As filed with the Securities and Exchange Commission on _________, 2007
Registration No. -________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TONGJI HEALTHCARE GROUP, INC.
-----------------------------
(Name of small business issuer in its charter)
Nevada 8062 None
----------------------- ---------------- ---------------
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial I.D. Number)
organization) Classification Code
Number)
No.5 Beiji Road, Nanning, China
0086-771-2020000
-------------------------
(Address and telephone number of principal executive offices)
No.5 Beiji Road, Nanning, China
0086-771-2020000
-------------------------
(Address of principal place of business or intended principal place of business)
William T. Hart
Hart & Trinen, LLP
1624 Washington St.
Denver, CO 80203
(303) 839-0061
-------------------------------------
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed Amount of
Maximum Maximum Registration
Title of Each Class of Amount to Offering Aggregate Fee
Securities to be Be Price Offering
Registered Registered Per Share (1) Price
- --------------------------------------------------------------------------------
Common stock 2,000,000 Shares$1.00 $2,000,000 $215
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. The per share offering price was calculated based upon
a price of $1.00 per share, which is the price that the shares will be
offered prior to the time that a market develops for the Company's common
stock.
The Company hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until it shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
2
2,000,000 shares of common stock
TONGJI HEALTHCARE GROUP, INC.
This prospectus covers the resale of 2,000,000 shares of our common stock
held by our selling stockholders for whom information is provided under the
"Selling Shareholder" section of this prospectus. The shares will be offered by
the selling stockholders initially at $1.00 per share and thereafter, if the
shares are listed for quotation on the OTC Bulletin Board, at prevailing market
prices or at privately negotiated prices. The offering will terminate on the
earlier of the date all of the shares are sold or one year from the date of this
prospectus. We will not receive any proceeds from the sale of shares offered by
the selling stockholders.
There is no market for our common stock and a market may never develop in
the future.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is February __, 2007.
3
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus as
we have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where an offer or sale is not permitted.
PROSPECTUS SUMMARY
This summary highlights material information regarding us and the
offering described in this prospectus. You should read the entire prospectus
carefully, including the financial information and related notes, before making
an investment decision.
Tongji Healthcare Group, Inc. was organized as a Nevada corporation on
December 19, 2006. On December 27, 2006 we issued 15,652,557 shares of our
common stock to acquire all of the outstanding shares of Nanning Tongji Hospital
Co., Ltd., which we refer to as "Tongji Hospital," a PRC company located in
Nanning, China. Unless otherwise indicated, all references to us throughout this
prospectus includes the operations of Tongji Hospital. The purpose of the
transaction was to redomicile us as a U.S. corporation.
We operate a 105 bed hospital in Nanning, China.
We do not have a website.
Our principal executive offices are located at No. 5 Beiji Road, Nanning,
China. Our telephone number is 0086-771-2020000.
The Offering
Securities offered by selling stockholders: 2,000,000 shares of common stock.
Price per share $1.00
Securities outstanding prior to and
after the offering: 15,652,557 shares of common stock.
Use of proceeds: We will not receive any proceeds
from the sale of the common stock
offered by the selling
stockholders.
By means of this prospectus, we are registering the resale of 2,000,000
shares of our common stock which are held by ten selling shareholders, all of
whom exchanged their shares of Tongji Hospital for the 2,000,000 shares we
issued to them. All selling shareholders are residents and citizens of China.
4
Conventions Which Apply to This Prospectus
Except as otherwise indicated and for purposes of this prospectus only:
o "we", "us" and "our" refer to:
Our company - Tongji Healthcare Group, Inc., as well as Tongji
Hospital, a PRC company that was merged into us in December 2006,
o "China" or "PRC" refers to the People's Republic of China, excluding
Taiwan, Hong Kong and Macau; and
o all references to "RMB" or "Renminbi" are to the legal currency of
China and all references to "$", "U.S. dollars," "dollars" and "US$"
are to the legal currency of the United States.
o unless otherwise indicated, all financial information in this
prospectus is in U.S. dollars.
Forward Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us which are discussed in the Risk Factors section above as
well as throughout this prospectus. In light of these risks, uncertainties and
assumptions, any forward-looking events discussed in this prospectus might not
occur.
RISK FACTORS
The shares of common stock offered by this prospectus involve a high
degree of risk and represent a highly speculative investment. You should not
purchase these shares if you cannot afford the loss of your entire investment.
In addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating an investment in our
common stock. The value of our common stock could decline if any of the risks
discussed below should occur.
The Chinese health care industry is extensively regulated and there is a
possibility we may not be able to comply with all regulations.
The healthcare industry in China is subject to extensive governmental laws
and regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services, and fees for services. Any
determination that we violated any laws, rules or regulations, could have a
material adverse effect on our business.
5
Government regulation of healthcare businesses in China is undergoing reforms
which are unpredictable.
Chinese regulations pertaining to hospitals are currently undergoing
reform by the Chinese government. New policies and regulations which may be
promulgated in the near future may have a negative impact on our businesses. It
may cost more to operate our hospital in the future due to compliance with any
new regulations. We may not be able to successfully implement our growth
strategies, which would adversely affect our business.
After the date of this prospectus we will attempt to acquire other
hospitals and companies involved in the healthcare industry in China using cash
and shares of our common stock. Substantial capital may be needed for these
acquisitions and we may need to raise additional funds through the sale of our
common stock, debt financing or other arrangements. The issuance of additional
shares of our common stock will dilute the equity ownership of our shareholders
and may depress the price for our common stock, should a market ever develop. We
do not have any commitments or arrangements from any person to provide us with
any additional capital. Additional capital may not be available to us, in which
case we would not be able to acquire other hospitals or businesses in the
healthcare industry.
Our operations will depend, in part, on recruiting and retaining physicians.
Since physicians generally direct the majority of hospital admissions, our
success, in part, is dependent upon the number and quality of our physicians,
the admissions practices of our physicians and the maintenance of good relations
with our physicians. The loss of physicians, our inability to recruit and retain
physicians or our inability to maintain good relations with our physicians could
have a material adverse effect on our business.
Changes in policies could materially affect our revenue.
Pursuant to current policy, hospitals can sell drugs and medications to
patients at a price between prevailing retail and wholesale prices. During the
year ended December 31, 2006 approximately 50% of our revenues were derived from
the sales of drugs and medications. If future regulations prevented us from
selling drugs and medications our revenues would decline substantially.
The China Ministry of Health, as well as other related agencies, have
proposed changes to the prices we can charge for medical services, drugs and
medications. We cannot predict the impact of these proposed changes since the
changes are not fully defined and we do not know whether those proposed changes
will ever be implemented or when they may take effect.
6
We could face substantial liability due to medical malpractice.
We may face liability claims in the event our physicians, nurses or
staff are negligent in the treatment of a patient. Although we carry insurance
for medical malpractice the successful prosecution of a medical malpractice case
against us could have a material adverse effect on us if the amount of any
judgment exceeds our issuance coverage.
Our bank accounts are not insured or protected against loss.
We maintain our cash with various banks and trust companies located in
China. Our cash accounts are not insured or otherwise protected. Should any bank
or trust company holding our cash deposits become insolvent, or if we are
otherwise unable to withdraw funds, we would lose the cash on deposit with that
particular bank or trust company.
We are subject to international economic and political risks over which we have
little or no control and may be unable to alter our business practice in time to
avoid the possibility of reduced revenues.
All of our business is conducted in the PRC. Doing business outside the
United States, particularly in the PRC, subjects us to various risks, including
changing economic and political conditions, major work stoppages, exchange
controls, currency fluctuations, armed conflicts and unexpected changes in U.S.
and foreign laws relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. We have no control over most of
these risks and may be unable to anticipate changes in international economic
and political conditions and, therefore, unable to alter out business practice
in time to avoid the possibility of reduced revenues.
If relations between the United States and the PRC worsen, investors may be
unwilling to hold or buy our stock and if our securities become qualified for
quotation on an exchange, our stock price may decrease.
At various times during recent years, the U.S. and the PRC have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and the PRC, whether or not directly
related to our business, could reduce the price of our common stock if our stock
is publicly traded.
The PRC government could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our and your investment.
Our business is subject to significant political and economic uncertainties
and may be affected by political, economic and social developments in the PRC.
Over the past several years, the PRC government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The PRC government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time with
little, if any, prior notice.
7
Changes in policies, laws and regulations or in their interpretation or
the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to stockholders, or
devaluations of currency could cause a decline in the price of our common stock,
should a market for our common stock ever develop. Nationalization or
expropriation could even result in the total loss of our investment in the PRC
and in the total loss of your investment.
The nature and application of many PRC laws create an uncertain environment for
business operations and they could have a negative effect on us.
The PRC legal system is a civil law system. Unlike the common law
system, the civil law system is based on written statutes in which decided legal
cases have little value as precedents. In 1979, the PRC began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in the PRC and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could could cause a decline in the price of our common stock,
should a market for our common stock ever develop. In addition, as these laws,
regulations and legal requirements are relatively recent, their interpretation
and enforcement involve significant uncertainty.
