstone
------------ ------------- ---------
Levgum-supplied "modifier"
to mix with used rubber $3,000 a ton $3,500 a ton $500 a ton
Royalty on a ton of Levgum-
processed rubber $30 a ton $60 a ton $30 a ton
13
Sub-license fee $0 Will vary Will vary
We need $50,000 in capital to fund our manufacture of a fully automated
tire de-beader, which we propose to then manufacture for sale to the industry,
to pursue opportunities to sublicense the Levgum devulcanization technology, and
to market crumb rubber produced by us or other manufacturers. We have not
identified the source of these funds.
Devulcanization
---------------
Technology exists today to "fine grind" rubber from 80 to 200 mesh (holes
per square inch). This technology has long been the best source for injecting
recycled rubber into virgin rubber mixes. The cost to do so is extremely high;
often costing 20 to 30 percent more than the cost of virgin rubber itself.
Rubber manufacturing companies do this to meet government regulations and to
have a way to recycle their own waste. Rubber disposal is extremely expensive;
companies that can "fine grind" have the ability to sell back to a company 100%
of its scrap in a usable form.
For years, manufacturers tried to establish a process that breaks the
sulfur links across polymer chains (devulcanize) without hurting the original
chemical properties, allowing the resulting material to be re-deployed in new
and existing products. Although some have been successful, they were plagued
with economic or environmental problems. We have a 5.5-year exclusive license
to the Western Hemisphere for a process that (i) breaks the sulfur lattice under
normal room temperature conditions using conventional machines and (ii) does
away with the expensive and lengthy operations involving grinding, chemical,
heating and mechanical processes. It is the only process known to us where
relatively large pieces of rubber waste can be used, a feature that saves
substantial amounts of investment in terms of plant and machinery, labor, power,
space, storage and transportation. The process itself is 100% non-toxic and eco
friendly. The final product produced is in granular form and, when mixed with
virgin rubber or master compounds, results in better homogeneity than any other
process we know of. The test results we obtained from a test facility in Akron,
Ohio proved that the devulcanized rubber, itself, maintains 80% of the original
properties of the uncured compound. This results in a product that can be
produced and sold at a cheaper price than the "fine grind" powders while
maintaining much higher physical properties.
Our devulcanized rubber development plan is as follows:
1. Develop a turnkey devulcanization system.
2. Develop the market.
3. Sub-license the technology to large recyclers, the largest of which has
contacted Softstone and is very interested in using the technology.
We envision utilizing our contacts in the recycled rubber and virgin rubber
14
industry to establish market presence. We see no need at this time to establish
a raw material supply beyond the needs of the development location to implement
the devulcanized technology into the market. Instead, we plan to expand on our
relationships with crumb rubber manufacturers by sublicensing the technology and
jointly developing the market.
Our compensation for these efforts will come from the following sources.
1. Sales of devulcanized rubber from the pilot plant in Ardmore.
2. Sales of sub-licenses.
3. Sales of specialty crumb rubber.
4. Royalties for the amount of rubber devulcanized with our process and
commissions on sales.
Conversion of Waste Tires Into Useful Products
There is a worldwide need for a method to convert whole waste tires into
useful products with no waste as a byproduct and with favorable economic
results. New tire manufacturers in the U.S. are required to dispose of their
manufacturing rejects without creating an unsightly mess or adding to ecological
problems. Government agencies at all levels tend to cooperate with any company
having a reasonable means of disposing of the approximately seven million tires
each year that are discarded as rejects or as worn-out tires. Virtually every
state has a program whereby it pays a fee per tire to qualified companies that
dispose of used tires.
Our past president, Frederick Parker, is a co-inventor of a patented
process Softstone uses to convert waste tires into useful products. The Parker
I System machine was constructed in Ardmore, Oklahoma as a proof-of-concept
prototype. With subtle adjustments recently made, this machine became a
production model that ingests whole tires at one end of the machine and ejects
rubber modules at the other end with virtually no waste or contaminants. The
rubber modules are virtually indestructible and have been tested for use as a
playground covering, pathways, walking trails, horse barn stalls and other uses.
The Parker I System machine can make a variety of products by using
different molds. Our most popular product is a two-foot by four-foot module
approximately two inches thick that interlocks with adjacent modules for walk
ways and driveways. However, the size and thickness of the modules can be
adjusted for use as highway cone holders, crash barriers, guardrails, bridge and
road impact pads and as a substitute for asphalt in several key applications.
Approximately 80 to 85 percent of the modules' composition is comprised of
wire-free tire chips. The balance is comprised of readily available
polyurethane binders and other substances.
We have raised and spent approximately $1.5 million since inception on
developing our patented process and on designing and constructing our Parker
System I proof-of-concept machine in Joshua, Texas. The Parker System I is
highly automated. Whole tires are inserted into a shredder, reduced to chip
15
rubber, blended with a specially prepared binder element, placed into a custom
mold and then pressed into place and locked. These molds are then moved on a
conveyor belt through a heated oven where the product cures and comes out the
other end as a rubber-molded product ready for sale. We believe there is no more
efficient or economical method of processing tires into finished products than
our process.
We need to refurbish our tire shredder and to purchase equipment that
produces wire-free chips from the shredded tires. Our modules have withstood a
300,000-pound deformation test and immediately rebounded; yet, the product has
qualified for installation on children's playgrounds. The product is ready to be
installed immediately after it is made. There is no curing time necessary. The
product is relatively light but does not break, crack or tear.
We believe that the primary markets for our products are paving
applications where concrete and asphalt now dominate, such as sidewalks,
driveways and trails. Concrete and asphalt have significant drawbacks compared
to Softstone-based products. Concrete and asphalt crack and heave due to soil
and weather conditions. They often must be replaced after a few years of use.
Softstone's rubber modules, however, will not crack because of weather's cold or
melt because of its heat. If there is a soil heaving condition, our product can
be lifted and relaid when the ground condition is corrected.
Crumb Rubber Importation
--------------------------
In the United States today there exists a demand for several specific
grades of crumb rubber. Until recently these grades had been considered waste
and were commonly landfilled or incorporated in various molded products. Hence,
the lack of value of these materials had limited their production. In the last
three years, however, the crumb rubber industry has seen some significant
changes, predominantly in the areas of playground and landscape. The demand for
such material has entered into the hundred million pounds per year sector, and
U.S. production only manufactures approximately 24,000,000 pounds per year of
this specified material. We have gained a presence in the international market
and have located various suppliers world wide to assist us in brokering this
material.
Distribution Methods
We have several interested parties for the distribution of our paving
material; however, since we have temporarily shut down this operation, we do not
have the product available for distribution.
Competitive Business Conditions
Many firms make molded rubber products, including some for patio, horse
trailer and barn applications. Many sell specified crumb rubber. It is our
observation and belief that our products are superior to all others in economics
and durability. We are also able to import crumb rubber from India, Sri Lanka
and China and resell it at prices lower than those of U.S. competitors.
16
Sources and Availability of Raw Materials; Names of Principal Suppliers
There is virtually an endless supply of waste tires. Many sources will pay
us to take the tires off their hands. Our earlier operation of the Parker
System was based on Michelin's paying us $0.77 to $0.85 a tire for recycling
purposes. However, in some sectors of the market, specifically the playground
and landscape industries, there is only a limited amount of the needed material
produced in the United States on an annual basis. This has led us to import
crumb rubber from overseas suppliers in India, Sri Lanka and China. We are
currently working on increasing our monthly supply by signing up new
manufacturers from these three areas. This would alleviate a dependence on any
one supplier and level out our monthly revenues.
Dependence on Major Customers or Suppliers
We are dependent on our international suppliers for our sources of
specified crumb rubber. The supply in the United States of the material we
import is 100% consumed on an annual basis.
We are still in the development stage as far as sales are concerned and are
dependent upon one major customer in St. Louis. There are many other buyers of
the same material in the United States; however, we are currently only supplying
a small percentage of their estimated monthly capacity.
Patents, Trademarks and Licenses
The inventors of our patented Parker One System, one of whom is Frederick
Parker, our past president, have assigned the patent to Softstone with no
retained royalty.
We have a 5.5-year exclusive license to the Levgum devulcanization
technology for the Western Hemisphere.
Regulatory Approvals
There are no federal or state regulatory requirements that must be complied
with or approval must be obtained in connection with the Transactions described
herein.
Government Regulations
Our operations are subject to regulation by various federal, state and
local governmental entities and enactments, which include environmental laws and
workplace regulations, including the Occupational Safety and Health Act, the
Fair Labor Standards Act, the Clean Air Act, the Clean Water Act and other laws
and regulations regarding health, safety, sanitation, environmental issues,
building codes and fire codes. We believe that our current compliance programs
adequately address such concerns and that we will be in substantial compliance
with such laws and regulations. Our failure to comply with such laws and
regulations could result in serious sanctions and penalties that could
materially and adversely affect our business.
17
Research and Development
We spent approximately $650,000 during 1999 and 2000 but nothing over the
last two years in research and development activities with regard to the
development of our products. None of the cost of these activities was borne
directly by our customers.
Environmental Laws
We must comply with the environmental regulations of the Environmental
Protection Agency and the equivalent Oklahoma and Texas agencies charged with
environmental protection. This consists, primarily, in complying with
regulations regarding the disposal of waste products. Such compliance requires
no significant outlay of capital by us and only minimum costs. We produce no
hazardous waste as most of our competitors do.
Seasonality
There is no seasonal aspect to our business.
Employees
We have one full-time employee and no part-time employees.
Exclusive License With Levgum, Ltd.
On March 15, 2002 we executed an agreement with Levgum, Ltd. of Tel Aviv,
Israel. Levgum owns patents pertaining to certain technology for the
devulcanization of rubber tires. We are convinced that this is the best
devulcanization technology in the world and that it is commercially viable, as
compared to other devulcanization technologies that work but cost more to apply
per pound of rubber produced than the cost of virgin rubber.
Levgum shipped to us ten kilograms of its devulcanized rubber for us to
perform laboratory trials on. The trials were most satisfactory. We then
acquired the exclusive rights to Levgum's technology for the Western Hemisphere,
including the right to sublicense the technology in this geographic area.
We paid $250,000 to Levgum for these exclusive rights for a 5.5 year period
and for a ten percent equity interest in Levgum. To retain the exclusive rights,
we will have to remit royalties to Levgum as follows:
First 18 months: $ 200,000
Next 12 months: 1,000,000
Next 12 months: 2,000,000
Next 12 months: 3,000,000
Next 12 months: 5,000,000
18
The royalties will consist of $30 for each ton of devulcanized rubber
produced in the Western Hemisphere using Levgum's devulcanization technology.
Reports to Security Holders
We file reports with the Securities and Exchange Commission. These reports
are annual 10-KSB, quarterly 10-QSB, and periodic 8-K reports. We also intend
to furnish stockholders with annual reports containing financial statements
audited by independent public or certified accountants and such other periodic
reports as we may deem appropriate or as required by law. The public may read
and copy any materials we file with the SEC at the Public Reference Room of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
Web site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The
address of such site is http://www.sec.gov.
DESCRIPTION OF PROPERTY
We neither own nor lease any office or manufacturing space. Our office
space is provided rent free in Pottsboro, Texas by our president. We no longer
have any space for manufacturing. All of our tire processing equipment was
placed into storage in August, 2002, rent free, at a warehouse in Ardmore,
Oklahoma owned by the Ardmore Industrial Airpark Authority. The equipment
consists of several modules that, together, convert reject vehicle tires into
rubber composition mats. The equipment has no other uses.
LEGAL PROCEEDINGS
Neither our company nor any of our property is a party to, or the subject
of, any material pending legal proceedings other than ordinary, routine
litigation incidental to our business.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of our stockholders during
the last fiscal year or during the subsequent period to the filing of this
report.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was admitted to trading on the OTC Bulletin Board on April
17, 2002. Its stock symbol initially was "SOFS." On August 15, 2003 the symbol
was changed to "TSET". The following table shows the quarterly high and low
prices of the stock since it was admitted to trading through June 30, 2003,
which was before the stock symbol change. The prices reflect inter-dealer
quotations without mark-up, mark-down or commissions and may not represent
actual transactions.
