U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the fiscal year ended December 31, 2007
or
o
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the
transition period from _____ to_____
Commission
File Number: 001-32477
TIENS
BIOTECH GROUP (USA), INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
75-2926439
|
(State
or other jurisdiction of incorporation or organization )
|
(I.R.S.
Employer Identification No.)
|
No.
6,
Yuanquan Rd.
Wuqing
New Tech Industrial Park
Tianjin,
China 301700
----------------------------------------
(Address
of principal executive offices) (Zip Code)
Registrant’s
Telephone Number, including area code: 011 86-22-8213-7626
Securities
registered under 12(b) of the Exchange Act:
Title
of Each Class
|
Name
of Each Exchange on which Registered
|
Common
Stock, par value $0.001
|
The
American Stock Exchange
|
Securities
registered under 12(g) of the Exchange Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company.
Large
Accelerated Filer
o
|
|
|
Smaller
Reporting Company
o
|
Based
upon the closing sale price of $3.83 per share of Common Stock on the American
Stock Exchange on June 30, 2007, the aggregate market value of the 3,503,586
shares of voting stock held by non-affiliates of the Registrant was
approximately $13,418,734.
There
were 71,333,586 shares of the Company’s common stock outstanding on March 28,
2008.
DOCUMENTS
INCORPORATED BY REFERENCE - None
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or
the
Company’s future financial performance. The Company has attempted to identify
forward-looking statements by terminology including “anticipates”, “believes”,
“expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”,
“plans”, “potential”, “predict”, “should” or “will” or the negative of these
terms or other comparable terminology. These statements are only predictions,
uncertainties and other factors, including the risks outlined under Risk Factors
contained in Item 1A of this Annual Report may cause the Company’s actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements. Although
the Company believes that the expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company expectations are as of
the
date this Form 10-K is filed, and the Company does not intend to update any
of
the forward-looking statements after the date this Annual Report on Form 10-K
is
filed to confirm these statements to actual results, unless required by law.
AVAILABILITY
OF SEC FILINGS
The
Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy and information statements and amendments
to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may
read and copy these materials at the Securities and Exchange Commission’s
(“SEC”) Public Reference Room at 450 Fifth Street, NW, 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. The SEC also maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and
other information regarding the Company and other companies that file materials
with the SEC electronically. You may also obtain copies of the Company’s reports
filed with the SEC, free of charge, on our website at
http://www.tiens-bio.com.
PART
I
ITEM
1. BUSINESS.
In
this Annual Report on Form 10-K, references to “dollars” and “$” are to United
States Dollars and references to “RMB” are to Chinese Renminbi (RMB). References
to “we”, “us”, “our”, the “Company” or “Tiens USA” include Tiens Biotech Group
(USA), Inc. and its subsidiaries.
Overview
Tiens
USA
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations
are
conducted from our headquarters in Tianjin, People’s Republic of China (“China”
or the “PRC”) through our 80% owned subsidiary, Tianjin Tianshi Biological
Development Co., Ltd. (“Biological”). We sell our products for distribution in
China to an affiliated company that in turn sells the products to consumers
through its chain store and its Chinese affiliated companies. Outside of China,
we sell our products to overseas affiliated companies located in 52 countries
that in turn sell them to independent direct sales distributors.
Corporate
History and Organization
Our
Company was incorporated on July 13, 1990 as Super Shops, Inc. under the laws
of
the State of Michigan. In October 2000, Super Shops, Inc. reincorporated in
Delaware and changed its name to MIA Acquisition Corp. On February 11, 2002,
in
connection with a change in control transaction, MIA Acquisition Corp changed
its name to Strategika, Inc. From 2000 until the reorganization described below,
our Company had only nominal assets and liabilities and was a development stage
company attempting to provide network security services to companies.
On
September 9, 2003, pursuant to an Agreement and Plan of Reorganization, dated
August 22, 2003, among the Company, Tianshi International Holdings Group Ltd.,
a
British Virgin Islands company (“Tianshi Holdings”), and Jinyuan Li, Wenjun Jiao
and Yupeng Yan, all Chinese Nationals who were stockholders of Tianshi Holdings,
the Company received from the Tianshi Holdings stockholders all of the issued
and outstanding common stock of Tianshi Holdings in exchange for the issuance
by
the Company of 68,495,000 shares of our common stock to the Tianshi Holdings
stockholders, representing 95% of the issued and outstanding common stock of
the
Company at such time, after giving effect to the issuance.
On
June
18, 2003, Tianshi Holdings acquired 80% of Biological’s outstanding shares from
Tianshi Hong Kong International Development Co., Ltd., which is 100% owned
by
our Chairman, Chief Executive Officer and President, Jinyuan Li. Biological
is a
Chinese-foreign equity joint venture company established under Chinese laws
on
March 27, 1998, subject to the Law on Sino Foreign Equity Joint Ventures. On
December 31, 2003 the Company changed its name from Strategika, Inc. to Tiens
Biotech Group (USA), Inc.
Tianjin
Tianshi Pharmaceuticals Co., Ltd. (“Tianshi Pharmaceuticals”), a Chinese
company, owns the remaining 20% of Biological. Tianjin Pharmaceuticals is 87.66%
owned by Tianjin Tianshi Group Co., Ltd. (“Tianshi Group”), a Chinese company,
and 7.29% owned by Mr. Li’s daughter, Baolan Li. Tianshi Group is 90% owned by
Jinyuan Li and 10% owned by Baolan Li. Tianshi Group also owns 51% of Tianjin
Tianshi Biological Engineering Co., Ltd. (“Tianshi Engineering”), the entity to
which we sell all of our products for consumption in China. Baolan Li owns
the
remaining 49% of Tianshi Engineering.
In
April
2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai Co. Ltd., a Chinese-Foreign Equity
Joint Venture (“Tiens Yihai”). Tiens Yihai is 99.4% owned by Tianshi Holdings
and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located in Shanghai,
China, and was established to build a new research and development facility
in
Shanghai, China. In March 2007, the Company decided to suspend the proposed
development by Tiens Yihai.
On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi International Investment Group Co., Ltd., a British Virgin Islands
Company (“Tianshi Investment”). Jinyuan Li owns 100% of Tianshi Investment.
Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy
all
of the registered share capital of Tianjin Tiens Life Resources Co., Ltd.,
a
Chinese Foreign Investment Enterprise (“Life Resources”) for $64.2 million. Life
Resources was incorporated on April 29, 2005 as a Foreign Investment Enterprise
(“FIE”) in Wuqing, Tianjin, PRC, with a registered share capital of $30,000,000.
On March 13, 2008 the Chinese government approved an increase in the registered
capital of Life Resources from $30,000,000 to $50,000,000. The closing of the
transaction was subject to government approval of transfer of the share capital
of Life Resources to Tianshi Holdings. On March 13, 2008, the Chinese government
approved the transfer of the shares of Life Resources. Life Resources is
currently constructing research and development, manufacturing and logistic
facilities, as well as administrative offices in Tianjin, China.
The
following chart shows the ownership interests in our subsidiaries.
Products
and Manufacturing
We
have
developed and produce 33 nutrition supplement products, which include wellness
products and dietary supplements.
Each
of
our wellness products includes at least one health function and has been issued
a Certificate of Domestic Wellness Product by the State Food and Drug
Administration (SFDA). This SFDA certificate is required for the production
and
sale of wellness products in China. Dietary supplements, which do not include
any health functions, are considered to be “ordinary food,” and do not require a
SFDA certificate. Each of our products has been issued a Product Standard Code
by the Bureau of Technical Supervision.
We
have
put great emphasis on product quality assurance. In 2002, we were awarded a
Quality System Certificate for compliance with the standard “ISO9001: 2000” in
the area of Design and Development, Production and Service of Food and Health
Care Food in China. In addition, many of our products have received a
certificate for Hazard Analysis Critical Control Point (“HACCP”). HACCP
identifies and assesses hazards and risk associated with the manufacture,
distribution and use of food-handling establishments. In 2007, four of our
products received a kosher certificate from the Kosher Supervision of America
(“KSA”), which is recognized by rabbinical societies throughout the world. These
products bear the KSA symbol, which tells consumers that they are in compliance
with kosher standards.
Our
products are manufactured at our facility in Tianjin, China. The manufacturing
processes of our nutrition supplement products are categorized into six types
depending on the different forms of the finished products: Powder, Tea,
Capsules, Tablets, Granules and Soft Gel Capsules. All of our manufacturing
complies with the product standards approved by the Bureau of Technical
Supervision in China.
The
following table lists our products.
Wellness
Products *
|
Dietary
Supplement Products *
|
Tianshi
Nutrient Super Calcium Powder (a) (b)
|
Tianshi
Super Calcium Milk Powder (a) (b)
|
Tianshi
Super Calcium Powder with Metabolic Factors (a) (b)
|
Tianshi
Double-cellulose Tablets (a) (b)
|
Tianshi
Super Calcium Powder for Children (a) (b)
|
Tianshi
Lycopene Tablets (a) (b)
|
Tianshi
Super Calcium Capsules with Lecithin (a) (b)
|
Tianshi
Tibet-Garlic Capsules (a)
|
Tianshi
Throat Care Granules (b)
|
Tianshi
Pine Pollen Powder Capsules (a) (b)
|
Tianshi
Lipid Metabolic Management Tea (a) (b) (c)
|
Tianshi
Protein Powder (b)
|
Tianshi
Slimming Tea (a) (b) (c)
|
Tianshi
Eel Oil Capsules (a)
|
Tianshi
Spirulina Tablets (b)
|
Tianshi
Multi-Vit-Mine Coffee (a) (b)
|
Tianshi
Spirulina Capsules (a) (b)
|
Tianshi
Gourmet Powder with Super Calcium (b)
|
Tianshi
Cell Rejuvenation Capsules (a) (b)
|
Tianshi
Hemp Seed Oil Softgels (a) (b)
|
Tianshi
Zinc Capsules (a) (b)
|
Tianshi
Snak-powder Capsules
|
Tianshi
Cordyceps Capsules (a) (b)
|
|
Tianshi
Chitosan Capsules (a) (b)
|
|
Tianshi
Sweet Dreams Granules (a) (b)
|
|
Tianshi
Vitality Softgels (a) (b)
|
|
Tianshi
Metabolic Balance Capsules (a) (b) (c)
|
|
Chewable
Calcium Tablets (a) (b)
|
|
Chewable
Calcium Tablets with multi-flavor (a) (b)
|
|
Grape
Extract Capsules (a) (b)
|
|
Tianshi
Beauty Face Capsules (a) (b)
(
c)
|
|
Bone
Treasure Tablets (a) (b)
|
|
Tianshi
Ginkgo Leaf Tablet (a) (b)
|
|
*
|
These
products are not intended to diagnose, treat, cure or prevent any
disease.
|
(a)
|
This
product has received Halal Approval, which certifies that our
manufacturing processes comply with the requirements of Islamic dietary
law.
|
(b)
|
This
product has received an HACCP
Certificate.
|
(c)
|
This
product has received KSA Kosher
Certificate.
|
During
2007, we phased out production of our personal care line of products, which
had
not been a material part of our business, to focus on our wellness products
and
dietary supplements. For the years ended December 31, 2007, 2006 and 2005,
all
of our revenue was generated from related party customers. See note 16 to our
consolidated financial statements for a breakdown of domestic and international
revenue, and revenue by product group for the last three fiscal years. In 2007,
2006 and 2005 our
Tianshi
Cordyceps Capsules accounted for 18.1%, 16.5% and 14.1% of our revenue,
respectively, and
our
Tianshi
Nutrient Super Calcium Powder
accounted for 15.8%, 14.1% and 17.3% of our revenue, respectively.
Trademarks
and Patents
We
consider the “Tiens” logo important to our business and have registered our
products under the logo “Tiens” with the State Administration of Industry and
Commerce in China. The registration is valid for a period of ten years from
May
21, 2002 and can be renewed for further ten-year periods multiple times. We
have
conducted extensive research and developed Tianshi Super Calcium Powder with
Metabolic Factors and Tianshi Super Calcium Powder for Children, which have
each
been awarded a patent from State Intellectual Properties Office in China with
respective patent numbers of ZL97115067.2 and ZL97115068.0. These two patents
are effective for 20 years, commencing on January 13, 2001.
Suppliers
We
have
established long-term relationships with most of our suppliers. We believe
that
the raw materials required for manufacturing our products are relatively easy
to
find and alternative suppliers are convenient to locate.
Research
and Development
We
incurred research and development expenses of $0.7 million, $1.0 million and
$0.6 million in 2007, 2006 and 2005 respectively. As of December 31, 2007,
we
employed 69 staff members in research and development, and we anticipate hiring
an additional 19 research and development employees in 2008.
Marketing
and Distribution
In
China,
we sell our products to Tianshi Engineering, an affiliated Chinese company.
Tianshi Engineering, in turn, sells the products to customers through its
branches and affiliated companies and at chain stores which are owned by
individual distributors. During 2007 Tianshi Engineering closed eleven of its
less profitable branches in China. As of December 31, 2007, Tianshi Engineering
had 100 branches in China. Prior to 2006, Biological sold all of its products
to
Tianshi Engineering as finished products at a price equal to 25% of the Chinese
market price for the products. This 25% figure was negotiated between the
parties in 2003, before we acquired Tianshi Holdings, and we believe that it
is
a reasonable sales price for us to receive.
At
the
beginning of 2006, we also began selling semi-finished products to Tianshi
Engineering. To qualify for a direct selling license in China, Tianshi
Engineering is required to produce a part of the products that it sells in
China. As a result, we began to sell semi-finished products to Tianshi
Engineering, which jointly shares with us licenses to produce, manufacture
and
sell the products. The price of semi-finished goods sold to Tianshi Engineering
was originally set at the beginning of 2006 to provide us with a 75% gross
profit margin. However, based on fluctuations in the cost of raw materials
and
quantities produced, this percentage varied during the year. This 75% figure
was
negotiated between the parties, and we believe that it is reasonable. The goal
of this new pricing policy was to try to maintain the Company’s gross margins on
semi-finished goods at a similar level to historical gross margins for finished
goods.
Internationally,
our strategy is to develop a strong direct sales force through our international
affiliated companies. Currently the United States is not a significant part
of
our business. We sell our products to overseas affiliated companies located
in
52 countries who in turn sell them to independent direct sales distributors.
During 2007, in order to consolidate our international distribution, we reduced
the number of countries where we sell directly to overseas affiliates from
63 to
52. Therefore, some of our overseas affiliate customers also now sell our
products on to other overseas affiliates which are no longer our direct
customers. In 2007 our highest sales outside of China were to the following
ten
countries, in descending order: Indonesia, Russia, Ukraine, Kazakhstan, Congo,
Hungary, South Africa, Peru, India and Columbia.
As
operation costs vary from country to country, international market prices vary
accordingly. We sell our products to overseas affiliates at the FOB (destination
port) price, which consists of 25% of the Chinese retail price, including
customs duty, value-added tax and other miscellaneous transportation cost.
The
overseas affiliates mark up the products to cover their expenses and realize
profits of approximately 10%.
Backlog
was $12.2 million as of December 31, 2007, compared to $15.4 million as of
December 31, 2006. We expect all of the backlog at the end of 2007 to be filled
within the 2008 fiscal year.
Competition
We
compete with other direct selling organizations, some of which have a longer
operating history and higher visibility, name recognition and financial
resources than we do. The leading direct selling companies in our existing
markets are Avon and Alticor (Amway). Some of our competitors, including Avon
and Alticor (Amway), have been granted a direct selling business license in
China pursuant to China’s recent regulations governing direct selling. In some
instances, these licenses can be limited to certain cities and/or provinces.
The
direct selling regulations require Tianshi Engineering, our affiliate who sells
our products in China, to apply for approval to conduct a direct selling
enterprise in China. Tianshi Engineering has made an application for, but has
not yet received, a direct selling license in China.
Regulatory
Framework
Product
Regulation
The
central governing authority in China for wellness products is the SFDA, which
is
under the jurisdiction of the State Council. SFDA issues administrative rules.
Provincial, city and town authorities implement the rules of the SFDA. Other
than the SFDA, other ministries and administrations also have certain
responsibility for the management of wellness or nutrition supplement products,
such as the State Administration for Industry and Commerce.
We
develop and manufacture products that are mainly classified as nutrition
supplement products, which includes wellness products and dietary supplement
products. Wellness products may not be sold in China without a wellness products
certificate. The governmental approval process in China for a newly developed
wellness product is as follows:
1.
|
An
application for a product certificate is filed with SFDA, which directs
the applicant to send the product samples to one of the government
appointed research institutes;
|
2.
|
The
appointed research institute conducts clinic trials, stability tests,
function tests and toxicity tests on the product, makes a report
and sends
the report back to SFDA within 6 months;
and
|
3.
|
The
Expert Committee of SFDA makes a final decision on the application
and
issues a “wellness products certificate” or a refusal notice to the
applicant.
|
This
certificate authorizes the sales and marketing of the product in China. The
certificate does not expire and does not require renewal. The whole process
generally takes 9 to 12 months. Dietary supplement products are not subject
to
SFDA regulation.
Sales
and Marketing Regulations
In
most
countries, sales of our products are usually considered under the categories
of
general commodities, which do not require specific permits and are not subject
to the strict regulations applied to drugs and medicine. In some countries,
direct selling (or multi-level marketing) is highly regulated or prohibited.
Since we sell our products to our affiliated companies for sale internationally,
the local approval issues with respect to sales and distribution are addressed
by our affiliates.
In
China,
we are aiming to expand our market share through the branches, chain stores,
and
affiliated companies of Tianshi Engineering, our affiliate who sells our
products in China. Because direct selling was only recently authorized in China,
the regulatory environment with respect to direct selling in this market remains
fluid and the process for obtaining the necessary governmental approvals have
been interpreted differently by different governmental authorities. The direct
selling regulations require Tianshi Engineering to apply for approval to conduct
a direct selling enterprise in China.
Tianshi
Engineering has applied for a direct selling license in a number of provinces
and must obtain a series of approvals from the Departments of Commerce in such
provinces, as well as the Departments of Commerce in each city and district
in
which we plan to operate. Tianshi Engineering is also required to obtain the
approval of the State Ministry of Commerce, which is the national government
authority overseeing direct selling.
Tianshi
Engineering has found that it is taking more time than anticipated to work
through the approval process with the Chinese authorities. These authorities
have broad discretion in interpreting the regulations and granting necessary
approvals. A delay in obtaining approvals at one level can delay its ability
to
obtain approvals at the next level. The complexity of the approval process
as
well as the government’s continued cautious approach as direct selling develops
in China makes it difficult to predict a timeline for obtaining these approvals.
Until the application is approved, Tianshi Engineering will continue to sell
our
products through its branches, chain stores, and affiliated companies in
China.
Environmental
Compliance
We
are
subject to China’s National Environmental Protection Law, as well as a number of
other national and local laws and regulations regulating air, water and noise
pollution and setting pollutant discharge standards. We believe that all our
manufacturing operations are in material compliance with all applicable
environmental laws.
Employees
As
of
December 31, 2007, we had 1,405 employees. We believe that our relations with
our employees are satisfactory.
ITEM
1A. RISK FACTORS.
THE
FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE
BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS,
FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY STATEMENT
IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED
TO
BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS. WE ARE SUBJECT TO, AMONG OTHERS, THE FOLLOWING RISKS:
RISKS
RELATED TO OUR BUSINESS
WE
MAY NOT BE ABLE TO RAISE ADEQUATE FUNDS TO COMPLETE THE CONSTRUCTION OF OUR
NEW
HEADQUARTERS, RESEARCH AND DEVELOPMENT AND MANUFACTURING FACITILITIES BEING
BUILT BY LIFE RESOURCES.
In
December 2007, we entered into an agreement to acquire Life Resources, a company
which is currently constructing research and development, manufacturing and
logistic facilities, as well as administrative offices totaling approximately
420,000 square meters in Tianjin, China.
We
currently estimate that the budget for completion of the Life Resources project
will be approximately $220 million, including the $64 million already spent
to
acquire all of the registered share capital of Life Resources. We intend to
construct the facilities in phases over several years, based on available cash
and capacity needs. Depending on the rate of construction and our cash flow,
we
may require additional financing to complete the funding of that project. If
we
are not able to fund the completion of the new facilities, our future growth
opportunities may be limited.
OUR
REPUTATION, REVENUES AND OPERATING INCOME MAY BE ADVERSELY AFFECTED BY PRODUCT
LIABILITY CLAIMS.
As
a
manufacturer of products designed for human consumption, claims may be brought
against us that a product injured its consumer. Our dietary supplement products
consist of vitamins, minerals, herbs and other ingredients that are not subject
to pre-market regulatory approval. Our products could contain contaminated
substances, and some of our products contain innovative ingredients that do
not
have long histories of human consumption. Previously unknown adverse reactions
resulting from human consumption of these ingredients could occur. A product
liability claim against us could result in increased costs and could adversely
affect our reputation with our customers, which in turn could adversely affect
our revenues and operating income.
OUR
NEWLY DEVELOPED PRODUCTS MAY NOT BE COMPATIBLE WITH MARKET
NEEDS.
Our
business is particularly subject to changing consumer trends and preferences.
Our continued success depends in part on our ability to anticipate and respond
to these changes, and we may not respond in a timely or commercially appropriate
manner to such changes. Because markets for nutrition supplement products
differentiate geographically, we must accurately assess demand in each specific
market into which we wish to make sales. If we fail to accurately assess
consumer health needs in each market we target, we may face limited market
acceptance of our products, which could have a material adverse effect on our
sales and revenue.
OUR
PRODUCTS MUST KEEP PACE WITH ADVANCES IN THE INDUSTRY OR THEY MAY BE DISPLACED
BY COMPETITORS’ NEWLY DEVELOPED PRODUCTS.
The
nutrition supplement products industry is characterized by rapid product
development, with significant competitive advantages gained by companies that
introduce products that are first to market, deliver constant innovation in
products and techniques, offer frequent new product introductions and have
competitive prices. Our future growth partially depends on our ability to
develop products that are more effective in meeting consumer needs. In addition,
we must be able to manufacture and effectively market those products. The sales
of our existing products may decline if a competing product is introduced by
other companies.
The
success of our new product offerings depends upon a number of factors, including
our ability to:
|
·
|
accurately
anticipate consumer needs;
|
|
·
|
innovate
and develop new products;
|
|
·
|
successfully
commercialize new products in a timely manner;
|
|
·
|
price
our products competitively;
|
|
·
|
manufacture
and deliver our products in sufficient volumes and in a timely manner;
and
|
|
·
|
differentiate
our product offerings from those of our competitors.
|
If
we
fail to do any of the above or we focus on technologies that do not lead to
more
effective products, our current and future products could be surpassed by more
effective or advanced products of others.
OUR
PRODUCTS MAY BE COPIED BY OUR COMPETITORS.
In
general, we rely on trade secrets to protect our intellectual property.
We have
been issued patents from the State Intellectual Properties Office in China
for
two of our products: Tianshi Super Calcium Powder with Metabolic Factors
and
Tianshi Super Calcium Powder for Children. These two patents are effective
for
20 years, which commenced on January 13, 2001. If we fail to adequately
protect
our intellectual property and trade secrets, our competitors may copy our
products, which could hurt our business.
OUR
MANUFACTURING PROCESS IS SUBJECT TO RISKS.
There
are
risks associated with ingredients mixing and production processes and
techniques. Our manufacturing process requires a significant degree of technical
expertise. If we fail to manufacture our products to specifications or
inadvertently use defective materials in the manufacturing process, the
reliability and performance of our products will be compromised.
We
rely
on our manufacturing operations to produce nearly all of the proprietary
products we sell. Any significant disruption in those operations for any reason,
such as regulatory requirements and loss of certifications, power interruptions,
fires, hurricanes, war or other force majeure, could adversely affect our sales
and customer relationships.
WE
HAVE LIMITED CONTROL OVER THE ACTIVITIES OF OUR
DISTRIBUTORS.
We
place
significant reliance on a network of affiliates to act as our primary sales
force. Although a majority of our affiliated companies are controlled in whole
or part by Jinyuan Li, our Chairman, Chief Executive Officer and President,
such
affiliates are not employed or otherwise controlled by us and are generally
free
to conduct their business at their own discretion. The distributors are
dedicated more to establishing their own reputations and business relationships
than to promoting our products. The simultaneous loss of a number of these
distributors could have a material adverse effect on our business, financial
condition, and results of operations.
WE
CONDUCT OUR BUSINESS WITH RELATED PARTIES, AND YOUR INVESTMENT MAY BE SUBJECT
TO
CONFLICT OF INTEREST AND SELF-DEALING RISKS.
Due
to
the inter-related ownership and business dealings among us and our affiliates,
there are conflict of interest and self-dealing risks and increased potential
for manipulation of financial results. We have affiliated companies or business
entities that are owned by Jinyuan Li and his immediate family members (mostly
his daughter Baolan Li). Although all affiliated companies and business entities
were established so that they are legally and financially independent, except
for the common ownership, they are centrally administrated by Tianshi Group.
The
decisions of Tianshi Group could materially affect the operation of our
business, which could be adverse to our investors.
We
sell
all of our products for resale in China to Tianshi Engineering. As both we
and
Tianshi Engineering are majority owned by Jinyuan Li, even given consideration
to the internal price transferring policies set among the related parties,
these
internal policies could be faulty or might not be strictly followed.
WE
FACE RISKS DUE TO OUR RELIANCE ON SALES IN INTERNATIONAL
MARKETS.
Our
future success will depend in part on the continued expansion of international
sales. Such international operations expose us to certain risks, including
but
not limited to; a need for export licenses; unexpected regulatory requirements;
tariffs and other potential trade barriers and restrictions; political, legal
and economic instability in foreign markets; longer account receivable cycles;
difficulties in managing operations across disparate geographic areas; foreign
currency fluctuations; limited protection of our intellectual property rights
in
some countries; dependence on local distributors; and potential disruptions
in
sales due to military or terrorist acts. Any or a combination of these risks
could result in a material adverse effect on our business, financial condition
or results of operations.
OUR
PRODUCTS ARE SUBJECT TO REGULATION OVER NUTRITIONAL SUPPLEMENT PRODUCTS IN
MARKETS OUTSIDE CHINA.
Nutrition
supplement products are subject to regulatory requirements that vary by country.
Obtaining approval to sell nutrition supplement products internationally
involves complexities of dealing with a variety of governmental regulations.
We
have limited experience in dealing with the specific regulations that may be
required to sell our products in certain international markets, which could
delay our ability to obtain relevant regulatory approval for our products.
In
addition, our product sales in other countries are subject to product regulatory
regimes of various degrees and direct marketing or distribution regulations.