Fluctuations in exchange rates could reduce our revenues.
Although we use the United States dollar for financial reporting purposes,
all of the transactions effected by our operating subsidiary are denominated in
the PRC's RMB. The exchange rate of the RMB may fluctuate wildly against the
U.S. dollar. We do not currently engage in hedging activities to protect against
foreign currency risks. Even if we chose to engage in such hedging activates, we
may not be able to do so effectively. Future movements in the exchange rate of
the RMB could reduce our revenues.
You may experience difficulties in attempting to enforce liabilities based upon
U.S. federal securities laws against our non-u.s operating subsidiary and its
non-u.s. resident directors and officers
Our operating subsidiary and its assets are located in the PRC. Our
directors and executive officers are foreign citizens and do not reside in the
U.S. It may be difficult for courts in the U.S. to obtain jurisdiction over
these foreign assets or persons, and it may be very difficult or impossible for
you to enforce judgments rendered against us or our directors or executive
officers in U.S. courts. In addition, the courts in China may not permit the
enforcement of judgments arising out of the U.S. and state securities or similar
laws.
8
Sales of our common stock could reduce the price of our stock.
There are 15,652,557 shares of our common stock outstanding. Once the
registration statement we have filed with the Securities and Exchange Commission
is effective, all of our outstanding shares will be freely tradable, either by
virtue of the registration statement or by Rule 144 of the Securities and
Exchange Commission.
The availability for sale of substantial amounts of common stock under
this prospectus or under Rule 144 could reduce prevailing prices for our common
stock.
Investors in this offering may have difficulty selling our shares since there is
no current market for our common stock and a market may never develop.
There is no public market for our common stock an active public market may
never develop in the future. Trades of our common stock, should a market ever
develop, will be subject to Rule 15g-9 of the Securities Exchange Act of 1934,
which rule imposes certain requirements on broker/dealers who sell securities
subject to the rule to persons other than established customers and accredited
investors. For transactions covered by the rule, brokers/dealers must make a
special suitability determination for purchasers of the securities and receive
the purchaser's written agreement to the transaction prior to sale. The
Securities and Exchange Commission also has rules that regulate broker/dealer
practices in connection with transactions in "penny stocks". Penny stocks
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ system, provided that current price and volume information with respect
to transactions in that security is provided by the exchange or system). The
penny stock rules require a broker/ dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the Commission that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker/dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker/dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for our
common stock. As a result of these rules, investors in this offering, should a
market for our shares ever develop, may find it difficult to sell their shares.
MARKET FOR OUR COMMON STOCK.
As of the date of this prospectus our common stock was not quoted on any
exchange and there was no public trading market. As of January 31, 2007 we had
243 record shareholders.
As of January 31, 2007, we had 15,652,557 outstanding shares of common
stock, of which 2,000,000 shares are being registered by this prospectus and
will be freely tradable on and after the date of this prospectus. In June 2007
these 2,000,000 shares, as well as the other shares owned by the selling
shareholders, will be eligible for sale under Rule 144.
9
The remaining outstanding shares are eligible for sale pursuant to Rule
144(k).
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or
o The average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Holders of common stock are entitled to receive dividends as may be
declared by our Board of Directors. The Board of Directors is not obligated to
declare a dividend and it is not anticipated that dividends will ever be paid.
Our Articles of Incorporation authorize our Board of Directors to issue up
to 20,000,000 shares of preferred stock. The provisions in the Articles of
Incorporation relating to the preferred stock allow our directors to issue
preferred stock with multiple votes per share and dividend rights which would
have priority over any dividends paid with respect to the holders of our common
stock. The issuance of preferred stock with these rights may make the removal of
management difficult even if the removal would be considered beneficial to
shareholders generally, and will have the effect of limiting shareholder
participation in certain transactions such as mergers or tender offers if these
transactions are not favored by our management.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATION
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this prospectus. Our financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
financial statements and the financial data included in this prospectus reflect
our reorganization and have been prepared as if our current corporate structure
10
had been in place throughout the relevant periods. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
Overview
We were organized as a Nevada corporation on December 19, 2006. On
December 27, 2006 we issued 15,652,557 shares of our common stock to acquire all
outstanding shares of Nanning Tongji Hospital Co., Ltd., which we refer to as
"Tongji Hospital," a PRC company which was formed in October 30, 2003. The
purpose of the transaction was to redomicile us as a Nevada corporation. Unless
otherwise indicated, all references to us throughout this prospectus includes
the operations of Tongji Hospital.
Our critical accounting policies, as well as recent accounting
pronouncements which apply to us, are described in Note 2 to our financial
statements which are included as part of this prospectus.
Results of Operation
Material changes of items in our Statement of Operations for the year
ended December 31, 2006, as compared to the year ended December 31, 2005, are
discussed below:
Patient Service Revenue: The increase in revenues was the result of more
patients being treated by our hospital, due to our increased reputation as being
a preferred provider of health care services in the region, and a change in our
patient mix. In 2006 the percentage of inpatients increased from 26% to 38%.
Generally, we receive greater revenue from an inpatient, as ooposed to an
oupatient, due to the length of the stay and the services provided to an
inpatient.
Gross profit: The increase in gross profit was the result of higher gross
revenues and a decrease in the cost of medical supplies.
Operating Expenses: Selling and promotion expenses decreased due to less
amounts spent on meals and entertainment. General and administrative fees
declined due to technological upgrades, allowing us to reduce the number of
employees in administration. Depreciation, amortization and expenses increased
mainly due to the depreciation and amortization of new medical equipment.
Trends, Events and Uncertainties
The China Ministry of Health, as well as other related agencies, have
proposed changes to the prices we can charge for medical services, drugs and
medications. We cannot predict the impact of these proposed changes since the
changes are not fully defined and we do not know whether those proposed changes
will ever be implemented or when they may take effect.
In accordance with the relevant laws and regulations of PRC our income tax
rate would typically be 33%. However we have received a waiver from the taxing
authorities in the PRC for corporate income tax for the years ended 2004, 2005
and 2006. Beginning in 2007, we will be taxed at the normal rate of 33%.
11
In addition, we would normally be required to pay a tax of 5% of the
income derived from providing medical treatment plus city construction and
educational taxes equal to 7% and 3% respectively, of the business tax. We have
accrued these taxes for 2005 but are exempt from these taxes for 2006, 2007 and
2008.
Other than the factors listed above we do not know of any trends, events
or uncertainties that have had or are reasonably expected to have a material
impact on our net sales or revenues or income from continuing operations. Our
business is not seasonal in nature.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the years ended December
31, 2006 and 2005 were:
2006 2005
---- ----
Cash provided by operations $134,656 $459,300
Purchase of medical equipment (54,706) (647,085)
Net loans (to) or from related parties (99,319) 197,786
Future payments due on our material contractual obligations as of December
31, 2006 are as follows:
Item Total 2007 2008
- ---- ----- ---- ----
Medical Buildings Lease $50,442 $25,221 $25,221
Except as shown above, as of December 31, 2006 we did not have any
material capital requirements.
Income from our operations has been, and is expected to be in the future,
our primary source of cash.
We do not have any off-balance sheet items reasonably likely to have a
material effect on our financial condition.
BUSINESS
We operate a general hospital with 105 licensed beds. Our hospital offers
care and treatment in the areas of surgery, internal medicine, ophthalmology,
orthopaedics, medical cosmetology, urology, dentistry, gynecology, pediatrics,
rehabilitation and emergency care. We receive revenues from Medicare funds and
self-pay patients. We believe our hospital has some of the most modern medical
equipment in the Nanning, China area.
In 2006 55,773 patients were treated at our hospital, in contrast to
53,682 in 2005. The increase is primarily attributable to additional Medicare
patients.
12
As is common in China, we generate revenues from providing both medical
treatment and the sale of drugs and medications. We purchase all drugs and
medications which we use and sell from Guangxi Tongji Medicine Co., Ltd., an
affiliated company, at prevailing market prices.
Our hospital is certified as a provider of Medicare services by the
Nanning municipal government and the Guangxi province government. Maintaining
the qualifications for acceptance of Medicare patients is very important as
revenue from Medicare patients accounted for 41% of total hospital income in
2006. The Medicare accreditation is valid for only one year and must be renewed
on an annual basis. If we do not maintain high standards for patient care the
social insurance bureau, which administers the Medicare program, has the
authority to terminate our ability to receive reimbursement from Medicade funds.
Statistical information concerning our hospital is shown in the following
tables:
2006 2005
Revenues
Medicare-patients 41% 29%
Self-pay-patients 59% 71%
----- -----
100% 100%
Patients Treated
Medicare 40% 40%
Self-pay 60% 60%
----- -----
100% 100%
Patients Treated
Inpatients 38% 26%
Outpatients 62% 74%
----- -----
100% 100%
The majority of healthcare providers in China are government owned and
operate at a low level of efficiency. We believe many government-owned hospitals
will be privatized in future. In addition, and according to China Hospital
Administration Association, there are approximately 1500 private hospitals in
China, most of which are independent of each other. The high degree of
fragmentation presents an opportunity for acquisition and economies of scale.