19
High Low
---- ---
Calendar 2002:
2nd Qtr 0.51 0.11
3rd Qtr 0.25 0.06
4th Qtr 0.17 0.05
Calendar 2003:
1st Qtr 0.1 0.1
2nd Qtr 0.1 0.05
3rd Qtr 5.4 0.08
There are approximately 175 holders of record of our company's common
stock.
Our company has declared no dividends on our common stock. There are no
restrictions that would or are likely to limit the ability of our company to pay
dividends on its common stock, but we have no plans to pay dividends in the
foreseeable future and intend to use earnings for the expansion of our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere. See "Financial Statements."
20
Results of operations, Fiscal Years 2002 and 2003
The following table presents, as a percentage of sales, certain selected
financial data for each of fiscal years ended June 30, 2002 and June 30, 2003:
Fiscal Year Ended
-----------------
06-30-2002 06-30-2003
---------- ----------
Sales 100% 100%
Operating expenses 2,007% 241%
------ -----
Income from operations (1,907)% (141)%
Other expenses (1,038)% 64%
------ -----
Net income (loss) (2,945)% (206)%
Net loss per share(1) $(3.90) $(0.69)
----------------------
(1) Based on each 21.8045 shares outstanding on August 14, 2003 being
consolidated to one share.
Sales
Sales of $37,490 for fiscal year 2002 increased by $72,589, or 194 percent,
to sales of $110,079 in fiscal 2003. The increase is due to our importing and
reselling in the U.S. crumb rubber from India.
Operating expenses
Operating expenses decreased to $265,721 in fiscal 2003 from $752,324 in
fiscal 2002. This 65 percent decrease is attributed primarily to fiscal 2002's
purchase of, and research conducted prior to, the purchase of the Levgum
Devulcanization Technology as well as our decision to discontinue our module
manufacturing operations in Ardmore, storing the Parker System at a rent free
facility and our President providing our office rent free at our current
address, 111 Hilltop Lane, Pottsboro, TX.
Net income (loss)
Our net loss of $226,365 in fiscal 2003 is a marked improvement from our
net loss of $1,104,133 in fiscal 2002. This improvement is attributed to the
company's purchasing the rights to a foreign patent for $250,000, which purchase
had to be expensed as the patent has not been appraised, and our discontinuing
our pilot plant operations in Ardmore, Oklahoma and storing our manufacturing
equipment, thus further lowering our operating expenses.
Balance sheet items
Current assets of $3,554 on June 30, 2003, compares unfavorably with
current liabilities of $905,815 at that time, an unfavorable current ratio of
..004.
21
Liquidity and Capital Resources
During the fiscal year ended June 30, 2003, we financed our net loss of
$226,365 primarily through -
- sales of common stock for $36,235 in cash,
- loans of $22,336,
- the sale of assets totaling $32,576,
- the receipt of $2,515 for stock to be issued,
- depreciation and amortization of $67,271,
- a $17,741 loss on settlement of debt, and
- an increase in accrued expenses of $48,514.
During the fiscal year ended June 30, 2002, we financed our net loss of
$1,104,133 primarily through -
- sales of common stock for $254,520 in cash,
- loans of $287,263,
- the issuance of $346,537 worth of common stock for services and interest,
- depreciation and amortization of $83,307,
- $125,000 loss on an investment, and
- a $214,444 loss on the impairment of assets.
OUTLOOK
We have been unable to raise funds for the renovation of our tire shredder
and the purchase of equipment that produces wire-free chips from shredded tires.
We were able, however, to raise $250,000 from the Boyds to acquire the exclusive
license from Levgum for the Western Hemisphere rights to its devulcanization
technology. We shifted our business emphasis to exploiting such license and to
brokering the sale of crumb rubber manufactured by other manufacturers. We have
not been able to achieve any significant success and have determined that it is
in the best interests of our shareholders to reorganize our company in
accordance with the reorganization agreement with TS Electronics (China)
described herein.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 5, 2002 Hogan & Slovacek of Oklahoma City and Tulsa, our
principal independent accountants, resigned. Hogan & Slovacek had been engaged
as our principal independent accountants since August 22, 2001, when it replaced
Grant Thornton LLP as our principal independent accountants. See Softstone's
Form 8-K filed with the Commission on August 27, 2001 (Commission File No.
000-29523).
22
The report of Hogan & Slovacek on the financial statements of Softstone
(our earlier name) for its fiscal year ended June 30, 2001 contained no adverse
opinions or disclaimers of opinion, and, other than raising substantial doubt
about Softstone's ability to continue as a going concern for the fiscal year
ended June 30, 2001, were not otherwise modified as to uncertainty, audit scope,
or accounting principles during the period of its engagement (August 22, 2001 to
September 5, 2002) or the interim period to September 5, 2002, the date of
resignation. Similarly, the reports of Grant Thornton on the financial
statements of Softstone contained no adverse opinions or disclaimers of opinion,
and, other than raising substantial doubt about Softstone's ability to continue
as a going concern for each of the fiscal years ended June 30, 2000 and 1999,
were not modified as to uncertainty, audit scope, or accounting principles
during such past two years or the interim period to August 21, 2001, the date of
resignation.
During the past two years or interim periods prior to September 5, 2002,
there were no disagreements between Softstone and either Grant Thornton or Hogan
& Slovacek, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Grant Thornton's or Hogan & Slovacek's satisfaction, would
have caused it to make reference to the subject matter of the disagreements in
connection with its reports.
On September 5, 2002, we engaged Kabani & Company, Inc. of Fountain Valley,
California as our new principal accountant to audit our consolidated financial
statements.
The decision to change accountants was recommended and approved by the
board of directors.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
A list of our current officers, directors and significant employees appears
below. The directors are elected annually by the shareholders. The officers
serve at the pleasure of the board of directors. The directors do not presently
receive fees or other remuneration for their services.
Office Held Term of
Person Office Since Office
------ ------ ----------- -------
Keith P. Boyd, 30 President 2001 October 2003
Director 2001 October 2003
Frederick W. Parker, 68 Director 1999 October 2003
Gene F. Boyd, 65 Secretary 1999 October 2003
Chairman of the
Board of Directors 1999 October 2003
Keith P. Boyd. Mr. Boyd has spent most of his adult life assisting his
father, Gene Boyd, with the family interests, Meinecke-Boyd, Inc., located near
Ardmore, Oklahoma. After a year in college, he joined the U.S. Navy and ended
his naval career as a petty officer - machinist mate 3rd class - aboard the USS
Chicago, SSN 721, a nuclear-powered, fast-attack submarine. In late 1998, Mr.
23
Boyd raised the first investor capital for Softstone. He has considerable
mechanical skills and abilities and assisted with the design and fabrication of
Softstone's Parker System machine. He formulated Softstone's sales and
marketing effort and has been responsible to date for all of its sales. In June
2001 he was elected president and CEO of Softstone, Inc. (the company's third)
and then merged the company with a 12G reporting shell, making Softstone an
SEC-reporting public corporation. Mr. Boyd negotiated our contract with Levgum,
Ltd., of Israel and restructured the company to incorporate the devulcanization
technology. Keith Boyd has initiated the beginnings of a global market strategy
through his research of product applications as well as market entries. He
devotes 100 percent of his time to the affairs of our company.
Frederick W. Parker. Mr. Parker attended the University of Southern
California and the University of Wyoming. From December 1969 to May 1980 he was
employed as an executive and wholesaler of drilling fund securities of Canadian
American Securities, a subsidiary of American Quasar Petroleum. From May 1980
to June 1982 he founded and operated ENEX Securities and the ENEX Income Funds.
From 1982 to November 1984 he owned and operated Parker Energy Funding, a coal
methane gas company. From 1986 to 1987 he was a consultant to several oil and
gas production companies regarding deep well injection of hazardous oil field
waste. From June 1987 to October 1990 he was the executive vice president of
Princeton Clearwater Corporation. From 1990 to 1999 he operated the consulting
firm of Donner-Gray, primarily regarding oil and gas and real estate activities.
From May 1996 to September 1998 he was the director of marketing of VE
Enterprises, a manufacturing concern. From October 1998 until June 1999 when it
was merged with Softstone, Inc., he was the president and owner of Softstone
International LLC, which owned the patented technology for the manufacture of
rubber modules, which patent was assigned to Softstone, Inc. Upon the
incorporation of Softstone, Inc. on January 28, 1999, he became its president
and a director. He is still a director but resigned his position as president
in May 2001.
Gene F. Boyd. Mr. Boyd, a 1960 graduate of Texas Tech, has been the
president of Meinecke-Boyd, Inc., an Oklahoma ranching and investment
corporation, since January 1979. As the operator of a 3600-acre Simmental
cattle ranch at Tishomingo, Oklahoma, Mr. Boyd practiced (and preached) holistic
resource management, which included rotational grazing to enhance the natural
recycling of soil and grasses. He also served as vice-president of the Oklahoma
Simmental Association and as a board member of soil and water conservation
districts. Intrigued by the potential and the need for recycled rubber
products, Mr. Boyd and his wife moved to Ardmore, Oklahoma after 26 years on the
ranch, so that he could be a full-time participant in the start-up and
development of Softstone, Inc. Upon the incorporation of Softstone, Inc., on
January 28, 1999, Mr. Boyd became its secretary and its chairman of the board of
directors, positions he still holds.
EXECUTIVE COMPENSATION
No executive officer of the company has received total compensation in any
of the last three years that exceeds $100,000. The table below sets forth all
compensation awarded to, earned by, or paid to the presidents of the company
during the last three fiscal years:
24
Securities
Other Underlying
Fiscal Annual Restricted Options/ LTIP
Name Year Salary Bonus Compensation Stock Awards SARS Payouts
---------- ------ ------ ----- ------------ ------------- ----------- -------
Keith Boyd 2003 $36,000 0 0 0 0 0
Keith Boyd 2002 $36,000 0 0 $50,000 0 0
Keith Boyd 2001 $36,000 0 0 $20,000 0 0
Frederick Parker 2001 0 0 0 0 0 0
Employment Contracts
We have no long-term compensation plans or employment agreements with any
of our officers or directors.
There are no employment contracts, compensatory plans or arrangements,
including payments to be received from our company, with respect to any director
or executive officer which would in any way result in payments to any such
person because of his or her resignation, retirement or other termination of
employment, any change in control, or a change in the person's responsibilities
following a change in control of our company.
Stock Options
There have been no stock options granted to the officers and directors of
our company, nor have there been any other forms of compensation paid to the
officers and directors of the company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the common stock of Softstone as of September 30, 2003 (giving
effect to the one-for-each-21.8045 shares of stock consolidation), by each
officer and director of our company, by each individual who is known, as of the
date of this filing, to be the beneficial owner of more than five percent of our
common stock, its only voting security, and by the officers and directors as a
group:
25
Amount and
Name and Address of Nature of Percent
Beneficial Owner Beneficial of
Ownership Class Office
------------------- ------------ ------- ------
Keith P. Boyd
111 Hilltop Lane
Pottsboro, TX 75076 74,129 12.4 President
Director
Frederick W. Parker 35,562 5.9 Director
811 N. Rockford Place
Ardmore, OK 73401
Gene F. Boyd 200,122 33.4 Secretary
712 Franklin Court Director
Ardmore, OK 73401
Betty Sue Boyd 25,015 4.2
612 Franklin Court
Ardmore, OK 73401
Officers and Directors as a Group 334,828 55.9
(3 persons)
No executive officer, director, person nominated to become a director,
promoter or control person of our Company has been involved in legal proceedings
during the last five years such as
- bankruptcy,
- criminal proceedings (excluding traffic violations and other minor
offenses), or
- proceedings permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities.