Although currently these aspects are handled by our affiliated distributors
in
the relevant jurisdictions, there can be no assurance that the current
operations of our company and our affiliates and distributors will not be
adversely affected by compliance issues and changes in applicable laws and
regulations in relevant jurisdictions.
THE
DISTRIBUTION OF OUR PRODUCTS IS SUBJECT TO REGULATION OUTSIDE
CHINA.
Products
distributed outside China are subject to government regulations of different
jurisdictions, which could be stricter than in China. In some developed
countries, the government regulations for product approval could be stricter
than in China, while in developing countries, government regulation could be
uncertain. Our products could take a significantly longer time than we expect
to
gain regulatory approval or may never gain approval in certain countries, which
could limit our ability to promote, sell and distribute products. In addition,
in terms of our marketing approach, multi-level marketing may also be prohibited
in some countries. As such, our sales may be adversely affected if such approval
cannot be obtained in certain jurisdictions.
OUR
MANAGEMENT LACKS EXPERIENCE OPERATING A U.S. PUBLIC
COMPANY.
Our
management had no experience operating a U.S. public company before our
acquisition of Tianshi Holdings. The initial difficulties with public company
regulations faced by U.S. managers of a newly public company are aggravated
with
respect to our management, by our unfamiliarity with Western regulatory regimes
and language and time zone differences. In addition, management must integrate
new accounting rules and control procedures. Learning compliance is likely
to
distract management from operations to a greater degree than might be the case
of management of a U.S. company, and the period during which our management
masters the rules, when errors are more likely to occur, may be longer.
Accordingly, the expense and operational risks inherent to a transition from
private to public company are greater for Tiens USA than might usually be the
case.
RISKS
RELATED TO DOING BUSINESS IN CHINA
WE
ARE SUBJECT TO THE RISKS ASSOCIATED WITH DOING BUSINESS IN
CHINA.
As
most
of our operations are conducted in China, we are subject to special
considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated
with, among others, the political, economic and legal environments and foreign
currency exchange. Our results may be adversely affected by changes in the
political and social conditions in China, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation,
among other things.
Although
the majority of productive assets in China are owned by the Chinese government,
in the past several years the government has implemented economic reform
measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
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We
will be able to capitalize on economic
reforms;
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The
Chinese government will continue its pursuit of economic reform policies;
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The
economic policies, even if pursued, will be successful;
and
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Economic
policies will not be significantly altered from time to
time.
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A
RECENT CAMPAIGN IMPOSED BY THE CHINESE GOVERNMENT AGAINST THE EXPORT OF UNSAFE
FOOD AND SUBSTANDARD PRODUCTS, IN HINDERING OUR ABILITY TO EXPORT OUR PRODUCTS
INTERNATIONALLY.
In
August
2007, China’s Administration of Quality Supervision, Inspection and Quarantine
(“AQSIQ”) announced an ongoing national campaign in China against unsafe food
and substandard products. The special campaign against poor product quality
was
launched in response to a series safety scares involving Chinese products
worldwide. The campaign set 20 detailed goals, including twelve "100 percents".
For example, 100 percent of food producers should be licensed; 100 percent
of
agricultural wholesale markets in cities must be monitored; 100 percent of
suppliers of raw materials for exported products should be inspected; and 100
percent of agricultural products must be free of five types of strong
pesticides. The campaign, which was originally scheduled to finish at the end
of
2007, is currently scheduled to continue throughout 2008.
As
a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and we have experienced
significant delays in obtaining export clearance for all of the products which
we sell to our international affiliates. We believe that these delays have
resulted in some of our international affiliates not being able to purchase
sufficient quantities of our products to meet their demand, resulting in a
loss
of sales. Continued delays in the export clearance for our products may continue
to result in us not being able to meet the demand for our products from our
international affiliates and future loss of sales. Currently we are not able
to
provide an estimate as to the timing for the clearance of our products for
export.
THE
RESEARCH, DEVELOPMENT, TESTING, MANUFACTURING AND MARKETING OF OUR PRODUCTS
ARE
SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS IN CHINA.
Government
regulation includes inspection of and controls over testing, manufacturing,
safety and environmental controls, efficacy, labeling, advertising, promotion,
record keeping and the sale and distribution of wellness products. Tianshi
Engineering is also subject to government regulations with respect to the prices
it will charge, the rebates it may offer to customers and the methods of its
marketing. Government regulation may substantially increase the cost of
developing, manufacturing and selling our products.
UNCERTAINTY
IN THE DEVELOPMENT OF DIRECT SELLING REGULATIONS MAY ADVERSELY AFFECT SALES
OF
OUR PRODUCTS IN CHINA.
Substantially
all of our assets are located in China, and approximately 56.0%, 40.5% and
40.9%
of our revenues in 2005, 2006 and 2007, respectively, were derived from our
operations in China. Accordingly, our operations are subject, to a significant
degree, to Chinese law. In China, we are aiming to expand our market share
through the branches, chain stores, and affiliated companies of Tianshi
Engineering, our affiliate who sells our products in China. Because direct
selling was only recently authorized in China, the regulatory environment with
respect to direct selling in this market remains fluid and the process for
obtaining the necessary governmental approvals have been interpreted differently
by different governmental authorities. The direct selling regulations require
Tianshi Engineering to apply for approval to conduct a direct selling enterprise
in China.
Tianshi
Engineering has applied for a direct selling license in a number of provinces
and must obtain a series of approvals from the Departments of Commerce in such
provinces, as well as the Departments of Commerce in each city and district
in
which we plan to operate. Tianshi Engineering is also required to obtain the
approval of the State Ministry of Commerce, which is the national government
authority overseeing direct selling.
Tianshi
Engineering has found that it is taking more time than anticipated to work
through the approval process with the Chinese authorities. These authorities
have broad discretion in interpreting the regulations and granting necessary
approvals. A delay in obtaining approvals at one level can delay our ability
to
obtain approvals at the next level. The complexity of the approval process
as
well as the government’s continued cautious approach as direct selling develops
in China makes it difficult to predict a timeline for obtaining these approvals.
If Tianshi Engineering does not receive a direct selling license in China,
then
its ability to compete against its competitors who have received such a license
may be hurt. As a result, Tianshi Engineering may lose distributors who find
a
competitor’s direct selling business and compensation model more attractive.
This could materially decrease the revenues that we receive from sales by
Tianshi Engineering in China.
WE
MAY NOT BE REFUNDED
MONIES WE HAVE PAID FOR THE TIENS YIHAI PROPERTY.
In
2005,
the Chinese central government issued its “Adjustment of Macro-Economic Policy”.
This policy implemented a new system of investment and use of state-owned
assets, including land. Pursuant to this policy, local government organizations
adjusted and re-allotted projects, including investment, construction and
reconstruction of state-owned resources. As a result, projects and enterprises
that had been affected, including Tiens Yihai, were awaiting further decisions
by state and local government.
On
November 10, 2006, Tiens International and the Local Government entered into
a
supplemental agreement pursuant to which the parties have agreed to the
acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres)
parcel of land. In order to proceed with the purchase of land use rights of
the
property by Tiens Yihai, Tianshi Holdings is required to provide a loan of
$6.4
million to the Local Government for relocation costs for people living on the
property. The $6.4 million loan is to be funded in two
installments:
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The
first installment of $3.2 million was paid on November 27,
2006.
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The
second installment of $3.2 million is to be paid after Tiens Yihai
obtains
a construction license to develop the property. The parties have
agreed to
allow Tianshi Holdings to reduce this second installment by the amount
of
the $1.6 million refund due to it.
|
In
return
for the loan, Tiens Yihai will receive a tax credit in the amount of the loan.
In March 2007, we received notice that the Local Government had approved the
land use rights for 50 acres of the Tiens Yihai property. As a result of the
reduction in the number of acres for which we have received land use rights
and
continued uncertainty relating to the Tiens Yihai project, management made
a
decision to suspend the development of the project. We are currently reviewing
alternative commercial uses for the Tiens Yihai site, as well as the possibility
of selling the land use rights to a third party. If Tiens Yihai does not proceed
with construction on the Tiens Yihai site or is not able to sell the land use
rights to a third party, it is not clear whether the Local Government will
return the $1.6 million it previously agreed to refund or repay the initial
loan
of $3.2 million made in November 2006.
THE
LEGAL AUTHORITIES IN CHINA ARE IN THE PROCESS OF EVALUATING HERETOFORE TAX
AND
FEE BENEFITS PROVIDED TO FOREIGN INVESTORS AND COMPANIES TO ENCOURAGE
DEVELOPMENT WITHIN THE COUNTRY SUCH THAT THESE BENEFITS MAY BE LESSENED OR
REMOVED WITH THE CONSEQUENCE THAT EXPENSES MAY RISE IMPACTING MARGINS AND NET
INCOME.
Biological
is located in Tianjin Wuqing Development Area, a national new technology
development zone, and is subject to the special reduced income tax rate of
15%.
Pursuant to the approval of the relevant PRC tax authorities, Biological is
fully exempt from PRC income taxes for two years starting from the year profits
are first made, followed by a 7.5% reduced tax rate for the next three years.
Prior
to
the year ended December 31, 2002, Biological suffered operating losses.
Biological started generating taxable profits in the year ended December 31,
2003. Effective January 1, 2005, the two-year
full
exemption for income taxes expired for Biological and it became subject to
income tax at a reduced rate of 7.5%.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs. The two years tax exemption, three years 50%
tax reduction tax holiday for production-oriented FIEs will be eliminated.
According to the new EIT, high-tech companies could be subject to a special
reduced tax rate of 15%. The qualification of a high-tech company is to be
reviewed annually. Biological currently qualifies as a high-tech company.
However, there are no detailed regulations regarding the implementation of
new
EIT. In the first quarter of 2008, we were required by local tax authority
to
prepay income tax at a tax rate of 25%. We are
currently evaluating the effect of the new EIT law will have on our financial
position.
WE
ARE SUBJECT TO COMPLEX CHINESE BUSINESS REGULATIONS.
As
China
changes its economy from planned to more market-oriented, uncertainties arise
regarding governmental policies and measures. Although, in recent years, the
Chinese government has implemented measures emphasizing the use of market forces
for economic reform, reduction of state ownership of productive assets, and
establishment of sound corporate governance practices, a substantial portion
of
productive assets in China are still owned by the Chinese government. For
example, all lands are state owned and leased to business entities or
individuals through governmental grants of state-owned land use rights. The
grant process is typically based on government policies at the time of grant,
which can be lengthy and complex and may adversely affect our planned
manufacturing expansion. The Chinese government also exercises significant
control over China’s economic growth through allocation of resources, foreign
currency control and providing preferential treatment to particular industries
or companies.
BECAUSE
MOST OF OUR DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, AND
SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES, IT
MAY
BE DIFFICULT FOR INVESTORS TO ENFORCE THEIR LEGAL RIGHTS AGAINST SUCH
INDIVIDUALS OR SUCH ASSETS.
Most
of
our directors and officers reside outside of the United States, and
substantially all of our assets are located outside of the United States. As
a
result, it may not be possible for investors in the United States to enforce
their legal rights, to effect service of process upon our directors or officers
or to enforce judgments of United States courts predicated upon civil
liabilities and criminal penalties of our directors and officers under Federal
securities laws. Although China has executed the Agreement on Mutual Judicial
Assistance in Criminal Matters with the United States in June 2000, there is
no
extradition treaty between the United States and China. Therefore, it is unclear
whether criminal penalties under United States federal securities laws would
be
enforced effectively in China, if at all.
OUR
OPERATING COMPANY IS SUBJECT TO RESTRICTIONS ON DIVIDEND PAYMENTS AND OTHER
DISTRIBUTIONS TO US.
Current
regulations in China would permit our operating company in China to pay
dividends to us only out of its accumulated distributable profits, if any,
determined in accordance with Chinese accounting standards and regulations.
In
addition, our operating company in China will be required to set aside at least
10% (up to an aggregate amount equal to half of its registered capital) of
its
accumulated profits each year. Such cash reserve may not be distributed as
cash
dividends. In addition, if our operating company in China incurs debt on its
own
behalf in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other payments to us.
THE
CHINESE LEGAL SYSTEM IS NOT FULLY DEVELOPED AND HAS INHERENT UNCERTAINTIES
THAT
COULD LIMIT THE LEGAL PROTECTIONS AVAILABLE TO INVESTORS.
The
Chinese legal system is a system based on written statutes and their
interpretation by the Supreme People’s Court. Prior court decisions may be cited
for reference but have limited legal precedents. Since 1979, the PRC government
has been developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with economic
matters such as foreign investment, corporate organization and governance,
commerce, taxation and trade. Two examples are the promulgation of the Contract
Law of the PRC to unify the various economic contract laws into a single code,
which went into effect on October 1, 1999, and the Securities Law of the
People’s Republic of China, which went into effect on July 1, 1999. However,
because these laws and regulations are relatively new, and because of the
limited volume of published cases and their non-binding nature, interpretation
and enforcement of these laws and regulations involve uncertainties. In
addition, as the Chinese legal system develops, changes in such laws and
regulations, their interpretation or their enforcement may have a material
adverse effect on our business operations.
ENFORCEMENT
OF REGULATIONS IN CHINA MAY BE INCONSISTENT.
Although
the Chinese government introduced new laws and regulations to modernize its
securities and tax systems on January 1, 1994, China does not yet possess an
expansive body of business law. As a result, the enforcement, interpretation
and
implementation of regulations may prove to be inconsistent and it may be
difficult to enforce contracts.
WE
MAY EXPERIENCE LENGTHY DELAYS IN RESOLUTION OF LEGAL
DISPUTES.
As
China
has not developed a dispute resolution mechanism similar to the Western court
system, dispute resolution over Chinese projects and joint ventures can be
difficult and there is no assurance that any dispute involving our business
in
China can be resolved expeditiously and satisfactorily.
CHINESE
ECONOMIC, POLITICAL AND SOCIAL CONDITIONS AS WELL AS GOVERNMENT POLICIES COULD
ADVERSELY AFFECT OUR BUSINESS.
All
of
our assets and operations are located in China. The economy of China differs
from the economies of most developed countries in many respects, including
government involvement, level of development, growth rate, control of foreign
exchange, and allocation of resources. The economy of China has been
transitioning from a planned economy to a more market-oriented economy. Although
in recent years the Chinese government has implemented measures emphasizing
the
utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
The
economy of China has experienced significant growth in the past 20 years, but
growth has been uneven both geographically and among various sectors of the
economy. The Chinese government has implemented various measures from time
to
time to control the rate of economic growth. Some of these measures benefit
the
overall economy of China, but may have a negative effect on us. For example,
our
operating results and financial condition may be adversely affected by:
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changes
in the rate or method of taxation;
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imposition
of additional restrictions on currency conversion and remittances
abroad;
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reduction
in tariff or quota protection and other import restrictions;
and
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changes
in the usage and costs of state-controlled transportation
services.
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FLUCTUATIONS
IN THE VALUE OF THE CHINESE RENMINBI RELATIVE TO FOREIGN CURRENCIES COULD AFFECT
OUR OPERATING RESULTS.
Substantially
all our revenues and expenses are denominated in the Chinese Renminbi. However,
we use the United States dollar for financial reporting purposes. The value
of
Chinese Renminbi against the United States dollar and other currencies may
fluctuate and is affected by, among other things, changes in China’s political
and economic conditions. The Chinese government values the exchange rate of
the
Chinese Renminbi against a number of currencies, rather than just exclusively
the United States dollar. Although the Chinese government has stated its
intention to support the value of the Chinese Renminbi, we cannot assure you
that the government will not revalue it. As our operations are primarily in
China, any significant revaluation of the Chinese Renminbi may materially and
adversely affect our cash flows, revenues and financial condition. For example,
to the extent that we need to convert United States dollars into Chinese
Renminbi for our operations, appreciation of this currency against the United
States dollar could have a material adverse effect on our business, financial
condition and results of operation. Conversely, if we decide to convert our
Chinese Renminbi into United States dollars for other business purposes and
the
United States dollar appreciates against this currency, the United States dollar
equivalent of the Chinese Renminbi would be reduced. To date, we have not
engaged in any hedging transactions in connection with our
operations.
RISKS
RELATED TO OUR COMMON STOCK
THE
LIQUIDITY OF OUR COMMON STOCK IS AFFECTED BY ITS LIMITED TRADING
MARKET.
Shares
of
our common stock are traded on the American Stock Exchange under the symbol
“TBV”. There is currently no broadly followed established trading market for our
common stock. An established trading market may never develop or be maintained.
Active trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders. The absence of an active trading
market reduces the liquidity of shares. The trading volume of our common stock
historically has been limited and sporadic. As a result of this trading
activity, the quoted price for our common stock is not necessarily a reliable
indicator of its fair market value. Further, if we cease to be quoted, holders
would find it more difficult to dispose of, or to obtain accurate quotations
as
to the market value of our common stock and the market value of our common
stock
likely would decline.
OUR
COMMON STOCK MAY BE SUBJECT TO REGULATIONS PRESCRIBED BY THE SECURITIES AND
EXCHANGE COMMISSION RELATING TO “PENNY STOCK”.
The
Securities and Exchange Commission has adopted regulations that generally define
a penny stock to be any equity security that has a market price (as defined
in
such regulations) of less than $5.00 per share, subject to certain exceptions.
If our common stock meets the definition of a penny stock, it will be subjected
to these regulations, which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors.
WE
ARE MAJORITY OWNED BY ONE STOCKHOLDER.
Our
president and chief executive officer, Jinyuan Li, controls a majority of our
common stock. Mr. Li beneficially owns approximately 92% of our outstanding
common stock. As a result, Mr. Li has the ability to exert significant control
over our management and affairs requiring stockholder approval, including
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying or preventing a change in control, including
a
merger, consolidation or other business combination involving us, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control, even if such change of control would benefit
our
other shareholders.
OUR
COMMON STOCK WILL LIKELY BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME
FLUCTUATIONS.
The
stock
market has experienced extreme price and volume fluctuations in recent years
that have significantly affected the quoted prices of securities of many
companies, including companies in our industry. The changes often appear to
occur without regard to specific operating performance. In addition, there
has
been a limited public market for our common stock. We cannot predict the extent
to which investor interest in us will be maintained. Such interest is necessary
for an active, liquid trading market for our common stock. Active trading
markets generally result in lower price volatility and more efficient execution
of buy and sell orders for investors. The price and trading volumes of our
common stock may fluctuate widely due to the limited public market for our
stock.
SHARES
AVAILABLE FOR FUTURE SALE MAY DILUTE AND DEPRESS THE PRICE OF OUR COMMON
STOCK.
A
significant number of our shares are eligible for sale pursuant to Rule 144,
and
their sale could depress the market price of our stock. Some or all of the
shares of common stock may be offered from time to time in the open market
pursuant to Rule 144, and these sales may have a depressive effect on the market
for the shares of common stock. In general, a person who has held restricted
shares for a period of one year may, upon filing with the SEC a notification
on
Form 144, sell into the market common stock in an amount equal to the greater
of
1% of the outstanding shares or the average weekly number of shares sold in
the
last four weeks prior to such sale. Such sales may be repeated once each three
months, and any of the restricted shares may be sold by a non-affiliate after
they have been held two years.
WE
DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE, AND THE LACK
OF
DIVIDENDS MAY HAVE A NEGATIVE EFFECT ON THE STOCK PRICE.
We
have
never declared or paid any cash dividends or distributions on our common stock.
We currently intend to retain our future earnings to support operations and
to
finance expansion and, therefore, do not anticipate paying any cash dividends
on
our common stock in the foreseeable future.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2. PROPERTIES.
We
conduct our main business activities in Tianjin, China. Our primary facilities
are located at No. 6. Yuanquan Road, Wuqing New-tech Industrial Park, Tianjin,
PRC.
Since
2003, Biological has leased office space and manufacturing facilities from
Tianshi Group. The lease expired at the end of 2007 and required annual rent
at
1% of our total gross revenues. The rent was negotiated by the parties before
we
acquired Tianshi Holdings, and we believe that it is a reasonable rent for
the
facilities. In 2007 we paid $522,318 to Tianshi Group under the lease. In
addition, we are obligated to pay insurance, maintenance and other expenses
related to the premises. Effective January 1, 2008, we entered into a new lease
with Tianshi Group regarding the following properties on the same terms as
the
lease which expired at the end of 2007:
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three
office buildings with a total area of 8,265 square
meters;
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one
research building with an area of 2,400 square meters;
and
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one
dormitory with an area of 2,365 square
meters.
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On
December 14, 2007, Biological entered into a Real Property Transfer Agreement
(the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
Biological transferred to Tianshi Group title to buildings consisting of
approximately 34,000 square meters of office, workshop, conference and
exhibition space located at the Company’s headquarters in Tianjin China for
$15,316,496. Biological also transferred land use rights on the underlying
land,
which is owned by the government of China, continuing through December 30,
2054
with respect to the conference center property and May 31, 2043 with respect
the
other properties. On December 14, 2007, Biological and Tianshi Group also
entered a Lease Agreement pursuant to which Biological has the right to use
and
occupy the office and workshop spaces being transferred under the Transfer
Agreement. The lease is rent-free, but Biological is required to pay Tianshi
Group for utility charges and maintenance costs on the buildings. The lease
continues until the earlier of the date that we move to the new administrative
offices being constructed by Life Resources, or the land use rights on the
underlying property expire.
The
following properties are covered by the December 14, 2007 lease:
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two
workshops with an area of 8,600 square
meters;
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two
warehouses with an area of 9,447 square meters;
and
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one
power station with an area of 615 square
meters
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Tiens
Yihai Property
In
April
2004, Tianshi Holdings entered a joint venture contract with Tianshi
Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is 99.4% owned by Tianshi
Holdings and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai is located
in
Shanghai, China, and was established to build a new research and development
facility, which would also produce certain of our products. In October 2004,
the
Company paid a deposit of $3.6 million to Zhu Jia Jiao Industrial Park
Economic
Development
Ltd (representative of the local government, “Local Government”) for acquiring
the land use right of 1,600 mu (263 acres) located in Shanghai. However, in
2005, the Chinese central government issued its “Adjustment of Macro-Economic
Policy”. This policy implemented a new system of investment and use of
state-owned assets, including land. Pursuant to this policy, local government
organizations adjusted and re-allotted projects, including investment,
construction and reconstruction of state-owned resources. As a result, projects
and enterprises that had been affected, including Tiens Yihai, were awaiting
further decisions by state and local government.
On
November 10, 2006, Tiens International and the Local Government entered into
a
supplemental agreement pursuant to which the parties have agreed to the
acquisition of land use rights by Tiens Yihai of a reduced 486 mu (80 acres)
parcel of land. The remaining 1,114 mu (184 acres) may not be available for
purchase in the future. Therefore, the Local Government has agreed to refund
to
us $1.6 million of the original $3.6 million deposit when we receive a
construction license for the development.
In
order
to proceed with the purchase of the property by Tiens Yihai, Tianshi Holdings
is
required to provide a loan of $6.4 million to the Local Government for
relocation costs for people living on the property. The $6.4 million loan is
to
be funded in two installments:
|
·
|
The
first installment of $3.2 million was paid on November 27,
2006.
|
|
·
|
The
second installment of $3.2 million is to be paid after Tiens Yihai
obtains
a construction license to develop the property. The parties have
agreed to
allow Tianshi Holdings to reduce this second installment by the amount
of
the $1.6 million refund due to it.
|
In
return
for the loan, Tiens Yihai will receive a tax credit in the amount of the loan.
In March 2007, we received notice that the Local Government had approved the
land use rights for 50 acres of the Tiens Yihai property. As a result of the
reduction in the number of acres for which we have received land use rights
and
continued uncertainty relating to the Tiens Yihai project, management made
a
decision to suspend the development of the project. We are currently reviewing
alternative commercial uses for the Tiens Yihai site, as well as the possibility
of selling the land use rights to a third party.
Life
Resources Property
On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi Investment to buy all of the registered share capital of Life
Resources for $64.2 million. The closing of the transaction was subject to
government approval of transfer of the share capital of Life Resources to
Tianshi Holdings. On March 13, 2008, the Chinese government approved the
transfer. Pursuant to the Sale and Purchase Agreement, the Tianshi Holdings
advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007.
This acquisition deposit was settled as follows:
|
·
|
$28,592,743
was paid by canceling a loan in the principal amount of RMB200,000,000
to
Tianshi Engineering owned by Biological together with interest accrued;
|
|
·
|
$16,557,914
was paid by canceling of other receivable owned by Tianshi Engineering
to
Biological; and
|
|
·
|
$19,096,525
was paid in cash.
|
Life
Resources is currently constructing research and development, manufacturing
and
logistic facilities, as well as administrative offices totaling approximately
420,000 square meters. Construction began in July 2006. The facilities are
located 7 kilometers from our current headquarters in Tianjin, China. We
currently estimate that the budget for completion of the Life Resources project
will be approximately $220 million, including the $64 million already spent
to
acquire all of the registered share capital of Life Resources. We intend to
move
our headquarters to these new facilities upon its completion.
ITEM
3. LEGAL PROCEEDINGS.
We
are
not a party to any material pending legal proceedings.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On
December 4, 2007, the annual meeting of stockholders of the Company (the “Annual
Meeting”) was held at the Company’s Tianjin offices for the following purposes:
1.
|
Elect
the following persons to the Board of Directors: Jinyuan Li, Wenjun
Jiao,
Yupeng Yan, Gilbert Raker, Howard Balloch, and Socorro Quintero.
|
2.
|
Ratify
the Board of Directors’ appointment of Grobstein, Horwath & Company
LLP, the independent public accountants as the auditor of the Company
for
the fiscal year 2007.
|
In
this
Annual Meeting, there were accordingly present, in person or by proxy, an
aggregate of 67,970,169 shares of Common Stock, such shares being a majority
of
the 71,333,586 shares of Common Stock entitled to notice of and to vote at
the
meeting.
The
result of the vote taken for the election of directors at the meeting was as
follows:
Directors
|
|
No.
of Shares For
|
|
No.
of Shares Against
|
|
Withheld
Authority
|
Jinyuan
Li
|
|
67,959,959
|
|
10,210
|
|
0
|
Wenjun
Jiao
|
|
67,959,959
|
|
10,210
|
|
0
|
Yupeng
Yan
|
|
67,959,959
|
|
10,210
|
|
0
|
Socorro
Quintero
|
|
67,959,959
|
|
10,210
|
|
0
|
Howard
Balloch
|
|
67,959,359
|
|
10,810
|
|
0
|
Gilbert
Raker
|
|
67,959,959
|
|
10,210
|
|
0
|
The
result of the vote taken for the ratification of the appointment of Grobstein,
Horwath & Company LLP was as follows:
|
·
|
67,959,924
shares voted in favor of the proposal,
|
|
·
|
7,208
shares voted against the proposal, and
|
|
·
|
3,037
shares abstained.
|
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASERS OF EQUITY SECURITIES.