After the date of this prospectus we will attempt to acquire other
hospitals and companies involved in the healthcare industry in China using cash
and shares of our common stock. Substantial capital may be needed for these
acquisitions and we may need to raise additional funds through the sale of our
common stock, debt financing or other arrangements. We do not have any
commitments or arrangements from any person to provide us with any additional
capital. Additional capital may not be available to us, or if available, on
acceptable terms, in which case we would not be able to acquire other hospitals
or businesses in the healthcare industry.
13
Competition
We compete with eleven government owned hospitals and three privately
owned hospitals in the city of Nanning. We believe that our ability to
effectively compete will be the result of:
o Providing advanced medical facilities and comfortable environments
o Maintaining the highest level of professional healthcare
o Maintaining competitive prices for medical treatment and drugs and
medications. PRC Laws and Regulations Affecting Our Business
Healthcare providers in China, as in most other populous countries, are
required to comply with many laws and regulations at the national and local
government levels. These laws and regulations relate to: licensing; the conduct
of operations; the relationships among hospitals and their affiliated providers;
the ownership of facilities; the addition of facilities and services;
maintenance and confidential treatment of medical records; billing for services;
and prices for services. If we fail to comply with applicable laws and
regulations, we could suffer penalties, including the loss of our license to
operate. In addition, further healthcare legislative reform is likely and could
adversely affect our business in the event we do not comply or if the cost of
compliance is expensive. The above list of regulated areas is not exhaustive and
it is not possible to anticipate the exact nature of future healthcare
legislative reform in China. Depending on the priorities determined by the
Chinese Ministry of Health, the political climate at any given time, the
continued development of the Chinese healthcare system and many other factors,
future legislative reforms may be highly diverse, including stringent infection
control policies and increased regulation of the distribution of drugs and
medications.
The PRC Legal System
The PRC legal system is a civil law system. Unlike the common law system,
the civil law system is based on written statutes in which decided legal cases
have little value as precedents. In 1979, the PRC began to promulgate a
comprehensive system of laws and has since introduced many laws and regulations
to provide general guidance on economic and business practices in the PRC and to
regulate foreign investment. Progress has been made in the promulgation of laws
and regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. The promulgation
of new laws, changes of existing laws and the abrogation of local regulations by
national laws could have a negative impact on our business and business
prospects. In addition, as these laws, regulations and legal requirements are
relatively recent, their interpretation and enforcement involve significant
uncertainty.
14
However, and subject to limitations on converting currency and statutory
reserve requirements, we do not believe there are any limitations concerning our
ability to access the assets held by Tongji Hospital, a PRC corporation which is
our wholly owned subsidiary.
Taxes
In accordance with the relevant laws and regulations of PRC our income tax
rate would typically be 33%. However we have received a waiver from the taxing
authorities in the PRC for corporate income tax for the years ended 2004, 2005
and 2006. Beginning in 2007, we will be taxed at the normal rate of 33%.
In addition, we would normally be required to pay a tax of 5% of the
income derived from providing medical treatment plus city construction and
educational taxes equal to 7% and 3% respectively, of the business tax. We have
accrued these taxes for 2005 but are exempt from these taxes for 2006, 2007 and
2008.
Required Statutory Reserve Funds
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Political and Trade Relations with the United States
Political and trade relations between the U.S. and the PRC government
during the past five years have been volatile and may continue to be in the
future. There can be no assurance that the political and trade ramifications of
these causes of volatility or the emergence of new causes of volatility will not
cause difficulties in our operations in the PRC marketplace.
Economic Reform Issues
The PRC is transitioning from a planned economy to a market economy. While
the PRC government has pursued economic reforms since its adoption of the
open-door policy in 1978, a large portion of the PRC economy is still operating
under five-year plans and annual state plans. Through these plans and other
economic measures, such as control on foreign exchange, taxation and
restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence
on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved.
15
Other political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
have a positive effect on our operations or future business development. Our
operating results may be adversely affected by changes in the PRC's economic and
social conditions as well as by changes in the policies of the PRC government,
such as changes in laws and regulations (or the interpretation of laws or
regulations), measures which may be introduced to control inflation, changes in
the interest rate or method of taxation, and the imposition of additional
restrictions on currency conversion.
There can be no assurance that the reforms to the PRC's economic system
will continue or that we will not be adversely affected by changes in the PRC's
political, economic, and social conditions and by changes in policies of the
government, such as changes in laws and regulations, measures which may be
introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
Currency Conversion and Exchange
The currency in the PRC is designated as the Renminbi ("RMB"). Although the
RMB/U.S. dollar exchange rate has been relatively stable in the past five years
there can be no assurance that the exchange rate will not become volatile or
that the RMB will not be officially devalued against the U.S. dollar by
direction of the PRC government.
Exchange rate fluctuations may adversely affect our financial performance
because of our foreign currency denominated assets and liabilities, and may
reduce the value, translated or converted, as applicable into U.S. dollars, of
our net fixed assets, our earnings and our declared dividends. We do not engage
in any hedging activities in order to minimize the effect of exchange rate
risks. As of December 31, 2006 the currency exchange rate was approximately 8.82
RMB for each U.S. dollar.
The PRC government imposes control over the conversion of Renminbi into
foreign currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Although we do not intend to pay dividends, any inability to convert RMB
into U.S. $ will limit our ability to pay dividends in the future.
Employees
As of January 31, 2007, we had 154 full time employees consisting of 49
licensed physicians, 52 nurses, 11 medical professionals and 42 employees in
administration and finance. None of our employees are represented by a labor
union or similar collective bargaining organization. We believe that our
relations with our employees are good.
16
Facilities
We lease our two hospital buildings from Tongji Healthcare Group. The
lease on the buildings expires in December 2008. Based on the exchange rate at
December 31, 2006 minimum lease payments are $25,221 annually in both 2007 and
2008.
MANAGEMENT
Name Age Position
Yun-hui Yu 44 President, Chief Executive Officer and Chairman
of the Board of Directors
Wei-dong Huang 37 Chief Financial and Accounting Officer
Jin-song Zhang 39 Chief Administrative Officer
Jing-xi Lv 61 Vice president and a Director
Jia-lin Zhang 66 Vice president and a Director
Lin Lin 61 Vice president and a Director
Xiang-wei Zeng 64 Vice president and a Director
Directors serve in such capacity until the next annual meeting of our
stockholders and until their successors have been elected and qualified. Our
officers serve at the discretion of our Board of Directors, until their death,
or until they resign or have been removed from office.
Yun-hui Yu has been our Chief Executive Officer, President and one of our
directors since October 2003. Since October 1999 Mr. Yu has also been the Chief
Executive Officer and a director of Guangxi Tongji Medicine Co., Ltd., an
affiliated company which operates pharmacies in China. Mr. Yu received his
bachelor's degree in medicine from the First Military Medical University of the
People's Liberation Army of China in August 1984. Mr. Yu holds a license as a
physician from the Chinese Ministry of Health.
Wei-dong Huang has been our Chief Financial and Accounting Officer since
May of 2006. Between April 2005 and May 2006 Mr. Huang was vice project general
manager at the Capital Hotel Group. Between April 2004 and March 2005, Mr. Huang
was the financial director at the Changsha InBev Baisha Beer Group, a brewery in
China. Between November 2002 and April of 2004, Mr. Huang was vice president at
Jingfang Investment & Management Consulting Co., Ltd. Between November 1996 and
November 2002 Mr. Huang was the financial controller at Blue Ribbon Beer Brewery
Co., Ltd, a brewery in China. Mr. Huang received his master's degree from
Capital University of Economics and Business in July of 1995. Mr. Huang holds a
license as a certified public accountant from the Chinese Institute of Certified
Public Accountants and is licensed as a securities broker with the Securities
Association of China.
Jin-song Zhang has been our Chief Administrative Officer since February
2006. Between August 2000 and January 2006 Mr. Jing-song was a director in the
Naning New & High Tech Industrial Development Zone administration commission.
Mr. Zhang received his bachelor's degree in engineering from the Electronic
Engineering Institute of the Peoples Liberation Army in August 1987.
17
Jing-xi Lv has been one of our vice presidents since January 2004. In
October 2006 Mr. Lv became one of our directors. Between July 1973 and December
2003 Mr. Lv was an orthopaedic surgeon at the Nanning No.1 People's Hospital.
Mr. Lv received his bachelor's degree from Guangxi Medicine University in August
1968 and holds a license as a physician from the Chinese Ministry of Health.