Nor has any such person been found by a court of competent jurisdiction in
a civil action, or the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities or
commodities law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal years 2002 and 2003, the following outstanding notes payable
were either issued or renewed from earlier years. In each instance, the notes
were either guaranteed by Gene Boyd, who is a director and the secretary of our
company, or were issued to him and his spouse, Betty Sue Boyd, in exchange for
loans of money to the company by them:
Revolving note payable to bank;
interest rate 7.5%, due on December 05, 2005 $ 88,468
Notes payable to stockholder, 8% & 12%
interest rates and due on demand 600,889
26
Bank term loan; 6.78% interest rate;
Maturing September 13, 2003 37,857
Bank term loan; interest at 6.25%
(variable); collateralized by
equipment, accounts receivable and
intangibles and guaranteed by the
principal stockholder of the Company,
due July 15, 2005 25,331
Note payable to stockholder; interest
free; due on demand 160,879
All of the liabilities represented by the above notes shall be released as
a condition of the reorganization.
MANAGEMENT'S PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto. It is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere.
We have exhausted our cash reserves. Our liabilities exceed $1 million.
Our assets consist primarily of unique equipment that has no known value other
than its scrap value. The cost of preparing and filing with the Securities and
Exchange Commission the periodic reports and audited financial statements
required of a public company can no longer be paid by our company. For these
reasons and the other reasons stated in this Information Statement, our
management has concluded that the best and most prudent course of action for all
shareholders is to approve the Reorganization Agreement with TS Electronics
(China), sell the rubber assets and business to the Boyds in exchange for the
cancellation or release of all debt and liabilities of our company, turn over
control of our company to the owners of TS Electronics (China) and pursue the
business of TS Electronics (China) rather than the rubber business that has
never been adequately capitalized.
FINANCIAL STATEMENTS OF OUR COMPANY
See Annex I attached hereto for the audited financial statements of our company.
INFORMATION WITH RESPECT TO TS ELECTRONICS (CHINA)
Business Development
TS Electronics (China) was incorporated in the State of Delaware on July
31, 2002. It conducts it business through a wholly-owned subsidiary, Tianjin
27
ShenDing Electronics Technology Co., Ltd. ("ShenDing Electronics"), which was
incorporated in China in March, 2001 and has its principal offices at XinMao
Technology Park, D1, Suite 5C-D, Tianjin, P.R. China.
Business
TS Electronics (China), through its subsidiary in China, Tianjin ShenDing
Electronics Technology Co., Ltd., manufacturers and distributes electronic
equipment for the wireless communications and utilities industries in China.
Our company is headquartered in the city of Tianjin, one of the largest Chinese
cities with a population exceeding 8 million. ShenDing has two main products -
Reactive Power Compensation Power saving box ("RPCP Saving Box") and
Uninterruptible Power Supply electronics equipment ("UPS").
RPCP Saving Box
RPCP Saving Box is utilized during the transmission of electricity.
Traditionally, when electricity is being transported via copper wires from a
power plant to various destinations, there is a high percentage of loss of the
electricity during such a transmission. TS Electronics (China)'s RPCP Saving
Box can substantially increase power transmission efficiency at minimum cost
while avoiding the shortfalls of alternative technologies.
In 1998, the Chinese State Power Corporation, a state-owned enterprise
reporting directly to the Central Government, initiated a "National Power
Network Restructuring" (NPNR) project. Its purpose is to improve and update the
Nation's electrical generation and transmission facilities in order to save
energy, to make power transmission safer and more reliable, and to meet the
Nation's rapidly growing power demands, particularly in rural areas. The
situation has changed little. The current Power Factor (the percentage of
generated electricity received after transmission) of the Chinese State Power
Transmission Network is still as low as 30 to 50 percent or even lower in rural
areas, and averages 15 to 20 percent elsewhere. TS Electronics (China)'s main
product, its RPCP Saving Box, is designed and produced as an integral part of
the NPNR project to meet the national mandate for efficient electricity
transmission. TS has a strategic alliance with the Tianjin Electronic Power
Corporation, a government agency that oversees the NPNR project in the Tianjin
area.
TS Electronics (China)'s RPCP saving box can be widely used in industrial
enterprises, oil fields, residential areas, high rise buildings, construction
areas, and low voltage power distribution networks in both cities and rural
areas, playing a role of dynamic compensation for the reactive power needed by
the electricity loads. The RPCP Saving Box optimizes power quality and expands
the electricity transmission capacity.
In particular, TS Electronics (China)'s RPCP Saving Box has the following
benefits:
- It improves the receiving power factor to over 95 percent (which is a 95%
electricity transmission retention rate),
28
- It adjusts terminal voltage and eliminates voltage fluctuation,
- It stabilizes the terminal voltage and improves the conformity rate of
the voltages,
- It improves the unbalanced-properties, three-phase power transmission
networks, and
- It optimizes the reactive power wave of the electric network by purifying
the pollution of the electric network and improving the operating
security of the electric network.
Such benefits are significant for the country of China, which stresses the
importance of power conservation and transmission loss reduction from a power
plant to end-users.
UPS
TS Electronics (China)'s second principal product is Power 2000
Uninterruptible Power Supply (UPS) electronic equipment utilized in the
telecommunications industry. UPS is based on line-interactive technology to
provide a back-up power supply for regional cellular transmission towers. UPS
is specifically used in so-called Personal Access Systems (PAS), a relatively
new regional cell phone solution in China. PAS is a relatively low-cost
wireless service in limited geographical areas, such as cities or towns.
Utilizing smaller transmission towers that can only effectively carry signals to
the distance of 300 meters, a PAS sets up such towers all over a city or a town.
Such towers, due to unstable power supply in certain regions, require reliable
backup batteries to provide the power needed in case of a power outage. Nasdaq-
listed UT Starcom (Nasdaq NM symbol UTSI) is a pioneer in China in the area of
providing telecommunications equipment that makes PAS possible in China. "UT
Starcom is capitalizing on a technology that many had dismissed as passe and is
fashioning it as the most affordable wireless solution for the common man in
China," says Alan Hellawell, head of Asian telecom research at Lehman Brothers
in Hong Kong.
China has the largest market for mobile telephones in the world, with 207
million users. To promote competition among the country's phone service
providers, especially in the rapidly growing mobile phone sector, China grants
the rights to provide nationwide cellular phone services to only two large
companies, China Mobile (NYSE symbol: CHL) and China Unicom (NYSE symbol: CHU).
China Telecom and other regional fixed line providers are prohibited from
providing nationwide cellular services. However, such restrictions are limited
to nationwide cellular phone services, not regional- or city-wide cellular phone
services. Companies such as UT Starcom teamed up with China Telecom and started
promoting regional cellular phone services that only cover the territories of a
city or a town, the PAS system. Over half of the Chinese population lives in
small and mid-sized cities, and most of the Chinese do not travel beyond their
cities or towns. Especially in large cities, such PAS systems have proved to be
efficient and cost-effective - their costs of service are about 25 percent of
the cost of nationwide cellular phone services. PAS has been well accepted by
most Chinese.
TS Electronics (China)'s UPS equipment is generally fixed on each
29
substation of a PAS communication network near a transmission tower and provides
a backup battery support in case an electricity outage occurs.
Distribution Methods
TS Electronics (China) usually markets and promotes its products by
participating in regional or national industry equipment exhibitions and product
promotional conferences, such as the Annual National Electronic Equipment
Exhibition and the Annual Telecommunication Equipment Exhibition.
Another approach that TS Electronics (China) utilizes in establishing sales
channels is by building close and reliable business relationships with various
regional and city power supply companies, as these companies normally are owned
or run by the government and play the important administrative role of
regulating the local electricity industry.
Competition
TS Electronics (China) is the major manufacturer of an RPCP Saving Box in
Tianjin and occupies 90 percent of the present market in Tianjin, the third
largest city in China.
TS Electronics (China) has, through ShenDing Electronics, built up
excellent working relationships with the Tianjin Power Corporation and its
related companies. TS Electronics (China) believes that this has secured for
itself an almost-monopoly position over its competitors in the Tianjin area.
TS Electronics (China) is now proceeding to expand its market beyond the
city of Tianjin. TS Electronics (China) perceives that it has several
advantages over potential competitors:
- There are approximately thirty RPCP saving box manufacturers in China.
However, none of these competitors has produced products that are
commercially available and mature enough to be widely utilized.
The majority of these competitors are subsidiary research labs of
universities or research institutes.
- TS Electronics (China) continues to develop new technologies to improve
its existing products.
- TS Electronics (China) has an established name brand, an established
customer base, and good product quality control.
- As for the UPS market, there are about a dozen competitors in China, but
only a few of them are the main suppliers of PAS. TS Electronics (China)
markets its UPS products through its own distribution channels. TS
Electronics (China) has rapidly gained market share since its initial
production in March 2002. In general, TS Electronics (China) has
30
relatively advanced technology due to sustained research and development
and has low costs and expenses because of its good management.
Sources and Availability of Raw Materials
There are numerous suppliers of raw materials TS Electronics (China) can
choose from to satisfy its production requirement. During the nine months ended
June 30, 2003, it purchased 89 percent of its materials from three vendors, all
unrelated to TS Electronics (China).
Dependence on Major Clients
TS Electronics (China) relies on its strategic alliance with Tianjin
Electric Power Corporation and several other regional power companies for
repeated business. During the nine months ended June 30, 2003, some 91 percent
of its revenues were attributable to sales to three power companies.
Patents, Trademarks and Licenses
TS Electronics (China), through its subsidiary company Tianjin ShenDing
Electronics Technology Co., Ltd. has various trademarks and licenses. It is also
in the process of applying for several patents in China related to the RPCP
Savings Box.
Governmental Approval of Principal Products
TS Electronics (China) does not need any special governmental approval
other than the customary business licenses to be able to sell its principal
products.
Governmental Regulations
The regulatory bodies of China's communication system, especially the
Ministry of Information Industry, do not have clearly stated policies regarding
the rapidly growing popularity of PAS - Personal Access Systems. Since PAS is
the target market of TS Electronics (China)'s UPS product, the projected demand
for TS Electronics (China)'s UPS depends on the future regulatory policies for
this new type of regional mobile communication system.
The Chinese telecommunications industry is regulated at national,
provincial and local levels. Currently, PAS is approved in some regions by
Public Telecommunication Administrations at the provincial and local levels.
China Telecom, restricted to providing only regional cellular services,
nevertheless competes at such levels with China Mobile, the major national
mobile communication service provider in China. China Telecom, a major customer
for TS Electronics (China)'s UPS equipment, has a vested interest in promoting
PAS systems in regional China, and the PAS system does provide a cost-effective
and reliable mobile communications system for the majority of the Chinese who
seldom leave their towns, cities or local regions.
Cost and Effects of Compliance with Environmental Laws
31
TS Electronics (China) is not subject to any environmental controls or
restrictions that require the outlay of capital or the obtaining of a permit in
order to engage in business operations.
Research and Development
TS Electronics (China)'s research and development has a staff of five.
Much of the company's research work is done in close cooperation with
universities and research labs. TS Electronics (China) expects to add an
additional fifteen technology experts in the next six months to strengthen its
research and development department.
Number of Employees
On September 30, 2003, TS Electronics (China) employed 40 full time and no
part time persons.
Description of Property
TS Electronics (China) owns 7,000 square feet of office and manufacturing
space in Tianjin, China, against which there is no indebtedness. There is ample
space available for currently anticipated expansion needs.
Legal Proceedings
Neither TS Electronics (China) nor any of its property is a party to, or
the subject of, any material pending legal proceedings.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified in
its entirety by the foregoing and by the more detailed financial information
appearing elsewhere. See "Appendix 2. Financial Statements."
Results of Operations
The following table presents, as a percentage of sales, certain selected
financial data for each of the fiscal years ended September 30, 2001 and 2002
32
and each of the nine-month interim periods ended June 30, 2002 and 2003:
9 months ended 9 months ended
FY ended 9-30-01 FY ended 9-30-02 6-30-02 6-30-03
---------------- ---------------- -------------- --------------
Sales 100 % 100 % 100 % 100 %
Cost of Goods Sold 82.6 62.1 62.0 45.2
Gross Profit Margin 17.4 37.9 38.0 54.8
S, G and A Expense 4.9 20.9 19.3 9.3
Income from Operations 12.5 17.0 18.7 45.5
----- ----- ----- -----
Net Income 12.9 16.7 18.5 40.1
===== ===== ===== =====
Sales
Sales of $77,804 in the fiscal year ended September 30, 2001 (from
inception on March 16, 2001 to September 30, 2001) increased by $35,618, or 46
percent, to $113,422 in the fiscal year ended September 30, 2002. This increase
can be attributed primarily to the fact that the fiscal year 2001 was a short
fiscal year since the inception of the fiscal year was March 16, 2001.