Stock
Performance Presentation
The
following chart compares the cumulative stockholder return on the Company’s
common stock with the cumulative total stockholder return of (i) the AMEX
Composite Index and (ii) the Nasdaq Biotechnology Index.
Cumulative
Total Return
Among
Tiens Biotech Group (USA), Inc.,
AMEX
Composite Market Index and NASDAQ Biotech Index (1) (2)
|
|
October
7,
2003
|
|
December
31,
2003
|
|
December
31,
2004
|
|
December
31,
2005
|
|
December
31,
2006
|
|
December
31,
2007
|
|
Tiens
Biotech Group (USA), Inc.
|
|
$
|
100.00
|
|
$
|
301.25
|
|
$
|
175.00
|
|
$
|
90.50
|
|
$
|
98.25
|
|
$
|
58.50
|
|
Amex
Composite Index
|
|
$
|
100.00
|
|
$
|
115.51
|
|
$
|
141.18
|
|
$
|
173.14
|
|
$
|
202.41
|
|
$
|
237.17
|
|
Nasdaq
Biotechnology Index
|
|
$
|
100.00
|
|
$
|
95.61
|
|
$
|
101.47
|
|
$
|
104.35
|
|
$
|
105.42
|
|
$
|
110.25
|
|
(1)
Assumes $100 invested on October 7, 2003 and assumes dividends reinvested.
The
Company has not paid any dividends on its common stock, and no dividends are
included in the report of the Company’s performance. Measurement points are at
the last trading day of the fiscal years ended December 31, 2003, 2004, 2005,
2006 and 2007. The material in this chart is not soliciting material, is not
deemed filed with the SEC and is not incorporated by reference in any filing
of
the Company under the Securities Act of 1933, as amended, or the Exchange Act,
whether made before or after the date of this proxy statement and irrespective
of any general incorporation language in such filing.
(2)
The
Company was listed on the American Stock Exchange as of April 25, 2005. The
Company’s common stock began quotation on the OTC Bulletin Board on October 7,
2003. Prior to October 7, 2003, the Company’s common stock was eligible for
quotation on the OTC Bulletin Board, but there was no trading
activity.
Market
Prices of Common Stock
Our
common stock was listed on the OTC Bulletin Board under the symbol “TBGU” from
January 1, 2004 to April 24, 2005. On April 25, 2005, our common stock was
listed on the American Stock Exchange under the symbol “TBV”. The following
table sets forth the range of high and low bid prices for our common stock
reported by the American Stock Exchange in each fiscal quarter from January
1,
2006 to December 31, 2007.
|
|
High
|
|
Low
|
|
Fiscal
2006
|
|
|
|
|
|
Quarter
Ended March 31, 2006
|
|
$
|
5.02
|
|
$
|
3.62
|
|
Quarter
Ended June 30, 2006
|
|
$
|
7.47
|
|
$
|
4.01
|
|
Quarter
ended September 30, 2006
|
|
$
|
4.40
|
|
$
|
2.61
|
|
Quarter
ended December 31, 2006
|
|
$
|
4.02
|
|
$
|
2.80
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2007
|
|
$
|
6.99
|
|
$
|
3.75
|
|
Quarter
Ended June 30, 2007
|
|
$
|
4.55
|
|
$
|
3.55
|
|
Quarter
ended September 30, 2007
|
|
$
|
4.55
|
|
$
|
2.65
|
|
Quarter
ended December 31, 2007
|
|
$
|
6.85
|
|
$
|
2.25
|
|
Shareholders
As
of
March 25, 2008, there were a total of 71,333,586 shares of our common stock
outstanding, held by approximately 941 stockholders of record. This number
of
holders of record does not represent the actual number of beneficial owners
of
shares of our common stock because shares are frequently held in “street name”
by securities dealers and others for the benefit of individual owners who have
the right to vote their shares.
Dividend
Policy
We
have
not declared any dividends on our common stock since inception and do not intend
to pay dividends on our common stock in the foreseeable future.
Recent
Sales of Unregistered Securities
None.
Authorization
of Securities for Issuance Under Equity Compensation Plans
None.
Issuer
Purchases of Equity Securities
None.
ITEM
6. SELECTED FINANCIAL DATA.
The
following table sets forth certain of our historical financial data. The
selected consolidated historical financial data set forth below are not
necessarily indicative of the results of future operations and should be read
in
conjunction with the discussion under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and the historical
consolidated financial statements and accompanying notes included elsewhere
in
this document. The following selected financial data as of and each of the
five
years ended December 31, 2003 through 2007 have been derived from our audited
consolidated financial statements.
|
|
Year
Ended December 31
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
- related parties
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
$
|
68,688,669
|
|
$
|
58,910,532
|
|
$
|
38,392,208
|
|
Cost
of sales
|
|
|
16,526,695
|
|
|
18,082,441
|
|
|
17,451,605
|
|
|
17,483,739
|
|
|
12,725,161
|
|
Gross
profit
|
|
|
38,373,365
|
|
|
48,708,025
|
|
|
51,237,064
|
|
|
41,426,793
|
|
|
25,667,047
|
|
Selling,
general and administrative expenses
|
|
|
14,306,660
|
|
|
12,789,810
|
|
|
13,413,875
|
|
|
7,363,248
|
|
|
3,171,338
|
|
Income
from operations
|
|
|
24,066,705
|
|
|
35,918,215
|
|
|
37,823,189
|
|
|
34,063,545
|
|
|
22,495,709
|
|
Other
income (expense), net
|
|
|
1,520,208
|
|
|
161,091
|
|
|
(639,137
|
)
|
|
388,266
|
|
|
(1,178,389
|
)
|
Income
before provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
and
minority interest
|
|
|
25,586,913
|
|
|
36,079,306
|
|
|
37,184,052
|
|
|
34,451,811
|
|
|
21,317,320
|
|
Provision
for income taxes
|
|
|
2,026,875
|
|
|
2,823,899
|
|
|
2,984,302
|
|
|
0
|
|
|
0
|
|
Income
before minority interest
|
|
|
23,560,038
|
|
|
33,255,407
|
|
|
34,199,750
|
|
|
34,451,811
|
|
|
21,317,320
|
|
Minority
interest
|
|
|
4,966,397
|
|
|
6,963,330
|
|
|
7,321,630
|
|
|
7,013,515
|
|
|
4,263,498
|
|
Net
income
|
|
|
18,593,641
|
|
|
26,292,077
|
|
|
26,878,120
|
|
|
27,438,296
|
|
|
17,053,822
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
8,265,358
|
|
|
3,480,775
|
|
|
2,246,380
|
|
|
(8,239
|
)
|
|
0
|
|
Comprehensive
income
|
|
$
|
26,858,999
|
|
$
|
29,772,852
|
|
$
|
29,124,500
|
|
$
|
27,430,057
|
|
$
|
17,053,822
|
|
Weighted
average number of shares outstanding
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,801,819
|
|
|
44,730,609
|
|
Earnings
per share, basic and diluted
|
|
$
|
0.26
|
|
$
|
0.37
|
|
$
|
0.38
|
|
$
|
0.38
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
(at
end of period)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and current investments
|
|
$
|
48,678,945
|
|
$
|
54,270,065
|
|
$
|
77,545,991
|
|
$
|
39,243,872
|
|
$
|
12,725,043
|
|
Working
capital
|
|
|
59,323,558
|
|
|
74,008,466
|
|
|
81,067,056
|
|
|
53,716,852
|
|
|
28,121,818
|
|
Total
assets
|
|
|
181,627,637
|
|
|
148,746,998
|
|
|
121,624,154
|
|
|
83,518,933
|
|
|
57,101,642
|
|
Current
potion of long-term debt
|
|
|
2,130,000
|
|
|
2,130,000
|
|
|
2,130,000
|
|
|
155,442
|
|
|
259,364
|
|
Long-term
debt
|
|
|
4,267,742
|
|
|
6,397,742
|
|
|
8,527,742
|
|
|
10,657,742
|
|
|
155,591
|
|
Stockholders’
equity
|
|
$
|
146,348,355
|
|
$
|
119,420,251
|
|
$
|
89,647,399
|
|
$
|
60,522,899
|
|
$
|
33,086,192
|
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
FORWARD-LOOKING
STATEMENTS:
The
following discussion of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and related
notes thereto. The words or phrases “would be,” “will allow,” “expect to”,
“intends to,” “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimate,” “project,” or similar expressions are intended to
identify “forward-looking statements”. Such statements include those concerning
our expected financial performance, our corporate strategy and operational
plans. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently
and
operate profitable operations, including whether our management will be able
to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities; (c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; (d) whether
we
are able to successfully fulfill our primary requirements for cash which are
explained below under “Liquidity and Capital Resources”; and (e) whether Tianshi
Engineering, our affiliate who sells our products in China, obtains a direct
selling license in China. Statements made herein are as of the date of the
filing of this Form 10-K with the Securities and Exchange Commission and should
not be relied upon as of any subsequent date.
Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the
date
of such statement.
The
following discussion and analysis should be read in conjunction with “Item 6.
Selected Financial Data” and our consolidated financial statements and the
related notes thereto and other financial information contained elsewhere in
this Form 10-K.
Overview
Tiens
USA
researches, develops, manufactures, and markets nutrition supplement products,
including wellness products and dietary supplement products. Our operations
are
conducted from our headquarters in Tianjin, China through our 80% owned
subsidiary, Biological. We sell our products to affiliated companies in China
and internationally.
We
develop our products at our product research and development center, which
employs highly qualified professionals in the fields of pharmacology, biology,
chemistry and fine chemistry. We have developed and produce 33 nutrition
supplement products, which include wellness products and dietary nutrition
supplements. During 2007, we phased out production of our personal care line
of
products, which had not been a material part of our business, to focus on our
wellness products and dietary supplements.
In
China,
we sell our products to Tianshi Engineering, an affiliated company. Tianshi
Engineering, in turn, sells the products to customers through its branches
and
affiliated companies and at chain stores which are owned by individual
distributors. Internationally, we sell our products to overseas affiliates
who
in turn sell to independent distributors who use the products themselves and/or
resell them to other distributors or consumers.
Results
of Operations
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Revenue.
In
2007
revenue was $54.9 million compared to $66.8 million in 2006, a decrease of
17.8%. The breakdown of revenue between Chinese and international sales is
as
follows.
Chinese
and International Revenue
Revenue
|
|
Year
2007
|
|
Year
2006
|
|
%
Change
|
China
|
|
$
|
22,476,135
|
|
$
|
27,074,979
|
|
|
-17.0%
|
International
|
|
$
|
32,423,925
|
|
$
|
39,715,487
|
|
|
-18.4%
|
In
2007
revenue from China decreased to $22.5 million, or 17.0% compared to $27.1
million in 2006, primarily due to a decrease in sales. In order to qualify
for a
direct selling license in China, Tianshi Engineering, our related party customer
in China, is required to produce a part of the products that it sells in China.
Therefore, at the beginning of 2006, we began selling semi-finished products
to
Tianshi Engineering, which jointly shares with us licenses to produce,
manufacture and sell the products. These semi-finished products have a lower
sales price than the finished products we had previously sold to Tianshi
Engineering. During 2006 we still had a considerable inventory of finished
products that we continued to sell to Tianshi Engineering. As a result, during
2006 we were still selling some of the higher-priced finished products. In
2007,
substantially all of the products we sold to Tianshi Engineering were
semi-finished products.
In
addition, in the third quarter of 2006, Tianshi Engineering conducted a special
promotion to stimulate sales in China. No similar promotion was held in 2007.
The application of Tianshi Engineering for a direct selling license in China
is
still pending. Until the application is approved, Tianshi Engineering will
continue to sell our products through its branches, affiliated companies and
chain stores in China.
In
2007,
international sales decreased by 18.4% to $32.4 million, compared to $39.7
million in 2006. This mainly reflects a sharp decrease in sales to countries
in
Africa during the second quarter of 2007 and a decrease in sales generally
in
other countries. In addition, in August of 2007, AQSIQ announced an ongoing
national campaign in China against unsafe food and substandard products. The
special campaign against poor product quality was launched in response to a
series safety scares involving Chinese products worldwide. The campaign set
20
detailed goals, including twelve "100 percents". For example, 100 percent of
food producers should be licensed; 100 percent of agricultural wholesale markets
in cities must be monitored; 100 percent of suppliers of raw materials for
exported products should be inspected; and 100 percent of agricultural products
must be free of five types of strong pesticides. The campaign, which was
originally scheduled to finish at the end of 2007, is currently scheduled to
continue throughout 2008.
As
a
result of this campaign by the AQSIQ, there has been a general slow-down and
backlog of export clearances for Chinese food products, and we have experienced
significant delays in obtaining export clearance for all of the products which
we sell to our international affiliates. However, to date, there have not been
any specific problems identified with our products. We believe that these delays
have resulted in some of our international affiliates not being able to purchase
sufficient quantities of our products to meet their demand and a corresponding
decrease in our international revenues. Continued delays in the export clearance
for our products may continue to result in us not being able to meet the demand
for our products from our international affiliates.
Cost
of sales.
Cost of
sales were $16.5 million in 2007 compared to $18.1 million in 2006, a decrease
of 8.6%. This decrease was primarily due to the corresponding decrease in sales
revenue. Cost of sales decreased at a lesser rate than revenue because the
cost
of raw materials increased during 2007 while our product prices remained
unchanged.
Gross
profit.
Gross
profit decreased by 21.2% to $38.4 million in 2007, compared to $48.7 million
in
2006. The gross profit margin for 2007 was 69.9% compared to 72.9% in 2006.
The
semi-finished products which we were selling in China during 2007 had a lower
profit margin than the finished products which we were selling
in
2006.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses increased by 11.9% to $14.3 million in
2007,
compared to $12.8 million in 2006. The increase was primarily due to increases
in salaries and benefits ($629,769), consulting expenses ($392,751), insurance
costs ($340,571) and depreciation expenses ($247,071). The selling and
administrative expenses as a percentage of sales increased to 26.1%
in 2007
from 19.1% in 2006.
Other
income, net.
Other
income, net was $1.5 million of income in 2007, compared to income of $0.2
million in 2006. Other income mainly includes interest income. On January 1,
2007, the $25.6 million loan to Tianshi Engineering became interest bearing.
In
addition beginning in January 2007, accounts receivable relating to Tianshi
Engineering and which are older than 90 days are transferred to other
receivables-related parties and become interest bearing.
Net
income.
For the
above stated reasons, net income in 2007 was $18.6 million compared to $26.3
million in 2006, a decrease of 29%.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Revenue.
In 2006
revenue was $66.8 million compared to $68.7 million in 2005, a decrease of
2.8%.
The breakdown of revenue between Chinese and international sales is as
follows.
Chinese
and International Revenue
Revenue
|
|
Year
2006
|
|
Year
2005
|
|
%
Change
|
China
|
|
$
|
27,074,979
|
|
$
|
38,181,090
|
|
|
-29.1%
|
International
|
|
$
|
39,715,487
|
|
$
|
30,507,579
|
|
|
30.2%
|
In
2006
revenue from China decreased to $27.1 million, or 29.1% compared to $38.2
million in 2005. At the beginning of 2006, we began selling semi-finished
products to Tianshi Engineering. In order to qualify for a direct selling
license in China, Tianshi Engineering, our related party customer in China,
is
required to produce a part of the products that it sells in China. As a result,
in 2006, we began to sell semi-finished products to Tianshi Engineering, which
jointly shares with us licenses to produce, manufacture and sell the products.
These semi-finished products have a lower sales price than the finished products
we had previously sold to Tianshi Engineering.
In
addition, we believe that sales to China in 2006 were negatively impacted by
other factors, including:
|
·
|
continued
consumer uncertainty in China regarding the impact of direct selling
regulations and uncertainty regarding the timing of the direct selling
license application process and approval;
and
|
|
·
|
increased
government and media scrutiny on the direct selling industry, particularly
following publication of new direct selling regulations at the end
of
2005.
|
In
2006,
international sales increased to $39.7 million, or 30.2% compared to $30.5
million in 2005. The strong growth reflected a significant increase in demand
for our products in Indonesia, as well as strong revenue growth in Kazakhstan,
South Africa, Thailand, Ukraine, Congo and Ghana.
Cost
of sales.
Cost of
sales increased by $0.6 million in 2006, a 3.6% increase compared with 2005.
Cost of sales as a percentage of revenue increased to 27.1% for the twelve
months ended December 31, 2006 compared to 25.4% for 2005. In order to improve
the quality of our products, during 2006 we introduced some new manufacturing
procedures and stricter quality control testing than previously, which added
to
our manufacturing costs. In addition, due to the uncertainty of the Chinese
market, we did not achieve domestic sales growth and the average fixed cost
per
unit was higher than in 2005
.
Gross
profit.
Gross
profit decreased by 4.9% to $48.7 million in 2006, compared to $51.2 million
in
2005. The gross profit margin for 2006 was 72.9% compared to 74.6% in 2005
as a
result of the reasons discussed under cost of sales.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses decreased to $12.8 million in 2006, or
4.7%
compared to $13.4 million in 2005. This decrease primarily reflects a decrease
in transportation expenses, as well as a decrease in low cost supplies expenses
and expenses relating to the startup costs of Tiens Yihai. In 2006 we began
to
sell semi-finished goods to Tianshi Engineering and the transportation costs
that were previously incurred by us are now incurred by Tianshi Engineering.
The
selling and administrative expenses as a percentage of sales decreased to 19.1%
in 2006 from 19.5% in 2005.
Other
income (expense), net.
Other
income (expense), net was $0.2 million of income in 2006, compared to expense
of
$0.6 million in 2005.
The
increase was a result of improved cash management, including the purchase of
an
investment product and deposits in higher interest-bearing
accounts.
Net
income.
For the
above stated reasons, net income in 2006 was $26.3 million compared to $26.9
million in 2005, a decrease of 2.2%.
Quarterly
Results of Operations
The
following table sets forth selected unaudited quarterly data for the periods
shown.
|
|
Quarter
Ended
|
|
|
|
Dec.
31,
2007
|
|
Sept.
30,
2007
|
|
June
30,
2007
|
|
March
31,
2007
|
|
Dec.
31,
2006
|
|
Sept.
30,
2006
|
|
June
30,
2006
|
|
March
31, 2006
|
|
Revenue-related
parties
|
|
$
|
13,315,311
|
|
$
|
11,027,478
|
|
$
|
14,320,482
|
|
$
|
16,236,789
|
|
$
|
16,587,160
|
|
$
|
19,187,748
|
|
$
|
14,292,998
|
|
$
|
16,722,560
|
|
Cost
of sales
|
|
|
4,546,711
|
|
|
3,089,791
|
|
|
4,454,594
|
|
|
4,435,599
|
|
|
4,367,702
|
|
|
5,066,051
|
|
|
3,842,392
|
|
|
4,806,296
|
|
Gross
profit
|
|
|
8,768,600
|
|
|
7,937,687
|
|
|
9,865,888
|
|
|
11,801,190
|
|
|
12,219,458
|
|
|
14,121,697
|
|
|
10,450,606
|
|
|
11,916,264
|
|
Selling,
general and administrative expenses
|
|
|
3,953,263
|
|
|
3,801,914
|
|
|
3,328,727
|
|
|
3,222,756
|
|
|
4,148,297
|
|
|
2,803,859
|
|
|
3,271,232
|
|
|
2,566,422
|
|
Income
from operations
|
|
|
4,815,337
|
|
|
4,135,773
|
|
|
6,537,161
|
|
|
8,578,434
|
|
|
8,071,161
|
|
|
11,317,838
|
|
|
7,179,374
|
|
|
9,349,842
|
|
Other
(expense) income, net
|
|
|
475,918
|
|
|
149,683
|
|
|
446,994
|
|
|
447,613
|
|
|
33,633
|
|
|
164,104
|
|
|
1,075
|
|
|
(37,721
|
)
|
Income
before provision for income taxes and minority interest
|
|
|
5,291,255
|
|
|
4,285,456
|
|
|
6,984,155
|
|
|
9,026,047
|
|
|
8,104,794
|
|
|
11,481,942
|
|
|
7,180,449
|
|
|
9,312,121
|
|
Provision
for income taxes
|
|
|
416,222
|
|
|
344,248
|
|
|
555,395
|
|
|
711,010
|
|
|
635,408
|
|
|
878,931
|
|
|
576,029
|
|
|
733,531
|
|
Income
before minority interest
|
|
|
4,875,033
|
|
|
3,941,208
|
|
|
6,428,760
|
|
|
8,315,037
|
|
|
7,469,386
|
|
|
10,603,011
|
|
|
6,604,420
|
|
|
8,578,590
|
|
Minority
interest
|
|
|
995,606
|
|
|
848,212
|
|
|
1,369,361
|
|
|
1,753,218
|
|
|
1,566,759
|
|
|
2,167,747
|
|
|
1,419,943
|
|
|
1,808,881
|
|
Net
income
|
|
|
3,879,427
|
|
|
3,092,996
|
|
|
5,059,399
|
|
|
6,561,819
|
|
|
5,902,627
|
|
|
8,435,264
|
|
|
5,184,477
|
|
|
6,769,709
|
|
Other
comprehensive income foreign currency translation
adjustment
|
|
|
3,334,871
|
|
|
1,593,144
|
|
|
2,062,282
|
|
|
1,275,061
|
|
|
1,083,976
|
|
|
1,411,012
|
|
|
267,960
|
|
|
717,827
|
|
Comprehensive
income
|
|
$
|
7,214,298
|
|
$
|
4,686,140
|
|
$
|
7,121,681
|
|
$
|
7,836,880
|
|
$
|
6,986,603
|
|
$
|
9,846,276
|
|
$
|
5,452,437
|
|
$
|
7,487,536
|
|
Weighted
average number of shares outstanding
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
Earnings
per share, basic and diluted
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.07
|
|
$
|
0.09
|
|
$
|
0.08
|
|
$
|
0.12
|
|
$
|
0.07
|
|
$
|
0.09
|
|
Contractual
Obligations and Commercial Commitments
The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2007.
|
|
Payments
due by period (1)
|
|
|
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
More
than
5
years
|
|
Long-term
Debt Obligations
|
|
$
|
6,397,742
|
|
$
|
2,130,000
|
|
$
|
4,260,000
|
|
$
|
7,742
|
|
$
|
0
|
|
Operating
Lease Obligations
|
|
|
574,550
|
|
|
574,550
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
fixed contractual obligations
|
|
$
|
6,972,292
|
|
$
|
2,704,550
|
|
$
|
4,260,000
|
|
$
|
7,742
|
|
$
|
0
|
|
(1)
We
lease our office building and manufacturing facilities in Tianjin, China from
Tianshi Group, a related party, through common ownership. On June 30, 2002,
we
entered into a written lease agreement with Tianshi Group to pay annual rent
at
1% of our total gross revenues. This agreement expired on December 31, 2007.
We
have entered into a new on-year lease agreement with Tianshi Group, effective
January 1, 2008, with the same terms. Because the rent is based upon a
percentage of our gross total revenues, we are not able to include a fixed
figure in the table relating to this obligation. The total amount paid in 2007
under this lease was $522,318.
Financial
Condition, Liquidity and Capital Resources
We
have
historically met our working capital and capital expenditure requirements,
including funding for expansion of operations, through net cash flow provided
by
operating activities. Our principal source of liquidity is our operating cash
flow.
Net
cash
provided by operating activities was $5.5 million in 2007, compared to $12.9
million in 2006. The decrease primarily reflects the decrease in net income
and
the fact that, during 2007, Tianshi Engineering did not pay us cash for products
it purchased from us, but offset such amounts from other liabilities we owed
Tianshi Engineering and other affiliates.
As
of
December 31, 2007, we had positive working capital of $59.3 million. Cash was
$48.7 million as of December 31, 2007, compared to $54.3 as of December 31,
2006.
Net
cash
used in investing activities was $8.3 million in 2007 compared to $35.9 million
in 2006. In 2006 we made a $25.6 million loan to Tianshi Engineering. That
loan
was paid off on December 20, 2007 by canceling an equal amount of the
consideration due to Tianshi Investment for the acquisition of Life Resources.
Net
cash
used in financing activities was $6.2 million for 2007, compared to $2.1 million
for 2006. In 2007 Biological paid a $6.7 million dividend to its minority
shareholder.
Accounts
receivable-related parties increased slightly to $14.3 million as of December
31, 2007 from $12.9 million as of December 31, 2006. Other receivable-related
parties increased to $13.1 million as of December 31, 2007 from $8.4 million
as
of December 31, 2006. Historically, Tianshi Engineering remitted payment to
us
upon sales to third-party customers. However, to support Tianshi Engineering’s
marketing efforts in anticipation of receiving a direct selling license in
China, we agreed to allow Tianshi Engineering to defer payment to us. Beginning
in January 2007, accounts receivable relating to Tianshi Engineering older
than
90 days are transferred to other receivables-related parties and become interest
bearing.
Going
forward, our primary requirements for cash consist of:
|
·
|
construction
by Life Resources of new research and development, manufacturing
and
logistic facilities, and administrative
offices;
|
|
·
|
the
continued production of existing products and general overhead and
personnel related expenses to support these
activities;
|
|
·
|
the
development costs of new products;
and
|
|
·
|
expansion
of production scale to meet the demands of our markets.
|
We
estimate that the completion of the Life Resources project will require
approximately $220 million, including the $64 million already spent to acquire
all of the registered share capital of Life Resources. We intend to construct
the facilities in phases over several years, based on available cash and
capacity needs. Depending on the rate of construction and our cash flow, we
may
require additional financing to complete the funding of that project. We
anticipate that our current operating activities will enable us to meet our
anticipated cash requirements for 2008.
Management
Assumptions
Management
anticipates, based on internal forecasts and assumptions relating to our current
operations that existing cash and funds generated from operations will be
sufficient to meet working capital for at least the next 12 months. In the
event
that our business plans change, our assumptions change or prove inaccurate
or if
other capital resources and projected cash flow otherwise prove to be
insufficient to fund operations (due to unanticipated expense, technical
difficulties, or otherwise), we could be required to seek additional financing.
There can be no assurance that we will be able to obtain additional financing
on
terms acceptable to us, or at all.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
Critical
Accounting Policies
Management’s
discussion and analysis of its financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition
and
results of operations.
Revenue
Recognition
During
2007, the Company sold both semi-finished products and finished products to
Tianshi Engineering domestically. Revenue from semi-finished products was
recognized at FOB
Tianjin
shipping point. Revenue from finished products was recognized only when the
related party Chinese distributors recognized sales of the Company's products
to
unaffiliated third parties. Revenues in both cases are net of
taxes.