Jia-lin Zhang has been one of our vice presidents since October 2004. In
October 2006 Mr. Zhang became one of our directors. Between 1964 and October
2004, Mr. Zhang was a surgeon at several hospitals, including the People's
Hospital of Du'an county and the Red Cross Hospital. Mr. Zhang received his
bachelor's degree from Guangxi Medicine University in August 1964 and holds a
license as physician from the Chinese Ministry of Health.
Lin Lin has been one of our vice presidents since May 2005. In October 2006
Mr. Lin became one of our directors. Between February 1977 and May 2005 Mr. Lin
was the director of Internal Medicine at the Guangxi Ethical Hospital. Mr. Lin
received a bachelor's degree from Guangxi Medicine University in July 1968 and
holds a license as a physician from the Chinese Ministry of Health.
Xiang-wei Zeng has been one of our vice presidents since March 2005. In
October 2006 Mr. Zeng became one of our directors. Between 2000 and December
2004, Mr. Zeng was the director of physicians at the Guanxi Medicine University
Hospital. Mr. Zeng received his bachelor's degree from Guangxi Medicine
University in July of 1967 and holds a license as a physician from the Chinese
Ministry of Health.
None of our directors are independent as that term is defined by Rule 4200
of the NASDAQ Marketplace Rules.
Summary Compensation Table
The following table shows the compensation paid or accrued during the two
years ended December 31, 2006 to Yunhui Yu, Tongji' Chief Executive Officer.
None of our executive officers or directors received compensation in excess of
$100,000 during our past two fiscal years.
All
Other
Annual
Stock Option Compen-
Name and Principal Fiscal Salary Bonus Awards Awards sation
Position Year (1) (2) (3) (4) (5) Total
- ------------------ ----- ------ ----- ------- ----- ------- -----
Yunhui Yu, Chief 2006 -- -- -- -- -- --
Executive Officer 2005 -- -- -- -- -- --
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
18
(3) During the periods covered by the table, the value of our shares issued as
compensation for services to the persons listed in the table.
(4) The value of all stock options granted during the periods covered by the
table.
(5) All other compensation received that we could not properly report in any
other column of the table.
The terms of the employment agreements which we have with our officers are
shown below. The table also shows the amount of time these officers expect to
devote to our business during the year ending December 31, 2007
Approximate Time
Monthly To Be Devoted
Name Salary Expiration Our Business
---- --------- ---------- ---------------------
Wei-dong Huang $625 5/7/08 100%
Jin-song Zhang $625 2/3/08 100%
Jing-xi Lv $375 12/30/07 100%
Jia-lin Zhang $500 12/30/07 100%
Lin Lin $375 12/30/07 100%
Xiang-wei Zeng $500 12/30/07 100%
We do not have an employment agreement with Yun-hui, our Chief Executive
Officer. During the year ending December 31, 2007 we do not plan to compensate
Mr. Yu. During 2007 Mr. Yu plans to devote substantially all of his time to our
business.
Stock Options. We have not granted any stock options to any of our
officers or directors and do not have any stock option plans in effect as of
January 31, 2007. In the future, we may grant stock options to our officers,
directors, employees or consultants.
Long-Term Incentive Plans. We do not provide our officers or employees
with pension, stock appreciation rights, long-term incentive or other plans and
have no intention of implementing any of these plans for the foreseeable future.
Employee Pension, Profit Sharing or other Retirement Plans. We do not have
a defined benefit, pension plan, profit sharing or other retirement plan,
although we may adopt one or more of such plans in the future.
Compensation of Directors. Our directors do not receive any compensation
pursuant to any standard arrangement for their services as directors.
Transactions with related parties and recent sales of unregistered securities.
In December 2006 we acquired all of the outstanding shares of Tongji
Hospital, a PRC corporation, in exchange for the issuance of 15,652,557 shares
of our common stock to the former shareholders of Tongji Hospital. The purpose
19
of this transaction was to redomicile us as a Nevada corporation. In connection
with this transaction, the following officers, directors and their affiliates
received shares of our common stock:
Name Number of Shares Received
Yun-hui Yu 7,000,000
Wei-dong Huang 32,600
Jin-song Zhang 72,000
Jing-xi Lv 10,000
Jia-lin Zhang 2,000
Lin Lin 1,000
Li-Yu Chen (1) 3,000,000
(1) Li-yu Chen is the wife of Yun-hui Yu.
We lease our two hospital buildings from Tongji Healthcare Group. The
lease on the buildings expires in December 2008.
We purchase all drugs and medications which we use and sell from Guangxi
Tongji Medicine Co., Ltd., at prevailing market prices.
We have advanced funds to Nanning Tongji Chain Pharmacy Co., Ltd. to assist
in their operations. As of December 31, 2006 and 2005 Nanning Tongji Chain
Pharmacy Co., Ltd. owed us $122,649 and $161,751, respectively.
Nanning Tongji Healthcare Co. Ltd. has loaned us money which we have used
in our operations. As of December 31, 2006 and 2005 we owed Nanning Tongji
Healthcare Co. Ltd, $328,614 and $399,997, respectively.
Yun-hui Yu, our Chief Executive Officer and one of our directors, has also
loaned us money which we have used in our operations. As of December 31, 2006
and 2005 we owed Mr. Yu $91,168 and $180,766, respectively.
The amounts we have borrowed and received accrue interest at a rate of 6%
per annum, which exceeds the interest rate in the PRC for similar borrowings.
Tongji Healthcare Group, Inc., Guangxi Tongji Medicince Co. Ltd. Nanning
Tongji Chain Pharmacy Co., Ltd., and Nanning Tongji Healthcare Co., Ltd., are
controlled by Yun-hui Yu.
PRINCIPAL SHAREHOLDERS
The following table shows, as of the date of this prospectus, the common
stock ownership of (i) each person known by us to be the beneficial owner of
five percent or more of our common stock, (ii) each officer and director and
(iii) all officers and directors as a group. Except as otherwise indicated, each
20
person has sole voting and investment power with respect to the shares of common
stock shown, and all ownership is of record and beneficial.
Number Percent
Name and Address of Shares of Class
---------------- --------- --------
Yun-hui Yu 7,000,000 45%
No. 5 Beiji Road
Nanning, China 530011
Wei-dong Huang 32,600 *
No. 5 Beiji Road
Nanning, China 530011
Jin-song Zhang 72,000 *
No. 5 Beiji Road
Nanning, China 530011
Jing-xi Lv 10,000 *
Dormitories 32-402 of Nanning #1
Hospital, Jingwen Road
Nanning, China
Jia-lin Zhang 2,000 *
Longxiangju Num.201, Qingxiu Village,
Qingshan Road
Nanning, China
Lin Lin 1,000 *
Mingxiu East Road 232-15-1
Nanning, China
Xiang-wei Zeng -- --
Jiangnan District
Nanning, China
Li-Yu Chen 3,000,000 (1) 19.2%
Jinhu Road #22
Mingdu Park 32221
Nanning, China
All officers and directors as a 7,117,600 45.5%
group (7 persons)
(1) Li-Yu Chen is the wife of Yun-hui Yu.
* Less than 10%
As indicated in the "Selling Shareholder" section of this prospectus,
Li-yu Chen is selling some of her shares by means of this prospectus.
21
SELLING SHAREHOLDERS
The persons listed in the following table plan to offer the shares shown
opposite their respective names by means of this prospectus. The owners of the
common stock to be sold by means of this prospectus are referred to as the
"selling shareholders". The selling shareholders acquired their shares in
exchange for their shares of Tongji Hospital, a PRC corporation which we
acquired in December 2006.
We will not receive any proceeds from the sale of the shares by the
selling shareholders. Although we will pay all costs of registering the shares
offered by the selling shareholders the selling shareholders will pay all sales
commissions and other costs of the sale of the shares offered by them.
Shares to be Shares ownership
Shares sold in this after this Offering
Name Owned Offering Number %
- ---- ------- --------- ------ ------
Li-yu Chen 3,000,000 1,500,000 1,500,000 10.4%
Hong Qian 316,667 100,000 216,667 1.0%
Mei-hui Lin 266,667 50,000 216,667 1.0%
Bai-yun Hou 228,334 50,000 178,334 1.0%
Yi-li Li 200,000 50,000 150,000 0.9%
Ying Gong 200,000 50,000 150,000 0.9%
Qing Huang 166,667 50,000 116,667 0.7%
Xiu-qiong Huang 253,333 50,000 203,333 1.2%
Chong-bo Xu 135,000 50,000 85,000 0.5%
Zhan Huang 130,000 50,000 80,000 0.5%
Plan of Distribution
The shares of our common stock which the selling stockholders or their
pledgees, donees, transferees or other successors in interest may offer for
resale will be sold initially at a price of $1.00 per share and thereafter if
the shares are listed for trading on the OTC Bulletin Board or any other stock
exchange at then prevailing market prices or privately negotiated prices in one
or more of the following transactions:
o Block transactions;
o Transactions on the OTC Bulletin Board or on such other market on
which our common stock may from time to time be trading;
o Privately negotiated transactions;
o Through the writing of options on the shares;
o Short sales; or
o Any combination of these transactions.