Results of interim nine-month periods ended June 30, 2002 and 2003
Sales of $97,049 for the interim period ended June 30, 2002 increased by
$1,173,955, or 1,200 percent, during the interim period ended June 30, 2003, to
$1,271,004. This increase can be attributed to the completion of the R&D phase
of development of the RPCP Savings Box and the commencement of commercialization
of production of the Savings Box. In addition, the company initiated aggressive
sales activities to expand the customer base for the product, resulting in
increased demand.
Cost of sales and Gross Margin
The cost of sales for the fiscal year ended September 30, 2001 of $64,277,
was 82.6 percent of sales, as contrasted with the cost of sales for the fiscal
year ended September 30, 2002 of $70,437, which was 62.1 percent of sales. The
gross profit margin for the fiscal year ended September 30, 2001, was 17.4
percent of sales and was 37.9 percent of sales for the fiscal year ended
September 30, 2002. The cost of sales for the interim period ended June 30,
2002 of $60,231 was 62 percent of sales, as contrasted with the cost of sales
for the interim period ended June 30, 2003 of $573,894, which was 45.2 percent
of sales. The gross profit margin for the interim period ended June 30, 2002 was
38 percent of sales and was 54.8 percent of sales for the interim period ended
June 30, 2003. These figures demonstrated such improvement due to the company's
margin management policy along with the increase in sales. This margin program
is designed to promote product pricing that is in line with the specific type
and extent of product that is provided to the customer.
Results of interim nine-month periods ended June 30, 2002 and 2003
The cost of sales for the interim period ended June 30, 2002 was 62 percent
33
of sales, as contrasted with the cost of sales for the interim period ended June
30, 2003, which was 45.2 percent of sales. The gross margin for the two periods
was 38 percent for nine-month period in FY 2002 and 54.8 percent for the
nine-month period in FY 2003. These figures demonstrated such improvement due
to the company's margin management policy along with the increase in sales.
General, Selling, General and Administrative Expenses
Selling, general and administrative expenses of $3,779 in the fiscal year
ended September 30, 2001 was 4.9 percent of sales; for the fiscal year ended
September 30, 2002, such expense increased to $23,643, which was 20.9 percent of
sales. This may be attributed to the significant increase of 46 percent in
sales during this period, as well as the relatively small base of sales of
$77,804 in the fiscal year ended September 30, 2001.
Results of interim nine-month periods ended June 30, 2002 and 2003
Selling, general and administrative expenses of $18,699 for the interim
period ended June 30, 2002 was 19.3 percent of sales; for the interim period
ended June 30, 2003, such expense was $118,501, which was 9.3 percent of sales.
The company attributes this decrease to its dedication to controlling expense
line items as a percentage of sales.
Net Income
As a result of the above, net income of $10,022, or 12.9 percent of sales,
in the fiscal year ended September 30, 2001 improved to net income of $19,091,
or 16.7 percent of sales in the fiscal year ended September 30, 2002.
Results of interim nine-month periods ended June 30, 2002 and 2003
In a continuation of improvements in sales volume, gross profit margins and
lower selling, general and administrative expenses as a percentage of sales, net
income of $17,920 for the nine-month period ended June 30, 2002, or 18.5 percent
of sales, improved markedly to $520,272 for the nine-month period ended June 30,
2003, which was 40.1 percent of sales.
Liquidity and Capital Resources
As of June 30, 2003, we had $4,034 cash on hand, compared to $4,640 cash on
hand as of September 30, 2002. We believe that our current cash needs for at
least the next twelve months can be met from working capital.
As of September 30, 2002, the company increased its inventory by $139,838
and its plant and equipment by $219,971. Accounts payable and accrued expenses
increased by $80,854 to $110,859. An earlier loan to an officer of $151,859 was
paid down by the officer to $65,727.
During the nine-month interim period ended June 30, 2003, we increased our
34
accounts receivable from $139,838 on September 30, 2002 to $983,601 and
increased our accounts payable and accrued expenses from $110,859 on September
30, 2002 to $499,395 on June 30, 2003.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public market on which TS Electronics (China)'s common stock is
traded.
There are two stockholders of TS Electronics (China). The transaction
described herein contemplates that all the capital stock of TS Electronics
(China) will be acquired by our company from these two stockholders.
PRO FORMA FINANCIAL INFORMATION
The following shows the pro forma effects of the acquisition by our company
of TS Electronics (China) and the sale to an entity owned by the Boyds of our
rubber business and related assets.
35
TS Electronics Inc. Unaudited Proforma Combined Balance Sheets June 30, 2003
Proforma
TS Electronics, Inc. Proforma Company
TS Electronics (China) (Formerly, Softstone, Inc) Adjustments Combined
---------------------- -------------------------- ----------- -----------
Assets
Current Assets
Cash and cash equivalents $ 4,034 $ 1,789 $ (1,789) $ 4,034 (1)
Accounts receivable, net 983,601 1,765 (1,765) 983,601 (1)
Inventories 142,547 - - 142,547
Loan to officer 60,404 - - 60,404
Loan to employees 14,570 - - 14,570
Loan to related party 2,914 - - 2,914
Loan to suppliers 2,390 - - 2,390
Deferred income taxes 2,220 - - 2,220
Prepaid expenses 23,753 - - 23,753
-----------------------------------------------------------------------------
Total Current Assets 1,236,433 3,554 (3,554) 1,236,433
Prperty, plant and equipment, net 227,862 295,074 (295,074) 227,862 (1)
-----------------------------------------------------------------------------
Total Assets 1,464,295 298,628 (298,628) 1,464,295
==========================================================================
Liabilities and Stockholders'
(Impairment) Equity
Current Liabilities
Accounts payable 467,806 29,311 (29,311) 467,806 (1)
Accounts payable - related party - 160,879 (160,879) - (1)
Accrued expenses 31,589 76,879 (76,879) 31,589 (1)
Notes payable - current - 638,746 (638,746) - (1)
Customer deposits 27,562 - - 27,562
Income taxes payable 59,747 - - 59,747
Other taxes payable 75,787 - - 75,787
Other current liabilities 9,439 - - 9,439
-----------------------------------------------------------------------------
Total Current Liabilities 671,930 905,815 (905,815) 671,930
Long Term Liabilities
Notes payable - long term - 126,773 (126,773) - (1)
-----------------------------------------------------------------------------
Total Liabilities 671,930 1,032,588 (1,032,588) 671,930
-----------------------------------------------------------------------------
Stockholders' (Impairment) Equity
Common stock 242,836 350 (237,186) 6,000 (1) & (2)
Additional paid-in capital - 2,294,088 (2,063,767) 230,321 (1) & (2)
Shares to be issued - 6,515 - 6,515
Accumulated (deficit) earnings 549,529 (3,034,913) 3,034,913 549,529 (2)
-----------------------------------------------------------------------------
Total stockholders'
(Impairment) Equity 792,365 (733,960) 733,960 792,365
Total Liabilities and
Stockholders' (Impairment)
Equity $ 1,464,295 $ 298,628 $(298,628) $1,464,295
=============================================================================
36
TS Electronics Inc. Unaudited Proforma Combined Statement of Earnings for twelve
months ended June 30, 2003
Proforma
TS Electronics, Inc. Proforma Company
TS Electronics (China) (Formerly, Softstone, Inc) Adjustments Combined
---------------------- -------------------------- ----------- -----------
Net Sales $ 1,299,359 $ 110,079 $ (110,079) $ 1,299,359 (1)
Cost of sales 591,503 - - 591,503
------------------------------------------------------------------------------
Gross Profit 707,856 110,079 (110,079) 707,856
------------------------------------------------------------------------------
Selling expenses 37,940 - - 37,940
General and administrative expenses 86,472 265,721 (265,721) 86,472 (1)
------------------------------------------------------------------------------
Total Operating Expenses 124,412 265,721 (265,721) 124,412
------------------------------------------------------------------------------
Income (Loss) from Operations 583,444 (155,642) 155,642 583,444
Other Income (Expense)
Miscellaneous expense (87) - - (87)
Miscellaneoue income - 159 (159) - (1)
Interest expense - (46,191) 46,191 - (1)
Interest income 170 - - 170
Loss on sale of assets - (17,741) 17,741 - (1)
Loss on settlement of debt - (6,950) 6,950 - (1)
------------------------------------------------------------------------------
Total Other Income (Expense) 83 (70,723) 70,723 83
Income (Loss) Before Income Taxes 583,527 (226,365) 226,365 583,527
Provision for Income Taxes 58,482 - - 58,482
------------------------------------------------------------------------------
Net Income (Loss) $ 525,045 $ (226,365) $ 226,365 $ 525,045
==============================================================================
Net (loss) earnings per share
from continuing operations
Basic $ 0.09
===========
Diluted $ 0.09
===========
Average number of shares
and share equivalents:
Basic 5,999,999
Diluted 5,999,999
37
The above proforma adjustments reflect the execution by the Company of a
Reorganization Agreement with TS Electronics (China), a Delaware Corporation
with its principal offices in Tianjin China. For accounting purposes, the
reorganization has been treated as an acquisition of TS Electronics, Inc. by TS
Electronics (China) and a recapitalization of TS Electronics, Inc.
(1) Reflects the sale of the company's business to an entity owned by the
Boyds. The company will have issued 50,000 shares of common stock, 100,000
Common Stock Purchase Warrants and transferred the company's assets to an entity
owned by the Boyds in exchange for their releasing, paying, or obtaining the
cancellation of all the company's liabilities.
(2) Reflects the acquisition of TS Electronics (China) and the
reorganization of TS Electronics. The company will have consolidated all the
outstanding shares into 600,000 shares and subsequently issued an additional
5,350,000 shares for the purchase of all the outstanding shares of TS
Electronics (China) and an additional 50,000 shares in conjunction with the sale
of the company's business to an entity owned by the Boyds.
FINANCIAL STATEMENTS OF TS ELECTRONICS (CHINA)
See Annex II for the audited financial statements of TS Electronics (China).
CERTAIN DIRECTOR MATTERS
New Director Designees
Simultaneously with the consummation of the transactions contemplated by,
and pursuant to, the Reorganization Agreement, the directors and officers of TS
Electronics (China) will become the directors and officers of our company.
There are no agreements, understandings or arrangements regarding any right by
any person to designate members of the post-merger board of directors other than
those contained in the Reorganization Agreement. All directors will stand for
re-election at our company's Annual Meeting in 2004.
The following sets forth the names and positions of the officers and
directors of TS Electronics (China) who will replace our present officers and
directors at the closing of the transactions contemplated by the Reorganization
Agreement, as well as certain biographical information relating to each such
person:
Office Held Term
Person Positions and Offices Since Expires
------ ---------------------- ------------ -------
Jingyi Wang, 45 (1) Chairman of Board of Directors March 2001 March 2004
and CEO
Jianzhong Wang, 39 (1) Vice President and Director March 2001 March 2004
Shao Hongwu, 37 Director March 2001 March 2004
Ling Fang, 30 Chief Financial Officer October 2002 March 2004
Jiaqi Sun, 41 Vice President, R & D March 2001 March 2004
----------------------
(1) Jingyi Wang and Jianzhong Wang are brothers.
Jiangyi Wang. Mr. Wang has served as chairman and chief executive officer
38
of TS Electronics since the inception of our company. Mr. Wang has over 20 years
of experience in the Chinese electronics industry. He was formerly a senior
manager at Tianjin Great Wall Electronics Co., Ltd., one of the largest
electronics instrument manufacturers in China. Mr. Wang worked in various
departments of production, quality inspection, marketing and management. From
1992 to 1999, Mr. Wang was the general manager of Tianjin XinSanLi Automobile
Electronics Technology Inc., an electronic instrument supplier for Tianjin
Daihatsu Automobile Company in China. Since 1999 to present, Mr. Wang has been
the Chief Executive Officer of Tianjin ShenDing Electronics Technology Co.,
Ltd., a wholly -owned subsidiary of TS Electronics (China). Mr. Wang graduated
from one of China's leading universities, the People's University, and received
a bachelor's degree in management. Mr. Wang has also received the accreditation
of Senior Economist.