For
overseas sales, the Company only sells finished products. The Company recognizes
revenue from international sales (non-Chinese) to both affiliated and
unaffiliated third parties, net of taxes as goods are shipped and clear review
by the customs department of the Chinese government.
The
Company is generally not contractually obligated to accept returns. However,
on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS No. 48, "Revenue Recognition when the Right
of
Return Exists", revenue is recorded net of an allowance for estimated returns.
Such reserves are based upon management's evaluation of historical experience
and estimated costs. The amount of the reserves ultimately required could differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As of December 31, 2007, Tianshi Engineering,
an affiliated company, owned all of the related party distributors which sell
our products in China.
Allowance
for Doubtful Accounts
Our
trade
accounts receivables are mainly due from related companies. We have a general
allowance for doubtful debts of 0.5% of the year-end balance of accounts
receivable-related parties. Management reviews its accounts receivable on a
regular basis to determine if the bad debt allowance is adequate at each
year-end, paying particular attention to the age of receivable outstanding.
Inventories
Inventories
are stated at the lower of cost or market using the moving average basis.
Management reviews inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.
Recent
Accounting Pronouncements
On
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurement"
("SFAS 157"), which provides enhanced guidance for using fair value to measure
assets and liabilities. This standard also responds to investors' requests
for
expanded information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value.
The
standard does not expand the use of fair value in any new circumstances. SFAS
157 is effective for financial statements issued for fiscal years beginning
after November 12, 2007, and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating whether the adoption
of SFAS 157 will have a material effect on its consolidated results of
operations and financial condition.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" (“SFAS 159”). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value
that
are
not
currently required to be measured at fair value. The objective of SFAS 159
is to
provide opportunities to mitigate volatility in reported earnings caused
by
measuring
related assets and liabilities differently, without having to apply hedge
accounting provisions. SFAS 159 also establishes presentation and
disclosure
requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities.
SFAS
159
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combination" (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets, the liabilities and any non-controlling interest in the
acquiree, and the goodwill acquired in business combination or a gain from
a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS
141R
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements- and amendment of ABB No. 51" (“SFAS 160”).
SFAS 160 provide a guide on how to report non-controlling interest in
consolidated financial statement. The objective of SFAS 160 is to improve the
relevance, comparability, and transparency of the financial information that
a
reporting entity provides in its consolidated financial statements.
SFAS
160
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Effects
of Inflation
We
are
subject to commodity price risks arising from price fluctuations in the market
prices of the various raw materials that comprise our products. Price risks
are
managed by each business unit through productivity improvements and
cost-containment measures. For the time being, the management does not believe
that inflation risk is material to our business or our consolidated financial
position, results of operations or cash flows.
Effect
of Fluctuations in Foreign Exchange Rates
Our
operating subsidiary, Biological, is located in China, and buys all of its
raw
materials in China and sells our products in China using the renminbi as the
functional currency. Based on Chinese government regulations, all foreign
currencies under the category of current accounts are allowed to be freely
exchanged with hard currencies. As of December 31, 2007, the exchange rate
was
$1 = RMB 7.31, compared to $1 = RMB 7.80 as of December 31, 2006.
Substantially
all our revenues and expenses are denominated in the renminbi. However, we
use
the dollar for financial reporting purposes. The value of renminbi against
the
dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. As our operations
are primarily in China, any significant revaluation of the renminbi may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert dollars into
renminbi for our operations, appreciation of this currency against the dollar
could have a material adverse effect on our business, financial condition and
results of operation. Conversely, if we decide to convert our renminbi into
dollars for other business purposes and the dollar appreciates against this
currency, the dollar equivalent of the renminbi would be reduced.
Given
the
uncertainty of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, product pricing, results of
operations or financial condition. Currently we have not entered agreements
or
purchased instruments to hedge our exchange rate risks, although we may do
so in
the future.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
financial statement required by this item may be found following the signature
page of this annual report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
On
September 26, 2007, we received notice from our principal independent
accountant, Moore Stephens Wurth Frazer & Torbet, LLP (“MSWF&T”), that
it was resigning as our accountant effective immediately.
During
the two most recent fiscal years through the date of MSWF&T’s resignation,
there was no disagreement between us and MSWF&T on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure, which disagreement, if not resolved to the satisfaction of
MSWF&T, would have caused MSWF&T to make reference to the subject matter
of the disagreement in connection with its report, and MSWF&T did not advise
us that the internal controls necessary for us to develop reliable financial
statements did not exist. None of the reportable events described under Item
304(a)(1)(v) of Regulation S-K occurred during the two most recent fiscal years
through the date of MSWF&T’s resignation.
The
audit
report of MSWF&T on our financial statements for the past two fiscal years
did not contain any adverse opinion or disclaimer of opinion, and such audit
report was not qualified or modified as to uncertainty, audit scope or
accounting principles.
On
September 26, 2007, we engaged Grobstein, Horwath & Company LLP (“GH&C”)
to serve as our new principal independent accountant in connection with the
review of our third quarter financial statements for the three months ended
September 30, 2007 and the audit of our financial statements for the year ended
December 31, 2007. The decision to engage GH&C as our principal independent
accountants was approved by our Audit Committee on September 26, 2007.
During
the fiscal years ended December 31, 2006 and 2005 and in the subsequent interim
periods prior to the engagement of GH&C, neither we nor any person on our
behalf consulted with GH&C concerning (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the
type
of audit opinion that might be rendered on our financial statements, and no
written report was provided to us or oral advice was provided that GH&C
concluded was an important factor considered by us in reaching a decision as
to
any accounting, auditing or financial reporting issue, or (ii) any matter that
was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)
of
Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of
Regulation S-K).
ITEM
9A(T). CONTROLS AND PROCEDURES.
Disclosure
Control
s
and
Procedures
Under
the
supervision and with the participation of management, including our chief
executive officer and the chief financial officer, we conducted an evaluation
of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act,
as of the end of December 31, 2007. Based on this evaluation, our chief
executive officer and chief financial officer concluded as of December 31,
2007
that our disclosure controls and procedures were effective such that the
material information required to be included in our SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to our company, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
Managemen
t’s
Report on Internal Control O
ver
Financial Reporting
Internal
control over financial reporting refers to the process designed by, or under
the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those policies and
procedures that:
(1)
Pertain to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our assets;
(2)
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
(3)
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have
a
material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence
and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented
or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the company.
Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of the Company’s internal control over financial reporting. Based
on this assessment, management has concluded that our internal control over
financial reporting was effective as of December 31, 2007.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only our management's report in this annual
report
.
Changes
in Internal Control Over Financial Reporting
There
has
been no change in our internal
control
over
financial reporting during the fourth quarter of 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Set
forth
below are the names of the directors and executive officers of the Company
as of
March 29, 2008. With the exception of Jinyuan Li, who served on the Board since
the reorganization in September 2003, all other directors served on the Board
since January 2004.
NAME
|
|
AGE
|
|
POSITION
|
|
|
|
|
|
Jinyuan
Li
|
|
50
|
|
Chairman,
Chief Executive Officer, President and Director
|
|
|
|
|
|
Wenjun
Jiao
|
|
44
|
|
Chief
Financial Officer, Director and Secretary
|
|
|
|
|
|
Yupeng
Yan
|
|
45
|
|
Executive
Vice President and Director
|
|
|
|
|
|
Socorro
Quintero
|
|
56
|
|
Director
|
|
|
|
|
|
Howard
Balloch
|
|
57
|
|
Director
|
|
|
|
|
|
Gilbert
Raker
|
|
64
|
|
Director
|
None
of
our directors and officers was selected pursuant to any agreement or
understanding with any other person. There is no family relationship between
any
director or executive officer and any other director or executive officer.
Jinyuan
Li
Mr.
Li
has served as the Chairman of the Board and a Director since September 2003.
Mr.
Li is also the President and founder of the Company. He also serves as President
of Tianshi Group and has held that position since 1995. Mr. Li has 14 years
of
experience in the petroleum and plastics industries. He holds a number of
leadership positions in government and social associations, including as
commissioner of the Tianjin Political Consultative Conference; Standing Director
of China Entrepreneur’s National Council; Executive Commissioner of All-China
Federation of Industry and Commerce; Vice President of Chinese Bioengineering
Association; and Vice president of Chinese Healthcare Association. Mr. Li was
elected as one of the Top Ten Most Outstanding Talents in the Greater China
Area; one of the Ten Most Popular Personages Among the High-Ranking, by China
Economic Forum; Excellent Entrepreneur, by the Organization Committee of the
Second Chinese Entrepreneur Forum in 2003, and as the Most Creative Chinese
Businessman of Asia in 2004. Mr. Li holds an MBA from Nankai University.
Wenjun
Jiao
Mr.
Jiao
has served as the Chief Financial Officer of the Company since September 2003
and Secretary since February 2007. Prior to that, Mr. Jiao served as the Chief
Financial Officer of Tianjin Tianshi Biological Development Co. Ltd from May
2001 through 2003. Mr. Jiao is a Certified Public Accountant in China. Before
he
joined Tianjin Tianshi Biological Development Co. Ltd, Mr. Jiao served as CFO
of
various large companies and as chairman of a consulting company in China. Mr.
Jiao has 19 years of financial management experience in the manufacturing,
trade, construction and consulting industries and received the 2005 and 2006
“Top Ten CFO of China Award” jointly from the China Enterprise Confederation,
CFO World Magazine and International Data Group. Mr. Jiao holds a Doctorate
in
Accounting from Tianjin University of Finance and Economics and an MBA from
Oklahoma City University.
Yupeng
Yan
Mr.
Yan
has served as Executive Vice-President of the Company since September 2003.
Mr.
Yan has also served as Vice-President of Tianshi Group since March 1997, acting
as general manager of its Information Technology Center since June 2007 and
as
head of Tianshi Marketing Group from June 2004 to June 2007. Mr. Yan currently
holds a number of leadership positions including Vice-Dean of Tianshi
Occupational Technique Institute, and Vice-Chairman of Tianshi Science and
Technique Association. Mr. Yan was elected as one of the Chinese Ten Outstanding
Professional Managers in 2004. Mr. Yan received an Executive MBA from Nankai
University in July 2004.
Socorro
Quintero
Dr.
Quintero serves as a director of the Company. Dr. Quintero is an Associate
Professor of Finance and Managing Director of the Corporate Directors Institute
at Oklahoma City University’s Meinders School of Business (“OCU”). Prior to
joining OCU in 1993, she served as Assistant Professor of Finance at the
University of South Florida. Dr. Quintero has extensive work experience in
various industrial engineering capacities and management levels while working
for Atlantic Steel Company, Abbott Laboratories and Levi Strauss & Co. She
received a Bachelor of Science in Physics from the University of the
Philippines, an M.S. in Industrial Engineering from the Georgia Institute of
Technology, and a Doctorate in Finance from the University of Texas at Austin.
Gilbert
Raker
Mr.
Raker
serves as a director of the Company, and has served as the President, Chief
Executive Officer and Chairman of the Board of SEMX Corporation (Pink Sheets:
SEMX) since 1988. SEMX Corporation manufactures materials and components used
in
microelectronic circuitry, primarily for the automotive, consumer electronics,
defense, medical and aerospace industries. Prior to 1988, Mr. Raker worked
at
two private equity investment firms and was employed as Chief Financial Officer
by two New York Stock Exchange listed companies and several private companies.
Mr. Raker received his B.S. in Chemistry from Eastern University and his MBA
in
Production Management from Syracuse University.
Howard
Balloch
Mr.
Balloch serves as a director of the Company and is the founder and President
of
The Balloch Group, an investment advisory and merchant banking firm located
in
Beijing, China. Mr. Balloch served as the Canadian ambassador to the People’s
Republic of China from February of 1996 until July of 2001. Mr. Balloch
currently serves on the board of directors of the following companies: Magic
Lantern Group (AMEX: GML), Zi Corporation (TSX: ZIC, NASDAQ: ZICA), Oztime
Media, a wholly-owned subsidiary of Zi Corporation, Ivanhoe Energy, Inc. (TSX:
IE, NASDAQ: IVAN), Ivanhoe Mines Ltd. (TSX, NYSE, NASDAQ: IVN), East Energy
Corp. (TSX: EEC), Methanex Corporation (TSX:MX, NASDAQ: MEOH), Maple Leaf
Education Holding and Capital Club, Beijing. Mr. Balloch is also the
Vice-Chairman of the Canada China Business Council and currently serves as
an
Adjunct Professor of International Business at the University of British
Columbia. Mr. Balloch received his B.A. and M.A. degrees from McGill University.
Audit
Committee
The
Board
of Directors has established an audit committee in accordance with Rule 10A-3
of
the Exchange Act. The members of the Audit Committee are Socorro Quintero
(Chairman), Howard Balloch and Gilbert Raker, each of whom is independent as
defined under Section 121(A) of the American Stock Exchange listing standards
currently in effect. None of the Audit Committee members is a current officer
or
employee of the Company or any of its affiliates.
The
Board
of Directors has determined that Socorro Quintero and Gilbert Raker each qualify
as an “audit committee financial expert” under Item 401(b) of Regulation S-K of
the Exchange Act.
Code
of Business Conduct and Ethics
The
Board
has adopted a Code of Business Conduct and Ethics to promote its commitment
to
the legal and ethical conduct of the Company’s business. The Chief Executive
Officer, Chief Financial Officer, and other senior officers are required to
abide by the Code of Business Conduct and Ethics, which provides the foundation
for compliance with all corporate policies and procedures, and best business
practices.
The
Code
of Business Conduct and Ethics was filed as an exhibit to the Company’s annual
report on Form 10-KSB for the year ended December 31, 2004. A written copy
of
the Code of Business Conduct and Ethics will be provided upon request at no
charge by writing to the Company’s corporate secretary, Alexander Jiao, at Tiens
Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial
Park, Tianjin, China 301700.
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely upon a review of Forms 3 and 4 and amendments to these forms furnished
to
the Company, all parties subject to the reporting requirements of Section 16(a)
of the Exchange Act filed all such required reports during and with respect
to
2007.
ITEM
11. EXECUTIVE COMPENSATION.
Compensation
Discussion and Analysis
All
compensation decisions for our executive officers, including the salary of
our
CEO and President, Jinyuan Li, are made by Jinyuan Li. Because Mr. Li owns
more
than 50% of our voting stock, we are a “controlled company” pursuant to Rule
801(a) of the American Stock Exchange Rules (“Amex Rules”). Therefore, we are
exempt from Amex Rule 805(a), which requires that the compensation of a CEO
and
all other executive officers be determined, or recommended to the Board for
determination, by a compensation committee composed of independent directors,
or
the majority of independent directors on the Board.
The
objectives of our compensation programs.
We
seek
to attract and retain executive officers of the highest caliber and motivate
them to maximize the success of our business.
What
our compensation program is designed to reward.
Our
CEO
believes that he is incentivized by his large equity ownership in the Company.
Therefore, he believes that a long-term employment contract providing a base
salary is appropriate compensation for him. With respect to the other executive
officers’ base salaries, our CEO bases his recommendations on past salary levels
with the Company and his perception of the quality of their respective
performances and attempts to match their salaries with his perception of
compensation levels at a small number of companies he considers comparable.
Our
CEO also takes into consideration the relatively low salary provided to
executive officers by companies in China compared to public companies in the
United States. Our CEO assesses the normal responsibilities of each position,
as
well as the extra responsibilities and additional work related to special
projects which such executive officers may be expected to perform. No relative
weight was assigned to any of the foregoing factors.
Elements
of compensation.
Each
executive officer receives cash compensation as a base salary. Base salary
for
our executive officers is fixed by their respective employment agreements,
as
described under “Employment Agreements.” Jinyuan Li and Wenjun Jiao’s salaries
for 2007 were fixed pursuant to employment agreements with Biological entered
into in 2005. Their base salaries were based on our CEO’s subjective perceptions
of salaries paid by comparable companies for comparable positions. The amount
of
the payments required to be paid upon termination of employment agreements
for
specified reasons are determined according to local Chinese employment
regulations.
Jinyuan
Li holds 92.3% of our shares of common stock. Our other executive officers
have
also been holders of our common stock as disclosed under “Security Ownership
Table” since the reorganization of our Company in September 2003. Each of our
executive officers received shares in the Company as a result of their share
ownership of our business before the reorganization. Our CEO believes that
the
executive officers’ equity interests in our Company motivate them to maximize
the success of our business and therefore did not consider bonuses for
2007.
Why
we chose to pay each element.
We
have
entered into long-term employment agreements with Messrs. Li and Jiao which
provide for a base salary.
Our
employment agreements with Messrs. Li and Jiao provide for payments upon
termination for specified reasons. These payments are required by local Chinese
employment regulations. Additional information regarding applicable payments
under such agreements is provided under the heading “Potential Payments Upon
Termination or Change of Control.”
How
we determine the amount for each element of pay.
With
respect to the executive officers’ base salaries, our CEO bases his
recommendations on past salary levels and his perception of the quality of
their
respective performances and attempts to match their salaries with his perception
of compensation levels at a small number of companies he considers comparable,
although not necessarily included in the AMEX Composite Index or Nasdaq
Biotechnology Index. Our CEO assesses the normal responsibilities of each
position, as well as the extra responsibilities and additional work related
to
special projects which such executive officers may be expected to perform.
Our
CEO also takes in to consideration the relatively low salary provided to
executive officers by companies in China compared to public companies in the
United States.
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K of the Exchange Act
with
management and the full Board. Based on that review and discussion, the
Compensation Committee recommended to the Board that the Compensation Discussion
and Analysis be included in the Company’s Annual Report on Form 10-K for
2007
.
The
Compensation Committee
Gilbert
Raker, Chairman
Wenjun
Jiao
Yupeng
Yan
Compensation
Committee Interlocks and Insider Participation
During
2007, the members of the Compensation Committee were Gilbert Raker, Wenjun
Jiao,
Yupeng Yan, and Ping Bai (who resigned as a director as of February 25, 2007).
The Compensation Committee did not deliberate on executive compensation for
fiscal 2007. Wenjun Jiao, Yupeng Yan and Ping Bai were each an employee and
officer of the Company during 2007. No member of the Compensation Committee
has
a relationship that would constitute an interlocking relationship with Executive
Officers or Directors of the Company or another entity.
Summary
Compensation Table
The
table
below summarizes the total compensation paid or earned by each of the named
executive officers for the fiscal year ended December 31,
2007.
Name
and
Principal
Position (1)
|
|
Year
|
|
Salary
($)
|
|
Total
($)
|
|
Jinyuan
Li
|
|
|
2007
|
|
$
|
166,660
|
|
$
|
166,660
|
|
Chairman,
Chief Executive
|
|
|
2006
|
|
$
|
166,660
|
|
$
|
166,660
|
|
|
|
|
2005
|
|
$
|
145,455
|
|
$
|
145,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenjun
Jiao
|
|
|
2007
|
|
$
|
77,000
|
|
$
|
77,000
|
|
Chief
Financial Officer
|
|
|
2006
|
|
$
|
77,000
|
|
$
|
77,000
|
|
|
|
|
2005
|
|
$
|
48,000
|
|
$
|
48,000
|
|
(1)
|
Ping
Bai and Yupeng Yan were employee Directors of the Company during
2007 but
did not qualify as a “named executive officer” because their respective
total compensation was less than
$100,000.
|
Grants
of Plan Based Awards; Outstanding Equity Awards at Fiscal Year-End; Option
Exercises and Stock Vested
The
Company does not have any stock option plans.
Pension
Benefits
None.
Nonqualified
Deferred Compensation
We
do not
provide any nonqualified deferred compensation to any of its
employees.
Employment
Agreements
Our
subsidiary, Biological, has entered into an employment agreement with each
of
its named executive officers and employee directors of the Company. Jinyuan
Li’s
contract is dated June 1, 2005 and has an indefinite period. Wenjun Jiao’s
contract is dated June 1, 2005 and terminates on June 30, 2010. The employment
contracts for Ping Bai and Yupeng Yan are dated April 1, 2004 and expire on
March 31, 2009. Under each of these employment contracts, the employee may
terminate the contract with 30 days written notice. For 2007, we paid a salary
of $166,660 to Jinyuan Li and $77,000 to each of Ping Bai, Wenjun Jiao and
Yupeng Yan.
Potential
Payments Upon Termination or Change of Control
The
employment contracts of Messrs. Li and Jiao each provide for a one-time lump
sum
payment equal to six months of the employee’s then current salary if we
terminate their employment contract for one of the following
reasons:
|
·
|
The
employee has a non-work-related injury and is unable to perform his
responsibilities; or
|
|
·
|
The
employee is unable to perform his responsibilities for other reasons;
or
|
|
·
|
The
circumstances based on which the employment contract was entered
into have
materially changed and the performance of the contract becomes
impractical; or
|
|
·
|
We
are contemplating bankruptcy and determine to reduce
staff.
|
Assuming
that Messrs. Li and Jiao were terminated for one of the above-stated reason,
Mr.
Li would receive $83,330 and Mr. Jiao would receive $38,500. There are no other
circumstances, including a change of control of our Company, where we are
required to make any additional payment to Messrs. Li and Jiao.
Director
Compensation
For
the
fiscal year ended December 31, 2007, members of the Board who are not our
employees are entitled to receive an annual cash retainer of
$30,000.
Director
Summary Compensation Table
The
table
below summarizes the compensation we paid to non-employee Directors for the
fiscal year ended December 31, 2007.
Name
(1)
|
|
Fees Earned or
Paid
in Cash
($)
|
|
Total
($)
|
|
Howard
Balloch
|
|
$
|
30,000
|
|
$
|
30,000
|
|
Ping
Bai (2)
|
|
$
|
0
|
|
$
|
0
|
|
Gilbert
Raker
|
|
$
|
30,000
|
|
$
|
30,000
|
|
Socorro
Quintero
|
|
$
|
30,000
|
|
$
|
30,000
|
|
Yupeng
Yan (2)
|
|
$
|
0
|
|
$
|
0
|
|
(1)
|
Jinyuan
Li and Wenjun Jiao are not included in this table as they are our
employees and thus receive no compensation for their services as
Directors. Their compensation is disclosed in the table in the “Summary
Compensation Table”.
|
(2)
|
Yupeng
Yan and Ping Bai were employee Directors of the Company during 2007
and
received no additional compensation for their services as Directors.
They
are not named executive officers and are excluded from the “Summary
Compensation Table”.
|
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
following table sets forth information with respect to the beneficial ownership
of shares of common stock as of March 28, 2008 by each person or entity who
is
known by the Company to beneficially own five percent or more of the common
stock; each director and executive officer of the Company; and all directors
and
executive officers of the Company as a group.
Name
of Beneficial Owner (1)
|
|
Number
of Shares
|
|
Percent
of Class
|
Jinyuan
Li
|
|
|
65,835,000
|
|
|
92.3%
|
Wenjun
Jiao
|
|
|
665,000
|
|
|
*
|
Yupeng
Yan
|
|
|
665,000
|
|
|
*
|
Socorro
Quintero
|
|
|
--
|
|
|
--
|
Howard
Balloch
|
|
|
--
|
|
|
--
|
Gilbert
Raker
|
|
|
--
|
|
|
--
|
All
Directors and Executive Officers as a Group (6 persons)
|
|
|
67,165,000
|
|
|
94.2%
|
____________________
*
Less
than one percent.
(1)
Unless
otherwise indicated, the address for each named individual or group is c/o
Tiens
Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech Industrial
Park, Tianjin, China 301700.
Unless
otherwise indicated, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of common
stock
beneficially owned by them.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
We
markets all of our products through various domestic and international business
entities that are related to us through common ownership. As a result, all
of
our total consolidated sales in 2007 were to related parties.
We
have a
sales contract with Tianshi Engineering which requires Tianshi Engineering
to
purchase all of our products to be sold in China. We sell our finished products
to Tianshi Engineering at a price equal to 25% of the Chinese market price
for
the products. This 25% figure was negotiated between the parties in 2003, before
we acquired Tianshi Holdings, and we believe that it is a reasonable sales
price
for us to receive. The price of semi-finished goods sold to Tianshi Engineering
was originally set at the beginning of 2006 to provide us with a 75% gross
profit margin. However, based on fluctuations in the cost of raw materials
and
quantities produced, the gross profit margin percentage varied during the year.
This 75% figure was negotiated between the parties, and we believe that it
is
reasonable. The goal of this new pricing policy was to try to maintain the
Company’s gross margins on semi-finished goods at a similar level to historical
gross margins for finished goods. All of Tianshi Engineering’s Chinese
affiliated companies are owned in whole or in part by Jinyuan Li’s immediate
family members.
Internationally,
we sell our products to overseas related companies located in 52 countries
who
in turn sell them to independent direct sales distributors. Our CEO, Jinyuan
Li,
owns or controls these overseas related companies. During 2007, in order to
consolidate our international distribution, we reduced the number of countries
where we sell directly to overseas affiliates from 63 to 52. Therefore, some
of
our overseas affiliate customers also now sell our products on to other overseas
affiliates which are no longer our direct customers. Due to the common
ownership, there are no formal sales or administrative agreements among us
and
those overseas related parties. The business operations among these related
entities are regulated through internal ordinances.
Our
related party transactions are required to be reviewed and approved or ratified
by a majority of our non-interested Board of Directors. The following tables
are
provided to facilitate your understanding of the transactions and outstanding
balances between those related parties and us during 2007 and 2006.