22
The sale price to the public in these transactions may be:
o The market price prevailing at the time of sale;
o A price related to the prevailing market price;
o Negotiated prices; or
o Such other price as the selling stockholders determine from time to
time.
In the event that we permit or cause this prospectus to lapse, the selling
stockholders may only sell shares of our common stock pursuant to Rule 144 under
the Securities Act of 1933. The selling stockholders will have the sole and
absolute discretion not to accept any purchase offer or make any sale of these
shares of our common stock if they deem the purchase price to be unsatisfactory
at any particular time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may also sell these shares of our common stock directly
to market makers and/or broker-dealers acting as agents for their customers.
These broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or the purchasers
of these shares of our common stock for whom such broker-dealers may act as
agents. As to a particular broker-dealer, this compensation might be in excess
of customary commissions. Market makers and block purchasers purchasing these
shares of our common stock may do so for their own account and at their own
risk. It is possible that a selling stockholder will attempt to sell shares of
our common stock in block transactions to market makers or other purchasers at a
price per share which may be below the prevailing market price of our common
stock. There can be no assurance that all or any of these shares of our common
stock offered hereby will be issued to, or sold by, the selling stockholders.
Upon effecting the sale of any of these shares of our common stock offered under
this prospectus, the selling stockholders and any brokers, dealers or agents,
hereby, may be deemed "underwriters" as that term is defined under the
Securities Act of 1933 or the Securities Exchange Act of 1934, or the rules and
regulations thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a post-effective amendment to the
registration statement of which this prospectus is a part.
The selling shareholders may also sell their shares pursuant to Rule 144
of the Securities and Exchange Commission.
The selling stockholders and any other persons participating in the sale or
distribution of these shares of our common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder including, without limitation, Regulation M. These provisions may
restrict activities of, and limit the timing of purchases and sales of any of
these shares of our common stock by, the selling stockholders. Furthermore,
pursuant to Regulation M, a person engaged in a distribution of securities is
23
prohibited from bidding for, purchasing or attempting to induce any person to
bid for or purchase our securities for a period beginning five business days
prior to the date of this prospectus until such person is no longer a selling
stockholder. These regulations may affect the marketability of these shares of
our common stock.
None of the selling shareholders are broker/dealers or are affiliated with
broker/dealers.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of our common stock, $.001 par
value per share, and 20,000,000 shares of preferred stock, $.001 par value per
share. See "Business-PRC Laws and Regulations Affecting our Business" for
information concerning PRC laws and regulations which could impact the rights of
our shareholders or limit our ability to pay dividends.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors. There is no right to cumulate votes in the election of directors. The
holders of common stock are entitled to any dividends that may be declared by
the Board of Directors out of funds legally available therefor subject to the
prior rights of holders of preferred stock and any contractual restrictions we
have against the payment of dividends on common stock. In the event of our
liquidation or dissolution, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock.
The currency in the PRC is designated as the Renminbi ("RMB"). The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Although we do not intend to pay dividends, any inability to convert
RMB into U.S. $ will limit our ability to pay dividends in the future.
Holders of common stock have do not have preemptive rights and do not have
the right to convert their common stock into any other securities.
Preferred Stock
We are authorized to issue 20,000,000 shares of $.001 par value preferred
stock in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by stockholders and could adversely affect the
rights and powers, including voting rights, of the holders of common stock. In
24
certain circumstances, the issuance of preferred stock could depress the market
price of the common stock. There are no shares of preferred stock outstanding.
EXPERTS
Our financial statements included in this prospectus as of and for the
years ended December 31, 2006 and 2005 have been included in reliance on the
report of Michael Pollack C.P.A., a independent registered certified public
accountant, given on the authority of Mr. Pollack as a expert in accounting and
auditing.
INDEMNIFICATION
The Nevada Revised Statutes authorize indemnification of any of our
directors, officers, employees or agents against expenses incurred in connection
with any action, suit, or proceeding to which he or she is named a party by
reason of having acted or served in such capacity, except for liabilities
arising from his or her own misconduct or negligence in the performance of his
or her duties. In addition, even a director, officer, employee, or agent who was
found liable for misconduct or negligence in the performance of his or her
duties may obtain such indemnification if, in view of all the circumstances in
the case, a court of competent jurisdiction determines such person is fairly and
reasonably entitled to indemnification. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to the common stock offered by this prospectus. This prospectus
does not contain all of the information in the registration statement and the
exhibits to the registration statement. For further information with respect to
our Company and the common stock offered by this prospectus, reference is made
to the registration statement and the exhibits filed as part of the registration
statement. Following the effective date of the registration statement, we will
be required to file periodic reports with the Securities and Exchange
Commission, including quarterly reports, annual reports which include our
audited financial statements and proxy statements. The registration statement,
including exhibits thereto, and all of our periodic reports may be inspected
without charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Public Reference Section of the Securities and Exchange Commission, 100 F Street
N.E., Washington, D.C. 20549. You may obtain additional information regarding
the operation of the Public Reference Section by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
also maintains a web site which provides online access to reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission at the address:
http://www.sec.gov.
25
Transfer Agent
Our transfer agent is:
Island Stock Transfer
100 Second Avenue, South, Suite 300N
St. Petersburg, FL 33701
(727) 289-0010
(727) 289-0069 - Fax
www.islandstocktransfer.com
26
TONGJI HEALTHCARE GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006 AND 2005
INDEX TO FINANCIAL STATEMENTS
Page(s)
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets as of December 31, 2006 and 2005 2
Consolidated Statements of Operations and Accumulated Other
Comprehensive Income for the Years Ended December 31, 2006
and 2005 3
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6-19
MICHAEL POLLACK CPA
46 EQUESTRIAN LANE
CHERRY HILL, NJ 08003
TEL (215) 588-5299
FAX (609) 482-8018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Tongji Healthcare Group, Inc.
I have audited the accompanying consolidated balance sheets of Tongji Healthcare
Group, Inc. (the "Company") as of December 31, 2006 and 2005 and the related
consolidated statements of operations and accumulated other comprehensive
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 2006 and 2005. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audits.
I conducted my audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. I was not engaged to
perform an audit of the Company's internal control over financial reporting. My
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, I express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tongji
Healthcare Group, Inc. as of December 31, 2006 and 2005, and the results of its
consolidated statements of operations and accumulated other comprehensive
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 2006 and 2005 in conformity with U.S. generally accepted accounting
principles.