Jianzhong Wang. From 1998 to 2000 Mr. Wang worked as head of business
development for Beijing Telecom. From March 2001 to present, Mr. Wang has served
as the Vice President of Tianjin ShenDing Electronics Technology Co., Ltd. Mr.
Wang graduated from Beijing Construction and Engineering College with bachelor's
and master's degrees in automation. Mr. Wang has been the project manager of
several telecommunication projects.
Hongwu Shao. Mr. Shao has served as an independent director of Tianjin
ShenDing Electronics Technology Co., Ltd. since March 2001. Mr. Shao brings
extensive experience in investment banking and financial consulting to TS
Electronics (China). Presently, Mr. Shao is the chief representative of the
Beijing office of Tianjin Huaerjie Investment Consulting Co., Ltd., a business
consulting firm. Mr. Shao graduated from Hebei Mechanical and Electronics
College in 1988. Mr. Shao has over fourteen years of business experience in
marketing and management. From 1997 to June 2002, Mr. Shao set up and operated
his own company, DeAn Electronic Equipment Inc. in the Hebei province of China,
which was the sole agent of Rolls Royce's electronic machines and instruments
and supplied several power plants in Huabei, China.
Ling Fang. Ms. Fang is the Chief Financial Officer of TS Electronics
(China) and graduated from Tianjin Economics and Management College, majoring in
international trade. Ms. Fang acquired the qualification of assistant
accountant in 1998. From 1998 to October 2002, Ms. Fang worked as a senior
39
accounting officer for the CPA firm of Tianjin Guanxin Certified Public
Accountants. Ms. Fang has extensive experience in accounting, auditing and
operations management. She has audited over 100 firms in various industries,
many of which are large multinational companies.
Jiaqi Sun. From 2002 to present, Mr. Sun has been a senior engineer at
Tianjin ShenDing Electronics Technology Co., Ltd. Mr. Sun received a bachelor's
degree in electrical engineering from Beijing Industry University in 1988.
After graduation, Mr. Sun continued to do research work in electronics for
Beijing Iron Engineering Research Institution for three years. From 1991 to
1999, Mr. Sun worked as vice president of Beijing SouTi Electric Installment
Company and was in charge of many electric installation projects for hotels.
From 1999 to 2000 Mr. Sun worked for Beijing Wanke Group and was the chief
project manager in charge of electric system construction and installation of
Wanke City Garden and Wanke Star Garden.
EXECUTIVE COMPENSATION
Set forth below is the aggregate compensation during fiscal years 2001 and
2002 and the current anticipated compensation for 2003 of the president of TS
Electronics (China):
Annual Salary in U S Dollars
---------------------------------
Name 2001 2002 2003
---- ---- ---- ----
Jingyi Wang $10,361 $14,457 $18,072
INDEPENDENT AUDITORS
Rosenberg Rich Baker Berman & Company of New Jersey has been retained by TS
Electronics (China) to audit its financial statements. Audited financial
statements of TS Electronics (China) are attached hereto in Annex II.
CONSENT REQUIRED FOR APPROVAL
The affirmative consent of at least a majority of shares of Common Stock
outstanding has been obtained for the approval of all of the Transactions
described herein.
ANNUAL REPORT
Copies of our company's annual Form 10-KSB and most recent Form 10-QSB
filed with the Securities and Exchange Commission may be obtained, without
charge to stockholders, by writing to Sherie Adams, Fuller Tubb Pomeroy and
Stokes, 201 Robert S. Kerr Ave., Oklahoma City, OK 73102.
40
By order of the Board of Directors,
/s/ Keith Boyd
Keith Boyd, President
October 7, 2003
Pottsboro, Texas
41
ANNEX I
Set forth below are the following financial statements for our company:
Independent Auditors' Report dated September 17, 2003 I-1
Independent Auditors Report dated October 15, 2001 I-2
Balance Sheet June 30, 2003 I-3
Statement of Operations from October 7, 1998 (Inception)
through June 30, 2003 I-4
Statement of Stockholders' Equity (Deficit) from October 7, 1998
through June 30, 2003 I-5
Statements of Cash Flows from October 7, 1998 (Inception)
through June 30, 2003 and 2002, and Cumulative From Inception I-6
Notes to Financial Statements I-7
ANNEX I
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
TS Electronics, Inc. (formerly, Softstone, Inc.)
We have audited the accompanying balance sheet of TS Electronics, Inc.
(formerly, Softstone, Inc.) as of June 30, 2003 and the related statements of
operations, stockholders' deficit and cash flows for the years ended June 30,
2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TS Electronics, Inc. as of June
30, 2003 and the results of its operations and its cash flows for the years
ended June 30, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company had accumulated deficit of $3,034,913 through June 03,
2003 and negative working capital of $902,261 at June 30, 2003. These factors,
as discussed in Note 10 to the financial statements, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 10. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Kabani & Company, Inc.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
September 17, 2003
I-1
Independent Auditors' Report
Board of Directors
Softstone, Inc.
We have audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows for the year ended June 30, 2001 of Softstone, Inc. (a
development stage company). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 of Softstone, Inc. referred to above
present fairly, in all material respects, the results of its operations, cash
flows and changes in stockholders' equity (deficit) for the year ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company has been in the
development stage since its inception on October 7, 1998, and the primary
activities include establishing its operations and raising capital to fund its
activities. The Company incurred losses since inception to June 30, 2001, of
$1,704,415. Realization of a major portion of its assets and satisfaction of its
liabilities is dependent upon the Company's ability to meet its future financing
requirements and the success of future operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might arise as a
result of this uncertainty.
Hogan and Slovacek
/s/ Hogan and Slovacek
Oklahoma City, Oklahoma
October 15, 2001
I-2
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
BALANCE SHEET
June 30, 2003
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,789
Accounts receivable 1,765
-----------
Total current assets 3,554
PROPERTY AND EQUIPMENT, net 295,074
-----------
$ 298,628
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 29,311
Accounts payable-related party 160,879
Accrued expenses 76,879
Notes payable - current 638,746
-----------
Total current liabilities 905,815
LONG TERM LIABILITIES
Notes payable - long term 126,773
-----------
Total liabilities 1,032,588
CONTINGENCY
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 30,000,000
shares authorized; 350,155 shares issued
and outstanding 350
Additional paid-in capital 2,294,088
Shares to be issued 6,515
Accumulated deficit (3,034,913)
-----------
Total stockholders' deficit (733,960)
-----------
$ 298,628
===========
The accompanying notes are an integral part of these financial statements.
I-3
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Year Ended June 30,
2003 2002
----------- ------------
Net revenues $ 110,079 $ 37,490
Operating expenses
General and administrative 265,721 752,324
----------- ------------
Operating loss (155,642) (714,834)
Other income (expense):
Miscellaneous Income 159 -
Interest expense (46,191) (49,855)
Loss on sale of assets (17,741) -
Loss on settlement of debt (6,950) -
Loss on investment - (125,000)
Loss on impairment of intangibles - (214,444)
----------- ------------
Total other income (expense) (70,723) (389,299)
----------- ------------
Net loss $ (226,365) $ (1,104,133)
=========== =============
Basic and diluted weighted average number
of common stock outstanding 326,941 283,176
=========== =============
Basic and diluted net loss per share $ (0.69) $ (3.90)
=========== =============
The accompanying notes are an integral part of these financial statements.
I-4
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Common Stock Additional Stock Total
-----------------
Number of Paid-In to be Unearned Accumulated Stockholders'
shares Amount Capital issued Compensation Deficit Deficit
--------- ------ ------------ ---------- ------------ ------------ -------------
Balance July 1, 2001 205,740 $ 4,486 $1,632,528 $ - $ - $(1,704,415) $ (67,401)
Share issued for cash
($8.72/shr) 11,158 243 97,077 - - - 97,320
Shares issued for cash
($10.90/shr) 13,272 290 144,410 - - - 144,700
Shares issued for cash
($21.80/shr) 573 13 12,487 - - - 12,500
Share issued for service
($7.85/shr) 11,790 257 92,290 - - - 92,547
Share issued for service
($8.72/shr) 24,903 543 216,657 - - - 217,200
Share issued for service
($10.90/shr) 1,147 25 12,475 - - - 12,500
Share issued for interest
($9.81/shr) 2,396 52 24,238 - - - 24,290
Shares issued for merger 53,126 1,158 - - - - 1,158
Shares to be issued
for cash ($7.20/shr) - - - 999 - - 999
Shares to be issued
for loan incentive
($8.72/shr) - - - 2,000 - - 2,000
Cancellation of shares (1,147) (25) - - - - (25)
Net loss - - - - - (1,104,133) (1,104,133)
--------- ------ ------------ ---------- ------------ ------------ -------------
Balance June 30, 2002 322,959 7,042 2,232,162 2,999 - (2,808,548) (566,345)
Reverse stock split
21.8045:1 on
August 14, 2003 - (7,288) 7,288 - - - -
Shares issued for cash 12,841 280 35,955 - - - 36,235
Stock issued for
settlement of notes
payable 13,759 300 17,700 - - - 18,000
344 Shares of common
stock to be issued
for cash - - - 2,515 - - 2,515
Shares issued for
cash included in
the prior period 138 3 996 (999) - - -
Adjustment to
share price 459 13 (13) - - - -
1147 Shares of
common stock to
be issued for
loan incentive - - - 2,000 - - 2,000
Net loss - - - - - (226,365) (226,365)
------- ------- ---------- ------- ----------- ----------- ----------
Balance June 30, 2003 350,155 $ 350 $2,294,088 $ 6,515 $ - $(3,034,913) $ (733,960)
======= ======= ========== ======= =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
I-5
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Year Ended Year Ended
June 30, June 30,
2003 2002
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (226,365) $ (1,104,133)
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss on sale of assets 17,741 -
Loss on settlement of debt 6,950 -
Depreciation and amortization 67,271 83,307
Issuance of common stock for compensation - -
Issuance of common stock for
services and interest - 346,537
Issuance of common stock for merger - 1,133
Shares to be issued for loan incentive 2,000 2,000
Loss on investment - 125,000
Loss on impairment of assets - 214,444
Write-off of samples - -
Decrease of other current assets - 4,473
(Increase) decrease of accounts
receivable 818 (2,583)
Increase (decrease) of accounts payable (10,055) 22,368
Increase in accrued expense 48,514 8,252
---------- ------------
Total adjustments 133,239 804,931
---------- ------------
Net cash used in operating activities (93,126) (299,202)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of patents/investment - (250,000)
Other - -
Receipt of cash on disposal
of property and equipment 32,576 -
---------- ------------
Net cash provided (used) in
investing activities 32,576 (250,000)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 22,336 287,263
Payments on borrowings - (5,000)
Issuance of common stock for cash 36,235 254,520
Receipt of cash for stock to be issued 2,515 999
---------- ------------
Net cash provided by financing activities 61,086 537,782
---------- ------------
Net increase (decrease) in cash & cash equivalents 536 (11,420)
CASH & CASH EQUIVALENTS, BEGINNING 1,253 12,673
---------- ------------
CASH & CASH EQUIVALENTS, ENDING $ 1,789 $ 1,253
========== ============
The accompanying notes are an integral part of these financial statements.
I-6
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
TS Electronics, Inc. (formerly, Softstone, Inc.) (the "Company"), a
Delaware corporation, was incorporated on October 7, 1998. The Company was
formed to manufacture a patented rubber product used in the road and
building construction industries. Its principal activities have consisted
of financial planning, establishing sources of production and supply,
developing markets, and raising capital. Prior to July 2002, the Company
was in the development stage as defined Statement of Financial Accounting
Standards No. 7 "Accounting and Reporting by Development Stage
Enterprises". Its principal operations began in the quarter ended September
30, 2002. On August 13, 2003, the Company changed its name to TS
Electronics, Inc.