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Revenue-related
party
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
Accounts
receivable, trade - related parties, net of allowance for doubtful
accounts of $71,700 and $86,776 as of December 31, 2007 and 2006,
respectively
|
|
$
|
14,268,229
|
|
$
|
12,926,670
|
|
Other
receivables - related parties
|
|
$
|
13,070,907
|
|
$
|
8,397,227
|
|
Loans
receivable - related parties
|
|
$
|
0
|
|
$
|
25,640,000
|
|
Advances
from customers - related parties
|
|
$
|
1,700,838
|
|
$
|
1,570,120
|
|
Other
payables - related parties
|
|
$
|
7,938,205
|
|
$
|
522,105
|
|
Current
portion of long-term debt - related party
|
|
$
|
2,130,000
|
|
$
|
2,130,000
|
|
Long
term debt - related party
|
|
$
|
4,267,742
|
|
$
|
6,397,742
|
|
Revenue-related
Parties
The
details of revenue-related parties are as follows:
|
|
2007
|
|
2006
|
|
Tianshi
Engineering
|
|
$
|
22,476,135
|
|
$
|
27,074,979
|
|
Overseas
Related Companies
|
|
|
32,423,925
|
|
|
39,715,487
|
|
Total
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
Accounts
Receivable-related Parties
The
details of accounts receivables, trade-related parties are as
follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Tianshi
Engineering
|
|
$
|
2,062,333
|
|
$
|
7,827,372
|
|
Overseas
Related Companies
|
|
|
12,277,596
|
|
|
5,186,074
|
|
Allowance
for Doubtful Accounts
|
|
|
(71,700
|
)
|
|
(86,776
|
)
|
Total
|
|
$
|
14,268,229
|
|
$
|
12,926,670
|
|
Other
Receivables-related Parties
Other
receivables - related parties are generated by the Company making various cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following table
summarizes the other receivables- related parties balances:
The
details of other receivables-related parties are as follows:
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Tianshi
Engineering
|
|
$
|
9,460,811
|
|
$
|
5,592,772
|
|
Shengshi
Real Estate Development
|
|
|
2,238
|
|
|
1,039
|
|
Tianjin
Tianshi Technical School
|
|
|
-
|
|
|
46,589
|
|
JinMao
(Group) Holding
|
|
|
-
|
|
|
104,466
|
|
Shanghai
Tianshi Jinquan Investment Co.
|
|
|
874
|
|
|
2,129
|
|
Tianshi
Group
|
|
|
2,334,493
|
|
|
2,650,232
|
|
Tianshi
Pharmaceuticals
|
|
|
5,065
|
|
|
-
|
|
Life
Resource
|
|
|
1,259,528
|
|
|
-
|
|
Beijin
Xingda Travel Co., Ltd
|
|
|
5,959
|
|
|
-
|
|
Tianjin
Xingda Travel Co., Ltd
|
|
|
1,939
|
|
|
-
|
|
Total
|
|
$
|
13,070,907
|
|
$
|
8,397,227
|
|
Historically,
Tianshi Engineering remitted payment to us upon sales to third party customers.
However, in order to support Tianshi Engineering’s marketing efforts in
anticipation of receiving a direct selling license in China, we have agreed
to
allow Tianshi Engineering to defer payment to us. Balances not remitted to
us
within 90 days are converted to other receivables - related parties. Beginning
on January 1, 2007, the other receivables - related parties became interest
bearing. The stated interest rate is the interest rate for the same level of
loan stipulated by the People’s Bank of China. The credit terms provide an
interest-free credit term of three months. Any amounts exceeding this term
are
transferred from accounts receivable - related parties to other receivable
-
related parties. Beginning January 1, 2007, the other receivables - related
parties will then become interest bearing once a loan contract is adopted.
The
interest rate is the interest rate, on the date the loan commences, that is
stipulated by the People’s Bank of China for a loan of the same
level.
On
January 1, 2007, Biological entered into a loan agreement (the “Q1 Loan”) with
Tianshi Engineering. The Q1 Loan provided that, beginning January 1, 2007,
$4.5
million of other receivables-related parties, which originated from Tianshi
Engineering as accounts receivable, became interest bearing. The Q1 Loan was
due
March 31, 2007 and the stated interest rate was 6.3%. Both of the principal
and
interest of $41,876 were paid off February 28, 2007.
On
April
24, 2007, a loan agreement (the “Q2 Loan”) was signed between Biological and
Tianshi Engineering. The Q2 Loan provided that beginning April 1, 2007, $5.1
million of other receivables-related parties, which originated from Tianshi
Engineering as accounts receivable, became interest bearing. The Q2 Loan was
due
June 30, 2007 and the stated interest rate was 5.67%, the interest rate for
a
loan of the same principal amount stipulated by the People’s Bank of China as of
the date the loan was made. Both of the principal and interest of $65,882 were
repaid on June 30, 2007.
On
July
23, 2007, a loan agreement (the “Q3 Loan”) was signed between Biological and
Tianshi Engineering. The Q3 Loan provided that, beginning July 1, 2007, $8.8
million of other receivables-related parties, which originated from Tianshi
Engineering as accounts receivable, became interest bearing. The Q3 Loan was
due
September 30, 2007 and the stated interest rate was 5.85%, the interest rate
for
a loan of the same principal amount stipulated by the People’s Bank of China as
of the date the loan was made. On September 30, 2007, $1 million of the Q3
Loan
was repaid.
On
October 15, 2007, a loan agreement (the “Q4 Loan”) was signed between Biological
and Tianshi Engineering. Pursuant to the Q4 Loan, beginning October 1, 2007,
$6.5 million of other receivables-related parties, which originated from Tianshi
Engineering as accounts receivable, became interest bearing. The loan was due
December 31, 2007 and the stated interest rate was 6.48%, the interest rate
for
a loan of the same principal amount stipulated by the People’s Bank of China as
of the date the loan was made. On December 20, 2007, the remaining principal
balance of $14,294,686 on the Q3 Loan and the Q4 Loan plus interest on the
two
loans of $306,360 was repaid by canceling an equal amount of the consideration
paid by us for the acquisition of Life Resources from Tianshi
Investment.
During
the years ended December 31, 2007 and 2006, we and Tianshi Group used common
meters at our headquarters for electricity and water, and also used the same
employee insurance account. When making payments to these outside parties,
we
usually pay the fees first and then are reimbursed by Tianshi Group. These
pro-rated amounts relating to Tianshi Group are categorized as other receivables
- related parties. In addition, during 2006 we were owed other
receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from
Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned
by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations,
and all of its rights and liabilities were transferred to Tianshi Group. This
amount was also included in other receivables - related parties.
In
June
2007, Biological signed four agreements with equipment suppliers in Europe
and
Australia, pursuant to which Biological agreed to purchase four production
lines
for use at its headquarters in Tianjin, China. At that time Biological paid
$996,711, one-third of the total consideration, to those equipment suppliers.
But, due to a government investment limitation policy, Biological could not
clear the equipment with Chinese customs without having to pay a large import
duty. However, no such import duty would need to be paid if Life Resources
imported the production lines. Therefore, on August 16, 2007, Biological, Life
Resources and the equipment suppliers entered into a new agreement. In this
new
agreement, Life Resources agreed: (i) to replace Biological as the purchaser
of
the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the
remaining balance of the consideration to the equipment suppliers. As of
December 31, 2007, Life Resources had paid the consideration due to the
equipment suppliers and received the equipment, and the amount of $996,711
due
to Biological had not been paid.
As
Life
Resources is still in the construction process and all of the construction
is
outsourced to third party contractors, it currently has no employees. All of
the
administrative work relating to the construction has been performed by employees
of the construction department of Biological. In December 2007, Biological
charged Life Resources $262,817 for this administrative work. At December 31,
2007 and 2006, amounts due from Life Resources were $1,259,528 and $0
respectively.
Loans
Receivable-related Party
Related
party loans receivable were $0 and $25.6 million as of December 31, 2007 and
2006 respectively. On January 1, 2006, Biological loaned Tianshi Engineering
$25.6 million. The loan was non-interest bearing and matured on December 31,
2006. The purpose of the loan was to enable Tianshi Engineering to strengthen
its sales network in China. On December 22, 2006, the loan was extended to
June
30, 2007 and was converted to an interest-bearing loan. The interest rate for
the loan was 22 base points plus the current interest rate for the same level
of
loan stipulated by the People’s Bank of China, which was 5.58%. The actual
interest rate on this loan totaled to 5.8%, On June 28, the loan was further
extended to September 30, 2007. On September 30, 2007, the loan was extended
to
December 31, 2007. On December 20, 2007, the principal loan and accrued interest
of $1,461,248, was repaid by canceling an equal amount of the consideration
payable by us for the acquisition of Life Resources from Tianshi Investment.
Advances
from Customers-related Parties
Advances
from related party customers were $1.7 million and $1.6 million as of December
31, 2007 and 2006, respectively. These advances represented prepayments made
to
us to insure that overseas customers could obtain enough of our products to
meet
their market demands.
Other
Payables-related Parties
These
amounts arose primarily from previous cash advances from related parties such
as
management fees due to related parties and various non-operational transactions
incurred with related parties.
The
details of other payable-related parties are as follows:
|
|
December 31, 2007
|
|
December 31, 2006
|
|
Tianshi
Investment
|
|
$
|
7,490,136
|
|
$
|
-
|
|
Tianshi
Engineering
|
|
|
244,980
|
|
|
-
|
|
Tianshi
Germany Co., Ltd
|
|
|
109,233
|
|
|
98,581
|
|
Beijin
Xingda Travel Co., Ltd
|
|
|
-
|
|
|
255
|
|
Shenzhen
Logistics Co., Ltd
|
|
|
-
|
|
|
295,333
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
13
|
|
|
13
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
84,359
|
|
Tianshi
Pharmaceuticals
|
|
|
9,308
|
|
|
8,728
|
|
Tianshi
Shanghai Co., Ltd
|
|
|
176
|
|
|
165
|
|
Director
- Jinyuan Li
|
|
|
-
|
|
|
34,671
|
|
Total
|
|
$
|
7,938,205
|
|
$
|
522,105
|
|
On
December 21, 2007 Tianshi Holdings signed an agreement with Tianshi Investment
pursuant to which it agreed to reimburse Tianshi Investment for a $7.5 million
capital contribution to be made to Life Resources. The reimbursement was to
be
made after the government approved the acquisition of Life Resources by Tianshi
Holdings. As of December 31, 2007 such approval had not been
received.
Long
Term Debt-related Party
In
2004,
Tianshi Holdings entered a term loan agreement with Tianyuan Capital Development
Co. Ltd. ("Tianyuan Capital"), pursuant to which Tianyuan Capital agreed to
lend
$10.65 million in the aggregate to Tianshi Holdings, at an interest rate of
5%
per year, with interest payable on June 30 and December 31, commencing December
31, 2004. Tianshi Holdings must repay the loan in ten consecutive semi-annual
installments of $1,065,000 commencing June 30, 2006 and ending June 30, 2011.
Tianshi Holdings used the loan proceeds in Tiens Yihai. Mr. Jinyuan Li owns
100%
of Tianyuan Capital. Interest of $399,543 and two installment payments totaling
$2,130,000 were made in 2007.
Other
T
ransactions
with Tianshi Group
Since
2003, Biological has leased office space and manufacturing facilities from
Tianshi Group. The lease provides for an annual rent at 1% of our total gross
revenues. The rent was negotiated by the parties before we acquired Tianshi
Holdings, and we believe that it is a reasonable rent for the facilities. The
term of the lease was for five years and expired on December 31, 2007. In
addition, we are obligated to pay insurance, maintenance and other expenses
related to the premises. The total amount paid on this lease amounted to
$522,318 for the 12 months ended December 31, 2007. We entered into a new
one-year lease agreement with Tianshi Group, effective January 1, 2008 covering
the same facilities and having identical rent terms.
On
December 14, 2007, Biological entered into a Real Property Transfer Agreement
(the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
Biological transferred to Tianshi Group title to buildings consisting of
approximately 34,000 square meters total of office, workshop, conference and
exhibition space, located at the Company’s headquarters in Tianjin China for
$15,316,496. Land use rights on the underlying land, which is owned by the
government of China and which rights continue through December 30, 2054 with
respect to the conference center property and May 31, 2043 with respect the
other properties were also transferred. Biological also assigned certain
contracts with third parties related to the servicing and upkeep of the
buildings being transferred (collectively, the “Third Party Contracts”). In
consideration for the transfer of the buildings and land-use rights, Tianshi
Group paid Biological $15,334,037, plus $3,190,773 to cover pre-payments
previously made by Biological under the Third Party Contracts.
On
December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement
pursua
nt
to
which Biological has the right to use and occupy the office and workshop spaces
being transferred under the Transfer Agreement. The lease is rent-free, but
Biological is required to pay Tianshi Group for utility charges and maintenance
costs on the buildings. The lease continues until the earlier of the date that
we move to the new administrative facilities being constructed by Life
Resources, or the land use rights on the underlying property
expire.
Other
Transactions with Tianshi Engineering
On
December 31, 2005, Biological entered into four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns with Biological for one year
started from January 1
st
,
2006.
These four lease agreements were renewed in December 2006 for the 2007 fiscal
year and on October 17, 2007 for the 2008 fiscal year. Rent revenue from these
leases amounted to $379,083 and $295,588 for the years ended 2007 and 2006
respectively.
On
October 31, 2007, Biological entered into four lease agreements with Tianshi
Engineering which enable Tianshi Engineering to share the use of certain of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns with Biological. Each of the
four agreements is effective as of January 1, 2008 and expires on December
31,
2009. Following is a summary of the monthly rent payable to Biological under
the
leases:
Lease
Agreement
|
|
Monthly
rent
|
|
|
|
|
|
Lease
Agreement for Health Products Production Equipment
|
|
$
|
11,481
|
|
Lease
Agreement for Health Products Production Workshops
|
|
$
|
13,367
|
|
Lease
Agreement for Personal Care Product Production Equipment
|
|
$
|
5,160
|
|
Lease
Agreement for Personal Care Products Production Workshops
|
|
$
|
2,891
|
|
On
December 14, 2007, Biological entered into the Transfer Agreement with Tianshi
Group, the parent company of Tianshi Engineering, pursuant to which Biological
transferred to Tianshi Group title to two of the four buildings included in
the
Lease Agreement for Health Products Production Workshops. On December 31,
Biological and Tianshi Engineering entered into a Supplement Agreement of Lease
Agreement for Health Products Production Workshops. The Supplement Agreement
removed the two buildings purchased by Tianshi Group from the lease and reduced
the rent to $5,928 per month.
On
December 31, 2007, Biological and Tianshi Engineering entered into a Supplement
Agreement of Lease Agreement for Personal Care Products Production Equipment.
The Supplement Agreement added additional production equipment to the lease
and
increased the rent to $5,635 per month.
In
November 2007, we sold two cars to a supplier of Tianshi Engineering for
$110,275. The proceeds from the sale to the supplier of Tianshi Engineering
were
recorded as other receivables from Tianshi Engineering, as both parties agree
that we transferred our right to receive the proceeds from the sale of the
cars
to Tianshi Engineering.
Transactions
with Tianshi Investments
On
December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement
with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the
Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the
registered share capital of Life Resources from Tianshi Investment for
RMB474,674,415 ($64,247,182). The closing of the transaction was subject to
government approval of the transfer of Life Resources to Tianshi Holdings.
On
March 13, 2008, the government approved the transfer.
Pursuant
to the Sale and Purchase Agreement, we advanced a deposit of $64,247,182 to
Tianshi Investment on December 20, 2007. This acquisition deposit was settled
as
follows:
|
·
|
$28,592,743
was paid by canceling a loan in the principal amount of RMB200,000,000
to
Tianshi Engineering owned by Biological together with interest accrued;
|
|
·
|
$16,557,914
was paid by canceling of other receivable owned by Tianshi Engineering
to
Biological; and
|
|
·
|
$19,096,525
was paid in cash.
|
On
December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a
Capital Contribution Agreement, pursuant to which Tianshi Investment agreed
to
fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi
Holdings agreed to pay back the $7.5 million to Tianshi Investment within five
days of the date of the government approval of the transfer of the shares of
Life Resources to Tianshi Holdings. The approval was received on March 13,
2008
and the $7.5 million was paid back on March 18, 2008, by canceling $7.5 million
of accounts receivable owed to us by Tianshi Engineering.
On
January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a Loan
Agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1
million without interest. The loan was required to be used by Tianshi Investment
to increase the registered share capital of Life Resources. The loan was due
on
March 31, 2008, provided however, that if the government approved the transfer
of the shares of Life Resources to Tianshi Holdings prior to that date, the
loan
would be cancelled, as Life Resources would then be a wholly-owned subsidiary
of
Tianshi Holdings. The approval was received on March 13, 2008, and therefore,
the loan was cancelled on the same date.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
On
September 26, 2007, the Board appointed Grobstein, Horwath & Company LLP
(GH&C”) as independent auditors to audit our financial statements for the
fiscal year ended December 31, 2007. Prior to September 26, 2007 Moore Stephens
Wurth Frazer and Torbet, LLP (“MSWF&T”) had served as our independent
auditor since 2002.
Public
Accounting Fees
Moore
Stephens Wurth Frazer and Torbet, LLP
|
|
|
|
2007
|
|
2006
|
|
Audit
Fees
|
|
$
|
200,000
|
|
$
|
240,000
|
|
Audit
Related Fees
|
|
$
|
0
|
|
$
|
0
|
|
Tax
Fees
|
|
$
|
5,000
|
|
$
|
5,000
|
|
All
Other Fees
|
|
$
|
0
|
|
$
|
11,000
|
|
Audit
fees were for professional services rendered by MSWF&T during the 2006
fiscal year for the audit of our annual financial statements and the review
of
the financial statements included in our quarterly reports on Forms 10-Q, and
services that are normally provided by MSWF&T in connection with statutory
and regulatory filings or engagements for that fiscal year. Audit fees were
for
professional services rendered by MSWF&T during the 2007 fiscal year for the
review of the financial statements included in our first and second quarter
reports on Forms 10-Q, and services that are normally provided by MSWF&T in
connection with statutory and regulatory filings or engagements for that fiscal
year. MSWF&T did not bill any other fees for services rendered to us during
the fiscal years ended December 31, 2006 and 2007 for assurance and related
services in connection with the audit or review of our financial statements.
Tax
fees involved preparation of the consolidated tax returns. All other fees
consisted of professional advice on the Company’s compliance with Section 404 of
the Sarbanes-Oxley Act of 2002.
Grobstein,
Horwath & Company
LLP
|
|
|
|
2007
|
|
2006
|
|
Audit
Fees
|
|
$
|
20,000
|
|
$
|
0
|
|
Audit
Related Fees
|
|
$
|
0
|
|
$
|
0
|
|
Tax
Fees
|
|
$
|
0
|
|
$
|
0
|
|
All
Other Fees
|
|
$
|
0
|
|
$
|
0
|
|
Audit
fees were for professional services rendered by GH&C during the 2007 fiscal
year for the review of the financial statements included in our third quarter
report on Form 10-Q, and services that are normally provided by GH&C in
connection with statutory and regulatory filings or engagements for that fiscal
year. GH&C did not bill any other fees for services rendered to us during
the fiscal year ended December 31, 2007 for assurance and related services
in
connection with the review of our financial statements.
Pre-approval
of Services
The
Audit
Committee has adopted pre-approval policies for all services, including both
audit and non-audit services, provided by the Company’s independent auditors.
For audit services, each year the independent auditor provides the Audit
Committee with an engagement letter outlining the scope of the audit services
proposed to be performed during the year, which must be formally accepted by
the
Audit Committee before the audit commences. The independent auditor also submits
an audit services fee proposal, which also must be approved by the Committee
before the audit commences. The audit, tax, and all other fees and services
described above were pre-approved for 2006 and 2007.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits
Exhibit
No.
|
|
Description
|
2.1
|
|
Agreement
and Plan of Reorganization, as amended, dated as of August 22, 2003,
by
and among Strategika,
Tianshi
Holdings and the Stockholders of Tianshi Holdings. (1)
|
3.1
*
|
|
Certificate
of Incorporation of the Company, as amended
|
3.2
|
|
By-laws
of
the
Company (2)
|
4.1
|
|
Specimen
Stock Certificate (2)
|
10.1
|
|
Lease
Agreement, dated June 30, 2002, by and between Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd. (3)
|
10.
2
|
|
Product
Purchase and Sales Agreement, dated June 25, 2003, by and between
Tianjin
Tianshi Biological Development Co., Ltd. And Tianjin Tianshi Biological
Engineering Co. Ltd. (3)
|
10.
3
|
|
Supplemental
Agreement for the Construction and Development of Tiens Yihai Industrial
Park Project, dated November 10, 2006 by and between Shanghai Zhu
Jia Jiao
Industrial Park Economic Development Ltd. Company, Tianshi International
Holdings Group Ltd. Company and Zhu Jia Jiao Townhouse, Qing Pu District,
Shanghai (4)
|
10.
4
|
|
Term
Loan
Agreement,
dated March 29, 2007 by and between Tianjin Tianshi Biological Development
Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
(5)
|
10.
5
|
|
Term
Loan
Agreement,
dated April 24, 2007 by and between Tianjin Tianshi Biological Development
Co., Ltd. and Tianjin Tianshi Biological Engineering Co., Ltd.
(6)
|
10.6
|
|
Term
Loan
Extension
Agreement, dated June 28, 2007 by and between Tianjin Tianshi Biological
Development Co., Ltd. and Tianjin Tianshi Biological Engineering
Co., Ltd.
(6)
|
10.
7*
|
|
Term
Loan
Agreement,
dated July 23, 2007 by and between Tianjin Tianshi Biological Development
Co., Ltd. and Tianjin Tianshi Biological Engineering Co.,
Ltd.
|
10.8
|
|
Term
Loan
Extension
Agreement, dated September 27, 2007 by and between Tianjin Tianshi
Biological Development Co., Ltd. and Tianjin Tianshi Biological
Engineering Co., Ltd. (7)
|
10.
9*
|
|
Term
Loan
Agreement,
dated October 15, 2007 by and between Tianjin Tianshi Biological
Development Co., Ltd. and Tianjin Tianshi Biological Engineering
Co.,
Ltd.
|
10.
10*
|
|
Health
Products Production Workshops Lease Agreement
,
dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd.
|
10.1
1*
|
|
Personal
Care Products Production Workshops Lease Agreement
,
dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd.
|
10.1
2*
|
|
Health
Products Production Equipment Lease Agreement
,
dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd.
|
10.1
3*
|
|
Personal
Care Products Production Equipment Lease Agreement
,
dated October 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd.
|
10.1
4*
|
|
Real
Property Transfer Agreement, dated December 14, 2007, by and between
Tianjin Tianshi Biological Development Co., Ltd. and Tianjin Tianshi
Group
Co. Ltd.
|
10.1
5*
|
|
Lease
Agreement, dated December 14, 2007, by and between Tianjin Tianshi
Biological Development Co., Ltd. and Tianjin Tianshi Group Co.
Ltd.
|
10.1
6*
|
|
Sale
and Purchase Agreement dated December 20, 2007
by
and among Tianshi International Investment Group Co., Ltd., Tianshi
International Holdings Group Limited, Tianjin Tianshi Biological
Development Co., Ltd. and Tianjin Tianshi Biological Engineering Co.,
Ltd.
|
10.
17*
|
|
Capital
Contribution Agreement dated December 21, 2007 by and between Tianshi
International
Holdings Group Co., Ltd. and Tianshi International Investment Group
Co.
Ltd.
|
10.
18*
|
|
Health
Products Production Workshops Supplemental Agreement
,
dated December 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co., Ltd.
|
10.
19*
|
|
Personal
Care Products Production Equipment Supplemental Agreement
,
dated December 31, 2007 by and between Tianjin Tianshi Group Co.,
Ltd. and
Tianjin Tianshi Biological Development Co.,
Ltd.
|
|
|
10.20*
|
Loan
Agreement dated January
14,
2008 by and between Tianshi International Holdings Group Co., Ltd.
and
Tianshi International Investment Group Co. Ltd.
|
10.2
1*
|
Lease
Agreement, dated January 17, 2008, by and between Tianjin Tianshi
Biological Development Co., Ltd. and Tianjin Tianshi Group Co.
Ltd.
|
21.1*
|
Subsidiaries
|
31.1*
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
31.2*
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1*
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002
|
*
Filed
herewith
(1)
Filed
as an exhibit to the Registrant’s Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 31, 2005.
(2)
Filed
as an exhibit to the Registrant’s Form 10-KSB filed with the Securities and
Exchange Commission on March 7, 2002.
(3)
Filed
as an exhibit to the Registrant’s Form 10-K filed with the Securities and
Exchange Commission on March 31, 2006
(4)
Filed
as an exhibit to the Registrant’s Form 10-K filed with the Securities and
Exchange Commission on March 29, 2007.
(5)
Filed
as
an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
Commission on May 15, 2007.
(6)
Filed
as
an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2007.
(7)
Filed
as
an exhibit to the Registrant’s Form 10-Q filed with the Securities and Exchange
Commission on November 14, 2007.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
TIENS
BIOTECH GROUP (USA), INC.
|
|
|
|
|
|
|
|
Date:
March 31, 2008
|
|
|
|
/s/
Jinyuan Li
|
|
|
Jinyuan
Li
|
|
Chief
Executive Officer and President
|
|
(Principal
Executive Officer)
|
|
|
|
Date:
March 31, 2008
|
|
|
|
/s/
Wenjun Jiao
|
|
|
Wenjun
Jiao
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting
Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Jinyuan Li
Jinyuan
Li
|
|
Chairman
of the Board, Chief Executive Officer and President (Principal Executive
Officer)
|
|
March 31,
2008
|
|
|
|
|
|
/s/
Wenjun Jiao
Wenjun
Jiao
|
|
Chief
Financial Officer (Principal Executive and Accounting Officer) and
Director
|
|
March 31,
2008
|
|
|
|
|
|
/s/
Yupeng Yan
Yupeng
Yan
|
|
Executive
Vice President And Director
|
|
March 31,
2008
|
|
|
|
|
|
/s/
Gilbert Raker
Gilbert
Raker
|
|
Director
|
|
March 31,
2008
|
|
|
|
|
|
/s/
Howard Balloch
Howard
Balloch
|
|
Director
|
|
March 31,
2008
|
|
|
|
|
|
/s/
Socorro Quintero
Socorro
Quintero
|
|
Director
|
|
March 31,
2008
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors of Tiens Biotech Group (USA), Inc.
We
have
audited the accompanying consolidated balance sheet of Tiens Biotech Group
(USA), Inc. (the “Company”) as of December 31, 2007 and the related consolidated
statements of income and other comprehensive income, stockholders’ equity and
cash flows for the year then ended. These consolidated financial statements
are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Tiens Biotech
Group (USA), Inc. as of December 31, 2007, and the consolidated results of
their
operations and their cash flows for the year then ended in conformity with
U.S.
generally accepted accounting principles.
As
discussed in Notes 1, 10, 11 and 12 to the consolidated financial statements,
the Company has had numerous significant transactions with entities that
are
under common control. The most significant of these transactions is that
all of
the Company’s sales are currently and have historically been made to a related
party controlled by the shareholder of the Company.
/s/
GROBSTEIN, HORWATH & COMPANY LLP
Sherman
Oaks, California
March
25,
2008
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
of
Tiens
Biotech Group (USA), Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Tiens Biotech Group
(USA), Inc. and Subsidiaries as of December 31, 2006, and the related
consolidated statements of income and other comprehensive income, and equity,
and cash flows for each of the years in the two-year period ended December
31,
2006. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement.