/s/ Michael Pollack CPA
Cherry Hill, NJ
February 5, 2007
TONGJI HEALTHCARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(IN US$)
ASSETS
2006 2005
Current Assets:
Cash and cash equivalents 16,065 $ 28,425
Accounts receivable, net 273,298 98,579
Due from related party 140,079 170,210
Inventories 97,399 129,469
Other receivables 1,908 7,028
Prepaid expenses and other current assets 26,271 1,729
------- -------
Total Current Assets
555,020 435,440
------- --------
Fixed assets, net of depreciation 825,033 904,214
---------- ---------
TOTAL ASSETS $1,380,053 $1,339,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 417,729 $ 443,560
Accrued taxes 56,025 51,596
Due to related parties 479,743 609,193
---------- ---------
Total Current Liabilities 953,497 1,104,349
Total Liabilities 953,497 1,104,349
---------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 Par Value; 20,000,000 shares
authorized and 0 shares issued and outstanding - -
Common stock, $0.001 Par Value; 50,000,000 shares
authorized and 15,652,557 and 3,000,000 shares issued
and outstanding, respectively 15,653 363,000
Additional paid-in capital 347,347 -
Statutory reserves 36,848 -
Retained earnings 16,404 (130,990)
Accumulated other comprehensive income 10,304 3,295
---------- ---------
Total Stockholders' Equity 426,556 235,305
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,380,053 $1,339,654
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
2
TONGJI HEALTHCARE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
2006 2005
PATIENT SERVICE REVENUE $ 1,666,641 $1,363,265
----------- ----------
DIRECT COST OF PROVIDING PATIENT SERVICE REVENUE
Inventory, beginning of period 129,469 59,642
Purchases of medical supplies, pharmaceuticals
and labor 762,961 628,510
Inventory, end of period (97,399) (129,469)
----------- ----------
Total Cost of Sales 795,031 558,683
----------- ----------
GROSS PROFIT 871,610 804,582
----------- ----------
OPERATING EXPENSES
Selling and promotion 412,746 549,817
General and administrative fees 109,919 122,640
Bad debt expense 9,444 5,128
Depreciation, amortization and impairment 133,887 73,596
---------- ----------
Total Operating Expenses 665,996 751,181
---------- ----------
INCOME BEFORE OTHER INCOME (EXPENSE) 205,614 53,401
OTHER INCOME (EXPENSE)
Interest expense, net of interest income 21,372 19,595
----------- ----------
Total Other Income (Expense) 21,372 19,595
----------- ----------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 184,242 33,806
Provision for Income Taxes - (50,105)
----------- ----------
NET INCOME APPLICABLE TO COMMON SHARES $184,242 $ (16,299)
=========== ==========
NET INCOME PER BASIC AND DILUTED SHARES $ 0.01 $ (0.00)
=========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 15,652,557 15,652,557
=========== ==========
COMPREHENSIVE INCOME
Net income $ 184,242 $ (16,299)
=========== ==========
Other comprehensive income
Currency translation adjustments 7,009 3,295
----------- ----------
Comprehensive income $ 191,251 $ (13,004)
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
TONGJI HEALTHCARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(IN US $)
Accumulated
Additional Retained Other
Common Stock Paid-in Statutory Earnings Comprehensive
Shares Amount Reserves Reserves (Deficit) Income Total
---------------------------------------------------------------------------------
Balance January 1, 2005 3,000,000 $ 363,000 $ - $ - $ (114,691) $ - $ 248,309
Net loss for the year ended
December 31, 2005 - - - - (16,299) 3,295 (13,004)
Balance December 31, 2005 3,000,000 363,000 - - (130,990) 3,295 235,305
Shares cancelled in merger
with Tongji, Inc. (3,000,000) (363,000) - - - - (363,000)
Shares issued in reverse merger
with Tongji Healthcare
Group, Inc. 15,652,557 15,653 347,347 - - - 363,000
Allocation of statutory reserves - - - 36,848 (36,848) - -
Net income for the year ended
December 31, 2006 - - - - 184,242 7,009 191,251
------------ ----------- ---------- --------- ---------- --------- ----------
Balance December 31, 2006 15,652,557 $ 15,653 $ 347,347 $ 36,848 $ 16,404 $ 10,304 $ 426,556
============ =========== ========== ========= ========== ========= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
TONGJI HEALTHCARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(IN US $)
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 184,242 $ (16,299)
------------- ------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, amortization and impairment 133,887 73,596
Allowance for doubtful accounts 9,196 5,188
Changes in assets and liabilities
(Increase) in accounts receivable (183,915) (79,540)
(Increase) decrease in inventory 32,070 (69,827)
(Increase) decrease in other receivables 5,120 (6,494)
(Increase) decrease in prepaid expenses and
other current assets (24,542) 106,341
Increase (decrease) in accounts payable and
and accrued expenses (21,402) 446,335
------------- ------------
Total adjustments (49,586) 475,599
------------- ------------
Net cash provided by operating activities 134,656 459,300
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Acquisitions) of fixed assets (54,706) (647,085)
Net advancements to/from related parties 30,131 (52,682)
------------- ------------
Net cash (used in) investing activities (24,575) (699,767)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITES
Net advancements from/to related parties (129,450) 250,468
------------- ------------
Net cash provided by (used in) financing
activities (129,450) 250,468
------------- ------------
Effect of foreign currency translation 7,009 3,295
------------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (12,360) 13,296
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 28,425 15,129
------------- ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 16,065 $ 28,425
============= ============
CASH PAID DURING THE YEAR FOR:
Income taxes $ - $ -
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
Nanning Tongji Hospital, Inc. ("NTH") was established in Nanning in
the province of Guangxi of the Peoples Republic of China ("PRC") by
the Nanning Tongji Medical Co. Ltd. and an individual on October 30,
2003.
NTH is the largest private hospital modernized and comprehensive in
combining medical treatment, scientific research, teaching,
prevention, and health care together. It is an assigned hospital for
medical insurance in Nanning and Guangxi. NTH contains specialties
in the areas of internal medicine, surgery, gynecology, pediatrics,
emergency medicine, ophthalmology, medical cosmetology,
rehabilitation, dermatology, otolaryngology, traditional Chinese
medicine, medical imaging, anesthesia, acupuncture, physical
therapy, health examination, and prevention. NTH is a 105-bed modern
hospital containing 4 operating rooms, with Paramount beds installed
from Japan, as well as the most advanced medical equipment worldwide
from Japan, USA, Germany and France.
On December 19, 2006, the officers of NTH filed Articles of
Incorporation in the State of Nevada which was approved December 19,
2006 to create Tongji Healthcare Group, Inc. a Nevada corporation
(the "Company") and also established Tongji, Inc., a Colorado
corporation ("Tongji") and wholly owned subsidiary of the Company.
On December 27, 2006, NTH merged into and with Tongji and became the
surviving entity and wholly owned subsidiary of the Company. The
Company incorporated with 50,000,000 shares of common stock and
20,000,000 shares of preferred stock both with a par value of
$0.001. The Company issued 15,652,557 shares of common stock to the
shareholders of NTH in exchange for 100% of the issued and
outstanding shares of NTH. Thereafter and for purposes of these
consolidated financial statements the "Company" and "NTH" are used
to refer to the operations of Nanning Tongji Hospital Co. Ltd. For
accounting purposes, the Company accounted for the acquisition of
NTH as a recapitalization. The transaction involved entities under
common control as defined in Statement of Financial Standard 141,
"Business Combinations". As such, the net assets of NTH were
acquired at their carrying values at the time of the acquisition.
The comparative figures for 2005 are those of NTH.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
6
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, the Company evaluates
its estimates, including, but not limited to, those related to bad
debts, income taxes and contingencies. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those
estimates.
Economic and Political Risks
----------------------------
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations
may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company's results may
be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of
taxation, among other things.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or
less to be cash equivalents. The Company maintained $2,782 and
$4,962 as of December 31, 2006 and 2005, respectively in cash on
hand. The remainder of the cash was in financial institutions.
7
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Comprehensive Income
--------------------
The Company adopted Statement of Financial Accounting Standards No,
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130
requires the reporting of comprehensive income in addition to net
income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that
historically has not been recognized in the calculation of net
income.
Inventory
---------
Inventory is valued at the lower of cost or market (using the
weighted average method) and net realizable value. Inventory
consists of Chinese and western medicines and pharmaceuticals.
The net realizable value is the estimated selling price in the
ordinary course of business less the estimated costs of completion,
selling expenses and related taxes.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts reported in the balance sheets for cash and
cash equivalents, accounts receivable, other receivables and
payables and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.
Currency Translation
--------------------
The Company's functional currency is that of the PRC which is the
Chinese Renminbi (RMB). The reporting currency is that of the US
Dollar. Capital accounts of the consolidated financial statements
are translated into United States dollars from RMB at their
historical exchange rates when the capital transactions occurred.
Assets and liabilities are translated at the exchange rates as of
the balance sheet date. Income and expenditures are translated at
the average exchange rate of the year. The year end RMB to US dollar
as of December 31, 2006 and 2005 were 7.8217 and 8.0702,
respectively, and the average yearly RMB to the US dollar for 2006
and 2005 were 7.9487 and 8.1734, respectively. The RMB is not freely
convertible into foreign currency and all foreign currency exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or
could be, converted into US dollar at the rates used in translation.
The Company records these translation adjustments as accumulated
other comprehensive income (loss). Gains and losses from foreign
currency transactions are included in other income (expense) in the
results of operations. For the years ended December 31, 2006 and
2005, the Company recorded approximately $7,009 and $3,295 in
transaction gains as a result of currency translation.
8
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Retirement Benefits
-------------------
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are
charged to the statements of operations as incurred.
Revenue Recognition
-------------------
According to the PRC Regulation of Healthcare Institutions,
hospitals shall be subject to register with the Administration of
Health of the local government to obtain their license for hospital
service operation. The Company received its renewed operation
license from Nanning's government in May of 2005, and this license
remains valid until the next scheduled renewing date of May 2008.
Other existing regulations having material effects on the Company's
business include those dealing with physician's licensing, usage of
medicine and injection, public security in health and medical
advertising.
As the Company maintains a facility with an excess of 100 beds, they
must have their license renewed at least every three years. The
Company is also obligated to provide free service or dispatch their
physicians or employees for public assistance. In the US this is
commonly referred to as charity care. The Company has a very small
percentage of their service for this area.
The Company generates revenue from the individuals as well as
third-party payers, including PRC government programs and insurance
providers, under which the hospital is paid based upon several
methodologies including established charges, the cost of providing
services, predetermined rates per diagnosis, fixed per diem rates or
discounts from established charges. Revenues are recorded at
estimated net amounts due from patients, third-party payers and
others for healthcare services provided.
The Company's customers consist primarily of individuals, government
units and insurance companies.
Third-party payers include, the Nanning Social Medicare Management
Center, a license that took effect in November of 2003, which works
like the US Medicare system. The hospital is reimbursed most of the
charges for the services provided with the exception of a self-pay
portion (like Medicare Part B); the hospital also has a license with
the Guangxi Province Medicare Center, which was initially entered
into in May of 2004, which works similar to that of Nanning.
9
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Accounts Receivable
-------------------
Accounts receivable are recorded at the estimated net realizable
amounts from government units, insurance companies and patients.