On October 7, 1998, SoftStone Building Products, Inc. ("SSBI" - an Oklahoma
corporation and predecessor to the Company) was incorporated. Effective May
31, 1999, SSBI was merged into Softstone, Inc. (incorporated January 28,
1999 under the laws of the State of Delaware) and SSBI was subsequently
dissolved. Each share of previously outstanding common stock was converted
into 2,500 shares of common stock of the new entity.
On July 24, 2001, the Company entered into a plan of reorganization
involving Kilkenny Acquisition Corp. (Kilkenny) whereby the Company is the
survivor and in control of the board of directors. The merger agreement
provided for the exchange of 1,158,387 shares of the Company's common stock
for all the common stock of Kilkenny. In connection with this merger, on
April 4, 2001, certain insider shareholders of the Company contributed
3,947,698 shares of their common stock to the Company effectively reducing
the then outstanding shares of stock to 3,685,992. Subsequent issues of
common stock for cash and services increased the outstanding stock of the
Company to 4,590,646. The issuance of the above mentioned shares of the
Company's common stock on the merger date increased the common stock of the
Company to 5,669,033 with the Company shareholders, prior to the merger,
owning approximately 81% of the outstanding shares of the Company. For
accounting purposes, the transaction between the Company and Kilkenny has
been treated as a re-capitalization of the Company, with the Company as the
accounting acquirer (reverse acquisition), and has been accounted for in a
manner similar to a pooling of interests. Since Kilkenny is a dormant
entity with insignificant assets or liabilities, no pro forma information
is presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon sale, retirement, or
I-7
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
other disposition, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations for the period. The Company depreciates property and equipment
using the straight-line method over their estimated useful lives ranging
from five to seven years.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying
amount may not be recoverable. When required, impairment losses are
recognized based upon the estimated fair value of the asset. Being a
development stage company, the Company does not believe any of its property
and equipment is impaired.
Patent and patent license agreement
In August 2000, patent rights amounting to $100,000 were acquired, in
exchange for 300,000 shares of common stock, forgiveness of debt and
assumption of additional debt. Patent rights were acquired for the
manufacturing process and had been amortized using the straight-line method
over fifteen years. In March 2002, additional patent rights were purchased
for $125,000. The net book value of $89,444 for the patent purchased in
2000 and the newly purchased patent of $125,000 were written off as
impairment of intangible assets in the year ended June 30,, 2002 as the
Company decided against selling the items under patent rights.
Revenue recognition
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin (SAB) 101. Revenue is recognized when merchandise is
shipped to a customer.
Income taxes
Deferred income taxes are provided on temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
years. Deferred income tax assets or liability are determined by applying
the presently enacted tax rates and laws.
Fair value of financial instruments
The carrying amount of all financial instruments at June 30, 2003 and 2002,
which consist of various notes and loans payable, approximate their fair
values.
Accounts payable - related party
The Company has an amount payable to a shareholder amounting $160,879 for
certain equipment purchased in prior years. The amounts are due on demand,
unsecured and interest free.
I-8
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
Earnings per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per
share". Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and
as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-based compensation
SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
stock issued to employees" (APB 25) and related interpretations with
proforma disclosure of what net income and earnings per share would have
been had the Company adopted the new fair value method. The Company has
chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee is required to pay for the stock.
The Company accounts for stock-based compensation issued to non-employees
and consultants in accordance with the provisions of SFAS 123 and the
Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling, Goods or Services". Valuation of shares for
services is based on the estimated fair market value of the shares issued.
As of June 30, 2003, the Company does not have any option for share
purchase or warrant outstanding.
I-9
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. Currently, SFAS 131 has
no effect on the Company's consolidated financial statements as
substantially all of the Company's operations are conducted in one industry
segment.
Accounting developments
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used, on reported results. The Statement is
effective for the Companies' interim reporting period ending January 31,
2003. The adoption of SFAS 148 does not have a material effect on the
earnings or financial position of the Company.
On April 30, the FASB issued FASB Statement No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. FAS 149
amends and clarifies the accounting guidance on (1) derivative instruments
(including certain derivative instruments embedded in other contracts) and
(2) hedging activities that fall within the scope of FASB Statement No. 133
(FAS 133), Accounting for Derivative Instruments and Hedging Activities.
FAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. FAS 149 is effective (1) for contracts entered into or modified
after June 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The Company does not expect the adoption of SFAS No. 149 to
have a material impact on its financial position or results of operations
or cash flows.
On May 15, 2003, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 150 (FAS 150), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. FAS 150
changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets
in some circumstances) in the statement of financial position. Further, FAS
150 requires disclosure regarding the terms of those instruments and
settlement alternatives. FAS 150 affects an entity's classification of the
following freestanding instruments: a) Mandatorily redeemable instruments
b) Financial instruments to repurchase an entity's own equity instruments
c) Financial instruments embodying obligations that the issuer must or
could choose to settle by issuing a variable number of its shares or other
equity instruments based solely on (i) a fixed monetary amount known at
inception or (ii) something other than changes in its own equity
instruments d) FAS 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The guidance in FAS
150 is generally effective for all financial instruments entered into or
I-10
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
modified after May 31, 2003, and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. For private
companies, mandatorily redeemable financial instruments are subject to the
provisions of FAS 150 for the fiscal period beginning after December 15,
2003. The Company does not expect the adoption of SFAS No. 150 to have a
material impact on its financial position or results of operations or cash
flows.
Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2003:
Furniture and computer equipment $ 42,198
Production and other equipment 450,063
Vehicles 29,381
----------
521,642
Less: Accumulated depreciation
and amortization (226,568)
----------
$ 295,074
==========
4. NOTES PAYABLE
Notes payable consist of the following at June 30, 2003:
Revolving note payable to bank;
interest rate 7.5%, due on December 05, 2005 $ 88,468
Notes payable to stockholder, 8% & 12%
interest rates and due on demand 600,889
Bank term loan; 6.78% interest rate;
Maturing September 13, 2003 37,857
Note payable to finance vehicle, 9.5%
interest rate, maturing September 23, 2005,
collaterized by vehicle 12,974
Bank term loan; interest at 6.25%
(variable); collateralized by
equipment, accounts receivable
and intangibles and guaranteed
by the principal stockholder
of the Company, due July 15, 2005 25,331
I-11
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
Note payable to stockholder; interest
free; due on demand 160,879
---------
926,398
Less: current portion 799,625
---------
Long-term debt $ 126,773
=========
The following is a summary of maturities of principal under long-term debt
for years ending June 30:
2006 $ 126,773
=========
The notes payable has been classified in the balance sheet at June 30, 2003
as per follows:
Accounts payable - related parties $ 160,879
Notes payable- current 638,746
---------
Current liabilities 799,625
Notes Payable - long term 126,773
---------
$ 926,398
=========
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method
as defined under the Financial Accounting Standard No. 95.
The Company paid $0 for income tax during the year ended June 30, 2003 and
2002. The Company paid $13,898 and $31,318 interest during the year ended
June 30, 2003 and 2002, respectively.
Supplemental disclosure of non-cash investing and financing activities:
The cash flow statements do not include following non-cash investing and
financing activities:
During the year ended June 30, 2003, the Company issued 13,759 shares of
common stock valued at $18,000 for settlement of short-term notes payable
amounting $11,050 resulting in a loss of $6,950 on settlement of debt.
6. STOCKHOLDERS' EQUITY
Common stock
During the year ended June 30, 2003, the Company issued common stocks in
exchange of various services to following parties:
I-12
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
During the year ended June 30, 2003, the Company issued 12,841 shares of
common stock for cash of $36,235 received during this period and issued 138
shares for cash amounting $999 received in the prior year.
During the year ended June 30, 2003, the Company issued 13,759 shares of
common stock valued at $18,000 for settlement of short-term notes payable
amounting $11,050 resulting in a loss of $6,950 on settlement of debt.
During the year ended June 30, 2003, the Company received cash of $2,515
for 344 shares to be issued.
During the year ended June 30, 2003, the Company issued 459 shares of
common stock for the adjustment to share price in the prior year.
At June 30, 2003, the Company has 1,147 shares of common stock amounting
$2,000 to be issued for the extension of the due date for the loan.
7. INCOME TAXES
The Company's effective income tax benefit differed from the benefit
computed using the federal statutory tax rate as follows:
Period from
Year Ended June 30,
2003 2002
---------- ---------
Income tax benefit at
federal statutory rate $ 90,546 $ 375,405
Nondeductible expenses (443) (2,100)
Other, including graduated rates - -
Change in valuation allowance (90,103) (373,305)
---------- ---------
$ - $ -
========== =========
Components of deferred tax assets at June 30, 2003, are as follows:
Assets
Net operating loss carryforward $ 1,072,101
Valuation allowance (1,072,101)
-----------
$ -
===========
The valuation allowance increased $90,103 for the year ended June 30, 2003,
and $373,305 for the year ended June 30, 2002.
A valuation allowance is provided for deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will
I-13
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
not be realized. At June 30, 2003 and 2002, the Company had a net deferred
tax asset mainly related to a net operating loss carryforward from
operating losses incurred. As such carryforward can only be used to offset
future taxable income, management has fully reserved this net deferred tax
asset with a valuation allowance until it is more likely than not that
taxable income will be generated. Net operating loss carryforwards can be
carried forward for fifteen years for federal tax purpose subject to
certain limitations and they will expire in the year 2018.
8. IMPAIREMENT OF INVESTMENT
In March 2002, the Company entered into a purchase agreement with Levgum,
Ltd. (Levgum) of Tel Aviv, Israel, where the Company received 83 shares
with 1.00 par value representing 10% of outstanding capital, for $250,000.
The Company also received the right to use their technology for rubber
devulcanization and right to sublicense as part of this purchase agreement.
The Company recorded its investment in Levgum for $125,000 and license
agreement acquired through acquisition at $125,000. On June 30, 2002, the
Company evaluated its investment and patents rights according to FASB 121
and recognized an impairment loss equal to the book value of these
intangible assets amounting $125,000.
9. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share for the six-month period ended June
30, 2003 and 2002 were determined by dividing net loss for the periods by
the weighted average number of basic and diluted shares of common stock
outstanding. Weighted average number of shares used to compute basic and
diluted loss per share is the same since the effect of dilutive securities
is anti-dilutive.
10. GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the company as a going concern. However, the Company has an
accumulated deficit of $3,034,913 at June 30, 2003 and a negative working
capital of $902,261 at June 30, 2003. In view of the matters described
above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued
operations of the company, which in turn is dependent upon the Company's
ability to raise additional capital, obtain financing and succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Management's plan of operations anticipates that the cash requirements for
the next twelve months will be met by obtaining capital contributions
through the sale of common stock and cash flow from operations. However,
there is no assurance that the Company will be able to implement its plan.
I-14
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
11. SUBSEQUENT EVENT & CONTINGENT LIABILTY
On July 31, 2003, the Company entered in to a reorganization agreement with
TS Electronics Corporation (TSEC), a Delaware corporation. Under the
reorganization agreement, TSEC shareholders shall purchase from the
Company, 5,350,000 shares of its common stock in a private placement under
rule 506 of the Regulation D of the Securities Act of 1933, in exchange of
for the transfer to the Company of all the capital stock of TSEC. Under the
agreement, all of the directors of the Company will be replaced by present
designee of TSEC to fill this vacancy and become the director of the
Company.
Per the agreement, TSEC and its shareholders shall be indemnified by the
Company against any liabilities arising either from a failure of the
Company or its current president to discharge all liabilities of the
Company. The closing of the agreement will be effective subject to
compliance of Securities and Exchange filing rules and regulations.
Pursuant to the reorganization agreement, on August 13, 2003, the Company
filed its Certificate of Amendment to Certificate of Incorporation with the
Secretary of State of the State of Delaware changing its name to "TS
Electronics, Inc." and consolidating the common stock of the corporation.
The stock consolidation to 600,000 shares, $0.001 par value, effective
August 14, 2003, consolidates each 21.8045 outstanding shares to one share,
with fractional shares being rounded up or down to the nearest whole
number.