The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Tiens Biotech Group (USA),
Inc. and Subsidiaries as of December 31, 2006, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/S/
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
March
19,
2007
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF
DECEMBER 31, 2007 AND DECEMBER 31, 2006
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
48,678,945
|
|
$
|
54,270,065
|
|
Accounts
receivable, trade - related parties, net of
|
|
|
|
|
|
|
|
allowance
for doubtful accounts of $71,700 and $86,776
|
|
|
|
|
|
|
|
as
of December 31, 2007 and 2006, respectively
|
|
|
14,268,229
|
|
|
12,926,670
|
|
Accounts
receivable, trade - third parties
|
|
|
104,398
|
|
|
18,135
|
|
Inventories
|
|
|
5,949,963
|
|
|
6,845,108
|
|
Other
receivables
|
|
|
892,489
|
|
|
349,905
|
|
Other
receivables - related parties
|
|
|
13,070,907
|
|
|
8,397,227
|
|
Employee
advances
|
|
|
64,336
|
|
|
111,121
|
|
Prepaid
expenses
|
|
|
623,638
|
|
|
2,135,917
|
|
Total
current assets
|
|
|
83,652,905
|
|
|
85,054,148
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
18,322,619
|
|
|
30,511,319
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
2,603,084
|
|
|
510,183
|
|
Long-term
prepaid expenses
|
|
|
5,301,847
|
|
|
7,031,348
|
|
Loans
receivable - related party
|
|
|
-
|
|
|
25,640,000
|
|
Acquisition
deposit
|
|
|
71,747,182
|
|
|
-
|
|
Total
other assets
|
|
|
79,652,113
|
|
|
33,181,531
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
181,627,637
|
|
$
|
148,746,998
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,070,906
|
|
$
|
4,123,105
|
|
Advances
from customers - related parties
|
|
|
1,700,838
|
|
|
1,570,120
|
|
Wages
and benefits payable
|
|
|
1,250,685
|
|
|
992,068
|
|
Other
taxes payable
|
|
|
536,819
|
|
|
93,714
|
|
Income
taxes payable
|
|
|
665,726
|
|
|
876,046
|
|
Other
payables
|
|
|
1,133,539
|
|
|
500,213
|
|
Other
payables - related parties
|
|
|
7,938,205
|
|
|
522,105
|
|
Dividend
payable to minority interest
|
|
|
4,902,629
|
|
|
238,311
|
|
Current
portion of long term debt, related party
|
|
|
2,130,000
|
|
|
2,130,000
|
|
Total
current liabilities
|
|
|
24,329,347
|
|
|
11,045,682
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Long
term debt, net of current portion, related party
|
|
|
4,267,742
|
|
|
6,397,742
|
|
Other
payables-non current
|
|
|
538,130
|
|
|
-
|
|
Total
non current liabilities
|
|
|
4,805,872
|
|
|
6,397,742
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
29,135,219
|
|
|
17,443,424
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
6,144,063
|
|
|
11,883,323
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 250,000,000 shares authorized,
|
|
|
|
|
|
|
|
71,333,586
issued and outstanding, respectively
|
|
|
71,334
|
|
|
71,334
|
|
Paid-in-capital
|
|
|
8,842,009
|
|
|
8,842,009
|
|
Additional
paid-in-capital
|
|
|
69,105
|
|
|
-
|
|
Statutory
reserves
|
|
|
9,420,783
|
|
|
9,420,783
|
|
Retained
earnings
|
|
|
113,964,778
|
|
|
95,371,137
|
|
Accumulated
other comprehensive income
|
|
|
13,980,346
|
|
|
5,714,988
|
|
Total
shareholders' equity
|
|
|
146,348,355
|
|
|
119,420,251
|
|
Total
liabilities and shareholders' equity
|
|
$
|
181,627,637
|
|
$
|
148,746,998
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
|
|
2007
|
|
2006
|
|
2005
|
|
REVENUE
- RELATED PARTIES
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
$
|
68,688,669
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES - RELATED PARTIES
|
|
|
16,526,695
|
|
|
18,082,441
|
|
|
17,451,605
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
38,373,365
|
|
|
48,708,025
|
|
|
51,237,064
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
14,306,660
|
|
|
12,789,810
|
|
|
13,413,875
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
24,066,705
|
|
|
35,918,215
|
|
|
37,823,189
|
|
|
|
|
|
|
|
|
|
|
|
|
(Interest
expense)
|
|
|
(399,773
|
)
|
|
(532,887
|
)
|
|
(542,414
|
)
|
Interest
income
|
|
|
3,019,153
|
|
|
859,720
|
|
|
204,489
|
|
Other
(expense) income, net
|
|
|
(1,099,172
|
)
|
|
(165,742
|
)
|
|
(301,212
|
)
|
OTHER
(EXPENSE) INCOME, NET
|
|
|
1,520,208
|
|
|
161,091
|
|
|
(639,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
AND
MINORITY INTEREST
|
|
|
25,586,913
|
|
|
36,079,306
|
|
|
37,184,052
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,026,875
|
|
|
2,823,899
|
|
|
2,984,302
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE MINORITY INTEREST
|
|
|
23,560,038
|
|
|
33,255,407
|
|
|
34,199,750
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
4,966,397
|
|
|
6,963,330
|
|
|
7,321,630
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
18,593,641
|
|
|
26,292,077
|
|
|
26,878,120
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
8,265,358
|
|
|
3,480,775
|
|
|
2,246,380
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
26,858,999
|
|
$
|
29,772,852
|
|
$
|
29,124,500
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE, BASIC AND DILUTED
|
|
$
|
0.26
|
|
$
|
0.37
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
71,333,586
|
|
|
71,333,586
|
|
|
71,333,586
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Number
of
shares
|
|
Common
stock
|
|
Paid-in
capital
|
|
Additional
Paid-in
capital
|
|
Statutory
reserves
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive
income
(loss)
|
|
Totals
|
|
BALANCE,
December 31, 2004
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
-
|
|
$
|
9,420,783
|
|
$
|
42,200,940
|
|
$
|
(12,167
|
)
|
$
|
60,522,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,878,120
|
|
|
|
|
|
26,878,120
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,246,380
|
|
|
2,246,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2005
|
|
|
71,333,586
|
|
|
71,334
|
|
|
8,842,009
|
|
|
-
|
|
|
9,420,783
|
|
|
69,079,060
|
|
|
2,234,213
|
|
|
89,647,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,292,077
|
|
|
|
|
|
26,292,077
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,480,775
|
|
|
3,480,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006
|
|
|
71,333,586
|
|
|
71,334
|
|
|
8,842,009
|
|
|
-
|
|
|
9,420,783
|
|
|
95,371,137
|
|
|
5,714,988
|
|
|
119,420,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,593,641
|
|
|
|
|
|
18,593,641
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,265,358
|
|
|
8,265,358
|
|
Additional
paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
|
69,105
|
|
|
|
|
|
|
|
|
|
|
|
69,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007
|
|
|
71,333,586
|
|
$
|
71,334
|
|
$
|
8,842,009
|
|
$
|
69,105
|
|
$
|
9,420,783
|
|
$
|
113,964,778
|
|
$
|
13,980,346
|
|
$
|
146,348,355
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|
|
2007
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
18,593,641
|
|
$
|
26,292,077
|
|
$
|
26,878,120
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
(15,076
|
)
|
|
(123,302
|
)
|
|
173,169
|
|
Minority
interest
|
|
|
4,966,397
|
|
|
6,963,330
|
|
|
7,321,630
|
|
Depreciation
|
|
|
2,891,893
|
|
|
2,509,261
|
|
|
1,701,415
|
|
Amortization
|
|
|
252,492
|
|
|
103,694
|
|
|
134,070
|
|
Interest
income
|
|
|
313,402
|
|
|
-
|
|
|
-
|
|
(Gain)
loss on sale of assets
|
|
|
(145,475
|
)
|
|
2,550
|
|
|
289,632
|
|
Inventory
write off
|
|
|
84,521
|
|
|
59,832
|
|
|
154,525
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade - related parties
|
|
|
(25,662,367
|
)
|
|
(16,542,297
|
)
|
|
3,810,415
|
|
Accounts
receivable, trade - third parties
|
|
|
(81,673
|
)
|
|
(17,763
|
)
|
|
-
|
|
Other
receivables
|
|
|
(501,258
|
)
|
|
(125,232
|
)
|
|
303,201
|
|
Other
receivables - related parties
|
|
|
1,439,387
|
|
|
(5,667,880
|
)
|
|
2,096,269
|
|
Inventories
|
|
|
1,211,822
|
|
|
847,005
|
|
|
(2,949,054
|
)
|
Employee
advances
|
|
|
52,015
|
|
|
38,067
|
|
|
(67,007
|
)
|
Prepaid
expense
|
|
|
1,586,652
|
|
|
(394,419
|
)
|
|
(1,081,102
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(313,235
|
)
|
|
1,305,537
|
|
|
850,852
|
|
Accounts
payable - related parties
|
|
|
-
|
|
|
-
|
|
|
(211,274
|
)
|
Advances
from customers - related parties
|
|
|
25,320
|
|
|
(565,520
|
)
|
|
1,366,951
|
|
Wages
and benefits payable
|
|
|
185,502
|
|
|
(93,942
|
)
|
|
862,872
|
|
Other
taxes payable
|
|
|
142,666
|
|
|
(481,080
|
)
|
|
763,249
|
|
Other
payables
|
|
|
576,205
|
|
|
153,890
|
|
|
70,110
|
|
Other
payables - related parties
|
|
|
(107,546
|
)
|
|
(1,324,779
|
)
|
|
837,554
|
|
Net
cash provided by operating activities
|
|
|
5,495,285
|
|
|
12,939,029
|
|
|
43,305,597
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Payment
of deposit on acquisition of Life Resource
|
|
|
(19,096,525
|
)
|
|
-
|
|
|
-
|
|
Increase
in loans receivable - related party
|
|
|
-
|
|
|
(24,992,000
|
)
|
|
-
|
|
Increase
in long-term prepaid expense
|
|
|
(209,087
|
)
|
|
(3,178,500
|
)
|
|
-
|
|
Increase
in intangible assets
|
|
|
(132,027
|
)
|
|
(42,273
|
)
|
|
(113,133
|
)
|
Proceeds
from sales of properties
|
|
|
14,111,723
|
|
|
76,596
|
|
|
28,581
|
|
Purchase
of equipment and automobiles
|
|
|
(2,978,395
|
)
|
|
(7,769,394
|
)
|
|
(6,100,936
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(8,304,311
|
)
|
|
(35,905,571
|
)
|
|
(6,185,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Increase
in other payables-non current
|
|
|
516,718
|
|
|
-
|
|
|
-
|
|
Payments
on long term debt, related party
|
|
|
-
|
|
|
(2,130,000
|
)
|
|
(156,984
|
)
|
Payments
to minority interest shareholder
|
|
|
(6,676,102
|
)
|
|
-
|
|
|
(58,136
|
)
|
Net
cash used in financing activities
|
|
|
(6,159,384
|
)
|
|
(2,130,000
|
)
|
|
(215,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
3,377,290
|
|
|
1,820,616
|
|
|
1,397,130
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
(5,591,120
|
)
|
|
(23,275,926
|
)
|
|
38,302,119
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of year
|
|
|
54,270,065
|
|
|
77,545,991
|
|
|
39,243,872
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of year
|
|
$
|
48,678,945
|
|
$
|
54,270,065
|
|
$
|
77,545,991
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
(net of amount capitalized)
|
|
$
|
399,773
|
|
$
|
532,887
|
|
$
|
515,692
|
|
Income
taxes
|
|
$
|
2,215,159
|
|
$
|
2,731,755
|
|
$
|
2,302,275
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Background
Tiens
Biotech Group (USA), Inc. (the “Company” or “Tiens”) was incorporated on July
13, 1990 as Super Shops, Inc. in the State of Michigan. In October 2000,
Super
Shops, Inc. reincorporated in Delaware and changed its name to MIA Acquisition
Corp., and subsequently to Strategika, Inc. in February 2002. On December
31,
2003, the Company changed its name from Strategika, Inc. to Tiens Biotech
Group
(USA), Inc.
The
Company is currently owned 4.91% by public stockholders, 2.8% by officers
and
92.29% by Jinyuan Li, the Company’s current Chairman, CEO and President. The
Company owns 100% of Tianshi International Holdings Group Limited (“Tianshi
Holdings”). Tianshi Holdings owns 80% of Tianjin Tianshi Biological Development
Co., Ltd. (“Biological”) and 99.4% of Tiens Yihai Co. Ltd. (“Tiens
Yihai”).
Acquisition
of Tianshi Holdings and Biological
On
September 9, 2003, pursuant to an Agreement and Plan of Reorganization, dated
August 22, 2003 (the “Agreement”), among the Company, Tianshi Holdings, and
Jinyuan Li, Wenjun Jiao and Yupeng Yan, all Chinese nationals who were
stockholders of Tianshi Holdings (the “Tianshi Stockholders”), the Company
received from the Tianshi Stockholders all of the issued and outstanding
common
stock of Tianshi Holdings in exchange for the issuance by the Company of
68,495,000 shares of its common stock to the Tianshi Stockholders, representing
95% of the issued and outstanding common stock of the Company at such time,
after giving effect to the issuance.
The
purchase of Tianshi Holdings and the issuance of the Company’s common stock in
connection with the purchase have been accounted for as a reverse acquisition
presented as a recapitalization, and no goodwill or other intangible assets
have
been recorded. For accounting purposes, the original Tianshi Holdings is
considered the acquirer in the reverse acquisition. The historical financial
statements are those of the original Tianshi Holdings.
Tianshi
Holdings was incorporated on March 24, 2003, in the territory of the British
Virgin Islands. On June 18, 2003, Tianshi Holdings acquired 80% of Biological
from Tianshi Hong Kong International Development Co., Ltd. (“Tianshi Hong
Kong”), which was 100% owned by the Company’s current Chairman, Chief Executive
Officer and President, Jinyuan Li. Biological is a Chinese-foreign equity
joint
venture company established under the laws of the People’s Republic of China
(the “PRC” or “China”) on March 27, 1998. Biological is subject to the Law on
Sino Foreign Equity Joint Ventures, its implementation regulations and other
related rules and regulations. Biological is an independent legal entity
having
the legal structure of a limited liability company, similar to a regular
corporation with limited liability organized under state laws in the United
States of America. The Articles of Association of Biological provide for
a
50-year term with registered capital of $10,000,000. As an approved
Chinese-foreign equity joint venture, Biological receives special income
tax
incentive treatment from both the local (Wuqing County) and central governments
in China.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
original partners in this joint venture were Tianshi Hong Kong, incorporated
in
Hong Kong, which owned 80% of the joint venture, and Tianjin Tianshi Biological
Engineering Co., Ltd. (“Tianshi Engineering”), which owned the remaining 20% of
Biological.
Tianshi
Hong Kong is owned 100% by Jinyuan Li. Tianshi Engineering is 49% owned by
Baolan Li, the daughter of Jinyuan Li and 51% by Tianjin Tianshi Group Co.,
Ltd.
(“Tianshi Group”). In June 2003, Tianshi Engineering transferred its 20%
interest in Biological for no consideration to Tianjin Tianshi Pharmaceuticals
Co., Ltd (
“
Tianshi
Pharmaceuticals”)
and
Tianshi Holdings acquired 80% of Biological from Tianshi Hong Kong for no
consideration. This transfer was made for no consideration, since Jinyuan
Li is
president and sole shareholder of both companies.
Acquisition
of Tiens Yihai
On
April
20, 2004, Tianshi Holdings entered a joint venture contract (the “Joint Venture
Project”) with Tianshi Pharmaceuticals to establish Tiens Yihai. Tiens Yihai is
located in Shanghai, PRC, and is in the business of research and development,
production and marketing of healthcare, home care and personal care products.
Tiens Yihai is a foreign investment joint venture which is incorporated under
the laws of PRC. Tiens Yihai is classified as a Foreign Investment Enterprise
(“FIE”) in the PRC and is subject to the FIE laws of the PRC. Tiens Yihai is a
Chinese registered limited liability company with a legal structure similar
to a
regular corporation with limited liability organized under state laws in
the
United States of America. The Articles of Association provide for a 50-year
term
beginning on May 27, 2004 with registered capital of $200,000,000. Tianshi
Holdings contributed 99.4% of the registered capital and Tianshi Pharmaceuticals
contributed the remaining 0.6%.
On
September 15, 2004, the board of directors of Tianshi Holdings ratified the
Joint Venture Project. The total amount to be invested in Tiens Yihai was
to be
$400 million, of which $200 million was to be registered capital. Tianshi
Holdings was to contribute $198.8 million, representing approximately 99.4%
of
the registered capital of Tiens Yihai, and Tianshi Pharmaceuticals was to
contribute $1.2 million representing 0.6% of the registered
capital.
Entry
into agreement to acquire Life Resources
On
December 20, 2007, Tianshi Holdings entered into a Sale and Purchase Agreement
with Tianshi International Investment Group Co., Ltd., a British Virgin Islands
Company (“Tianshi Investment”). Jinyuan Li owns 100% of Tianshi Investment.
Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy
all
of the registered share capital of Tianjin Tiens Life Resources Co., Ltd.
(“Life
Resources”) for $64.2 million (see Note 10). The closing of the transaction was
subject to government approval of transfer of all of the share capital of
Life
Resources to Tianshi Holdings, which as of December 31, 2007, had not been
received (see Note 19).
Life
Resources was incorporated on April 29, 2005 as a FIE in Wuqing, Tianjin,
PRC,
with a registered share capital of $30,000,000. The Company is currently
constructing research and development and manufacturing and logistic facilities,
as well as administrative offices. Construction on the project began in July
2006. Upon the closing of this transaction, Tianshi Holdings would own 100%
of
Life Resources.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Nature
of operations
The
Company through its subsidiaries is primarily engaged in the manufacturing
of
nutritional supplement products, including wellness products, dietary supplement
products, and personal care products (which were discontinued during 2007).
In
the PRC, the Company sells its products to Tianshi Engineering. Tianshi
Engineering, in turn, sells the products to customers through its branches
and
affiliated companies and at chain stores which are owned by individual
distributors. Outside the PRC, the Company sells its products to overseas
affiliated companies located in 52 countries who in turn sell them to
independent direct sales distributors.
Note
2 - Summary of significant accounting policies
Basis
of presentation
These
financial statements of the Company and its subsidiaries are prepared in
accordance with accounting principles generally accepted in the United States
of
America (“U.S. GAAP”).
The
reporting entity
The
Company’s consolidated financial statements reflect the activities of the
following Company subsidiaries:
Subsidiary
|
|
Country
of Incorporation
|
|
%
Ownership
|
Tianshi
Holdings
|
|
British
Virgin Islands
|
|
100.0%
|
Biological
|
|
PRC
|
|
80.0%
|
Tiens
Yihai
|
|
PRC
|
|
99.4%
|
Principles
of consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions
and
balances are eliminated in consolidation.
Use
of estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
in
the consolidated financial statements and accompanying notes. Management
believes that the estimates utilized in preparing its financial statements
are
reasonable and prudent. Actual results could differ from these
estimates.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Foreign
currency translation
The
reporting currency of the Company is the US dollar. Biological’s and Tiens
Yihai’s financial records are maintained and the statutory financial statements
are stated in its local currency, Renminbi (RMB), as their functional currency.
Results of operations and cash flows are translated at average exchange rates
during the period, and assets and liabilities are translated at the unified
exchange rate as quoted by the People’s Bank of China at the end of each
reporting period. Translation adjustments resulting from this process are
included in other comprehensive income in the statement of income and other
comprehensive income.
This
quotation of the exchange rates does not imply free convertibility of RMB
to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China. Approval of foreign currency payments by the People’s Bank of China or
other institutions requires submitting a payment application form together
with
invoices, shipping documents and signed contracts.
Translation
adjustments amounted to $8,265,358, $3,480,775 and 2,246,380 for the years
ended
December 31, 2007, 2006 and 2005, respectively. Asset and liability accounts
at
December 31, 2007 were translated at RMB7.31 to $1.00 USD compared to RMB7.80
at
December 31, 2006. Equity accounts were stated at their historical rate.
The
average translation rates applied to income statement accounts for the years
ended December 31, 2007, 2006 and 2005 were RMB7.62, RMB7.96 and RMB8.18,
respectively. Cash flows are also translated at average translation rates
for
the period. Therefore, amounts reported on the statement of cash flows will
not
necessarily agree with changes in the corresponding balances on the balance
sheet.
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included
in the
results of operations as incurred. These amounts are not material to the
financial statements.
Fair
value of financial instruments
The
Company’s financial instruments consist primarily of cash, trade accounts
receivable, trade payables, advances, other receivables, and debt instruments.
The carrying amounts of the Company’s financial instruments generally
approximate their fair values at December 31, 2007 and December 31, 2006,
except
for long-term debt, which has a fixed interest rate. The fair value of the
long-term debt is estimated based on the borrowing rates currently available
to
the Company for bank loans with similar terms and average maturities. The
carrying value and fair value of long-term debt is as follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
Balance
Sheet amount
|
|
Fair
value
|
|
Balance
Sheet amount
|
|
Fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt-related party
|
|
$
|
(6,397,742
|
)
|
|
(6,443,795
|
)
|
$
|
(8,527,742
|
)
|
|
(8,527,742
|
)
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Cash
Cash
includes cash on hand and demand deposits in accounts maintained with banks
of
which no deposits are covered by insurance. The Company has not experienced
any
losses in such accounts and believes it is not exposed to any significant
risks
on its cash in bank accounts.
Accounts
receivable
The
Company’s trade accounts receivable are mainly due from related companies. The
Company has a general allowance for doubtful debt of 0.5% of the year end
balance of accounts receivable-related parties. Management reviews its accounts
receivable on a regular basis to determine if the bad debt allowance is
adequate, paying particular attention to the age of receivables outstanding.
At
December 31, 2007 and December 31, 2006 receivables outstanding more than
180
days totaled $2,937,718 and $31,586, respectively. The Company did not incur
any
losses on receivables for the periods reported. The following table represents
the changes in the allowance for doubtful accounts:
|
|
Balance
at
Beginning
of
Period
|
|
Provision
for
Doubtful
Accounts
|
|
Recovery
|
|
Balance
at
End
of Period
|
|
Period
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
and allowances deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
$
|
86,776
|
|
$
|
71,700
|
|
$
|
86,776
|
|
$
|
71,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
and allowances deducted from assets accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
$
|
206,916
|
|
$
|
86,776
|
|
$
|
206,916
|
|
$
|
86,776
|
|
Inventories
Inventories
are stated at the lower of cost or market using the moving average basis.
The
Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Prepaid
expenses
Prepaid
expenses consist of advances to suppliers and short-term prepaid expenses.
The
Company reviews its advances to suppliers annually for determining whether
provisions should be provided. The amount included in prepaid expense is
net of
any provisions. Provisions for prepaid expenses amounted to $872,053 and
$684,371 at December 31, 2007 and December 31, 2006, respectively.
Property,
plant and equipment, net
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as
follows:
|
Estimated
Useful Life
|
Buildings
and improvements
|
20
years
|
Machinery
and equipment
|
10
years
|
Computer,
office equipment and furniture
|
5
years
|
Automobiles
|
5
years
|
Construction
in progress represents the costs incurred in connection with the construction
of
buildings or new additions to the Company’s plant facilities. No depreciation is
provided for construction in progress until such time as the relevant assets
are
completed and are ready for their intended use.
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the
consolidated statements of income and other comprehensive income. Maintenance,
repairs and minor renewals are charged directly to expenses as incurred.
Major
additions and betterment to buildings and equipment are
capitalized.
Impairment
of long-lived assets
Long-lived
assets, including intangible assets, of the Company are reviewed annually
as to
whether their carrying value has become impaired. The Company considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations. The Company also re-evaluates the periods of
depreciation and amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Other
assets
Intangible
assets mainly consist of land use rights. All the land located in the PRC
is
owned by the government and cannot be sold to any individual or company.
However, the government grants “land use rights” for a specified period of time.
The company amortizes its land use rights according to the actual useful
life of
50 years. Other intangible assets include patents and trademarks and are
amortized over their estimated useful life ranging from five to ten
years.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Long-term
prepaid expenses mainly consist of a deposit and a related loan made to a
local
government agency for the acquisition of land use rights in Shanghai (see
Note
9). Originally, the deposit related to the proposed acquisition of land use
rights for 80 acres of land by Tiens Yihai. However, as of December 31, 2007,
land use rights for only 50 of the 80 acres had been received. Therefore,
long-term prepaid expenses are not subject to amortization.
Loans
receivable-related party represents a loan made by the Company to Tianshi
Engineering (see Note 12). The loan became interest bearing since January
1,
2007, and the interest accrued on the loan during 2007 was included in Loans
receivable-related party.
Acquisition
deposit represents the consideration paid by the Company for the acquisition
of
Life Resources on December 20, 2007. The acquisition was subject to approval
by
the government. As of December 31, 2007, such approval had not been received.
Therefore, the consideration paid was classified as an acquisition deposit
(See
Note 10 and Note 19).
Minority
interest
Minority
interest represents the outside shareholder’s 20% ownership of Biological and
0.6% ownership of Tiens Yihai. The net income shown in Consolidated Statements
of Cash Flows and Consolidated Statements of Income and Other Comprehensive
Income is net of minority interest.
Revenue
recognition
During
2007, the Company sold both semi-finished products and finished products
to
Tianshi Engineering domestically. Revenue from semi-finished products was
recognized at FOB Tianjin shipping point. Revenue from finished products
was
recognized only when the related party Chinese distributors recognized sales
of
the Company’s products to unaffiliated third parties. Revenues in both cases are
net of taxes.
For
overseas sales, the Company only sells finished products. The Company recognizes
revenue from international sales (non-Chinese) to both affiliated and
unaffiliated third parties, net of taxes as goods are shipped and clear review
by the customs department of the Chinese government.
The
Company is generally not contractually obligated to accept returns. However,
on
a case by case negotiated basis, the Company permits customers to return
their
products. In accordance with SFAS No. 48, “Revenue Recognition when the Right of
Return Exists”, revenue is recorded net of an allowance for estimated returns.
Such reserves are based upon management’s evaluation of historical experience
and estimated costs. The amount of the reserves ultimately required could
differ
materially in the near term from amounts included in the accompanying
consolidated financial statements. As the Company did not receive any returns
of
products during the past three years, no allowance for estimated returns
has
been recorded for the years ended December 31, 2007, 2006 and 2005.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Advertising
costs
The
Company sells all its products to related parties and these related parties
are
primarily responsible for marketing. Advertising costs of the Company for
years
ended December 31, 2007, 2006 and 2005 amounted to $24,556, $5,651 and $68,499,
respectively, and were expensed as incurred.
Shipping
and handling
Shipping
and handling totaled $550,972, $878,135 and $1,314,645 for the years ended
December 31, 2007, 2006 and 2005, respectively. The Company sells products
on
FOB condition, however, it usually prepays shipping and handling expenses
to
transportation companies on behalf of customers and collects these shipping
and
handling expenses when it receives payments from customers. The payments
received form customers were included in revenue and the related shipping
and
handling costs were included in selling, general and administrative
expenses.