Generally, the third-party payers reimburse the Company on a 30-day
cycle, so collections for the Company has historically not been
considered to be an area that exposes the Company to additional
risk. Hospital staff does perform verification of patient coverage
prior to examinations and/or procedures taking place
For any Medicare patient who visits the hospital that is qualified
for acceptance, the hospital will only include the portion that the
social insurance organization in the accounts receivable and
collects the self-pay portion in cash at the time of the service. At
times, the pre-determined rate the hospital will charge may be
different than the approved Medicare rate, thus the likelihood of
some bad debt can occur. Management has spent a great deal of time
estimating this likelihood and has determined that a reserve
estimating 5% of their total accounts receivable does accurately
account for their bad debt. Management continues to evaluate this
estimate on an ongoing basis.
The Company has established a reserve for uncollectibles of $14,384
and $5,188 as of December 31, 2006 and 2005, respectively.
Advertising Costs
-----------------
The Company expenses the costs associated with advertising as
incurred. Advertising expenses for the years ended December 31, 2006
and 2005 of $84,960 and $4,733, respectively are included in selling
and promotional expenses in the statements of operation. Advertising
costs include marketing brochures and an advertising campaign to the
public.
Advance to Suppliers
--------------------
Advances to suppliers represent the cash paid in advance for
purchasing materials utilized in the hospital as well as
pharmaceuticals.
10
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Fixed Assets
------------
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
net of the estimated residual values; equipment - 5 to 10 years (3
to 5% residual value) and vehicles - 5 years (3% residual value).
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or
betterments.
Land Use Rights
---------------
According to the laws of China, the government owns all the land in
China. Companies or individuals are authorized to possess and use
the land only through land use rights granted by the Chinese
government. Land use rights would be amortized using the
straight-line method over the respective lease term. The Company
does not have nay land use rights as they lease the land and
building from a related party.
Construction in Progress
------------------------
Construction in progress represents direct costs of construction or
acquisition and design fees incurred, as well as interest charges
directly related to debt incurred on behalf of particular
construction projects. Capitalization of these costs ceases and the
construction in progress is transferred to fixed assets (building or
equipment) when substantially all the activities necessary to
prepare the assets for their intended use are completed. No
depreciation is provided until it is completed and ready for
intended use. There were no such costs for the Company in the years
ended December 31, 2006 and 2005, respectively.
11
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Impairment of Long-Lived Assets
-------------------------------
Long-lived assets, primarily fixed assets, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets might not be recoverable. The
Company does perform a periodic assessment of assets for impairment
in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate that the carrying
amount of an asset or group of assets is not recoverable. For
long-lived assets to be held and used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment loss
based on the difference between the carrying amount and estimated
fair value.
Earnings Per Share of Common Stock
----------------------------------
Basic net earnings per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per
share (EPS) includes additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of
stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be antidilutive for
periods presented. The Company did not have a loss for either
period.
The following is a reconciliation of the computation for basic and
diluted EPS:
December 31, December 31,
2006 2005
------------ ------------
Net income (loss) $ 184,242 $ (16,299)
Weighted-average common shares
Outstanding (Basic) 15,652,557 15,652,557
Weighted-average common stock
Equivalents
Stock options - -
Warrants - -
Weighted-average common shares
Outstanding (Diluted) 15,652,557 15,652,557
12
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Income Taxes
------------
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in
future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the
Company is able to realize their benefits, or that future
realization is uncertain.
In accordance with the relevant tax laws and regulations of PRC and
US, the corporation income tax rate would typically be 33% in the
PRC. The Company has received a waiver (duty free certificate) from
the taxing authorities in the PRC for corporate enterprise income
tax for the year ended 2004 through 2006. Effective 2007, the
Company will be taxed at the rate of 33%.
In addition, companies in the PRC are required to pay business taxes
consisting of 5% of income they derive from providing medical
treatment and city construct taxes, and educational taxes are based
on 7% and 3% of the business taxes, and the Company has accrued
these taxes for 2005. The Company has received notification that
they are exempt from these taxes for the years ending 2006 through
2008.
Stock-Based Compensation
------------------------
The Company follows FASB 123R in accounting for its stock based
compensation (see Recent Accounting Pronouncements). This measures
compensation expense for its employee stock-based compensation using
the intrinsic-value method. Under the intrinsic-value method of
accounting for stock-based compensation, when the exercise price of
options granted to employees and common stock issuances are less
than the estimated fair value of the underlying stock on the date of
grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period. The Company
for 2006 and 2005 did not grant any options or warrants that would
need to be valued under such method. The following represents the
effect on net income attributable to common shareholders per share
if the fair value method had been applied to all awards.
13
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
Years Ended December 31,
2006 2005
---- ----
Net income (loss):
As reported $184,242 ($16,299)
Add: Stock-based employee compensation expense
included in reported net loss, net of related
tax effects - -
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects ( -) ( -)
---------- ----------
Pro forma $184,242 ($16,299)
Net earnings (loss) per share:
As reported:
Basic $0.01 ($0.00)
Diluted $0.01 ($0.00)
Pro forma:
Basic $0.01 ($0.00)
Diluted $0.01 ($0.00)
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". The fair value of the option issued is used to measure
the transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the
Company's common stock on the date that the commitment for
performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the equity
instrument is charged directly to compensation expense and
additional paid-in capital.
Segment Information
-------------------
The Company follows the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This
standard requires that companies disclose operating segments based
on the manner in which management disaggregates the Company in
making internal operating decisions. For 2006 and 2005, the Company
operated in one segment and one geographical location.
14
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 3- FIXED ASSETS
------------
Fixed assets as of December 31, 2006 and 2005 were as follows:
Estimated
Useful
Lives 2006 2005
(Years)
Office equipment 5-10 $ 179,005 $ 159,675
Medical equipment 5 785,377 747,722
Fixtures 10 92,052 89,109
Vehicles 5 35,599 34,461
---------- -----------
1,092,033 1,030,967
Less: accumulated depreciation 267,000 126,753
---------- -----------
Property and equipment, net $ 825,033 $ 904,214
========== ===========
There was $133,887 and $73,596 charged to operations for
depreciation expense for the years ended December 31, 2006 and 2005,
respectively. There was no impairment for these assets during the
years ended December 31, 2006 and 2005.
The Company leases the building and land from a related party, under
an arms length agreement. Rent expense included in selling and
promotional expenses for the years ended December 31, 2006 and 2005
were $24,817 and $24,131 (197,266 RMB each year), respectively. The
lease term runs from October 2003 to December 2008.
NOTE 4- INVENTORIES
-----------
Inventories consisted of the following as of December 31, 2006 and
2005:
2006 2005
------ ------
Medicines and pharmaceuticals $97,399 $129,469
Less: provision for write-down
of inventory - -
Inventory, net $97,399 $129,469
======= ========
There was no obsolescence of inventory or write-downs of inventory
for the years ended December 31, 2006 and 2005.
15
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 5- STOCKHOLDERS' EQUITY
--------------------
Common Stock
------------
As of December 31, 2006, the Company has 50,000,000 shares of common
stock authorized with a par value of $0.001.
The Company 15,652,557 shares of common stock in exchange of 100%
of the authorized capital of Nanning Tongji Hospital Co. Ltd.
(CHINA).
Nanning Tongji Hospital Co. Ltd. (CHINA) in 2003 issued 3,000,000
shares.
The Company has not granted any options or warrants during 2006 or
2005.
Preferred Stock
---------------
As of December 31, 2006, the Company has 20,000,000 shares of
preferred stock authorized with a par value of $0.001. There are no
shares issued and outstanding.
Statutory Reserves
------------------
The Company is required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory welfare fund and
discretionary surplus reserve, based on after-tax net income
determined in accordance with generally accepted accounting
principles of the PRC ("PRC GAAP"). Appropriation to the statutory
surplus reserve is required to be at least 10% of the after tax net
income determined in accordance with the PRC GAAP until the reserve
is equal to 50% of the entities' registered capital. Appropriations
to the statutory public welfare fund is required to be 10% of the
after-tax net income determined in accordance with the PRC GAAP.
Appropriations to the discretionary surplus reserve are made at the
discretion of the Board of Directors.
The statutory 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, providing that the remaining reserve balance
after such issue is not less than 25% of the registered capital.
The statutory welfare reserve 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
liquidation. The transfer to this fund must be made before
distribution of any dividend to shareholders.
16
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 5- STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------
Statutory Reserves
------------------
The discretionary surplus fund may be used to acquire fixed assets
or to increase the working capital to expend on production and
operation of the business. The Company's Board of Directors decided
not to make appropriations to this reserve.
NOTE 6- PROVISION FOR INCOME TAXES
--------------------------
Corporate Income Taxes
----------------------
In accordance with the relevant tax laws and regulations of PRC, the
corporate income tax rate is 33%. As noted, the corporate income tax
for 2004 through 2006 was 0% due to the Company's receipt of a
waiver (tax relief) from the PRC government as they acquired a
previous government-owned hospital and privatized it and improved
it. Commencing, 2007, the corporate tax rate will be 33%.