I-15
ANNEX II
Set forth below are the following financial statements for T S Electronics
(China):
Report of Independent Accountant II-1
Balance Sheets for fiscal years ended
September 30, 2002 and 2001 II-2
Statement of Income and Retained Earnings for the
fiscal years ended September 30, 2002 and 2001 II-3
Cash Flows for the fiscal year ended September 30, 2002
and for the interim period from inception (March 16, 2001)
through September 30, 2001 II-4
Notes to Financial Statements II-5
Report of Independent Accountant II-9
Balance Sheet at June 30, 2003 (Unaudited) II-10
Statement of Income and Retained Earnings for the nine-month
periods ended June 30, 2003 and 2002 (unaudited) II-11
Statement of Cash Flows for the nine-month periods ended
June 30, 2003 and 2002 (unaudited) II-12
Notes to Financial Statements II-13
ANNEX II
Independent Auditors' Report
To the Board of Directors and Stockholders of
Tianjin ShenDing Electronics Technology Co., Ltd.
We have audited the accompanying balance sheets of Tianjin ShenDing Electronics
Technology Co., Ltd. as of September 30, 2002 and 2001 and the related
statements of income and retained earnings, and cash flows for the year ended
September 30, 2002 and the period from inception (March 16, 2001) through
September 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tianjin ShenDing Electronics
Technology Co., Ltd. as of September 30, 2002 and 2001 and the results of their
operations and cash flows for the year ended September 30, 2002 and the period
from inception (March 16, 2001) through September 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
November 15, 2002
II-1
Tianjin ShenDing Electronics Technology Co., Ltd.
Balance Sheets
September 30,
-------------
2002 2001
---- ----
Assets
Current Assets
Cash and equivalents $ 4,640 $ 1,962
Accounts receivable 30,750 48,991
Inventories 139,838 -
Loan to officer 65,727 151,859
Loan to supplier 2,379 7,249
Prepaid expenses 23,845 79,741
----------- -----------
Total Current Assets 267,179 289,802
----------- -----------
Plant and equipment 219,971 -
----------- -----------
Total Assets 487,150 289,802
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 110,859 30,005
Building loan payable 65,243 -
Customer deposits 26,822 -
Other current liabilities 13,473 8,135
----------- -----------
Total Current Liabilities 216,397 38,140
----------- -----------
Commitments and Contingencies - -
Stockholders' Equity
Capital 241,640 241,640
Retained earnings 29,113 10,022
----------- -----------
Total Stockholders' Equity 270,753 251,662
----------- -----------
Total Liabilities and Stockholders' Equity $ 487,150 $ 289,802
=========== ===========
See notes to the financial statements.
II-2
Tianjin ShenDing Electronics Technology Co., Ltd.
Statements of Income and Retained Earnings
Period of Inception
Year Ended (March 16, 2001)
September 30, through September 30,
--------------------- ---------------------
2002 2001
--------------------- ---------------------
Amount % of Sales Amount % of Sales
--------- ---------- -------- ----------
Net Sales $ 113,422 100.0% $ 77,804 100.0%
Cost of goods sold 70,437 62.1 64,277 82.6
--------- ----- -------- -----
Gross Profit 42,985 37.9 13,527 17.4
--------- ----- -------- -----
Selling expenses 1,340 1.2 1,115 1.5
General and administrative expenses 22,303 19.7 2,664 3.4
--------- ----- -------- -----
Total Operating Expenses 23,643 20.9 3,779 4.9
--------- ----- -------- -----
Income from Operations 19,342 17.0 9,748 12.5
--------- ----- -------- -----
Other Income (Expense)
Miscellaneous expense (349) (0.3) (12) -
Interest income 98 - 286 0.4
--------- ----- -------- -----
Total Other Income (Expense) (251) (0.3) 274 0.4
--------- ----- -------- -----
Net Income $ 19,091 16.7% $ 10,022 12.9%
========= ===== ======== =====
Retained Earnings at
Beginning of Period $ 10,022 $ -
Net income above 19,091 10,022
--------- --------
Retained Earnings at
End of Period $ 29,113 $ 10,022
========= ========
See notes to the financial statements.
II-3
Tianjin ShenDing Electronics Technology Co., Ltd.
Statements of Cash Flows
Period of
Inception
(March 16,
Year Ended 2001) through
September 30, September 30,
------------- -------------
2002 2001
------------- -------------
Cash Flows From Operating Activities
Net income $ 19,091 $ 10,022
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation expense 6,382 -
Decrease (increase) in assets
Accounts receivable 18,241 (48,991)
Inventories (139,838) -
Prepaid expenses 55,896 (79,741)
Loan to supplier 4,870 (7,249)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 80,854 30,005
Customer deposits 26,822
Other current liabilities 70,581 8,135
----------- ----------
Net Cash Provided by (Used in)
Operating Activities 142,899 (87,819)
----------- ----------
Cash Flow From Investing Activities
Purchases of plant and equipment (226,353) -
----------- ----------
Net Cash Used in Investing Activities (226,353) -
----------- ----------
Cash Flow From Financing Activities
Proceeds from shareholder paid-in
register capital - 241,640
Loan proceeds to officer - (151,859)
Repayment of officer loan 86,132 -
----------- ----------
Net Cash Provided by Financing Activities 86,132 89,781
----------- ----------
Net Increase in Cash and Equivalents 2,678 1,962
Cash and Equivalents at Beginning of Period 1,962 -
----------- ----------
Cash and Equivalents at End of Period $ 4,640 $ 1,962
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
There were no cash payments for interest or income taxes during the year ended
September 30, 2002 and the period from inception (March 16, 2001) through
September 30, 2001.
See notes to the financial statements.
II-4
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Tianjin ShenDing Electronics Technology Co., Ltd. (the Company) was
founded in the People's Republic of China on March 16, 2001. The
Company, located in D1-C Xinmao Technology Zone Hayuan Industry Area
Tianjin, is primarily engaged in developing, consulting, servicing and
transferring electronic integrative technology and products within
Tianjin, China.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents
include time deposits, certificates of deposit and all highly liquid
debt instruments with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the
estimated losses that will be incurred in the collection of all
receivables. The estimated losses are based on a review of the current
status of the existing receivables. The Company expects all
receivables to be collected; the allowance for doubtful accounts as of
September 30, 2002 and 2001 is zero.
Inventories
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
Fixed Assets and Depreciation
The cost of plant and equipment is depreciated for financial reporting
purposes on a straight-line basis over the estimated useful lives of
the assets: 20-30 years for buildings and building improvements and
5-10 years for machinery and equipment. Repairs and maintenance
expenditures which do not extend the useful lives of the related
assets are expensed as incurred.
Revenue Recognition
Sales revenue is recognized at the date of shipment to customers, at
which time, no other significant obligations of the Company exist,
other than normal warranty support.
Income Taxes
According to the Provisional Regulations of the People's Republic of
China on Income Tax, the Document of Reductions and Exemptions of
Income Tax for the Company is approved by the Tianjin local tax bureau
and the Management Regulation of New Technology Industry Zone of
Tianjin. The Company is exempt from income tax in 2002 and 2001, its
first two years of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit
risk of specific customers, historical trends, and other information.
II-5
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
CONCENTRATIONS OF BUSINESS AND CREDIT RISK, (Continued)
Since inception, the Company had significant sales to one customer
representing 84% and 100% of total revenues in 2002 and 2001, respectively.
This significant customer, Tianjin Green Multiple Energy Saving Tech Co.,
Ltd. (GMET), is owned and controlled by similar interests as the Company.
The Company has also made significant purchases from two vendors
representing 15% and 39% of total purchases in 2002 and 2001, respectively.
These two significant vendors, Jianjie Material Co., Ltd. and Zhengtai
Electronic Appliance Co., are not related parties to the Company.
INVENTORIES
Inventories consist of the following:
September 30,
-------------------------
2002 2001
------------ ---------
Raw materials $ 29,421 $ -
Work in process 513 -
Finished goods 109,904 -
------------ ---------
Total $ 139,838 $ -
============ =========
LOAN TO OFFICER
Loan to officer is unsecured, non-interest bearing and due upon demand.
PLANT AND EQUIPMENT
Plant and equipment at cost, less accumulated depreciation, consists of the
following:
September 30,
-------------------------
2002 2001
------------ ---------
Buildings $ 217,501 $ -
Equipment 7,348 -
Work shop 1,504 -
------------ ---------
Subtotal 226,353 -
Less accumulated depreciation 6,382 -
------------ ---------
Total $ 219,971 $ -
============ =========
Depreciation expense charged to operations was $6,382 and $0 in 2002 and
2001, respectively.
The Company's office and manufacturing site is located in Tianjin. The
Company leases land per a real estate contract with the People's Republic
of China Government, for a period from January 2001 through January 2051.
Per the People's Republic of China's governmental regulations, the
Government owns all land. The Government allows for 50 year leases at no
cost for commercial building owners.
II-6
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
BUILDING LOAN PAYABLE
As of September 30, 2002, the Company had outstanding a non-interest
bearing balance of $65,243 due to the seller of the building purchased in
December, 2001. The balance is expected to be paid in full in the current
period.
OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
September 30,
-------------------------
2002 2001
------------ ---------
Affiliates payable $ 15,706 $ -
Staff salary payable 1,214 1,124
Welfare payable 2,397 617
Taxes (credit) payable (5,844) 6,394
------------ ---------
Total Other Current Liabilities $ 13,473 $ 8,135
============ =========
TAXES PAYABLE
Taxes (credit) payable are ($5,844) and $6,394 as of September 30, 2002 and
2001, respectively and consist of the following:
September 30,
-------------------------
2002 2001
------------ ---------
Value-added tax $ (9,971) $ 5,760
City construction tax 781 403
Education fee 335 173
Flood prevent tax - 58
Deed tax 2,900 -
River way maintenance fee 111 -
----------- ---------
Total Taxes (Credit) Payable $ (5,844) $ 6,394
=========== =========
EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance
with Chinese law and regulations. The Company makes annual pre-tax
contributions of 14% of all employees' salaries.
The total expense for the above plan amounted to $1,872 and $617 for the
year ended September 30, 2002, and the period from inception (March 16,
2001) through September 30, 2001, respectively.
WARRANTIES
The Company warrants that all equipment manufactured by it will be free
from defects in material and workmanship under normal use for a period of
one year from the date of shipment. Through September 30, 2002,
substantially all sales by the Company have been from electric efficiency
boxes. During 2002, a production error was made for one shipment, yielding
a $1,534 warranty repair. Except for this production error, the Company's
experience for cost and expenses in connection with such warranties has
been minimal and through September 30, 2002, no additional amounts have
been considered necessary to reserve for additional warranty costs at this
time.
II-7
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
RELATED PARTY TRANSACTIONS
The Company sells significant goods to GMET, a related affiliate whose
shareholders are also owners of the Company. Following is a summary of
transactions and balances with GMET for 2002 and 2001.
GMET was formed on June 17, 1998 and enjoyed special tax treatment which
provided tax-free status with respect to its income for a period of two
years from the date of formation of the Company. Upon expiration of such
tax benefits, the shareholders of GMET formed the Company on March 16, 2001
in order to take advantage of such tax benefits for an additional two-year
period.
However, GMET had certain existing contracts with customers who are
non-related third parties. GMET continued to make sales to and collect
payment from such customers subsequent to the formation of the Company. The
vast majority of such GMET customer contracts were completed as of June 30,
2003. The Company became the manufacturer of GMET's products and sold such
products to GMET so that GMET could fulfill its contracts with GMET's
buyers under GMET's existing contracts with such buyers.
September 30,
-------------------------
2002 2001
------------ ---------
Sales to GMET $ 95,263 $ 77,804
----------- ---------
Due from GMET $ 30,750 $ 48,991
----------- ---------
Due to GMET $ 15,706 $ -
----------- ---------
The Company also advanced a loan as referred to above to an officer and
majority shareholder of the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The current carrying amounts of the Company's cash and equivalents,
accounts receivables, accounts payables and accrued expenses approximate
their fair values at September 30, 2002 and 2001 due to the short term
maturities of these financial instruments.