Research
and development
Research
and development expenses include salaries, supplies, and overhead such as
depreciation, utilities and other costs. These costs are expensed as incurred
in
accordance with SFAS No. 2, “Accounting for Research and Development Costs.” The
Company expensed research and development costs of $720,675, $1,016,102 and
$557,175 for the years ended December 31, 2007, 2006 and 2005, respectively.
These costs are included in selling, general and administrative expenses
in the
accompanying statements.
Income
taxes
The
Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return.
According
to FIN No. 48, the evaluation of a tax position is a two-step process. The
first
step is recognition: the enterprise determines whether it is more likely
than
not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation process, based on the technical merits
of
the position. The second step is measurement: a tax position that meets the
more-likely than not recognition threshold is measured to determine the amount
of benefit to recognize in the financial statement. The tax position is measured
at the largest amount of benefit that is greater than 50 percent likely of
being
realized upon ultimate settlement.
The
Company has not been subjected to income tax examinations by taxing authorities
for the years ended December 31, 2007, 2006 and 2005. However, the Company
incurred expense of $339,299 for additional taxes and penalties to the Chinese
government during the first quarter in 2005 as the result of a VAT examination
by the local government. During the years ended December 31, 2007 and 2006,
the
Company did not recognize any amount in interest and penalties. The Company
did
not accrue any amount for the payment of interest and penalties at December
31,
2007 and 2006, respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Earnings
per share
The
Company has adopted SFAS No. 128, “Earnings per Share”. SFAS No. 128 requires
the presentation of earnings per share (“EPS”) as Basic EPS and Diluted EPS.
Basic EPS excludes dilution and is computed by dividing net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. There are no differences between Basic
and
Diluted EPS for the periods ended December 31, 2007, 2006 and 2005.
Other
comprehensive income
Other
comprehensive income represents foreign currency translation adjustments
for the
year. The amounts shown in the Consolidated Statements of Income and Other
Comprehensive Income and Consolidated Statements of Shareholders’ Equity do not
include other comprehensive income attributed to minority interest.
Recently
issued accounting pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurement” (“SFAS 157”), which provides enhanced guidance for
using fair value to measure assets and liabilities. This standard also responds
to investors’ requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used
to
measure fair value, and the effect of fair value measurements on earnings.
The
standard applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. The standard does not expand the
use
of fair value in any new circumstances. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 12, 2007, and
interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating whether the adoption of SFAS 157 will have
a
material effect on its consolidated results of operations and financial
condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are
not
currently required to be measured at fair value. The objective of SFAS 159
is to
provide opportunities to mitigate volatility in reported earnings caused
by
measuring related assets and liabilities differently, without having to apply
hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets
and
liabilities. SFAS 159 will be effective in the first quarter of fiscal 2009.
The
Company is evaluating the impact that this statement will have on its
consolidated financial statements.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combination” (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements
the
identifiable assets, the liabilities and any non-controlling interest in
the
acquiree, and the goodwill acquired in business combination or a gain from
a
bargain purchase. It also determines what information to disclose. The objective
of SFAS 141R is to improve the relevance, representational faithfulness,
and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R
will
be effective in the first quarter of fiscal 2009. The Company is evaluating
the
impact that this statement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements- and amendment of ABB No. 51” (“SFAS 160”).
SFAS 160 provide a guide on how to report non-controlling interest in
consolidated financial statement. The objective of SFAS 160 is to improve
the
relevance, comparability, and transparency of the financial information that
a
reporting entity provides in its consolidated financial statements. SFAS
160
will be effective in the first quarter of fiscal 2009. The Company is evaluating
the impact that this statement will have on its consolidated financial
statements.
Note
3 - Supplemental disclosure of cash flow information
Income
taxes paid for the years ended December 31, 2007, 2006 and 2005 amounted
to
$2,215,159, $2,731,755 and $2,302,275, respectively.
Interest
paid amounted to $399,773, $532,887and $515,692 for the years ended December
31,
2007, 2006 and 2005, respectively.
On
December 20, 2007, the Company signed a Sale and Purchase Agreement with
Tianshi
Investment. Based on the valuation conducted by Vigers Appraisal &
Consulting Limited, Tianshi Investment agreed to sell 100% of its shares
in Life
Resources to the Company for $64,247,182. Pursuant to the Sale and Purchase
Agreement, the Company advanced a deposit of $64,247,182 to Tianshi Investment
on December 20, 2007. This acquisition deposit has been settled as
follows:
|
(a)
|
$28,592,743
was paid by canceling of a loan from Biological to Tianshi
Engineering in
the principal amount of RMB200,000,000 together with interest
accrued
thereon;
|
|
(b)
|
$16,557,914
was paid by canceling other receivables owed by Tianshi Engineering
to
Biological; and
|
|
(c)
|
$19,096,525
was paid by cash.
|
The
right
of offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Tianshi
Investment;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company, Tianshi Investment and Tianshi Engineering agreed
to offset
the amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
December 21, 2007, the Company, Tianshi Investment and Life Resources entered
into a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
to Life Resources without interest. The Company agreed to pay back the $7.5
million to Tianshi Investment within five days of the date of the government
approval of the transfer of the shares of Life Resources to Tianshi Holdings
(see Note 10).
On
June
29, 2007, Tianshi Engineering paid $1,276,441 to Tianyuan Capital Development
Corporation Ltd. (“Tianyuan Capital”) on behalf of the Company, representing one
installment of the loan and the interest on the remaining loan for the six
months ended June 30, 2007 (see Note 12). In return, a part of loan made
to
Tianshi Engineering by the Company on April 24, 2007 relating to other
receivables-related parties was offset.
The
right
of offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Tianyuan
Capital;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company and Tianshi Engineering agreed to offset the two amounts;
and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
On
September 27, 2007, Tianshi Engineering paid $1,000,000 to Tianshi Holdings
on
behalf of Biological, representing a dividend payment by Biological. In return,
$1,000,000 of Biological’s accounts receivable from Tianshi Engineering was
offset. The right to offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
Biological
had a determinable outstanding dividend payable to Tianshi
Holdings;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company and Tianshi Engineering agreed to offset the two amounts;
and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
On
December 31, 2007, Tianshi Engineering paid $1,253,102 to Tianyuan Capital
on
behalf of the Company, representing one installment of the loan and the interest
on the remaining loan for the six months ended December 31, 2007. In return,
$1,253,102 of the loan made to Tianshi Engineering by the Company on October
15,
2007 relating to other receivables-related parties was offset (see Note
12).
The
right
of offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Tianyuan
Capital;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company and Tianshi Engineering agreed to offset the two amounts;
and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
November 2007, the company sold one used car to a supplier in the amount
of RMB
420,000 ($55,138) and two used cars to a supplier of Tianshi Engineering
in the
amount of RMB 840, 000 ($110,275) through Tianshi Engineering. The proceeds
of
the sale to the supplier of the Company were settled by offsetting accounts
payable to this supplier.
The
right
of offset existed because:
|
1.
|
The
Company had a determinable outstanding debt payable to the
supplier;
|
|
2.
|
The
Company had a determinable right to receive the proceeds from the
sale to
the supplier;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company and the supplier agreed to offset the two amounts;
and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
The
proceeds from the sale to the supplier of Tianshi Engineering was recorded
as
other receivables from Tianshi Engineering, as both parties agreed that the
Company transferred its right to receive the proceeds from the sale of the
cars
to Tianshi Engineering.
Note
4 - Inventories
Inventories
consist of the following at December 31, 2007 and 2006:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Raw
materials
|
|
$
|
1,842,760
|
|
$
|
2,106,929
|
|
Packing
materials
|
|
|
810,319
|
|
|
1,113,360
|
|
Miscellaneous
supplies
|
|
|
217,370
|
|
|
377,819
|
|
Work
in process
|
|
|
571,173
|
|
|
688,007
|
|
Processing
materials
|
|
|
137,188
|
|
|
369,618
|
|
Finished
goods
|
|
|
2,371,153
|
|
|
2,189,375
|
|
Total
|
|
$
|
5,949,963
|
|
$
|
6,845,108
|
|
The
Company has written off obsolete goods that amounted to $84,521, $59,832
and
$154,525 for the years ended December 31, 2007, 2006 and 2005,
respectively.
Note
5 - Employee advances
Employee
advances represents cash advances to various employees of the Company. In
the
PRC, a majority of business transactions are completed in cash. These cash
advances represent monies advanced to certain employees to pay for various
expenses and purchases related to the Company’s daily operations. Employee
advances amounted to $64,336 and $111,121 at December 31, 2007 and December
31,
2006, respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
6 - Prepaid expenses
Prepaid
expense consists of advances to suppliers and short-term prepaid expenses.
The
details of prepaid expenses at December 31, 2007 and 2006 are as
follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Advance
to suppliers
|
|
$
|
622,275
|
|
$
|
2,124,613
|
|
Short-term
prepaid expenses
|
|
|
1,363
|
|
|
11,304
|
|
Total
|
|
$
|
623,638
|
|
$
|
2,135,917
|
|
Note
7 - Property, plant and equipment, net
Property,
plant and equipment consisted of the following at December 31, 2007 and
2006:
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Buildings
and improvements
|
|
$
|
6,923,475
|
|
$
|
14,829,748
|
|
Office
equipment
|
|
|
397,224
|
|
|
323,753
|
|
Computer
equipment and software
|
|
|
2,644,296
|
|
|
1,622,731
|
|
Machinery
and equipment
|
|
|
11,333,473
|
|
|
9,329,628
|
|
Automobiles
|
|
|
5,188,650
|
|
|
5,187,572
|
|
Construction
in progress
|
|
|
2,287,807
|
|
|
7,629,623
|
|
Total
|
|
|
28,774,925
|
|
|
38,923,055
|
|
Less:
accumulated depreciation
|
|
|
(10,452,306
|
)
|
|
(8,411,736
|
)
|
Property,
plant and equipment, net
|
|
$
|
18,322,619
|
|
$
|
30,511,319
|
|
Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 amounted to
$2,891,
893, $2,509,261 and $1,701,415, respectively.
See
Note
11 regarding related party sale of property.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
8 - Intangible assets
Intangible
assets consisted of the following at December 31, 2007 and 2006:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Land
use rights
|
|
$
|
2,530,644
|
|
$
|
673,627
|
|
Other
intangible assets
|
|
|
328,873
|
|
|
267,815
|
|
Less
accumulated amortization
|
|
|
(256,433
|
)
|
|
(431,259
|
)
|
Intangible
assets, net
|
|
$
|
2,603,084
|
|
$
|
510,183
|
|
Amortization
expense for the year ended December 31, 2007, 2006 and 2005 amounted to
$252,492, $103,694 and $134,070, respectively. As of December 31, 2007, $52,226
was amortized for the land use rights of Tiens Yihai. The estimated amortization
expense for the next five years is as follows:
Estimated
amortization expense for
the
year ending December 31,
|
|
Amount
|
|
2008
|
|
$
|
74,
176
|
|
2009
|
|
$
|
73,
816
|
|
2010
|
|
$
|
73,
455
|
|
2011
|
|
$
|
67,
369
|
|
2012
|
|
$
|
67,
369
|
|
All
the
land located in the PRC is owned by the government and cannot be sold to
any
individual or company. However, the government grants “land use rights” for a
specified period of time. The Company’s subsidiary, Tiens Yihai, acquired land
use rights in Shanghai, PRC for approximately 50 acres for fifty years from
November 30, 2006 for $2,530,644. The costs are being amortized over fifty
years
from December 2006, using the straight-line method.
The
Company recorded impairment losses in the amount of $82,356 on two production
technologies for the year ended December 31, 2007. The Company bought Ants
Wine
production technology and Aolan Shampoo production technology in October
2004
and June 2005 for $51,954 and $68,360, respectively, and began amortizing
them
over 10 years. Due to a change of strategy, the Company subsequently determined
that it did not have a use for these two production technologies and could
not
sell them to any third party. As a result, the remaining carrying value of
these
two production technologies of $82,356 was written off as selling, general
and
administrative expense in 2007.
Note
9 - Long-term prepaid expenses
In
October 2004, the Company paid a 10% deposit totaling of RMB 29,700,000 (or
US
$4,060,584) to Zhu Jia Jiao Industrial Park Economic Development Ltd
(representative of the local government, “Local Government”) to acquire the land
use rights for approximately 263 acres of land located in Shanghai. However,
in
2005, the Chinese central government issued its “Adjustment of Macro-Economic
Policy”. This policy implemented a new system of investment and use of
state-owned assets, including land. Pursuant to this policy, local government
organizations readjusted and re-allocated projects, including investment,
construction and reconstruction of state-owned resources. As a result, projects
and enterprises that had been affected, including Tiens Yihai, were required
to
wait for decisions by state and local government before proceeding with
development.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
November 10, 2006, Tianshi Holdings and the Local Government entered into
the
Supplemental Agreement pursuant to which the parties agreed to the acquisition
of land use rights by Tiens Yihai of a reduced 80 acre parcel of land. At
that
time, it was not clear whether the remaining approximately 183 acres would
be
available for purchase in the future. Therefore, the Local Government agreed
to
refund to Tiens RMB 12,176,000 (or US $1,664,703) of the original RMB 29,700,000
(or US $4,060,584) deposit at the time of receiving a construction license
for
the development. In order to proceed with the purchase of the property by
Tiens
Yihai, Tianshi Holdings was also required to provide a loan of RMB 50,000,000
(or US $6,836,000) to the Local Government for relocation costs for people
living on the property. The loan was to be funded in two
installments:
|
·
|
The
first installment of RMB 25,000,000 (or US $3,418,000) was paid
on
November 27, 2006.
|
|
·
|
The
second installment of RMB 25,000,000 (or US $3,418,000) was to
be paid
after Tiens Yihai obtains a construction engineering license to
develop
the property. The parties have agreed to allow Tiens to reduce
this second
installment by the amount of the RMB 12,176,000 (or US $1,664,703)
refund
due to it.
|
In
return
for the loan, Tiens Yihai was also to receive a tax credit equal to the amount
of the loan, plus interest. The loan accrues interest at a fixed rate of 6.12%,
which was the interest rate stipulated by the People’s Bank of China for a loan
of the same level on November 27, 2006.
For
the
year ended December 31, 2007, the Company accrued $209,182 of interest
receivable which was added to the loan and included in long-term prepaid
expense. In addition, Tianshi Group, a related party, agreed to provide a
guarantee on behalf of the Local Government for an additional loan from a
commercial bank of RMB 50,000,000 (or US $6,836,000). As of December 31 2007,
the Company was considering alternative uses for the land, including a possible
sale. Based on initial negotiations between the Company and local government
agency, it is not probable that the guarantee will be utilized.
As
of
December 31, 2007, Tiens Yihai had obtained the land use rights for
approximately 50 acres. Therefore, the Company reclassified $2,395,881 to
intangible assets from long-term prepaid expenses. Due to the decrease in
the
size of the property for which Tiens Yihai has received land use rights and
continued uncertainty relating to the Tiens Yihai project, the Company has
decided to suspend the development of the property as an industrial park
and is
currently considering alternative commercial uses. The Company is currently
reviewing alternative commercial uses for the Tiens Yihai site, as well as
the
possibility of selling the land use rights to a third party. If Tiens Yihai
does
not proceed with construction on the Tiens Yihai site or is not able to sell
the
land use rights to a third party, it is not clear whether the Local Government
will return the $1.7 million it previously agreed to refund or the initial
loan
of $3.5 million made in November 2006. Based on a current appraisal, the
fair
value of the land use rights exceed all of acquisition costs incurred plus
the
$1.7 million agreed upon refund and $3.5 million loan. No valuation allowance
has been made on the related land use rights and Long-term prepaid
expenses.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
A
total
of 15%, or approximately $30,000,000, of the registered capital was required
to
be contributed by the joint venture partners, within three months of when
the
business license was issued. Tianshi Holdings made its required capital
contribution in the amount of $29,861,853. The remaining registered capital
was
required to be contributed by each joint venture partner by May 27, 2007.
Because of the significant reduction by the Local Government in the number
of
acres approved for the Tiens Yihai project, the Company did not make the
additional capital contribution of $170 million to Tiens Yihai by May 27,
2007.
After negotiating with the local government in Shanghai, the deadline of
the
payment was extended for one year.
On
April
18, 2007, the Company entered into the Association of Chinese Industry
Development and prepaid RMB 1 million (or US $136,720) for five years membership
fee from year 2007 to year 2011. At December 31, 2007, RMB 800,000 (or US
$109,376) of unamortized prepaid membership fee was included in the long-term
prepaid expenses also.
Note
10 - Related party purchase
On
December 20, 2007, the Company entered into a Sale and Purchase Agreement
with
Tianshi Investment. Pursuant to the Sale and Purchase Agreement, the Company
agreed to buy all of the registered share capital of Life Resources for $64.2
million. The closing of the transaction was subject to government approval
of
transfer of all of the share capital of Life Resources to Tianshi Holdings,
which as of December 31, 2007, had not been received.
On
December 21, 2007, Tianshi Holdings, Tianshi Investment and Life Resources
entered into a Loan Agreement pursuant to which Tianshi Investment loaned
$7.5
million to Life Resources without interest. The Company agreed to pay back
the
$7.5 million to Tianshi Investment within five days of the date that the
Chinese
government approves the transfer of all of the shares of Life Resources to
the
Company. This $7.5 million is to be used to increase the registered capital
of
Life Resources. However, if the Chinese government were not to approve the
transfer, then the Company would no obligation to repay the loan. The increase
of the registered capital of Life Resources also had to be approved by the
Chinese government. As of December 31, 2007, such approval had not been received
(see Note 19).
It
is
probable that the approval of the acquisition of Life Resources and the increase
in the registered capital will be received. Therefore the Company characterized
the $7.5 million as an investment deposit in Life Resources. The total amount
of
$71.7 million associated with the acquisition paid by the Company to date
has
been treated as an acquisition deposit.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Life
Resources was incorporated on April 29, 2005 as a FIE in Wuqing, Tianjin,
PRC,
with a registered share capital of $30,000,000. Life Resources is constructing
research and development, manufacturing and logistic facilities, as well
as
administrative offices on its land. Construction on the project began in
July
2006.
Pursuant
to the Sale and Purchase Agreement, the Company advanced a deposit of
$64,247,182 to Tianshi Investment on December 20, 2007. This acquisition
deposit
has been settled as follows:
|
(a)
|
$28,592,743
was paid by canceling a loan in the principal amount of RMB200,000,000
to
Tianshi Engineering owned by Biological together with interest
accrued;
|
|
(b)
|
$16,557,914
was paid by canceling of other receivable owned by Tianshi
Engineering to
Biological; and
|
|
(c)
|
$19,096,525
was paid by cash.
|
The
right
of offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding debt payable to Tianshi
Investment;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company, Tianshi Investment and Tianshi Engineering agreed
to offset
the amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
The
consolidated financial statements of the Company for the year ended December
31,
2007 do not include the financial statements of Life Resources, and the
consideration paid by the Company for the acquisition and the $7.5 million
loan
to date have been characterized as an acquisition deposit.
Note
11 - Related party sale of property
On
December 14, 2007, Biological entered into a Real Property Transfer Agreement
(the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement,
Biological transferred to Tianshi Group title buildings consisting of
approximately 34,377 square meters total of office, workshop, conference
and
exhibition space, located at No. 6 Yuanquan Road, Wuqing Development Area,
Tianjin New-Tech Industry Park, China, and land use rights on the underlying
land, which are owned by the government of China and which rights continue
through December 30, 2054 with respect to the conference center property
and May
31, 2043 with respect the other property. Biological also assigned certain
contracts with third parties related to the servicing and upkeep of the
buildings being transferred (collectively, the “Third Party
Contracts”).
In
consideration for the transfer of the buildings and land-use rights, Tianshi
Group paid Biological RMB 113,011,852 (or US $15,316,496), plus RMB 23,516,000
(or US $3,187,123) to cover pre-payments previously made by Biological under
the
Third Party Contracts, and entered a lease agreement with Biological, as
further
described below. The carrying value of property transferred is RMB 106,579,374
(or US $14,444,703). The Company paid a business tax related to the sale
of
property of RMB 5,650,593 (or US $ 765,825) and income tax of RMB 144,525
(or US
$19,587) on the transaction that resulted a gain of RMB 637,360 (or US $86,381)
from the disposal. 80% of the gain, or $69,105, was attributed to the Company.
As both the Company and Tianshi Group were under common control by Jinyuan
Li,
the gain from the disposal was classified as additional paid in
capital.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement
pursuant to which Biological will have the right to use and occupy the office
and workshop spaces being transferred under the Transfer Agreement. The lease
is
rent-free, but Biological is required to pay Tianshi Group for utility charges
and maintenance costs on the buildings. The lease continues until the earlier
of
the date that Biological acquires use of alternate facilities or the land
use
rights on the underlying property expire.
Note
12 - Other related party transactions and balances
During
the years 2007, 2006 and 2005, the Company mainly conducted related party
transactions with Tianshi Group, Tianshi Engineering, Tianshi Investment
and
overseas related companies of Tianshi Group. Tianshi Group is owned 90% by
Jinyuan Li and 10% by his daughter, Baolan Li. Tianshi Engineering is owned
51%
by Tianshi Group and 49% by Baolan Li. Tianshi Investment is 100% owned by
Jinyuan Li. Jinyuan Li owns or controls the overseas related companies of
Tianshi Group.
Our
related party transactions are required to be reviewed and approved or ratified
by Board of Directors. No director that is a related person in a related
party
transaction may participate in any discussion, approval or ratification of
the
related party transaction except to provide information concerning it. The
following tables are provided to facilitate your understanding of the
transactions and outstanding balances between those related parties and the
Company during 2007 and 2006.
|
|
December
31, 2007
|
|
December
31,
2006
|
|
Revenue-related
parties
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
Accounts
receivable, trade -
related
parties, net of allowance for doubtful accounts of $71,700, $86,776
and
$206,916 as of December 31, 2007, 2006 and 2005,
respectively
|
|
$
|
14,268,229
|
|
$
|
12,926,670
|
|
Other
receivables - related parties
|
|
$
|
13,070,907
|
|
$
|
8,397,227
|
|
Loans
receivable - related party
|
|
$
|
-
|
|
$
|
25,640,000
|
|
Advances
from customers - related parties
|
|
$
|
1,700,838
|
|
$
|
1,570,120
|
|
Other
payables - related parties
|
|
$
|
7,938,205
|
|
$
|
522,105
|
|
Current
portion of long-term debt - related party
|
|
$
|
2,130,000
|
|
$
|
2,130,000
|
|
Long
term debt - related party
|
|
$
|
4,267,742
|
|
$
|
6,397,742
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Revenue
-related parties
The
details of revenue-related parties are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Tianshi
Engineering
|
|
$
|
22,476,135
|
|
$
|
27,074,979
|
|
$
|
38,181,090
|
|
Overseas
Related Companies
|
|
|
32,423,925
|
|
|
39,715,487
|
|
|
30,507,579
|
|
Total
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
$
|
68,688,669
|
|
The
Company markets all of its products through various domestic and international
business entities that are related to the Company through common ownership.
As a
result, almost all of the Company’s total consolidated sales in 2007, 2006 and
2005 were to related parties.
The
Company sells products to Tianshi Engineering, a related party through common
ownership. Tianshi Engineering, in turn, markets and sells the products to
customers through its branches and affiliated companies and at chain stores
which are owned by individual distributors. Tianshi Engineering is solely
responsible for all marketing and payments of sales commissions to independent
distributors.
The
Company has a sales contract with Tianshi Engineering which requires Tianshi
Engineering to purchase all of the Company’s products to be sold in China. The
Company sells its finished products to Tianshi Engineering at a price equal
to
25% of the Chinese market price for the products. This 25% figure was negotiated
between the parties in 2003, before the Company acquired Tianshi Holdings.
The
price of semi-finished goods sold to Tianshi Engineering was originally set
at
the beginning of 2006 to provide the Company with a 75% gross profit margin.
However, based on fluctuations in the cost of raw materials and quantities
produced, the gross profit margin percentage varies. The goal of this new
pricing policy was to try to maintain the Company’s gross margins on
semi-finished goods at a similar level to historical gross margins for finished
goods. All of Tianshi Engineering’s Chinese affiliated companies are owned in
whole or in part by Jinyuan Li’s immediate family members.
Internationally,
the Company sells its products directly to our overseas affiliates. These
overseas related companies market and sell the Company’s products to overseas
independent distributors or end users of the products. Due to the common
ownership, there are no formal sales or administrative agreements among
Biological and those overseas related companies. The business operations
among
these related entities are regulated through internal ordinances.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Accounts
receivable, trade -related parties
The
details of accounts receivable, trade-related parties are as
follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Tianshi
Engineering
|
|
$
|
2,062,333
|
|
$
|
7,827,372
|
|
Overseas
Related Companies
|
|
|
12,277,596
|
|
|
5,186,074
|
|
Allowance
for Doubtful Accounts
|
|
|
(71,700
|
)
|
|
(86,776
|
)
|
Total
|
|
$
|
14,268,229
|
|
$
|
12,926,670
|
|
Other
Receivables-related parties
Other
receivables - related parties are generated by the Company making various
cash
advances and short term loans, the allocation of various expenses to related
parties, and amounts transferred from accounts receivable. The following
table
summarizes the other receivables- related parties balances:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Tianshi
Engineering
|
|
$
|
9,460,811
|
|
$
|
5,592,772
|
|
Shengshi
Real Estate Development
|
|
|
2,238
|
|
|
1,039
|
|
Tianjin
Tianshi Technical School
|
|
|
-
|
|
|
46,589
|
|
JinMao
(Group) Holding
|
|
|
-
|
|
|
104,466
|
|
Shanghai
Tianshi Jinquan Investment Co.
|
|
|
874
|
|
|
2,129
|
|
Tianshi
Group
|
|
|
2,334,493
|
|
|
2,650,232
|
|
Tianshi
Pharmaceuticals
|
|
|
5,065
|
|
|
-
|
|
Life
Resources
|
|
|
1,259,528
|
|
|
-
|
|
Beijin
Xingda Travel Co., Ltd
|
|
|
5,959
|
|
|
-
|
|
Tianjin
Xingda Travel Co., Ltd
|
|
|
1,939
|
|
|
-
|
|
Total
|
|
$
|
13,070,907
|
|
$
|
8,397,227
|
|
Historically,
Tianshi Engineering remitted payment to the Company upon sales to third party
customers. However, in order to support Tianshi Engineering’s marketing efforts
in anticipation of receiving a direct selling license in China, the Company
agreed to allow Tianshi Engineering to defer payment to the Company. The
credit
terms provide an interest-free credit term of three months. Balances not
remitted to the Company within 90 days are converted to other receivables
-
related parties. Beginning January 1, 2007, the other receivables - related
parties became interest bearing. The stated interest rate is the interest
rate
for the same level of loan stipulated by the People’s Bank of
China.