Business Taxes
--------------
In accordance with the relevant tax laws and regulations of PRC, the
Company is required to pay business taxes of 5% of income they
derive from providing medical treatment and then 7% and 3%,
respectively for city construct taxes and educational taxes. As
noted, the Company has received a waiver for these taxes for the
years ending 2006 through 2008.
At December 31, 2006 and 2005, corporate income and business taxes
consist of the following:
2006 2005
------ ------
Corporate income tax $ - $ -
Business taxes including city
construct and educational taxes - 50,105
-------- --------
$ - $ 50,105
======== ========
A reconciliation of the PRC enterprise income tax and business tax
rate to the effective income tax rate is as follows:
2006 2005
------ ------
Statutory rate - corporate income tax 0% 0%
Business taxes 0% 149%
---- ----
0% 149%
==== ====
17
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 6- PROVISION FOR INCOME TAXES (CONTINUED)
--------------------------------------
Deferred income taxes are determined using the liability method for
the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred
income taxes are measured based on the tax rates expected to be in
effect when the temporary differences are included in the Company's
tax return. Deferred tax assets and liabilities are recognized based
on anticipated future tax consequences attributable to differences
between financial statement carrying amounts of assets and
liabilities and their respective tax bases. The Company has no
temporary or permanent differences. Therefore, no deferred tax
assets and liabilities have been recognized and no valuation
allowance has been established.
The depreciation methods and lives the Company utilizes are
identical for book and tax purposes. Additionally, there is no
income or expense included in books not included in tax.
NOTE 7- RELATED PARTY TRANSACTIONS
--------------------------
Due from Related Party
----------------------
The Company has entered into an agreement with Nanning Tongji Chain
Pharmacy Co. Ltd. whereby the Company from time to time will advance
amounts to Nanning Tongji Chain Pharmacy Co., Ltd. to assist them in
their operations. The two companies have common shareholders. The
advanced amounts accrue interest at a rate of 6% per annum which
exceeds the interest rates in the PRC for similar borrowings. The
Company as of December 31, 2006 and 2005 is owed, $122,649 and
$161,751, respectively. Accrued interest receivable on this
agreement of $17,430 and $8,459 as of December 31, 2006 and 2005,
respectively, is included in due from related party.
Due to Related Parties
----------------------
The Company has entered into an agreement with Nanning Tongji
Healthcare Co. Ltd. whereby the Company from time to time will be
advanced amounts to assist them in their operations. The two
companies have common shareholders. The advanced amounts accrue
interest at a rate of 6% per annum which exceeds the interest rates
in the PRC for similar borrowings. The Company as of December 31,
2006 and 2005 is indebted to Nanning Tongji Healthcare Co. Ltd, in
the amounts of $328,614 and $399,997, respectively. Accrued interest
payable on this agreement of $40,788 and $17,941 as of December 31,
2006 and 2005, respectively, is included in due from related party.
18
TONGJI HEALTHCARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 7- RELATED PARTY TRANSACTIONS (CONTINUED)
--------------------------------------
Due to Related Parties (Continued)
----------------------------------
The Company has entered into an agreement with the Chairman of the
Company, Mr. Yunhui Yu whereby the Company from time to time will be
advanced amounts to assist it in their operations. The advanced amounts
accrue interest at a rate of 6% per annum which exceeds the interest rates
in the PRC for similar borrowings. The Company as of December 31, 2006 and
2005 is indebted to their Chairman in the amounts of $91,168 and $180,766,
respectively. Accrued interest payable on this agreement of $19,173 and
$10,489 as of December 31, 2006 and 2005, respectively, is included in due
from related party.
Rental
------
The Company has entered into a lease agreement for their hospital with
Tongji Healthcare Group that expires December 2008. Monthly rentals are
16,438.86 per month (RMB). Based on the exchange rate at December 31,
2006, minimum lease payments are as follows:
Year ending December 31, 2007 $25,221
2008 25,221
19
TONGJI HEALTHCARE GROUP, INC.
No dealer salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this prospectus.
Any information or representation not contained in this prospectus must not be
relied upon as having been authorized by us. This prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, the securities offered
hereby in any state or other jurisdiction to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this prospectus nor
any sale made hereunder shall, under any circumstances, create an implication
that there has been no change in our affairs since the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary ..........................................
Risk Factors .................................................
Market for Our Common Stock ..................................
Management's Discussion and Analysis of Results of Operation .
Business .....................................................
Management ...................................................
Principal Shareholders .......................................
Selling Shareholders .........................................
Description of Capital Stock..................................
Experts ......................................................
Indemnification ..............................................
Additional Information .......................................
Financial Statements .........................................
Until ________________, ____ (90 days from the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation provide for indemnification of our officers,
directors and controlling persons to the full extent provided by Nevada law. Our
Articles of Incorporation also provide that no director is personally liable to
us or our stockholders for monetary damages for any breach of fiduciary duty by
such person as a director or officer except for (i) a breach of the director's
duty of loyalty to us or our stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct, fraud or a knowing violation of
law, (iii) a transaction from which the director received an improper benefit or
(iv) an act or omission for which the liability of a director is expressly
provided under Nevada law.
Under the Nevada corporate statutes, Nevada corporations are permitted to
indemnify their officers and directors for liability to stockholders, so long as
such indemnification does not include the items set forth in the previous
paragraph under (i) through (iv).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fees $ 215
Legal Fees $ 40,000
Accounting Fees $ 30,000
Miscellaneous Expenses $ 4,785
----------
Total $ 75,000
==========
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The only shares which the Company has issued were 15,652,557 shares issued
in December 2006 to 243 persons in connection with the acquisition of Nanning
Tongji Hospital Co., Ltd., a Chinese corporation. These shares were all issued
to non-U.S. persons who reside outside of the United States. The negotiations
and agreements relating to the issuance of these shares were made by the
Company's officers (who were all Chinese citizens) from China. There is no
market for the Company's securities in the United States and none of the
securities have been transferred since their issuance. The issuance of these
shares was exempt from the registration requirements of the Securities Act of
1933 pursuant to Rule 901 of the Securities and Exchange Commission.
1
ITEM 27. EXHIBIT INDEX.
Number Exhibit
- ------ -------
2 Plan of Merger
3.1 Articles of Incorporation
3.2 Bylaws
5 Opinion of Counsel
10.1 Employment Contracts
10.2 Hospital Lease
10.3 Agreement with Guangxi Tongji Medicine Co., Ltd.
21. Subsidiaries
23.1 Consent of Attorneys
23.2 Consent of Accountants
* Filed with initial registration statement.
ITEM 28. UNDERTAKINGS.
(a) The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to.
(i) Include any Prospectus required by Section l0 (a)(3) of the
Securities Act:
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
2
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned small business issuer or used or referred to
by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to
the offering containing material information about the undersigned small
business issuer or its securities provided by or on behalf of the undersigned
small business issuer; and
(iv) Any other communication that is an offer in the offering made
by the undersigned small business issuer to the purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of l933 (the "Act") may be permitted to directors, officers and controlling
persons of the Small Business Issuer pursuant to the foregoing provisions or
otherwise, the Small Business Issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Small Business Issuer of expenses incurred or paid by a director, officer or
controlling person of the Small Business Issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Small Business
Issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) That, for the purpose of determining liability under the Securities Act
to any purchaser:
3
(1) If the small business issuer is relying on Rule 430B:
(i) Each prospectus filed by the undersigned small business issuer
pursuant to Rule 424(b)(3) shall be deemed to be part of the registration
statement as of the date the filed prospectus was deemed part of and included in
the registration statement; and
(ii) Each prospectus required to be filed pursuant to Rule
424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a) of
the Securities Act shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in Rule
430B, for liability purposes of the issuer and any person that is at that date
an underwriter, such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the registration statement
to which that prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; or
(2) If the small business issuer is subject to Rule 430C, include the
following:
Each prospectus filed pursuant to Rue 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the date
it is first used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such date of first use.
4
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the city of Xi'an, China on February 12, 2007.
TONGJI HEALTHCARE GROUP, INC.
By: /s/ Yun-hui Yu
----------------------------
Yun-hui Yu, President and Chief Executive
Officer
By: /s/ Wei-dong Huang
-----------------------------
Wei-dong Huang, Chief Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons.
Name Position Date
/s/ Yun-hui Yu
- -------------------------- Director February 12, 2007
Yun-hui Yu
/s/ Jing-xi Lv
- --------------------------- Director February 12, 2007
Jing-xi Lv
/s/ Jia-lin Zhang
- --------------------------- Director February 12, 2007
Jia-lin Zhang
/s/ Lin Lin
- --------------------------- Director February 12, 2007
Lin Lin
/s/ Xiang-wei Zeng
- --------------------------- Director February 12, 2007
Xiang-wei Zeng
EXHIBITS
TONGJI HEALTHCARE GROUP, INC.
REGISTRATION STATEMENT ON
FORM SB-2