II-8
To the Board of Directors and Stockholder of
Tianjin ShenDing Electronics Technology Co., Ltd.
We have reviewed the accompanying balance sheet of Tianjin ShenDing Electronics
Technology Co., Ltd. as of June 30, 2003, and the related statements of income
and retained earnings for the three and nine month periods ended June 30, 2003
and 2002, and the statements of cash flows for the nine month periods ended June
30, 2003 and 2002, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of the management of Tianjin ShenDing Electronics Technology Co.,
Ltd.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in United States of
America.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
August 15, 2003
II-9
Tianjin ShenDing Electronics Technology Co., Ltd.
Balance Sheet
June 30, 2003
Assets
Current Assets
Cash and equivalents $ 4,034
Accounts receivable net of allowance for doubtful accounts 983,601
Inventories 142,547
Loan to officer 60,404
Loan to employees 14,570
Loan to related party 2,914
Loan to suppliers 2,390
Deferred income taxes 2,220
Prepaid expenses 23,753
-----------
Total Current Assets 1,236,433
Property, plant and equipment, net 227,862
-----------
Total Assets 1,464,295
===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 499,395
Customer deposits 27,562
Income taxes payable 59,747
Other taxes payable 75,787
Other current liabilities 9,439
-----------
Total Current Liabilities 671,930
-----------
Stockholders' Equity
Capital 242,836
Retained earnings 549,529
-----------
Total Stockholders' Equity 792,365
-----------
Total Liabilities and Stockholders' Equity $ 1,464,295
===========
See notes to financial statements and accountants' report.
II-10
Tianjin ShenDing Electronics Technology Co., Ltd.
Statements of Income and Retained Earnings
Nine Months Ended June 30,
-----------------------------
2003 2002
---- ----
Amount % of Sales Amount % of Sales
--------- ---------- -------- ----------
Net Sales $1,271,004 100.0% $ 97,049 100.0%
Cost of sales 573,894 45.2 60,231 62.0
---------- ----- -------- -----
Gross Profit 697,110 54.8 36,818 38.0
---------- ----- -------- -----
Selling expenses 37,605 3.0 645 0.7
General and administrative expenses 80,896 6.3 18,054 18.6
---------- ----- -------- -----
Total Operating Expenses 118,501 9.3 18,699 19.3
---------- ----- -------- -----
Income (Loss) from Operations 578,609 45.5 18,119 18.7
Other Income (Expense)
Miscellaneous expense - - (349) (0.4)
Interest income 145 - 150 0.2
---------- ----- -------- -----
Total Other Income (Expense) 145 - (199) (0.2)
---------- ----- -------- -----
Income (Loss) Before Income Taxes 578,754 45.5 17,920 18.5
Provision for Income Taxes 58,482 5.4 - -
---------- ----- -------- -----
Net Income (Loss) $ 520,272 40.1% $ 17,920 18.5%
========== ===== ======== =====
Retained Earnings at Beginning
of Period $ 29,257 $ 10,022
Net income (loss) above 520,272 17,920
---------- --------
Retained Earnings at End of Period $ 549,529 $ 27,942
========== ========
See notes to financial statements and accountants' report.
II-11
Tianjin ShenDing Electronics Technology Co., Ltd.
Statements of Cash Flows
Nine Months Ended June 30,
--------------------------
2003 2002
---------- ---------
Cash Flows From Operating Activities
Net Income $ 520,272 $ 17,920
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 4,190 4,193
Deferred income taxes (2,220) -
(Increases) Decreases in Assets
Accounts receivable (952,698) 14,951
Inventories (2,017) (71,973)
Loan to employees (14,570) -
Prepaid expenses 210 -
Loan to suppliers - 151,863
Increases (Decreases) in Liabilities
Accounts payable 387,988 49,592
Customer deposits 607 -
Building loan (65,565) -
Income tax payable 59,747 -
Other tax payable 81,660 -
Other current liabilities (9,975) 61,036
---------- ---------
Net Cash Provided by Operating Activities 7,629 227,582
---------- ---------
Cash Flows From Investing Activities
Purchases of fixed assets (10,992) (218,140)
---------- ---------
Net Cash Used in Investing Activities (10,992) (218,140)
---------- ---------
Cash Flows From Financing Activities
Proceeds from officer's loan 5,648 -
Loan proceeds to related party (2,914)
---------- ---------
Net Cash Provided by Financing Activities 2,734 -
---------- ---------
Net (Decrease) Increase in Cash and Equivalents (629) 9,442
---------- ---------
Cash and Equivalents at Beginning of Period 4,663 1,885
---------- ---------
Cash and Equivalents at End of Period $ 4,034 $ 11,327
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $ 955 $ -
========== ==========
Interest $ - $ -
========== =========
See notes to financial statements and accountants' report.
II-12
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Tianjin ShenDing Electronics Technology Co., Ltd. (the Company) was
founded in the People's Republic of China on March 16, 2001. The
Company, located in D1-C Xinmao Technology Zone Hayuan Industry Area
Tianjin, is primarily engaged in developing, consulting, servicing and
transferring electronic integrative technology and products within
Tianjin, China.
Effective June 2, 2003, the Company became a subsidiary of TS
Electronics Corp, incorporated in the state of Delaware. On August 13,
2003, TS Electronics Corp changed its name to TS Electronics (China)
Corp.
Cash and Equivalents
For the purpose of the statements of cash flows, cash equivalents
include time deposits, certificates of deposit and all highly liquid
debt instruments with original maturities of three months or less.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the
estimated losses that will be incurred in the collection of all
receivables. The estimated losses are based on a review of the current
status of the existing receivables. The Company expects all
receivables to be collected; the allowance for doubtful accounts as of
June 30, 2003 is zero.
Inventories
Inventories are valued at the lower of cost (determined on a first-in,
first-out basis) or market.
Fixed Assets and Depreciation
The cost of plant and equipment is depreciated for financial reporting
purposes on a straight-line basis over the estimated useful lives of
the assets: 20-39 years for buildings and building improvements and
5-10 years for machinery and equipment. Repairs and maintenance
expenditures which do not extend the useful lives of the related
assets are expense as incurred.
Revenue Recognition
Sales revenue is recognized at the date of shipment to customers, at
which time, no other significant obligations of the Company exist,
other than normal warranty support.
Income Taxes
According to the Provisional Regulations of the People's Republic of
China on Income Tax, the Document of Reductions and Exemptions of
Income Tax for the Company is approved by the Tianjin local tax bureau
and the Management Regulation of New Technology Industry Zone of
Tianjin. The Company was exempt from income tax in 2002 and 2001, its
first two years of operations.
After its first two year exempt period, income taxes are provided for
the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred taxes related
primarily to differences between the bases of financial and income tax
reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are recovered
or settled.
See notes to financial statements and accountants' report.
II-13
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company provides credit in the normal course of business to customers
located primarily in Tianjin of People's Republic of China. The Company
performs ongoing credit evaluations of its customers and maintains
allowances for doubtful accounts based on factors surrounding the credit
risk of specific customers, historical trends, and other information.
The Company had significant sales to three customer representing 91% of
total revenues for the nine months period ended June 30, 2003. These three
significant clients, Baodi Power Bureau, Ninhe Power Bureau, Wuqing Power
Bureau, are not related parties to the Company. The Company also made
significant purchases from three vendors representing 89% of total
purchases for the nine months period ended June 30, 2003. These three
significant vendors, Huaxingkexin Co., Zhengtai Electronic Appliance Co.,
and Shangdizhiguang Science & Technology Co., are not related parties to
the Company.
INVENTORIES
Inventories consist of the following as of June 30, 2003:
Amount
------------
Raw materials $ 42,386
Work in process 6,558
Finished goods 93,603
------------
Total $ 142,547
============
LOAN TO OFFICER
Loan to officer is unsecured, non-interest bearing and due upon demand.
PLANT AND EQUIPMENT
Plant and equipment at cost, less accumulated depreciation, consists of the
following as of June 30, 2003:
Amount
------------
Buildings $ 219,919
Equipments 9,308
Work shops 8,857
Furniture 381
------------
Subtotal 238,465
Less accumulated depreciation 10,603
------------
Total $ 227,862
============
Depreciation expense charged to operations was $4,190 for nine months ended
June 30, 2003.
See notes to financial statements and accountants' report.
II-14
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
The Company's office and manufacturing site is located in Tianjin. The
Company leases land per a real estate contract with the People's Republic
of China Government, for a period from January 2001 through January 2051.
Per the People's Republic of China's governmental regulations, the
Government owns all land. The Government allows for 50 year leases at no
cost for commercial building owners.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of June
30, 2003. These amounts are expected to be paid within the subsequent
fiscal year.
Amount
------------
Accounts payable $ 467,806
Accrued professional fee 15,000
Accrued warranty expenses 16,589
------------
Total Other Current Liabilities $ 499,395
============
OTHER TAXES PAYABLE
Other taxes payable are $75,787 as of June 30, 2003, consist of the
following:
Amount
------------
Value-added tax $ 74,554
City construction tax 785
Education fee 336
Flood prevent tax 112
------------
Total Other Taxes Payable $ 75,787
============
OTHER CURRENT LIABILITIES
Other current liabilities consist of the following as of June 30, 2003:
Amount
------------
Staff salary payable $ 6,211
Welfare payable 3,228
------------
Total Other Current Liabilities $ 9,439
============
INCOME TAXES
According to the Provisional Regulations of the People's Republic of China
on Income Tax, a Guidebook of Local Taxes issued by the Tianjin local tax
bureau, after its first two year income tax exemption, the Company is
imposed income taxes of 15% of its net income. Income tax expenses were
$58,482 and $28,735 for nine and three month periods ended June 30, 2003,
respectively.
See notes to financial statements and accountants' report.
II-15
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
The income tax provision (benefit) is comprised of the following:
Amount
------------
Nine Months Ended June 30, 2003
Current $ 60,702
Deferred (2,220)
------------
$ 58,482
============
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and income tax purposes.
The differences relate primarily to depreciable assets (using accelerated
depreciation methods for income tax purposes).
EMPLOYEE WELFARE PLAN
The Company has established its own employee welfare plan in accordance
with Chinese law and regulations. The Company makes annual pre-tax
contributions of 14% of all employees' salaries.
The total expense for the above plan was $3,346 for nine months ended June
30, 2003.
WARRANTIES
The Company warrants that all equipment manufactured by it will be free
from defects in material and workmanship under normal use for a period of
one year from the date of shipment. Through June 30, 2003, substantially
all sales by the Company have been from electric efficiency boxes. The
Company's experience for cost and expenses in connection with such
warranties has been minimal. However, through June 30, 2003, $16,589.00 has
been reserved for additional warranty costs.
RELATED PARTY TRANSACTIONS
The Company sells goods to GMET, a related affiliate whose shareholders are
also owners of the Company. Following is a summary of transactions and
balances with GMET for the nine month period ended June 30, 2003.
GMET was formed on June 17, 1998 and enjoyed special tax treatment which
provided tax-free status with respect to its income for a period of two
years from the date of formation of the Company. Upon expiration of such
tax benefits, the shareholders of GMET formed the Company on March 16, 2001
in order to take advantage of such tax benefits for an additional two-year
period.
However, GMET had certain existing contracts with customers who are
non-related third parties. GMET continued to make sales to and collect
payment from such customers subsequent to the formation of the Company. The
vast majority of such GMET customer contracts were completed as of June 30,
2003. The Company became the manufacturer of GMET's products and sold such
products to GMET so that GMET could fulfill its contracts with GMET's
buyers under GMET's existing contracts with such buyers.
Amount
------------
Sales to GMET $ 567
------------
Accounts Receivable from GMET $ 8,113
------------
Due from GMET $ 2,914
------------
See notes to financial statements and accountants' report.
II-16
Tianjin ShenDing Electronics Technology Co., Ltd.
Notes to the Financial Statements
FAIR VALUE OF FINANCIAL INSTRUMENTS
The current carrying amounts of the Company's cash and equivalents,
accounts receivables, accounts payables and accrued expenses approximate
their fair values on June 30, 2003 due to the short term maturities of
these financial instruments.
See notes to financial statements and accountants' report.
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