On
January 1, 2007, the Company entered into a loan agreement with Tianshi
Engineering. Pursuant to that agreement, beginning on January 1, 2007,
$4,507,908 of other receivables-related parties, which originated from Tianshi
Engineering as accounts receivable, became interest bearing. The loan was
due on
March 31, 2007 and the stated interest rate was 6.3%. Both of the principal
of
$4,507,908 and interest on the loan of $41,876 were paid off on February
28,
2007.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
April
24, 2007, the Company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, beginning on April 1, 2007, $5,109,083 of other
receivables - related parties, which originated from Tianshi Engineering
as
accounts receivable, became interest bearing. The loan was due on April 30,
2007
and the stated interest rate was 5.67%, the interest rate for a loan of the
same
principal amount stipulated by the People’s Bank of China as of the date the
loan was made. Both of the principal of $5,109,083 and interest on the loan
of
$65,882 were paid off on June 30, 2007.
On
July
23, 2007, the Company entered into a loan agreement with Tianshi Engineering.
Pursuant to that agreement, beginning on July 1, 2007, $8,835,779 of other
receivables - related parties, which originated from Tianshi Engineering
as
accounts receivable, became interest bearing. The loan was due on September
30,
2007 and the stated interest rate was 5.85%, the interest rate for a loan
of the
same principal amount stipulated by the People’s Bank of China as of the date
the loan was made. On September 30, 2007, $1 million of the loan was paid
off.
On
October 15, 2007, the Company entered into a loan agreement with Tianshi
Engineering. Pursuant to that agreement, beginning on October 1, 2007,
$6,458,907 of other receivables - related parties, which originated from
Tianshi
Engineering as accounts receivable, became interest bearing. The loan was
due on
December 31, 2007 and the stated interest rate was 6.48%, the interest rate
for
a loan of the same principal amount stipulated by the People’s Bank of China as
of the date the loan was made. On December 20, 2007, the remaining loan of
$14,294,686 and the accrued interest of $306,360 were paid off by canceling
part
of the consideration for the acquisition of Life Resources (see Note
10).
During
the years ended December 31, 2007 and 2006, we and Tianshi Group used common
meters at our headquarters for electricity and water, and also used the same
employee insurance account. When making payments to these outside parties,
we
usually pay the fees first and then are reimbursed by Tianshi Group. These
pro-rated amounts relating to Tianshi Group are categorized as other receivables
- related parties. In addition, during 2006 we were owed other
receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from
Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned
by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations,
and all of its rights and liabilities were transferred to Tianshi Group.
This
amount was also included in other receivables - related parties.
In
June
2007, Biological signed four agreements with equipment suppliers in Europe
and
Australia, pursuant to which Biological agreed to purchase four production
lines
for use at its headquarters in Tianjin, China. At that time Biological paid
$996,711, one-third of the total consideration, to those equipment suppliers.
But, due to a government investment limitation policy, Biological could not
clear the equipment with Chinese customs without having to pay a large import
duty. However, no such import duty would need to be paid if Life Resources
imported the production lines. Therefore, on August 16, 2007, Biological,
Life
Resources and the equipment suppliers entered into a new agreement. In this
new
agreement, Life Resources agreed: (i) to replace Biological as the purchaser
of
the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the
remaining balance of the consideration to the equipment suppliers. As of
December 31, 2007, Life Resources had paid the consideration due to the
equipment suppliers and received the equipment, and the amount of $996,711
due
to Biological had not been paid.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
As
Life
Resources is still in the construction process and all of the construction
is
outsourced to third party contractors, it currently has no employees. All
of the
administrative work relating to the construction has been performed by employees
of the construction department of Biological. In December 2007, Biological
charged Life Resources $262,817 for this administrative work. At December
31,
2007 and 2006, amounts due from Life Resources were $1,259,528 and $0
respectively.
Loans
Receivable-related party
On
October 1, 2005, Biological loaned Tianshi Engineering RMB 200,000,000
($25,640,000). The loan was non-interest bearing, matured on December 31,
2005
and was repaid upon maturity. The purpose of the loan was to enable Tianshi
Engineering to strengthen its sales network in China. On January 1, 2006,
this
amount was loaned to Tianshi Engineering again, with a maturity date of December
31, 2006. In order to continue support of Tianshi Engineering’s efforts in
China, on December 22, 2006, the loan was extended to June 30, 2007 and was
converted to an interest-bearing loan. The interest rate for the loan is
based
on the interest rate stipulated by the People’s Bank of China for a loan of the
same amount plus 22 basis points or 5.8% at January 1, 2007. On June 28,
2007,
the loan was further extended to September 30, 2007. On September 30, 2007,
this
loan was extended again to December 31, 2007. On December 20, 2007, this
loan,
together with accrued interest of $1,461,248 was paid back by canceling part
of
the consideration for the acquisition of Life Resources (see Note
10).
Advances
from Customers-related parties
These
advances represented prepayments made to the Company to insure that overseas
related companies could obtain enough of the Company’s products to meet their
market demands.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Other
Payables-related parties
The
details of other payable-related parties are as follows:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Tianshi
Investment
|
|
$
|
7,490,136
|
|
$
|
-
|
|
Tianshi
Engineering
|
|
|
244,980
|
|
|
-
|
|
Tianshi
Germany Co., Ltd
|
|
|
109,233
|
|
|
98,581
|
|
Beijin
Xingda Travel Co., Ltd
|
|
|
-
|
|
|
255
|
|
Shenzhen
Logistics Co., Ltd
|
|
|
-
|
|
|
295,333
|
|
Tianshi
Administrative Committee of Industrial Park
|
|
|
13
|
|
|
13
|
|
Tianyuan
Capital Development Co. Ltd.
|
|
|
84,359
|
|
|
84,359
|
|
Tianshi
Pharmaceuticals
|
|
|
9,308
|
|
|
8,728
|
|
Tianshi
Shanghai Co., Ltd
|
|
|
176
|
|
|
165
|
|
Director
-Jinyuan Li
|
|
|
-
|
|
|
34,671
|
|
Total
|
|
$
|
7,938,205
|
|
$
|
522,105
|
|
These
amounts arose primarily from previous cash advances from related parties
such as
management fees due to related parties and various non-operational transactions
incurred with related parties.
On
December 21, 2007 the Company, Tianshi Investment and Life Resources entered
into a Loan Agreement, pursuant to which Tianshi Investment loaned $7.5 million
to Life Resources without interest. The Company agreed to pay back the $7.5
million to Tianshi Investment within 5 days of the date of the government
approval of the transfer of the shares of Life Resources to Tianshi Holdings.
As
of December 31, 2007 such approval had not been received (See Note
19).
Long
term debt - related party
On
September 10, 2004, Tianshi Holdings entered into a loan agreement with Tianyuan
Capital to borrow $10.65 million to fund Tianshi Holdings’ contribution due to
Tiens Yihai. Jinyuan Li is a director of Tiens Yihai and a director of Tianyuan
Capital. Jinyuan Li owns 100% of Tianyuan Capital.
The
principal of the loan will be paid in ten consecutive semi-annual installments
of $1,065,000 on the last day of June and December, commencing June 2006
and
ending June 31, 2011. The first interest payment was to be paid on December
31,
2004 at an annual interest rate of 5%. Interest of $399,543, $532,887 and
$697,863 was paid for the years ended December 31, 2007, 2006 and 2005,
respectively, and four installment payments had been made by the end of December
2007.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
loan
balance at December 31, 2007 and 2006 consisted of the following:
|
|
December
31, 2007
|
|
December
31, 2006
|
|
Note
payable to Tianyuan Capital Development Corp. Ltd., related
party
|
|
$
|
6,397,742
|
|
$
|
8,527,742
|
|
Less
current portion of long term debt
|
|
|
(2,130,000
|
)
|
|
(2,130,000
|
)
|
Total
|
|
$
|
4,267,742
|
|
$
|
6,397,742
|
|
Total
principal payments for the next four years on all long-term debt are as
follows:
Year
Ending
|
|
|
|
December
31,
|
|
Amount
|
|
2008
|
|
$
|
2,130,000
|
|
2009
|
|
$
|
2,130,000
|
|
2010
|
|
$
|
2,130,000
|
|
2011
|
|
$
|
7,742
|
|
Other
transactions with Tianshi Engineering
On
December 31, 2005, Biological entered into four lease agreements with Tianshi
Engineering which enabled Tianshi Engineering to share the use of certain
of
Biological’s product production workshops and equipment to manufacture products
which Tianshi Engineering owns, or jointly owns with Biological for one year
beginning January 1, 2006. These four lease agreements were renewed in December
2006 for the 2007 fiscal year and October 2007 for the 2008 fiscal year.
Rent
revenue from these leases amounted to $379,083, $295,588 and $0 for the years
ended 2007, 2006 and 2005, respectively.
Other
transactions with Tianshi Group
On
June
30, 2002, the Company entered into an office and facilities lease agreement
with
Tianshi Group, a company owned 90% by Jinyuan Li and 10% by Baolan Li. Under
the
terms of the five year agreement, the Company’s annual rent is equal to 1% of
gross revenues. In addition, the Company is obligated to pay insurance,
maintenance and other expenses related to the premises. Rent expense totaled
$522,318, $662,082 and $667,990 for the year ended December 31, 2007, 2006
and
2005, respectively. This agreement expired on December 31, 2007. The company
entered into a new one-year lease agreement with Tianshi Group, effective
January 1, 2008 covering the same facilities and having identical rent terms.
On
November 10, 2006, Tianshi Holdings signed an agreement with the local
government relating to Tiens Yihai (see Note 9). Tianshi Group also entered
into
the agreement and agreed to provide a guarantee on behalf of the local
government for a loan from a commercial bank of RMB 50,000,000.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
13 - Minority interest and distribution
The
roll
forward of Minority Interest balance in the balance sheet is shown
below:
|
|
Biological
USD
|
|
Biological
Minority
Owners
(20
%)
|
|
Tiens
Yihai
USD
|
|
Yihai
Minority
Owners
(0.60
%)
|
|
Total
Minority
Interest
|
|
December
31, 2004
|
|
$
|
36,659,269
|
|
$
|
7,331,854
|
|
$
|
30,033,868
|
|
$
|
180,203
|
|
$
|
7,512,057
|
|
Net
income (loss)
|
|
|
36,633,220
|
|
|
7,326,644
|
|
|
-835,705
|
|
|
-5,014
|
|
|
7,321,630
|
|
Other
comprehensive Income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Dividend
distribution
|
|
|
-14,523,235
|
|
|
-2,904,647
|
|
|
-
|
|
|
-
|
|
|
-2,904,647
|
|
December
31, 2005
|
|
$
|
58,769,254
|
|
$
|
11,753,851
|
|
$
|
29,198,163
|
|
$
|
175,189
|
|
$
|
11,929,040
|
|
Net
income (loss)
|
|
|
34,828,089
|
|
|
6,965,617
|
|
|
(381,238
|
)
|
|
(2,287
|
)
|
|
6,963,330
|
|
Other
comprehensive Income
|
|
|
2,636,342
|
|
|
527,269
|
|
|
1,738,121
|
|
|
10,429
|
|
|
537,698
|
|
Dividend
distribution
|
|
|
(37,733,723
|
)
|
|
(7,546,745
|
)
|
|
-
|
|
|
-
|
|
|
(7,546,745
|
)
|
December
31, 2006
|
|
$
|
58,499,962
|
|
$
|
11,699,992
|
|
$
|
30,555,046
|
|
$
|
183,331
|
|
$
|
11,883,323
|
|
Net
income (loss)
|
|
|
24,840,180
|
|
|
4,968,036
|
|
|
-273,217
|
|
|
-1,639
|
|
|
4,966,397
|
|
Other
comprehensive Income
|
|
|
2,947,667
|
|
|
589,533
|
|
|
2,019,327
|
|
|
12,116
|
|
|
601,649
|
|
Additional
paid-in-capital
|
|
|
86,381
|
|
|
17,276
|
|
|
-
|
|
|
-
|
|
|
17,276
|
|
Dividend
distribution
|
|
|
(56,622,912
|
)
|
|
(11,324,582
|
)
|
|
-
|
|
|
-
|
|
|
(11,324,582
|
)
|
December
31, 2007
|
|
$
|
29,751,278
|
|
$
|
5,950,255
|
|
$
|
32,301,156
|
|
$
|
193,808
|
|
$
|
6,144,063
|
|
Dividends
declared by Biological are split pro rata between the shareholders according
to
their ownership interest. The payment of the dividends to the shareholders
may
occur at different times, resulting in distributions which do not appear
to be
reflective of the minority ownership percentages. The table below shows the
outstanding dividends payable of Biological, as well as the allocation of
dividends between Tianshi Holdings and the minority shareholder.
As
Biological declares dividends in RMB, and the RMB has appreciated against
the
dollar since 2005, dividends outstanding generated comprehensive income to
Tianshi Holdings and the minority shareholder. Comprehensive income to Tianshi
Holdings for the years ended December 31, 2007, 2006 and 2005 amounted to
$3,900,013, $1,463,775 and $728,420 respectively. Because most of the dividends
payable to the minority shareholder have been distributed, after they were
declared, Comprehensive income to minority shareholders for the year ended
December 31, 2007, 2006 and 2005 amounted to $15,838, $0 and $0,
respectively.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Date
|
|
Tianshi
Holdings
|
|
Minority
Shareholder
|
|
Totals
|
|
Dividends
outstanding, December 31, 2004 Balance
|
|
$
|
9,743,635
|
|
$
|
-
|
|
$
|
9,743,635
|
|
Dividends
declared
|
|
|
11,618,588
|
|
|
2,904,647
|
|
|
14,523,235
|
|
Dividends
paid
|
|
|
(6,204,800
|
)
|
|
(2,904,647
|
)
|
|
(9,109,447
|
)
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
728,420
|
|
|
-
|
|
|
728,420
|
|
Dividends
outstanding, December 31, 2005 Balance
|
|
|
15,885,843
|
|
|
-
|
|
|
15,885,843
|
|
Dividends
declared
|
|
|
30,186,978
|
|
|
7,546,745
|
|
|
37,733,723
|
|
Dividends
paid
|
|
|
(1,557,742
|
)
|
|
(7,308,434
|
)
|
|
(8,866,176
|
)
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
1,463,775
|
|
|
-
|
|
|
1,463,775
|
|
Dividends
outstanding, December 31, 2006 Balance
|
|
|
45,978,854
|
|
|
238,311
|
|
|
46,217,165
|
|
Dividends
declared
|
|
|
45,298,330
|
|
|
11,324,582
|
|
|
56,622,912
|
|
Dividends
paid
|
|
|
(86,747,565
|
)
|
|
(6,676,102
|
)
|
|
(93,423,667
|
)
|
Accumulated
Other Comprehensive Income (loss)
|
|
|
3,900,013
|
|
|
15,838
|
|
|
3,915,851
|
|
Dividends
outstanding, December 31, 2007 Balance
|
|
$
|
8,429,632
|
|
$
|
4,902,629
|
|
$
|
13,332,261
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
14 - Accumulated other comprehensive income (loss)
|
|
Biological
|
|
Tiens
Yi Hai
|
|
Tianshi
Holdings
|
|
Total
|
|
Balance
as of December 31, 2004
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(12,167
|
)
|
$
|
(12,167
|
)
|
Increase
during the year
|
|
|
1,088,433
|
|
|
732,331
|
|
|
425,616
|
|
|
2,246,380
|
|
Balance
as of December 31, 2005
|
|
|
1,088,433
|
|
|
732,331
|
|
|
413,449
|
|
|
2,234,213
|
|
Increase
during the year
|
|
|
1,020,640
|
|
|
995,361
|
|
|
1,464,774
|
|
|
3,480,775
|
|
Balance
as of December 31, 2006
|
|
|
2,109,073
|
|
|
1,727,692
|
|
|
1,878,223
|
|
|
5,714,988
|
|
Increase
during the year
|
|
|
2,358,134
|
|
|
2,007,211
|
|
|
3,900,013
|
|
|
8,265,358
|
|
Balance
as of December 31, 2007
|
|
$
|
4,467,207
|
|
$
|
3,734,903
|
|
$
|
5,778,236
|
|
$
|
13,980,346
|
|
Accumulated
other comprehensive Income was recorded in Biological and Tiens Yihai was
due to
balance sheet translations. Accumulated other comprehensive income was recorded
in Tianshi Holdings due to the effect of foreign exchange rate on dividend
receivables from Biological.
Note
15 - Statutory reserves
The
laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to
its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserve. The statutory
reserves include the surplus reserve fund, the common welfare fund, and the
enterprise fund.
Statutory
reserve fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory
surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. As of December 31, 2005, the Company’s statutory reserve fund had
reached 50% of the Company’s registered capital, therefore, no statutory reserve
is required thereafter.
The
transfer to this reserve must be made before distribution of any dividend
to
shareholders. For the years ended December 31, 2007, 2006 and 2005, the Company
did not transfer any net income to this reserve and the amount of this reserve
remained at $ 2,455,269.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
surplus reserve fund is non-distributable other than during liquidation and
can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par
value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
welfare fund
The
Company is required to transfer 5% to 10% of its net income, as determined
in
accordance with the PRC accounting rules and regulations, to the statutory
common welfare fund. This fund can only be utilized on capital items for
the
collective benefit of the Company’s employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities. This
fund
is non-distributable other than upon liquidation. The transfer to this fund
must
be made before distribution of any dividend to shareholders. For the years
ended
December 31, 2007, 2006 and 2005, the directors authorized, subject to
shareholders’ approval, that no funds be transferred to this reserve. The amount
of the statutory common welfare fund reserve at December 31, 2007 was
$4,709,499.
Enterprise
fund
The
enterprise fund may be used to acquire fixed assets or to increase the working
capital to expend on production and operation of the business. No minimum
contribution is required. For the years ended December 31, 2007, 2006 and
2005,
the board of directors determined, subject to shareholders’ approval, that no
funds be transferred to this reserve. The amount of the enterprise fund reserve
at December 31, 2007 was $2,256,015.
The
Chinese government restricts distributions of registered capital and the
additional investment amounts required by the Chinese joint ventures. Approval
by the Chinese government must be obtained before distributions of these
amounts
can be returned to the shareholders.
Note
16 - Additional product sales information
The
Company has a single operating segment. All of the Company’s revenues were
generated from related parties for the years ended December 31, 2007, 2006
and
2005. Summarized enterprise-wide financial information concerning the Company’s
revenues based on geographic area and product groups is shown in the following
tables:
Revenue
by Geographic Area:
Revenue
|
|
2007
|
|
2006
|
|
2005
|
|
China
|
|
$
|
22,476,135
|
|
$
|
27,074,979
|
|
$
|
38,181,090
|
|
Indonesia
|
|
|
9,084,438
|
|
|
13,426,537
|
|
|
4,738,415
|
|
Russia
|
|
|
4,611,258
|
|
|
7,007,799
|
|
|
8,173,242
|
|
Ukraine
|
|
|
3,782,073
|
|
|
4,022,351
|
|
|
2,981,110
|
|
Other
international countries
|
|
|
14,946,156
|
|
|
15,258,800
|
|
|
14,614,812
|
|
Total
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
$
|
68,688,669
|
|
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Revenue
by Product Group:
|
|
2007
|
|
2006
|
|
2005
|
|
Wellness
products
|
|
$
|
49,609,410
|
|
$
|
58,845,597
|
|
$
|
58,884,556
|
|
Dietary
supplement products
|
|
|
4,928,181
|
|
|
5,255,277
|
|
|
4,360,795
|
|
Personal
care products
|
|
|
362,469
|
|
|
2,689,592
|
|
|
5,443,318
|
|
Total
|
|
$
|
54,900,060
|
|
$
|
66,790,466
|
|
$
|
68,688,669
|
|
Note
17 - Income taxes
The
Company is subject to income taxes on an entity basis on income arising in
or
derived from the tax jurisdiction in which each entity is domiciled. The
Company’s subsidiary, Tianshi Holdings, was incorporated in the British Virgin
Islands and is not liable for income taxes.
The
Company’s subsidiaries, Biological and Tiens Yihai, are Sino-Foreign Joint
Ventures incorporated in the PRC. Pursuant to the income tax laws of the
PRC
concerning Foreign Investment Enterprises and Foreign Enterprises and various
local income tax laws (the “Income Tax Law”), Sino-foreign joint venture
enterprises generally are subject to income tax at an effective rate of 33%
(30%
state income taxes plus 3% local income taxes) on income as reported in their
statutory financial statements unless the enterprise is located in
specially-designated regions or cities for which more favorable effective
rates
apply.
Biological
is located in Tianjin Wuqing Development Area, a national new technology
development zone, and is subject to the special reduced income tax rate of
15%.
Pursuant to the approval of the relevant PRC tax authorities, Biological
is
fully exempt from PRC income taxes for two years starting from the year profits
are first made, followed by a 7.5% reduced tax rate for the next three
years.
Prior
to
the year ended December 31, 2002, Biological suffered operating losses.
Biological started generating taxable profits in the year ended December
31,
2003. Effective January 1, 2005, the two-year 100% exemption for income taxes
expired for Biological and it became subject to income tax at a reduced rate
of
7.5%.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Tiens
Yihai is located in a Special Industry Zone and is subject to a special reduced
income tax rate of 15%. Pursuant to the approval of the relevant local Chinese
tax authorities, Tiens Yihai is fully exempt from PRC income taxes for two
years
starting from the first year profits are made, followed by a 7.5% reduced
tax
rate for the next three years. In addition, in order to encourage Tiens Yihai
to
do business in the Special Industry Zone, the local Chinese tax authorities
agreed to refund 50% of the total income tax after the five-year tax break.
As
of December 31, 2007, Tiens Yihai was in the developmental stage of its
organization and did not have any operating income.
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs. The two years tax exemption, three years
50%
tax reduction tax holiday for production-oriented FIEs will be eliminated.
According to the new EIT, high-tech companies could be subject to a special
reduced tax rate of 15%. The qualification of a high-tech company is to be
reviewed annually. Biological currently qualifies as a high-tech company.
However, as there is no detailed regulation regarding the implementation
of new
EIT, in the first quarter of 2008, the Company was required by local tax
authority to prepay income tax at a tax rate of 25%. The Company is currently
evaluating the effect of the new EIT law will have on its financial
position.
Provisions
for income taxes were all current income tax expenses and for the years ended
December, 2007, 2006 and 2005 were $2,026,875, $2,823,899 and $2,984,302,
respectively.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate:
|
|
2007
|
|
2006
|
|
2005
|
|
U.S.
Statutory rate
|
|
|
34.0%
|
|
|
34.0%
|
|
|
34.0%
|
|
Foreign
income not recognized in USA
|
|
|
(34.0)
|
|
|
(34.0)
|
|
|
(34.0)
|
|
China
income taxes
|
|
|
33.0
|
|
|
33.0
|
|
|
33.0
|
|
Effect
of reduced tax rate
|
|
|
(25.5)
|
|
|
(25.5)
|
|
|
(25.5)
|
|
Total
provision for income taxes
|
|
|
7.5%
|
|
|
7.5%
|
|
|
7.5%
|
|
The
estimated tax savings due to the reduced tax rate for the years ended December
31, 2007, 2006 and 2005 amounted to $6,851,099,$9,601,257 and $10,146,627
respectively. The net effect on earnings per share if the income tax had
been
applied would decrease earnings per share for the years ended December 31,
2007,
2006 and 2005 by $0.08, $0.11, and $0.11, respectively.
Note
18 - Retirement plan
Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all employees. All Biological employees are entitled
to a
retirement pension amount calculated based upon their salary at their date
of
retirement and their length of service in accordance with a government managed
pension plan. The PRC government is responsible for the pension liability
to the
retired staff.
TIENS
BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Biological
is required to make contributions to the state retirement plan at 20% of
the
employees’ monthly salary. Employees are required to contribute 8% of their
salary to the plan. Total pension expense incurred by the Company amounted
to
$604,067, $475,331 and $434,363 for the years ended December 31, 2007, 2006
and
2005, respectively.
The
Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of his or her salary to the plan.
The
Company matches the contributions in an amount equal to two times the
contribution of each participant. The Company made contributions to the
unemployment insurance plan of $60,478, $45,871 and $41,860 for the years
ended
December 31, 2007, 2006 and 2005, respectively. All contributions are paid
to a
PRC insurance company, which in turn, is responsible for the unemployment
liability. On January 1, 2002, the Company introduced a basic medical insurance
plan for its employees. Pursuant to that medical insurance plan, the Company
is
required to pay an amount equal to 10% of its employees’ salary to a PRC
insurance company, which amounted to $329,203, $259,315, and $181,597 for
the
years ended December 31, 2007, 2006 and 2005, respectively.
Note
19 - Subsequent events
On
January 14, 2008, Tianshi Holdings entered into a Loan Agreement with Tianshi
Investment pursuant to which it loaned Tianshi Investment $4,100,000. Tianshi
Investment was required to use the money to increase the registered capital
of
Life Resources. There was no interest on the loan, and the maturity date
was
March 31, 2008. If Tianshi Holdings’ acquisition of Life Resources closed prior
to March 31, 2008, the loan would be cancelled.
On
March
13, 2008, the Chinese government approved the transfer of the shares of Life
Resources (see Note 10) from Tianshi Investment to Tianshi Holdings, and
the
increase of registered capital of Life Resources from $30,000,000 to
$50,000,000. Tianshi Holdings closed its acquisition of Life Resources from
Tianshi Investment on the same date. The $7.5 million was paid back by canceling
$7.5 million of accounts receivable owed to the Company by Tianshi Engineering.
The right to offset existed because:
|
1.
|
Tianshi
Engineering had a determinable outstanding debt payable to the
Company;
|
|
2.
|
The
Company had a determinable outstanding payable to Tianshi
Investment;
|
|
3.
|
The
Company had the right to offset the two
amounts;
|
|
4.
|
Both
the Company, Tianshi Investment and Tianshi Engineering agreed
to offset
the two amounts; and
|
|
5.
|
The
agreement to offset is enforceable under Chinese contract
law.
|
On
March
13, 2008, the $4,100,000 loan to Tianshi Investment was cancelled as a result
of
the closing of Tianshi Holdings’ acquisition of Life Resources. Tianshi
Investment used the proceeds of the loan to increase the registered capital
of
Life Resources, and the cancelled loan became accounted for as an additional
investment in registered capital of Life Resources after the approval of
acquisition.
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